Module III· DCM — High Yield & HybridIntermediate
Question
What is yield-to-worst (YTW), and why is it used for HY bonds instead of YTM?
Answer
Mechanics
Yield-to-worst is the lowest yield an investor can receive across all permitted redemption scenarios, assuming no default.
For a callable bond:
```
YTW = min(YTM, yield to first call, yield to later calls, yield to put if applicable)
```
Example
A HY bond priced at 105 with 7% coupon may have 6.2% yield to maturity but only 5.5% yield to first call. YTW is 5.5%.
Why used
HY issuers call bonds when refinancing is favorable. Investors therefore focus on the worst economic call scenario. YTM can overstate expected return if the bond is likely to be called early.
Pitch tip
IG bonds are often discussed on YTM / spread basis; callable HY bonds are typically priced on yield-to-worst.