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 calculated by the following formula: [Annual Coupon + (FV – PV) ÷ Number of Compounding Periods] ÷ [(FV + PV) ÷ 2]. The YTM metric offers bondholders with the option to estimate the return on a bond instrument, as well as measure the impact on the portfolio return.
How do I calculate my APY? If you're looking to understand the math behind calculating your APY, there's a formula: APY = 100 [(1 + Interest/Principal)(365/Days in term) - 1]. But we think it's easier to use a calculator, so all you need to do is plug in the required information.
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.
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated by the following formula: yield = coupon amount/price. When the price changes, so does the yield.
–Yield to Worst: This is the lowest annualized return an investor might receive from buying and holding a bond until either early repayment or maturity, i.e., it is the minimum of all the YTCs and the YTM.
For example, if you write your formula with a five percent coupon, it would look like this:YTM=[0.05 + (FV-PV)/n] / [(FV+PV)/2]The 0.05 value represents five percent coupon price and takes the place of the letter "C" in the formula.
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.
Yield is defined as an income-only return on investment (it excludes capital gains) calculated by taking dividends, coupons, or net income and dividing them by the value of the investment, expressed as an annual percentage.
For example, a lender might charge an interest rate of 10% for a one-year loan of $1,000.At the end of the year, the yield on the investment for the lender would be $100, or 10%.
We are given the principal amount, P = $3,000, the interest, I = 33.00, and the loan period in years is t = 1. The interest rate is determined from the simple interest formula, I = Prt, solving for r: Therefore, the annual simple interest rate is 1.1%.
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.
While BEY is the rate of return, annualized, of a discounted bond. It is helpful when comparing bond interest from one to the other. YTM is a measure of the return on a bond investment, if you were to hold it until maturity. But when is it helpful to use these terms?
Yield to Maturity (YTM) represents the return an investor will receive if a CD is held to term. Annual Percentage Yield (APY) is also quoted and represents the return earned based on a simple interest calculation that includes the effect of compounding.
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