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.
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.
YTM formula is as follows: YTM = APR + ((Face value - current market price) divided by the number of years until maturity). Then take that value and divide it by (Face value + market price) / 2.
Some of these different types of bond yields include among others, the so called running yield, nominal yield, yield to maturity (YTM), yield to call (YTC) and yield to worst (YTW).
–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.
You can calculate yield-to-call in accounting by applying the formula:P. = (C/2) x {[1 - (1 + YTC/2)-2t)] / [(YTC/2)]} + (CP/1 + YTC/2)2tWhere: P is the current market price of the bond. C is the yearly coupon payment, which is a percentage of the face value of the bond.
The earnings yield is the inverse ratio to the price-to-earnings (P/E) ratio. The quick formula for Earnings Yield is E/P, earnings divided by price. The yield is a good ROI metric and can be used to measure a stocks rate of return.
Note that if a synthesis is a linear multistep process, then the overall yield is the product of the yields of each step. So for example, if a synthesis has two steps, each of yield 50% then the overall yield is 50% x 50% = 25%.
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].
The current yield of a bond is calculated by dividing the annual coupon payment by the bond's current market value. Because this formula is based on the market value or purchase price rather than the par value of a bond, it more accurately reflects the profitability of a bond, relative to other bonds on the market.
Yield to Worst (YTW) is a financial metric that helps investors assess the minimum yield they can expect from a bond under various scenarios. It accounts for the bond's yield in the worst-case scenario, considering factors like call provisions, prepayments, and other features that may affect the bond's cash flows.
Also referred to as a bond's coupon rate, the nominal yield is the annual income divided by the bond's face value. For example, a bond with a $1,000 face value that pays $50 annually has a nominal yield of 5% (50 ÷ 1,000 = 0.05). For fixed-rate bonds, the nominal yield always remains consistent.
YTM is yield to maturity which means the total return you expect from your investment in bonds/debt mutual funds if the same is held till maturity. It is expressed as a percentage of the current market price. It is used for comparing different bonds and debt funds with different maturities.
Note that if a synthesis is a linear multistep process, then the overall yield is the product of the yields of each step. So for example, if a synthesis has two steps, each of yield 50% then the overall yield is 50% x 50% = 25%.
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.
You can calculate a bond's yield by dividing its coupon payment by the bond's face value. Yields on mutual funds: Mutual fund yields include income from dividends and interest received over a period. You can calculate yields on the mutual fund by dividing the annual dividend by its share price.
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