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.

  1. Yield

    Yield is the return a company gives back to investors for investing ...
  2. Running Yield

    Running yield is the annual income on an investment divided by ...
  3. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  4. Yield Pickup

    The additional interest rate an investor receives when selling ...
  5. Breakeven Yield

    The breakeven yield is the yield required to cover the cost of ...
  6. Negative Bond Yield

    A negative bond yield is an unusual situation in which issuers ...
Related Articles
  1. 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.
  2. Investing

    How Bond Yields Could Topple the Stock Market

    Bond yields have reached a crucial point since the election that could be bad news for the stock market.
  3. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  4. Investing

    Corporate bonds: an Introduction to credit risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk — including credit risk— involved before you buy.
  5. Investing

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  6. Investing

    Bond Yield Curve Holds Predictive Powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  7. Investing

    Climb The Bond Ladder To Higher Income

    Whether it's learning how to ladder bonds or finding alternatives, investors seeking better returns need to be more active.
  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. 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 >>
  3. 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 >>
  4. How do I calculate yield to maturity of a zero-coupon bond?

    Find out how to calculate the yield to maturity of a zero-coupon bond, and learn why this calculation is simpler than one ... Read Answer >>
  5. What is the relationship between current yield and yield to maturity (YTM)?

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center