Yield To Worst (YTW)

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.

Explaining ‘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.

Further Reading

  • Incentives and disincentives for financial disclosure: Voluntary disclosure of defined benefit pension plan information by Canadian firms – www.jstor.org [PDF]
  • The Global Supply and Demand for Agricultural Land in 2050: A Perfect Storm in the Making? – academic.oup.com [PDF]
  • Thy neighbor's keeper: The design of a credit cooperative with theory and a test – academic.oup.com [PDF]
  • A cost-based methodology for evaluating product platform commonality sourcing decisions with two examples – www.tandfonline.com [PDF]
  • International mutual fund selectivity and market timing during up and down market conditions – onlinelibrary.wiley.com [PDF]
  • The forecast quality of CBOE implied volatility indexes – papers.ssrn.com [PDF]
  • Complex rules and congressional outcomes: An event study of energy tax legislation – www.journals.uchicago.edu [PDF]
  • Return momentum and global portfolio allocations – www.sciencedirect.com [PDF]
  • Forecast of value at risk for equity indices: an analysis from developed and emerging markets – www.emerald.com [PDF]
  • The economic model of retinopathy of prematurity (EcROP) screening and treatment: Mexico and the United States – www.sciencedirect.com [PDF]