What is yield to worst, and why is it the most conservative yield measure for callable bonds?

Yield to worst (YTW) is the most conservative yield measure because it represents the lowest possible yield an investor could receive across all potential call dates and maturity.

The Concept:

For a callable bond, the issuer can redeem the bond before maturity on specific call dates. Each call date has a different yield-to-call (YTC). The yield to worst is simply the minimum of all these yields and the yield to maturity.

YTW = min(YTC_1, YTC_2, ..., YTC_n, YTM)

Why Investors Use YTW:

When interest rates fall, the issuer is most likely to call the bond (refinance at lower rates). This means the investor receives their principal back early and must reinvest at lower rates — exactly when they don't want to. YTW captures this worst-case scenario.

Worked Example:

Pacifica Municipal Power issues a 6% coupon bond at par ($1,000), maturing in 10 years, callable at:

• Year 3 at $1,030 (3% call premium)
• Year 5 at $1,015
• Year 7 at $1,000 (par call)

Current market price: $1,065 (trading at a premium because rates have fallen)

YTW = 4.12% (the Year 3 call scenario)

Because the bond trades at a premium, the earliest call produces the worst yield. The issuer is likely to call because current rates are below the 6% coupon.

When YTW = YTM:

If the bond trades below par (at a discount), rates are above the coupon rate, so calling is unlikely. In this case, the YTM is typically the lowest yield, and YTW = YTM.

Key Rule:

• Premium bonds: YTW is usually the nearest call date (lowest yield)
• Discount bonds: YTW is usually YTM (longest duration, lowest yield)
• Par bonds: YTW = YTC = YTM (all approximately equal)

Exam Tip: If given multiple call dates and a current price, calculate YTC for each date and compare to YTM. The lowest is YTW. Most exam questions will test whether you correctly identify which scenario produces the minimum yield.

Practice YTW calculations in our CFA Level I fixed income question bank.