Yield to worst is
Yield to worst is a measure of the lowest possible yield that a bond can have and still be traded in the market. This yield is determined by the worst case senario of all interest payments being made on time and the bond’s price not moving.
A method of calculating the lowest possible yield that a bond can reach
Yield to worst is a method of calculating the lowest possible yield that a bond can reach given its current price. The yield to worst is often used when bond prices are volatile, as it provides a more conservative estimate of returns than the other methods.
To calculate the yield to worst, we first need to know the coupon rate, the maturity date, and the current price of the bond. From there, we can use a simple formula:
Yield to worst = (Coupon rate – [Current price – Maturity value]) / [Current price + Maturity value]
For example, let’s say we have a bond with a coupon rate of 5%, a maturity date of 10 years, and a current price of $1,000. The maturity value is the face value of the bond, which in this case is also $1,000. We can plug those numbers into our formula to get:
Yield to worst = (5% – [$1,000 – $1,000]) / [$1,000 + $1,000] = 5%
So in this example, the yield to worst would be 5%.
Used by bond investors to determine the riskiness of a bond
Yield to worst (YTW) is a measure used by bond investors to determine the riskiness of a bond. It is the yield that an investor would receive if the issuer of a bond were to default on its obligations and not make any interest payments. The yield to worst is usually lower than the yield to maturity, which is the yield that an investor would receive if the issuer of a bond made all of its interest payments on time and paid back the face value of the bond at maturity.
How to calculate yield to worst
Yield to worst is the lowest possible yield that can be received on a bond that has more than one call date. The yield to worst is calculated by taking the lowest yield of the call dates and adding it to the yield of the bond to maturity.
Find the yield to call
First, you need to find the yield to call. To do this, you’ll add the stated rate of interest to the call premium. The sum is the yield to call. In this example, the stated rate is 4%, the call premium is 2%, and the yield to call would be 6%.
Next, you need to find the yield to maturity. To do this, you’ll add the coupon rate to the difference between the price of the bond and par value. In this example, let’s say that bonds with a par value of $1,000 are currently selling for $1,040. The coupon rate is 6%, and 6% of $1,000 equals $60. So, the yield to maturity would be 4% + (($1,040 – $1,000) / $1,000), or 10%.
Lastly, you need to find the yield to worst. To do this, you’ll take the lowest number out of either the yield to call or yield to maturity. In this example, that would be 6%.
Find the yield to maturity
To calculate the yield to worst, you first need to find the yield to maturity. The yield to maturity is the rate of return you’ll earn if you hold a bond until it matures. To find the yield to maturity, you need to know the current market price of the bond, the face value of the bond, the coupon rate, and the number of years until maturity. Once you have that information, you can use this formula:
YTM = [(FV + CP) / 2] / [FP * (1 + YTM)^n] – 1
YTM = Yield to maturity
FV = Face value of bond
CP = Coupon payments per year
FP = Current market price of bond
n = Number of years until maturity
Once you have the yield to maturity, finding the yield to worst is easy. The yield to worst is simply the lowest possible yield you could get if the issuer were to call your bond or if it defaults. So, if your bonds have a YTM of 6% and a yield to worst of 4%, that means that even if the issuer calls your bonds or they default, you’ll still earn a 4% return on your investment.
Compare the two yields and choose the lower one
When two companies have similar yield to maturity numbers, the yield to worst can be used to more accurately compare the two. The yield to worst is the lower of a bond’s yield to maturity or its yield to call. The yield to call is the interest rate you would receive if you held the bond until its next call date and then got called away.
To calculate the yield to worst, first compare the bond’s yield to maturity and yield to call. If the YTM is lower, then that is the YTW. If the YTC is lower, then that is the YTW.
For example, imagine Company A’s bonds have a YTM of 6% and a YTC of 5%. Company B’s bonds have a YTM of 7% and a YTC of 6%. In this case, Company A has a lower YTW than Company B.
Investors often choose bonds with lower yields to worst because there is less chance that they will lose money on their investment.
Check some connected readings on, for instance the history of junk bonds information article, and also convertible bond explained.
Why yield to worst is important
Yield to worst is the lowest yield that a bond can currently be traded at in the market. The yield to worst is important because it is the worst-case scenario for a bondholder. If interest rates rise, the price of the bond will fall and the yield to worst will increase. This yield is used to compare different bonds.
Helps investors compare different bonds
It is important for investors to compare different bonds before deciding which one to invest in. The yield to worst (YTW) is a measure that can be used when comparing bonds. YTW is the lowest yield that a bond can reach if the issuer defaults on its payments. In other words, YTW is the yield that an investor would receive if they purchased a bond today and the issuer defaulted on its payments immediately.
YTW is generally lower than the bond’s current yield because it takes into account the possibility of default. For this reason, YTW can be a useful measure for comparing the riskiness of different bonds. If two bonds have similar yields, but one has a higher YTW than the other, this suggests that the first bond is riskier than the second.
It is important to note that YTW only applies to bonds that are in danger of defaulting. For example, government bonds typically have very low default risk and as a result, their YTW will be similar to their current yield.
Helps investors understand the risks associated with a bond
Yield to worst is the lowest yield that can be received on a bond without the issuer actually defaults. The yield to worst is basically a worst-case scenario yield, and it helps investors understand the risks associated with a bond. In most cases, the yield to worst will be lower than the coupon rate, but if the bond is close to maturity, the two rates may be close to each other.