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Yield to Worst – What It Is And How It Works

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learnbonds-glossaryYield to worst is an estimate of the lowest yield that you can expect to earn from a bond when holding to maturity, absent a default.  It is a measure that is used in place of yield to maturity with callable bonds.  As callable bonds can be bought back before their stated maturity date, yield to maturity does not provide an accurate picture of what an investor can expect to earn.  You can learn more about how callable bonds work here.

To see a list of high yielding CDs go here.

To figure out what would be this worst case yield will potentially be you need to calculate the yield to call, using the first potential call date.  This basically assumes that the issuer will call the bond on the first possible date if interest rates in the market decline.  Yield to worst can equal (but never surpass) the yield to maturity.  If the yield to call is greater than the yield to maturity, then the yield to maturity is equal to the yield to worst.

Knowing a bond’s yield to worst is important when comparing one investment to another and allows you to make apples to apples comparisons of bonds with varying call features and coupon payments.

Yield To Worst Example:

Imagine a bond with a maturity of 6 years, a coupon rate of 6% with annual payments, and a provision to call it every 2 years. By using a financial calculator you realize that the yield to maturity is 5.8%. But since the bond can be called in just 2 years, the interest payments of the following years would be lost should the bond be called. Again using your financial calculator you discover that the yield to call for the first 2 years is only 4.4%. This would be your yield to worst.

You can calculate a bond’s yield to worst by using this yield to call calculator and then comparing the yield to call to the yield to maturity. The lower number is the yield to worst.

 

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David Waring

David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

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