Yield to Worst (YTW): A Comprehensive Guide

Search Fintrev

Search our guides, reviews and glossary.

Yield to worst (YTW) is the lowest annualized yield a bond can produce without the issuer defaulting. It is calculated by working out the yield to every date on which the bond could be retired early under its contract (each call date, plus maturity) and taking the smallest result. For a bond with no call provision, yield to worst and yield to maturity are the same number.

How Yield to Worst Works

A callable bond gives the issuer the right to repay principal before maturity, usually at a stated call price on or after specified dates. When the bond is called, the investor receives the call price and coupon payments stop. Issuers have the most reason to call when market rates have fallen below the bond’s coupon, because they can refinance with new debt at a lower rate.

From the investor’s side, an early call shortens the income stream. Yield to worst asks which redemption date the contract allows leaves the holder with the least return at today’s price. Answering it takes three steps:

1. Calculate the yield to maturity at the current price.
2. Calculate the yield to call for each call date, using the call price that applies on that date.
3. Take the lowest figure. That is the yield to worst.

Calculating yield to worst

Exact yields are found by solving for the discount rate that sets the present value of the bond’s cash flows equal to its price, which software or a financial calculator handles. A common approximation for yield to call is:

YTC ≈ [annual coupon + (call price − price) ÷ years to call] ÷ [(call price + price) ÷ 2]

The yield to maturity approximation has the same form, with face value in place of the call price and years to maturity in place of years to call.

Example of Yield to Worst

Hypothetical bond: $1,000 face value, 6% annual coupon ($60 a year), 10 years to maturity, priced at $1,050. It is callable in 3 years at $1,020 and in 5 years at $1,000. The figures below use the approximation formula.

• Yield to maturity: [60 + (1,000 − 1,050) ÷ 10] ÷ 1,025 = 55 ÷ 1,025 ≈ 5.37%
• Yield to first call (year 3): [60 + (1,020 − 1,050) ÷ 3] ÷ 1,035 = 50 ÷ 1,035 ≈ 4.83%
• Yield to second call (year 5): [60 + (1,000 − 1,050) ÷ 5] ÷ 1,025 = 50 ÷ 1,025 ≈ 4.88%

The yield to worst is about 4.83%, the first call. The buyer pays a $50 premium over face value, and an early call gives less time to spread that loss across coupon income.

Now change the price to $950, a discount. Yield to maturity becomes (60 + 5) ÷ 975 ≈ 6.67%, while yield to the first call rises to (60 + 23.33) ÷ 985 ≈ 8.46%, because being repaid $1,020 early on a $950 purchase speeds up the gain. Here the yield to worst is the yield to maturity. As a rule of thumb, a call date tends to set YTW when a bond trades above its call price, and maturity tends to set it when the bond trades at a discount.

Why Yield to Worst Matters

Quoting only yield to maturity on a premium callable bond overstates what the investor is likely to earn if rates stay low enough for the issuer to call. YTW gives the conservative figure, which makes callable and non-callable bonds comparable on a like-for-like basis.

Brokerage quote screens often show YTW next to the price, sometimes as a bid YTW and an ask YTW: the ask YTW is what a buyer locks in by paying the ask price, and the bid YTW reflects what a seller would receive. On non-callable securities, such as a typical Treasury note or a non-callable CD, YTW and YTM show the same value, while a callable brokered CD can show a YTW below its YTM.

Analysts also compare bonds of similar duration using spread to worst (STW), the difference between a bond’s YTW and the yield on a comparable U.S. Treasury security. Using YTW rather than YTM keeps the spread from looking wider than the bond’s realistic return supports.

Limitations of Yield to Worst

• It is not a guaranteed minimum. YTW assumes no default, full timely payment and holding until the relevant date. Selling earlier at a lower market price can produce a worse return.
• It assumes reinvestment at the same yield. Like YTM, YTW is an internal rate of return, so the stated figure is only realized if coupons are reinvested at that rate. If rates fall, which is when calls happen, reinvestment returns are often lower.
• It ignores the investor’s options. A put that lets the holder sell the bond back at a set price can improve outcomes, but it is excluded from YTW.
• It is a snapshot. YTW changes with the bond’s price, and the date that produces the worst yield can shift as the price moves above or below the call price.
• It is not a probability. YTW says what the lowest contractual yield would be, not how likely a call is.

Yield to Worst vs. Related Measures

Nominal (coupon) yield is simply the coupon rate on face value and does not change with price.

The Bottom Line

Investors weighing callable bonds, especially ones priced at a premium, should judge them by yield to worst rather than yield to maturity. It gives the conservative contractual figure and lets callable and non-callable bonds be compared fairly. It is still a snapshot that assumes no default, holding to the relevant date and reinvestment at the same rate, so it does not guarantee a minimum return or predict whether a call will happen.