Yield to Worst

Lesson

Yield to Worst (YTW) measures the lowest potential yield an investor will receive (assuming no default) if the issuer calls a callable bond at the earliest call date.

Practice Question #1

Which of the following best describes Yield to Worst?

A) The highest potential yield on a bond

B) The yield of a bond if it is called by the issuer

C) The lowest potential yield on a bond without the issuer defaulting

D) The yield of a bond if it is held until maturity

Select an option above to see an explanation here.

A) Yield to Worst is not the highest potential yield on a bond. B) Yield to Call is the bond yield if the issuer calls it. C) Yield to Worst is the lowest potential yield on a bond without the issuer defaulting. D) Yield to Maturity is a bond's yield if it is held until maturity.

Terms

Yield to Worst (YTW):: The lowest potential yield that can be received on a bond without the issuer defaulting.

Practice Question #2

What is the primary risk associated with callable bonds?

A) Interest rate risk

B) Reinvestment risk

C) Call risk

D) Default risk

Select an option above to see an explanation here.

A) Interest rate risk is associated with all bonds, not just callable bonds. B) Reinvestment risk is a risk associated with callable bonds, but it is not the primary risk. C) Call risk is the primary risk associated with callable bonds, as the issuer may call the bond, resulting in a lower yield for the investor. D) Default risk is associated with all bonds, not just callable bonds.

Do Not Confuse With

Current yield:: The annual income from a bond divided by its current market price.
Yield to Call (YTC):: The bond yield if the issuer calls it at the next call date.
Yield to Maturity (YTM):: A bond's yield if it is held until its maturity date.

Practice Question #3

Which of the following factors does Yield to Worst take into account when evaluating callable bonds?

A) Yield to Maturity

B) Yield to Call

C) Interest rate changes

D) All of the above

Select an option above to see an explanation here.

A) Yield to Worst takes into account Yield to Maturity when evaluating callable bonds. B) Yield to Worst takes into account Yield to Call when evaluating callable bonds. C) Yield to Worst considers interest rate changes when evaluating callable bonds. D) Yield to Worst considers all of the above factors when evaluating callable bonds.

Real-World Example

An investor is considering purchasing a callable bond with a Yield to Maturity of 5% and a Yield to Call of 4%. By calculating the Yield to Worst, the investor can determine that the worst-case scenario for their investment is a yield of 4% if the bond is called by the issuer.

Practice Question #4

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Example Series 65 Example Practice Question

Formulas to Remember

Yield to Worst (YTW) = min(Yield to Call, Yield to Maturity)

Practice Question #5

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Formula Examples

Suppose we have a callable bond with the following characteristics: - Yield to Call: 4% - Yield to Maturity: 5% To calculate the Yield to Worst, we need to find the minimum of the Yield to Call and Yield to Maturity. YTW = min(YTC, YTM) YTW = min(4%, 5%) YTW = 4%

Practice Question #6

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Pitfalls to Remember

Assumptions:: Yield to Worst assumes that the bond issuer will act in their best interest, which may not always be the case.
Market conditions:: Yield to Worst may not accurately reflect the bond's performance if market conditions change significantly.