Yield To Worst (YTW) Calculator
Calculate the minimum potential yield a bond can earn, considering all possible early redemption (call) dates and the final maturity date.
Bond Details
Potential Call Dates & Prices (Optional - Add up to 3)
Enter dates and prices if the bond can be called before maturity. Leave blank if non-callable or you don't need to consider calls.
Understanding Yield To Worst (YTW)
What is Yield To Worst?
Yield To Worst (YTW) represents the lowest potential yield an investor can expect to receive on a bond, assuming the issuer does not default. It takes into account the possibility of the bond being called (redeemed early) by the issuer on various call dates, as well as the final maturity date.
For a bond that is callable, the YTW is the minimum of the Yield To Maturity (YTM) and all possible Yields To Call (YTC).
Why is YTW Important?
YTW provides a conservative estimate of a bond's return. If a bond is likely to be called (e.g., a bond trading at a premium with interest rates lower than the coupon rate), the investor should expect to receive the Yield To Call rather than the Yield To Maturity, and if there are multiple call dates, the lowest YTC would be the YTW.
Yield To Maturity (YTM) vs. Yield To Call (YTC)
- Yield To Maturity (YTM): The total return anticipated on a bond if it is held until it matures. It accounts for the coupon payments and the difference between the current market price and the par value.
- Yield To Call (YTC): The total return anticipated on a bond if it is held until a specific call date and redeemed by the issuer at the call price on that date.
The YTW is simply the minimum yield across all these potential scenarios (YTM and all YTCs).
Yield To Worst Examples
Explore these scenarios to see how YTW is determined:
Example 1: Premium Bond, Callable Above Par
Scenario: A bond trading at a premium with interest rates lower than its coupon.
Inputs: Par $1000, Coupon 5% (Semi-Annual), Price $1050, Maturity 10 years. Callable in 5 years at $1020.
Calculation Idea: Calculate YTM and YTC to 5 years. YTM will be lower than the coupon (due to premium). YTC will likely be even lower than YTM because the bond is called at a price less than what you paid ($1050 > $1020), resulting in a capital loss sooner.
Outputs (Approx): YTM ≈ 4.32%, YTC (5yr call) ≈ 3.65%. YTW = 3.65%.
Conclusion: The YTW is the YTC because it's the lowest possible yield.
Example 2: Discount Bond, Callable Below Par
Scenario: A bond trading at a discount with interest rates higher than its coupon.
Inputs: Par $1000, Coupon 3% (Semi-Annual), Price $950, Maturity 10 years. Callable in 5 years at $980.
Calculation Idea: Calculate YTM and YTC to 5 years. YTM will be higher than the coupon (due to discount). YTC might be lower than YTM if the call price is less than the par value you'd receive at maturity.
Outputs (Approx): YTM ≈ 3.68%, YTC (5yr call) ≈ 4.30%. YTW = 3.68%.
Conclusion: The YTW is the YTM as it's the lowest yield scenario here.
Example 3: Par Bond, Callable at Par
Scenario: A bond trading near par, callable at par.
Inputs: Par $1000, Coupon 4% (Semi-Annual), Price $1000, Maturity 8 years. Callable in 4 years at $1000.
Calculation Idea: Both YTM and YTC will be equal to the coupon rate (4%) when the price is par and call price is par. The lowest yield is 4%.
Outputs (Approx): YTM ≈ 4.00%, YTC (4yr call) ≈ 4.00%. YTW = 4.00%.
Conclusion: YTW equals YTM and YTC when the bond is at par and callable at par.
Example 4: Premium Bond, Callable at Significant Premium
Scenario: A bond trading at a premium, callable at an even higher premium.
Inputs: Par $1000, Coupon 6% (Semi-Annual), Price $1080, Maturity 12 years. Callable in 6 years at $1040.
Calculation Idea: YTM will be below 6%. YTC to the 6-year call date will be negative because the call price ($1040) is less than the purchase price ($1080), resulting in a capital loss that overwhelms coupon income over 6 years.
Outputs (Approx): YTM ≈ 5.05%, YTC (6yr call) ≈ -0.42%. YTW = -0.42%.
Conclusion: A negative YTW indicates the investor is likely to lose money if the bond is called, making that scenario the worst outcome.
Example 5: Discount Bond, Non-Callable
Scenario: A bond trading at a discount with no call provisions.
Inputs: Par $1000, Coupon 4.5% (Annual), Price $920, Maturity 7 years. Non-callable.
Calculation Idea: Since there are no call options, YTW is simply equal to YTM.
Outputs (Approx): YTM ≈ 6.13%. YTW = 6.13%.
Conclusion: For non-callable bonds, YTW = YTM.
Example 6: Multiple Call Dates
Scenario: A bond with more than one potential call date.
Inputs: Par $1000, Coupon 5.5% (Semi-Annual), Price $1030, Maturity 15 years. Callable in 5 years at $1020, and in 10 years at $1010.
Calculation Idea: Calculate YTM, YTC to 5 years, and YTC to 10 years. Find the minimum of these three yields.
