Yield to Worst (YTW)
Definition
Yield to Worst (YTW) is the lowest annualised yield an investor can earn on a bond without the issuer defaulting, taking into account all possible redemption scenarios (maturity and any call/put/early-redemption features). It is the minimum of the bond’s YTM, YTC(s), and other applicable yields.
Key Takeaways
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Conservative yardstick: YTW = min(YTM, any YTC, etc.).
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Needed for callable/putable bonds: captures early-redemption risk.
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Risk control: portfolio and compliance reports often quote YTW.
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Price behaviour: when call is likely, market pricing gravitates toward call price, making YTC (and thus YTW) more relevant than YTM.
How It’s Determined (no LaTeX)
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Compute YTM (yield to stated maturity).
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Compute YTC for each eligible call date/price.
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If applicable, compute other embedded-option yields (e.g., Yield to Put).
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YTW is the lowest of those yields, using dirty price (clean + accrued).
Nigeria Context (illustrative)
A corporate NGN bond, first call at par after Year 5:
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YTM = 12.8%, YTC(Year 5) = 12.1% → YTW = 12.1%.
Investors and risk managers would evaluate the bond on 12.1%, not 12.8%, because early call is possible.
Why YTW Matters
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Prevents overstating return when call is likely.
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Standard for mandates/limits (e.g., “portfolio YTW ≥ X%”).
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Useful for scenario analysis and worst-case planning (non-default).
Common Pitfalls
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Looking only at YTM on callable bonds.
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Ignoring call schedule (dates/prices) when computing YTC.
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Using clean price instead of dirty price for yield math.
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Forgetting that YTW can change as time and market yields move.
Mini-FAQ
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Is YTW a guarantee? No—just the lowest yield under the contract’s redemption options (no default).
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If a bond isn’t callable, what’s YTW? Then YTW = YTM.
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Which should I quote—YTM or YTW? Quote both; use YTW for conservative comparisons and risk reporting.
Related Terms
Yield to Maturity (YTM) · Yield to Call (YTC) · Callable Bond · Yield to Put · Duration · Convexity · Coupon
