What is the ‘Yield To Worst – YTW’
The yield to worst (YTW) is the least expensive potential yield that can be gotten on a bond without the company in fact defaulting. The YTW is determined by making worst-case situation presumptions on the problem by determining the return that would be received if the company utilizes provisions, consisting of prepayments, calls or sinking funds. This metric is used to evaluate the worst-case scenario for yield to assist investors manage risks and ensure that particular income requirements will still be satisfied even in the worst circumstances.
BREAKING DOWN ‘Yield To Worst – YTW’
A bond’s YTW is computed on all possible call dates. It is presumed that a prepayment takes place if the bond has call option and the issuer can provide a lower coupon rate based on present market rates. The YTW is the lowest of yield to maturity or yield to call (if the bond has prepayment provisions); YTW may be the same as yield to maturity, but it can never ever be higher. It is the holder’s lowest rate of return.
The yield to call is the yearly rate of return presuming the bond is redeemed by the issuer on the next call date. A bond is callable if the company has the right to redeem it prior to the maturity date. YTW is the lower of the yield to call or accept maturity. A put provision gives the holder the right to offer the bond back to the company at a particular cost at a specified date. There is a yield to put, however this doesn’t factor into the YTW since it is the financier’s alternative on whether to offer the bond.
Identifying Which Yield is Right
If a bond is not callable, the yield to maturity is the proper yield for financiers to utilize, because there isn’t a yield to call. However, if a bond is callable, it ends up being crucial to look at the YTW. In specific, for a bond is trading above par worth, the yield to maturity may be greater than the yield to call, because the financier pays a premium that removes from the return. In this case, the YTW is necessary to examine given that the bond could be called and this is the least expensive yield possible, assuming there is not a default.
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