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YTM vs YTW: Yield to Maturity vs Yield to Worst
Yield to maturity (YTM) and yield to worst (YTW) both express a bond's return as a single annualized percentage, but they assume different futures. YTM assumes the bond survives to its final maturity date. YTW assumes the least favorable outcome the issuer can force on you. On a callable bond those two numbers can diverge sharply, and quoting the wrong one overstates what you will actually earn.
Key Takeaways
- YTM is the total annualized return if you hold a bond to its stated maturity and reinvest every coupon at that same rate.
- YTW is the lowest yield you can receive across every possible early-redemption date, including each call date, assuming the issuer acts in its own interest.
- For a non-callable bond YTM and YTW are identical; the gap only appears when the issuer holds an option to redeem early.
- On a premium bond the issuer is likely to call, so YTW (usually the yield to call) is the conservative figure to trust, not the higher YTM.
Key Takeaways
- YTM is the total annualized return if you hold a bond to its stated maturity and reinvest every coupon at that same rate.
- YTW is the lowest yield you can receive across every possible early-redemption date, including each call date, assuming the issuer acts in its own interest.
- For a non-callable bond YTM and YTW are identical; the gap only appears when the issuer holds an option to redeem early.
- On a premium bond the issuer is likely to call, so YTW (usually the yield to call) is the conservative figure to trust, not the higher YTM.
What It Is
Yield to maturity is the single discount rate that sets the present value of a bond's remaining coupons plus its par redemption equal to its current market price. It is the internal rate of return under one assumption: the bond is held all the way to maturity.
Yield to worst is not a new formula. It is a selection rule. You compute the yield to every date the issuer could redeem the bond, the yield to maturity plus a yield to call for each call date, and then report the smallest of them. That minimum is the worst outcome the issuer's options can impose, hence the name.
Both are expressed as an annual percentage, and for both a higher number means a higher return to you.
The Intuition
A bond's yield depends on when you get your money back. An issuer will only call a bond early when doing so benefits the issuer, which is precisely when it hurts the holder. Issuers call bonds after interest rates fall, refinancing expensive coupons cheaply. That early redemption cuts short the stream of above-market coupons you were counting on.
YTM ignores this by assuming the bond always runs full term. YTW takes the issuer's option seriously and asks: given every exit the issuer can choose, what is the least I might earn? Answering that question keeps you from paying for coupons you may never collect.
How It Works
For any single redemption date, the yield is the rate y that solves:
- Price = C / (1+y) + C / (1+y)^2 + ... + (C + Redemption) / (1+y)^n
where C is the periodic coupon, n is the number of periods to that date, and Redemption is par at maturity or the call price at a call date.
To get YTW, solve this equation once per possible redemption date, then take the minimum yield. A useful shortcut: a bond trading at a premium (above par) will almost always show its lowest yield at the earliest call date, so YTW equals the yield to the first call. A bond trading at a discount (below par) usually shows its lowest yield at maturity, so YTW equals YTM. This is because calls redeem at or near par, which is a smaller payoff than a premium price and a larger one than a discount price.
Worked Example
Take a bond with $1,000 par, a 6% annual coupon ($60), priced at $1,050, with 10 years to maturity and one call in 3 years at par ($1,000).
Use the standard yield approximation, [C + (Redemption - Price) / n] / [(Redemption + Price) / 2]:
- YTM = [60 + (1000 - 1050) / 10] / [(1000 + 1050) / 2] = [60 - 5] / 1025 = 55 / 1025 = 5.37%.
- Yield to call = [60 + (1000 - 1050) / 3] / [(1000 + 1050) / 2] = [60 - 16.67] / 1025 = 43.33 / 1025 = 4.23%.
Solving the two cash-flow equations exactly gives close figures, roughly 5.34% for YTM and 4.19% for the call. Either way, the yield to call is lower.
- YTW = min(5.37%, 4.23%) = 4.23%.
Because the bond trades at a premium, the issuer has every reason to call it in three years and refinance. Quoting the 5.37% YTM would overstate your realistic return by more than a full percentage point. The 4.23% YTW is the honest number.
Common Mistakes
- Trusting YTM on a callable premium bond. The higher YTM assumes coupons you will likely lose to a call. YTW is the figure that survives the issuer's decision.
- Assuming YTW always equals the yield to call. For a discount bond the worst case is usually holding to maturity, so YTW equals YTM. Check the price relative to par before concluding.
- Ignoring reinvestment risk. Both measures assume coupons are reinvested at the computed yield. If rates fall, real reinvestment happens at lower rates and your realized return trails both figures.
- Comparing bonds on different yield measures. Screening one bond by YTM and another by YTW is not apples to apples. Rank a callable universe on YTW consistently.
- Forgetting sinking funds and make-whole calls. These are additional redemption paths that a full YTW calculation must include, not just a single stated call date.
Frequently Asked Questions
Q: What is the core difference in ytm vs ytw? YTM is the return if the bond runs to its final maturity date. YTW is the lowest return across every date the issuer could redeem it early, including each call. YTW is always less than or equal to YTM.
Q: When are YTM and YTW the same number? They are identical whenever the bond has no early-redemption feature, or when the worst redemption case happens to be maturity itself, which is typical for a bond trading below par. In those cases there is nothing for the issuer to call away early.
Q: For a callable premium bond, which of ytm vs ytw should I use? Use YTW. A premium bond is a strong candidate for an early call, so its worst-case yield, usually the yield to the first call, is the conservative and realistic figure. The higher YTM assumes coupons you may never collect.
Q: Can yield to worst ever be higher than yield to maturity? No. YTW is defined as the minimum of all possible yields, and YTM is one of the candidates in that set. By construction YTW is less than or equal to YTM.
Q: Does yield to worst assume the issuer will definitely call the bond? Not exactly. It assumes the issuer will act in its own interest at each redemption date and reports the outcome worst for you. It is a conservative planning figure, not a prediction that a specific call will happen.
Sources
- Investopedia. "Yield to Maturity (YTM)." https://www.investopedia.com/terms/y/yieldtomaturity.asp
- Investopedia. "Yield to Worst (YTW)." https://www.investopedia.com/terms/y/yieldtoworst.asp
- Investopedia. "Yield to Call (YTC)." https://www.investopedia.com/terms/y/yieldtocall.asp
- FINRA. "Bonds." https://www.finra.org/investors/investing/investment-products/bonds
Disclaimer
This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.