What Is Yield to Worst (YTW)?

The lowest yield that may be obtained on a bond that entirely complies with the provisions of its contract without defaulting is known as the yield to worst. That kind of yield is mentioned when a bond includes features that enable the issuer to close it out before it matures. The bond’s contract has several conditions that might compel an early retirement of the bond, the most frequent of which is scalability. The worst-case yield situation at the earliest permitted retirement date is assessed using the yield-to-worst measure. YTW assists investors in risk management and guarantees that specific income needs will be satisfied even in the worst-case situations.

Knowledge of Yield to Worst

The earliest call or retirement date determines a bond’s yield to maturity (YTW). If a bond issuer exercises the call option, it is presumed that a principal prepayment will take place. The principal is typically refunded, and coupon payments are halted after the call. If yields are declining and the issuer can achieve a lower coupon rate via fresh issuance in the present market, the issuer is likely to execute its callable option.

Another name for the YTW is yield to call (YTC). Yield to call and yield to maturity should be computed to get the YTW. YTW and yield to maturity are generally similar but can never be greater since YTW indicates the investor’s yield at an earlier prepayment date than the full maturity. The lowest return an investor may get from keeping a particular bond that complies with its terms to the letter and doesn’t default is known as yield to maturity (YTW). YTW is not related to defaults, which are entirely unrelated situations.

The Workings

A bond’s yield to call is its yearly rate of return, supposing the issuer redeems it at the earliest possible callable date. It is callable if the bond’s issuer can save it before it matures. The lesser of the yield to call and yield to maturity is known as YTW. The right to sell the bond back to the corporation at a specific price on a predetermined date is granted to the investor via a put provision. The yield to put is there, but as the investor retains the option to sell the bond, it is not considered when calculating yield to value (YTW).

The following formula is used to determine YTC:

• YTC = (coupon interest payment + (call price – market value) ÷ number of years until call) ÷ (( call price + market value ) ÷ 2 )

Analyzing Yields

Usually, yields are given every year. The yield to maturity is the most significant and relevant yield for investors if a bond is not callable, since there is no yield to call.

Examining the YTW becomes crucial if a bond is callable. Since the investor makes more money when they retain the bond until it matures, the yield to maturity will always be greater than the yield to weight (YTW) (YTC). However, the YTW matters because it offers more thorough due diligence on bonds that include call provisions. An investor makes less money the longer they hold a bond. YTW calculates the potential lowest yield in this hypothetical scenario. An investor may consider different yield forms, such as nominal yield and running work.

Conclusion

• The lowest yield that may be obtained on a bond with an early retirement clause is the yield at its worst.
• Yield to call and yield to worst are often synonymous.
• Since yield to worst indicates a return for a shorter investment time, it must always be smaller than yield to maturity.