Yield to Worst

Often abbreviated as YTW, yield to worst is one of the factors considered by investors when considering a purchase on the bond market. Yield to worst is the figure representing the overall return on investment if all market factors perform in the most negative manner possible. It is unlikely that the investment will actually experience all these negative factors; the yield to worst is a hypothetical figure that represents the worst case scenario regarding profitability for a specific bond investment.

Calculating Yield to Worst

The yield to worst figure is determined by figuring the yields for every available call date as well as the maturity date of the bond. The amount of the lowest return on investment, regardless of whether it is a call date or the maturity date, is the yield to worst. In calculating YTW, it is assumed that the current prevailing market rate will remain static and that bond issuers will make prepayments if it is to their advantage to do so, but will allow the bond to mature if the current market rates exceed the promised yield of the bond. For purposes of YTW all transactions are assumed to be executed to the advantage of the bond issuer; this provides a true worst case scenario figure for calculating risk.

Yield to Worst Example

For instance, in order to calculate the yield to worst for a five-year bond with annual call dates, you would determine the yield to call for each call date and the yield to maturity. By comparing each of these figures and selecting the lowest, you can identify the yield to worst figure. This yield to worst example is relatively simple; actual yield to worst calculations may involve hundreds of call dates, rather than five.

Yield to Worst Vs Yield to Maturity

Yield to worst is sometimes confused with yield to maturity, since both are used to compare different bond investments in terms of risk and reward. Yield to worst comparisons offer a solid idea of the amount of risk involved in the investment, while yield to maturity figures typically indicate the potential for reward available in that investment. In that way, yield to worst vs yield to maturity can be seen as risk vs reward in the bond investment analysis field, and should be regarded in that context as an indicator of the possible profitability and risk of any bond investment under consideration.
Tim Ord
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