Yield to worst
Also known as: YTW
Yield to worst is the lowest yield an investor can receive on a bond without the issuer defaulting — the smaller of its yield to maturity and the yield to each possible call date. It is the most conservative yield measure for callable bonds.
Yield to worst (YTW) answers a practical question for anyone buying a callable bond: what is the worst-case return if the issuer exercises its rights? To find it, calculate the bond's yield to maturity (YTM) and its yield to call (YTC) for every possible call date, then take the lowest result. That lowest figure is the yield to worst.
For a bond trading at a premium, the yield to call is typically the lowest number, because the investor paid more than par and a call cuts short the years of coupon income that would offset that premium — so the earliest call date usually produces the worst yield. For a bond trading at a discount, yield to call is higher than yield to maturity, and since issuers rarely call discount bonds anyway, YTW generally equals YTM.
Yield to worst matters because it keeps quoted yields honest. If a broker-dealer advertised a premium callable bond using its yield to maturity, the investor might never earn that figure — the issuer could call the bond early. That's why municipal bond rules require premium callable bonds to be quoted at their yield to worst (typically the yield to the near-term call), ensuring customers see the most conservative number.
The Series 7 exam tests yield to worst directly: know the yield ladder for premium bonds (nominal yield > current yield > YTM > YTC), that YTW is the lowest of YTM and all YTCs, and that callable bonds quoted to customers must reflect the worst-case yield.
Key takeaways
- Yield to worst is the lowest of a bond's yield to maturity and its yields to every call date.
- For premium callable bonds, yield to call (usually to the earliest call date) is typically the worst yield.
- For discount bonds, yield to worst generally equals yield to maturity, since calls are unlikely and YTC would be higher.
- Quoting premium callable bonds at yield to worst ensures investors see the most conservative possible return.