What is a Yield to Worst?

The yield to worst is understood to be the yield to maturity of a bond issue when the worst possible set of circumstances has taken place. As the lowest of all yield to maturity projections, the yield to worst makes a number of different assumptions and applies them to the yield on a bond. This approach helps to demonstrate what factors could impact the return on the bond in a negative manner.

Several of the factors that are taken into consideration with a yield to worst calculation are somewhat common, while others tend to carry much less chances of ever occurring. Generally, the assumptions are presented as simple cause and effect terms. For example, if there is no prepayment associated with the bond issue, then chances are the market yield will turn out to be higher than the coupon. At the same time, if the market yield is anticipated to be below the coupon, then prepayment is assumed.

Since the yield to worst represents the lowest possible quote on the yield to maturity, the calculation is an important consideration when considering a bond issue. Looking at what could possibly impact the value of the investment, allowing for various types of complications, will help the investor have a better picture of what type of reduced return could occur. This approach can help the potential investor consider the bond in a broader context, and not just in the best case scenario.

At the same time, the yield to worst should not be given an unusual amount of consideration. In most instances, the yield to worst is not more than one possibility of how the investment will turn out. While the strategy is helpful in investigating all possible scenarios associated with the bond issue, the results of those predictions should be balanced with the assumption that the ultimate yield on the bond issue will be more in line with the original projections presented by the institution issuing the bond.