What is yield to worst and when is it the right metric?

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AcadiFi · Accepted Answer

Yield to worst (YTW) is the lowest yield an investor would realize across all possible call, put, and maturity scenarios. It's the conservative yield assuming the issuer always acts optimally (calls when favorable, declines to call otherwise) and represents a floor on returns. Formally: YTW = min(YTM, YTC_1, YTC_2, ..., YTP_1, YTP_2, ...). Calls favor the issuer (the issuer calls when rates fall), so YTC matters for premium bonds. Puts favor the holder (holder puts when rates rise), so YTP matters for discount bonds. Example: Rytherfel Industries 7.25% semi-annual bond with 8 years to maturity, two call dates at 2 years ($1,030) and 4 years ($1,015), one put date at 5 years ($1,000). Current price = $1,065. Scenarios: YTM = 6.20% (hold to maturity), YTC-2yr = 5.85% (call at $1,030 after 2 years), YTC-4yr = 6.02%, YTP-5yr = 6.28% (put at par). YTW = min(6.20, 5.85, 6.02, 6.28) = 5.85%. Market quotes this as the conservative yield. Why industry standard: (1) regulators (SEC, FINRA) require it for retail disclosures to avoid overstating returns; (2) portfolio managers use it for callable-bond duration and spread calculations; (3) it prevents misleading comparisons — a high YTM premium callable bond might actually deliver only YTC.

What is yield to worst and when is it the right metric?

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