Yield to Worst (YTW)

What is Yield to Worst?

Yield to Worst (YTW) is the lowest yield an investor can receive on a bond if the bond is redeemed before its stated maturity under the terms of the contract (for example, if the issuer calls the bond). YTW assumes the bond operates within its contractual provisions and does not default.

Key takeaways

• YTW measures the minimum possible yield for a bond with early-retirement provisions.
• For callable bonds, YTW is the lower of yield to call (YTC) and yield to maturity (YTM).
• YTW is never greater than YTM because earlier redemption shortens the investor’s holding period.
• Put provisions (the investor’s right to sell the bond back) do not factor into YTW, since they are exercised at the investor’s discretion.

Why YTW matters

Callable bonds give issuers the option to redeem debt early, typically when market yields fall and the issuer can refinance at a lower cost. YTW helps investors assess the downside of that possibility and ensures income expectations are realistic even in the worst contractual scenario.

How YTW is determined

1. Calculate yield to call(s) for all possible callable dates.
2. Calculate yield to maturity.
3. YTW = the lowest yield among the yields calculated above.

Because YTW assumes the issuer will exercise any option that is unfavorable to the investor (e.g., calling when interest rates decline), it is a conservative metric used in fixed-income due diligence.

Yield to Call (YTC) — formula

A common approximation for YTC is:

YTC = (Coupon payment + (Call price − Market price) ÷ Years until call) ÷ ((Call price + Market price) ÷ 2)

This yields an annual rate. For exact YTC, solve for the interest rate that equates the bond’s price to the present value of expected cash flows assuming redemption at the call date.

Yield to Maturity (YTM) — concept

YTM is the internal rate of return (IRR) that equates the current market price of the bond with the present value of all future coupon payments and the principal repayment at maturity. It is found by solving:

Price = Σ (Coupon_t / (1 + y)^t) + (Face / (1 + y)^n)

where y is the YTM and n is the number of periods until maturity.

Simple example

Bond details:
* Face = $1,000; coupon = 5% → annual coupon = $50
* Market price = $1,050
* Call price = $1,000 in 3 years

Approximate YTC:
* Numerator = 50 + (1,000 − 1,050) / 3 = 50 − 16.67 = 33.33
* Denominator = (1,000 + 1,050) / 2 = 1,025
* YTC ≈ 33.33 / 1,025 ≈ 3.25% annually

If YTM (calculated via the IRR equation) is, say, 4.5%, then YTW = min(YTC, YTM) = 3.25%.

Additional considerations

• Reporting: Yields are typically reported on an annual basis.
• Non-callable bonds: For non-callable bonds, YTM is the relevant yield because there’s no call risk.
• Spread-to-worst (STW): Investors often compare a bond’s YTW to a Treasury yield of similar duration; the difference is called spread-to-worst and helps assess credit and liquidity compensation.
• Investor options: Put provisions provide upside protection for investors (yield to put exists) but do not enter into the YTW calculation because the investor controls that decision.

Conclusion

YTW is a conservative yield metric that captures the lowest contractual return an investor can receive from a bond with early redemption features. To evaluate callable bonds, compute YTC(s) and YTM and use the lowest result to understand downside income risk from issuer actions.