Outputs (Approx): YTM ≈ 5.17%, YTC (5yr call) ≈ 4.82%, YTC (10yr call) ≈ 5.01%. YTW = 4.82%.
Conclusion: The lowest yield among all scenarios is the YTW.
Example 7: Zero Coupon Bond (Callable)
Scenario: A zero-coupon bond with a call provision.
Inputs: Par $1000, Coupon 0% (Annual), Price $800, Maturity 5 years. Callable in 3 years at $900.
Calculation Idea: YTM is the yield from price $800 to par $1000 over 5 years. YTC is the yield from $800 to $900 over 3 years. Compare these two.
Outputs (Approx): YTM ≈ 4.57%, YTC (3yr call) ≈ 3.93%. YTW = 3.93%.
Conclusion: Even with a zero coupon, callable features affect YTW.
Example 8: Bond Trading Slightly Below Par, Callable at Par
Scenario: A bond trading at a small discount, callable at par.
Inputs: Par $1000, Coupon 4.8% (Semi-Annual), Price $990, Maturity 7 years. Callable in 3 years at $1000.
Calculation Idea: YTM will be slightly above 4.8%. YTC will also be slightly above 4.8% (due to the small capital gain to either par or call price). Compare.
Outputs (Approx): YTM ≈ 4.99%, YTC (3yr call) ≈ 5.20%. YTW = 4.99%.
Conclusion: In this case, the YTM is the lowest yield.
Example 9: High Coupon, Deep Premium, Callable at Small Premium
Scenario: A bond with a high coupon bought at a significant premium, callable at a smaller premium.
Inputs: Par $1000, Coupon 8% (Annual), Price $1150, Maturity 10 years. Callable in 4 years at $1050.
Calculation Idea: YTM will be well below 8%. YTC will be much lower, likely negative, as the capital loss from $1150 down to $1050 over 4 years is substantial.
Outputs (Approx): YTM ≈ 5.86%, YTC (4yr call) ≈ -2.16%. YTW = -2.16%.
Conclusion: The possibility of being called early at a price below the purchase price results in the worst yield scenario being the YTC.
Example 10: Short Term Bond, Callable
Scenario: A bond maturing relatively soon, with one call option.
Inputs: Par $1000, Coupon 3.5% (Semi-Annual), Price $1010, Maturity 2 years. Callable in 1 year at $1005.
Calculation Idea: Calculate YTM over 2 years and YTC over 1 year. Both will be below the coupon due to the premium, but the shorter time to the YTC calculation makes the capital loss impact ($1010 to $1005) more significant per period.
Outputs (Approx): YTM ≈ 2.98%, YTC (1yr call) ≈ 2.49%. YTW = 2.49%.
Conclusion: The YTC is the worst yield as it's the lowest.
Frequently Asked Questions about Yield To Worst (YTW)
1. What is Yield To Worst (YTW)?
YTW is the lowest potential yield an investor can receive on a bond, assuming the bond does not default. It compares the Yield To Maturity (YTM) with the Yield To Call (YTC) for all possible call dates and takes the minimum value.
2. How is YTW different from Yield To Maturity (YTM)?
YTM assumes the bond is held until its final maturity date. YTW considers that the bond might be called before maturity, and specifically calculates the yield for each possible call date, then reports the lowest of all these yields (including YTM).
3. When is YTW most relevant?
YTW is particularly important for callable bonds trading at a premium. In this scenario, if interest rates fall below the bond's coupon rate, the issuer is likely to call the bond to refinance at a lower rate. The investor's actual return will then be the (lower) YTC, and YTW identifies the worst possible YTC scenario.
4. Can YTW be the same as YTM?
Yes, YTW equals YTM if the bond is not callable or if all calculated Yields To Call are higher than the Yield To Maturity. This often happens with bonds trading at a discount.
5. What is Yield To Call (YTC)?
YTC is the total return anticipated on a bond if it is held until a specific call date and redeemed by the issuer at the specified call price on that date, instead of maturing.
6. Can YTW be negative?
Yes. If an investor pays a significant premium for a bond and it is called early at a price below the purchase price, the capital loss incurred over the short period until the call date can be large enough to result in a negative overall yield, meaning the investor loses money.
7. Does YTW guarantee the actual return?
No. YTW is an *expected* return based on potential redemption scenarios. The actual return depends on whether the bond is called and when, whether you sell before maturity/call, and assumes the issuer does not default on payments.
8. How does the coupon rate affect YTW?
A higher coupon rate means higher periodic payments. However, if rates fall, a high coupon bond is more likely to be called, potentially limiting the investor's return to a lower YTC. The relationship between coupon, current price, and potential call price determines whether YTM or a specific YTC is the worst yield.
9. How does the call price affect YTW?
A call price significantly below the current market price (especially for bonds bought at a premium) will result in a lower, or even negative, YTC, making that scenario more likely to be the "worst" yield.
10. What other factors does this calculator consider besides call dates?
It considers the bond's Par Value, Annual Coupon Rate, Coupon Payment Frequency, Current Market Price, and Maturity Date for calculating YTM. For callable bonds, it also considers the specific Call Dates and Call Prices provided.
