Loading the player...

What is the 'Yield To Worst - YTW'

The yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The YTW is calculated by making worst-case scenario assumptions on the issue by calculating the return that would be received if the issuer uses provisions, including prepayments, calls or sinking funds. This metric is used to evaluate the worst-case scenario for yield to help investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios.

BREAKING DOWN 'Yield To Worst - YTW'

A bond's YTW is calculated on all possible call dates. It is assumed that a prepayment occurs if the bond has call option and the issuer can offer a lower coupon rate based on current market rates. The YTW is the lowest of yield to maturity or yield to call (if the bond has prepayment provisions); YTW may be the same as yield to maturity, but it can never be higher. It is the holder's lowest rate of return.

The Mechanics

The yield to call is the annual rate of return assuming the bond is redeemed by the issuer on the next call date. A bond is callable if the issuer has the right to redeem it prior to the maturity date. YTW is the lower of the yield to call or yield to maturity. A put provision gives the holder the right to sell the bond back to the company at a certain price at a specified date. There is a yield to put, but this doesn't factor into the YTW since it is the investor's option on whether to sell the bond.

Determining Which Yield is Right

If a bond is not callable, the yield to maturity is the appropriate yield for investors to use, since there isn't a yield to call. However, if a bond is callable, it becomes important to look at the YTW. In particular, for a bond is trading above par value, the yield to maturity may be higher than the yield to call, since the investor pays a premium that takes away from the return. In this case, the YTW is important to examine since the bond could be called and this is the lowest yield possible, assuming there is not a default.

If a bond is trading below par, the discount adds to an investor's return. Therefore, the yield to maturity is lower than the yield to call, even if the security can be redeemed. The yield to maturity is the YTW.

Both yield to maturity and yield to call are estimates of return. The yield to call and yield to maturity both assume the coupons are reinvested at the lower rate, but interest rates change. It also assumes the bond is held until the call date or maturity.

RELATED TERMS
  1. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  2. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  3. Yield Pickup

    The additional interest rate an investor receives when selling ...
  4. Yield

    The income return on an investment. This refers to the interest ...
  5. Call Privilege

    The provision in a bond indenture that gives the bond issuer ...
  6. Realized Yield

    The actual amount of return earned on a security investment over ...
Related Articles
  1. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  2. Investing

    Calculating Yield to Worst

    Yield to worst is the lowest possible yield on a bond that may be called in the future.
  3. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  4. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  5. Investing

    Bond Yields: Current Yield And YTM

    A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ...
  6. Investing

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  7. Investing

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  8. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  9. Investing

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
RELATED FAQS
  1. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
  2. What is the difference between the yield of stock and the yield of a bond?

    Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond ... Read Answer >>
  3. Can I use the current yield to compare a bond to an equity investment?

    Learn about the different types of yield measurements for stocks and bonds, and find out how to make careful comparisons ... Read Answer >>
  4. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  5. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
  6. How can I use the holding period return yield to determine whether or not I should ...

    Find out how to use the holding period return yield formula to determine whether it is a good time to sell your bond based ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center