### Core Financial Modeling

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Learn moreThe “Yield to Worst” (YTW) of a bond is the worst-case possible annualized return an investor could earn if they buy the bond at today’s market price and hold it until either maturity or until the company “calls” it by repaying it early; it’s the minimum of the Yield to Call on each possible call date and the Yield to Maturity.

Yield to Worst (YTW): Definition, Intuition, and Excel Calculation Examples

The “Yield to Worst” (YTW) of a bond is the

worst-casepossible annualized return an investor could earn if they buy the bond at today’s market price and hold it until either maturity or until the company “calls” it by repaying it early; it’s the minimum of the Yield to Call on each possible call date and the Yield to Maturity.

The true “worst-case scenario” is that the company will **default** on its debt and not be able to pay interest or repay the debt principal on time; the YTW is the “worst-case scenario *assuming interest and principal repayments still happen.*”

When a bond trades **at or below par value**, the **Yield to Worst equals the Yield to Maturity**.

In other words, the worst-case outcome for investors in this case is to hold the bond until it matures. If the company “calls it” by repaying the bond early, the investors will earn a **higher annualized return.**

When a bond trades **at a premium to par value**, the **Yield to Worst is less than the Yield to Maturity**.

In other words, if the investors pay a premium for a bond, they *earn more *if the company waits until the official maturity date to repay the bond rather than repaying it early.

This is because when investors pay a premium, that extra amount is “distributed” over a shorter time frame if the company repays the bond early, which hurts the average annualized returns.

Learn accounting, 3-statement modeling, valuation/DCF analysis, M&A and merger models, and LBOs and leveraged buyout models with 10+ global case studies.

Learn moreThe YTW helps investors evaluate the worst-case scenarios and target specific return ranges.

In real life, the Yield to Worst is a common method of **pricing and comparing bonds**.

Metrics such as the Yield to Call do not work as well for comparing different bonds because each bond has different call dates and penalty fees for early repayment on those dates.

But the YTW is a **single metric** that factors in every possible YTC and the YTM and, therefore, lets you easily compare many different bonds.

Bond Yields – Formulas and Examples (XL)

Yield to Call and Yield to Worst – Excel Examples (XL)

Suppose that a bond’s maturity date is June 15^{th}, 2031, and it currently trades at a **5% discount to par value** (market price of $950 vs. par value of $1000). It has a coupon rate of 5%.

The **call premiums** or **penalty fees for early repayment** range from 5.3% in the current year (2024) down to 0% in the final two years (2030 and 2031).

Additionally, the bond is **callable** – meaning the company can repay it early – on June 15^{th} and December 15^{th} of each year.

To calculate the **Yield to Worst** for this bond, you’d start by calculating the **Yield to Call** on each possible call date:

The Yield to Call is based on the current market price of the bond, the “settlement date” (the purchase date), the coupon rate, the repayment date, and the percentage of the original principal that gets repaid, which reflects the penalty fee.

Once you have all these, you can calculate the Yield to Maturity using the same Excel function, but with a different repayment date and no penalty fee (i.e., the “Redemption Value” should be 100):

Then, you can take the minimum of all the YTCs and the YTM to calculate the **Yield to Worst.**

Here’s the Excel output for this scenario:

Since this is a **discount bond**, the YTW equals the YTM. In other words, investors get the **worst deal** if the company waits until the official maturity to repay the bond.

For a **premium bond**, the YTW is **less than** the YTM because in this case, it’s worse for the investors if the company repays the bond early.

Here’s an example of the same scenario, but with a bond that trades at a 5% premium (market price of $1,050 vs. a par value of $1,000):

The YTW can **never** exceed the YTM; it’s always less than or equal to the YTM, depending on the bond’s price:

**Discount Bond:** YTW = YTM

**Par Value Bond:** YTW = YTM

**Premium Bond:** YTW < YTM

In investment banking groups such as Leveraged Finance and Debt Capital Markets, you often use the **Yield to Worst** as part of the Debt comps (i.e., an analysis of comparable Debt issuances from similar companies) when advising clients on possible refinancings.

For example, the YTW might give a client an approximate idea of what they might pay on a new bond issuance if they want to raise capital.

This YTW *might* represent the coupon rate on a new bond, but it could also represent the “overall yield” on the bond, which might include a possible original issue discount (OID) and call premium as well.

For example, even if the YTW is 8%, it doesn’t necessarily mean the company has to issue a new bond with an 8% coupon rate.

Instead, the company might be able to issue bonds at a 7.0% or 7.5% coupon rate and then **offer investors a discount** on the purchase that results in a yield closer to 8%.

The YTW is almost always included as a key field in these “Comparable Debt Issuances,” as shown below in a case study based on Netflix and its peer media/streaming companies, taken from our Advanced Financial Modeling course:

These yield metrics all measure the **returns** an investor can expect to receive on a bond, but they do it in different ways.

**–Current Yield**: This tells you the percentage investors would earn on a bond if they bought it today and **held it for a year**, factoring in the market price and the coupon rate on the bond.

**–Yield to Maturity**: This gives the annualized return investors earn if they buy a bond at its current market price and **hold it until maturity**, assuming the company makes all the required payments and the investor reinvests the interest payments at the same rate as the overall return.

**–Yield to Call**: This is similar to the YTM, but investors hold the bond only until **an earlier call date**, not the maturity date, and also receive some type of penalty fee paid by the company in exchange for this early repayment.

**–Yield to Worst**: This is the lowest annualized return an investor might receive from buying and holding a bond until *either* early repayment *or* maturity, i.e., it is the **minimum** of all the YTCs and the YTM.

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.