Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. It is a type of yield that is referenced when a bond has provisions that would allow the issuer to close it out before it matures. Early retirement of the bond could be forced through a few different provisions detailed in the bond’s contract—most commonly callability.
The yield to worst metric is used to evaluate the worst-case scenario for yield at the earliest allowable retirement date. YTW helps investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios.
A bond's YTW is calculated based on the earliest call or retirement date. It is assumed that a prepayment of principal occurs if a bond issuer uses the call option. After the call, principal is usually returned and coupon payments are stopped. An issuer will likely exercise their callable option if yields are falling and the issuer can obtain a lowercoupon rate through new issuancein the current market environment.
The YTW may also be known as the yield to call (YTC). In order to identify the YTW, yield to call and yield to maturity should both be calculated. In general, YTW may be the same as yield to maturity, but it can never be higher since it represents yield for the investor at an earlier prepayment date than the full maturity. YTW is the lowest possible return an investor can achieve from holding a particular bond that fully operates within its contract without defaulting. YTW is not associated with defaults, which are different scenarios altogether.
Key Takeaways
Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision.
Yield to worst is often the same as yield to call.
Yield to worst must always be less than yield to maturity because it represents a return for a shortened investment period.
The yield to call is an annual rate of return, assuming a bond is redeemed by the issuer at the earliest allowable callable 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. Aput provisiongives the investor 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 because it is the investor's option on whether to sell the bond. Bond investors will also review similar-duration securities' spread-to-worst (STW) values. STW calculates the difference between the YTW of a bond and a U.S. Treasury security.
The equation for calculating YTC is the following:
YTC = (coupon interest payment + (call price - market value) ÷ number of years until call) ÷ (( call price + market value ) ÷ 2 )
Analyzing Yields
Yields are typically always reported in annual terms. If a bond is notcallable, the yield to maturity is the most important and appropriate yield for investors to use because there is no yield to call.
If a bond is callable, it becomes important to look at the YTW. The yield to maturity will always be higher than the YTW because the investor earns more when they hold the bond for its full maturity. The YTW is important though because it provides deeper due diligence on a bond with a call provision. The shorter time frame a bond is held for, the less the investor earns. YTW provides a clear calculation of this potential scenario showing the lowest yield possible.
Some other types of yield that an investor might also want to consider include: running yield and nominal yield.
A bond's YTW is calculated based on the earliest call or retirement date. It is assumed that a prepayment of principal occurs if a bond issuer uses the call option. After the call, principal is usually returned and coupon payments are stopped.
The yield to maturity (YTM) is the expected annual rate of return earned on a bond, assuming the debt security is held until maturity. The yield to maturity (YTM) is calculated by the following formula: [Annual Coupon + (FV – PV) ÷ Number of Compounding Periods] ÷ [(FV + PV) ÷ 2].
While YTM represents the expected return assuming the bond is held until maturity, YTC focuses on the return if the bond issuer chooses to call the bond before maturity. YTW, on the other hand, considers both these scenarios and selects the worst outcome, providing a cautious perspective for investors.
The “Yield to Worst” (YTW) of a bond is the worst-case possible annualized return an investor could earn if they buy the bond at today's market price and hold it until either maturity or until the company “calls” it by repaying it early; it's the minimum of the Yield to Call on each possible call date and the Yield to ...
According to the 1996 edition of Vogel's Textbook, yields close to 100% are called quantitative, yields above 90% are called excellent, yields above 80% are very good, yields above 70% are good, yields above 50% are fair, and yields below 40% are called poor.
Percent yield is the percent ratio of actual yield to the theoretical yield. It is calculated to be the experimental yield divided by theoretical yield multiplied by 100%. If the actual and theoretical yield are the same, the percent yield is 100%.
The primary importance of yield to maturity is the fact that it enables investors to draw comparisons between different securities and the returns they can expect from each. It is critical for determining which securities to add to their portfolios.
Yield to maturity (YTM) is the overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity. Mathematically, it is the discount rate at which the sum of all future cash flows (from coupons and principal repayment) equals the price of the bond.
The yield to maturity (YTM) is an estimated rate of return. It assumes that the bond buyer will hold it until its maturity date and reinvest each interest payment at the same interest rate. Thus, yield to maturity includes the coupon rate within its calculation. YTM is also known as the redemption yield.
A bond's current yield is the investment's annual income, the interest it pays, divided by the current price of the security. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until its maturation date.
Yield to maturity is the total return that will be paid out from the time of a bond's purchase to its expiration date. Yield to call is the price that will be paid if the issuer of a callable bond opts to pay it off early. Callable bonds generally offer a slightly higher yield to maturity.
The SEC Yield calculation shows investors what they would earn in yield over the course of a 12-month period if the respective fund continued earning the same rate for the rest of the year. Yield-to-Worst is presented gross of fees and reflects the lowest possible yield on a callable bond without the issuer defaulting.
What Is the Difference Between Coupon Rate and Yield? The coupon rate is the stated periodic interest payment due to the bondholder at specified times. The bond's yield is the anticipated rate of return from the coupon payments alone, calculated by dividing the annual coupon payment by the bond's current market price.
The primary difference between a coupon rate and yield to maturity is that the coupon rate has fixed bond tenure throughout the year. On the contrary, the yield to maturity keeps changing depending on multiple factors, such as the current price at which the bond is being traded and the remaining years till maturity.
Because a bond's price on the secondary market may be more or less than its face value, you can calculate its current yield by dividing its annual income payments by its current price.
Introduction: My name is Carlyn Walter, I am a lively, glamorous, healthy, clean, powerful, calm, combative person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
:max_bytes(150000):strip_icc()/yieldtoworst.asp-final-238598ef37d145bfa93913784183d129.jpg "Yield to Worst (YTW): What It Is and the Formula to Calculate It (1)")
:max_bytes(150000):strip_icc()/dotdash_Final_Yield_to_Worst_YTW_Oct_2020-01-cabc0d0cf5b64ef0b4f72afb4888b3aa.jpg "Yield to Worst (YTW): What It Is and the Formula to Calculate It (2)")
