Yield To Worst Calculator
Introduction
Calculating yield to worst (YTW) is essential for investors assessing the potential returns of bonds. YTW represents the lowest possible yield a bondholder can receive given the bond's various call provisions and maturity dates. With a proper understanding of YTW, investors can make informed decisions regarding bond investments.
How to Use
To use the yield to worst calculator, input the bond's current price, face value, coupon rate, years to maturity, call price, and call date (if applicable). Then click the "Calculate" button to obtain the yield to worst.
Formula
The formula for calculating yield to worst involves determining the yield under each scenario (such as maturity or call date) and selecting the lowest yield. The formula is as follows:
YTW = \frac{{C + \frac{{F - P}}{{n}}}}{{\frac{{F + P}}{{2}}} \times 100
Where:
- C = Annual coupon payment
- F = Face value of the bond
- P = Current price of the bond
- n = Number of years to maturity
Example Solve
Consider a bond with a face value of $1000, a coupon rate of 5%, currently priced at $950, with 5 years to maturity. The bond can be called in 3 years at a call price of $1020.
YTW = \frac{{50 + \frac{{1000 - 950}}{{5}}}}{{\frac{{1000 + 950}}{{2}}} \times 100 = 5.8\%
FAQs
What is Yield to Worst (YTW)?
Yield to worst represents the lowest potential yield an investor can receive on a bond, considering all possible scenarios such as maturity or call date.
Why is Yield to Worst Important?
YTW helps investors understand the minimum return they could receive from a bond investment, considering different circumstances like early redemption.
Conclusion
In conclusion, calculating yield to worst is crucial for bond investors to assess the potential returns of their investments accurately. By utilizing the yield to worst calculator and understanding its implications, investors can make more informed decisions regarding bond investments.