What does YTW mean in investments? | Finance
By: William Pirraglia | Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance | Updated on March 05, 2019
In the investment world, YTW stands for Yield to Worst. YTW is the lowest potential return you can receive from a bond, assuming the issuer does not default. If the bond has call provisions, the YTW calculations assume that the bond will be called, prepaid. If the buy provisions allow the issuer to reduce the coupon rate below market levels, the YTW displays the lowest possible return you would receive in a worst-case scenario.
The YTW acts as a measure by which investors can identify the lowest possible return on their bond acquisitions barring payment default.
Understanding on-call performance
Bonds often have multiple call dates, when the issuer can repay the bond’s principal and accrued interest before maturity. Investors calculate the call yield, YTC, for each call date over the remaining terms of the bonds. In this case, YTW is equal to the lowest possible yield on all call dates, assuming the issuer redeems the bond on the following or additional call dates.
Explore yield to maturity
The yield to maturity, commonly known as YTM, is the actual yield you will earn if you held the bond to its stated maturity. For example, you buy a 10-year bond in its third year. The YTM is your projected yield if you hold the bond for the next seven years, when it matures, paying you principal and all interest owed. Many investors also calculate YTW from the stated maturity of the bond.
Valuation of redeemable bonds
YTW is most important when you own callable bonds. Common terms for callable bonds include an annual coupon payment and a call date. For example, a $ 1,000 bond with a 5% coupon rate and a three-year term costs you $ 1,012. The bond pays annual coupons, but is redeemable in one year. The YTM is 4.56% and the YTC is 3.75%. In this example, YTW is also 3.75% because the worst-case scenario is that the issuer calls the bond in a year.
The importance of YTW
The YTW is vital for investors, especially those with callable bonds. For example, if the current interest rates fall below the coupon rate of a callable bond, issuers often recall those bonds on the next repayment date so that they can reissue them at lower rates. Calculating the YTW gives investors valuable insight into their minimum return if the bond is called, leaving it up to them to find other investments.
Other relevant considerations
YTW is not useful in all situations. For example, consider zero coupon bonds. Since these do not guarantee any periodic interest payments, they are usually sold at large discounts from their face value. Since there is no stated interest rate or coupon, YTW’s calculations don’t mean much. You decide on the lowest yield you will accept and price the bond accordingly.