Yield to Worst

The lowest potential yield that can be received on a bond without the issuer actually defaulting.

Yield to Worst (YTW) is a measure of the lowest possible yield that an investor can expect to receive from a debt security, assuming the issuer does not default. It is calculated by evaluating all potential redemption scenarios, including the bond being called (redeemed early by the issuer), put (sold back by the investor), or held to its final maturity date. This metric is highly critical for investors analyzing callable bonds, where the issuer has the right to buy back the bond before maturity. Because issuers typically call bonds when interest rates fall to refinance at a lower cost, an investor might not get to hold a high-yielding bond to maturity. YTW provides a conservative, worst-case return scenario so investors do not overstate their expected income. For non-callable bonds, the Yield to Worst is identical to the Yield to Maturity. When comparing fixed-income assets, a higher YTW generally indicates a better worst-case return, but it may also reflect higher credit risk. Investors should be cautious when comparing the YTW of different bonds without considering their credit ratings, as a high YTW on a junk bond carries a much higher risk of default than a lower YTW on an investment-grade bond.

A corporate bond has a Yield to Maturity (YTM) of 5.5% but is callable in two years. If the issuer calls the bond early, the yield to that call date (Yield to Call) is only 4.2%. The Yield to Worst (YTW) for this bond is therefore 4.2%, as it is the lower of the two scenarios.