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What is yield to worst?

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Yield to put (YTP) is the total return on a bond that has an embedded put option to sell it back to the issuer if the puttable bond is held until the first permissible date when the put option can be exercised at a fixed price – typically at face value.  The YTP is usually higher than its YTM and trades at a discount to face value.  A puttable bond will have less price volatility at higher yields than a comparable option-free (straight) bond.

Yield to call (YTC) is the average annual internal rate of return on a callable bond that makes the present value of its cash flows equal to its price – frequently including a call premium – if it is held only to a call date, which shortens the bond’s cash flowYield-to-first-par-call date is the yield on a callable bond until the first date when the bond can be called at par.  A callable bond will have lower price volatility at lower yields than a comparable option-free (straight) bond.

Yield to worst is the lower of the yield to maturity (YTM) and the yield to call (YTC) on a callable bond on the call date with the lowest anticipated yield.  YTW applies only to callable bonds, which normally have multiple call dates.  The lower of the YTM and the YTC should be used in quoting the yield for a callable bond trading at a premium, since YTC is the more realistic measure of return.

Yield Relationships (Example)
Price Coupon Rate Current Yield YTM YTC YTW
100 8.00% 8.00% 8.00% 8.00% 8.00%
99 8.00% 8.08% 8.15% 8.22% 8.15%
101 8.00% 7.92% 7.85% 7.78% 7.78%

The yield to sinker on a sinking fund bond that anticipates some amount of the bond to be redeemed on the next scheduled sinking fund date.  Instead of yield to worst (YTW), yield to average life is used where bonds are retired systematically during the life of the issue, as is the case of sinking fund bonds.

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