CFA Level IFixed IncomeMedium
A callable bond has the following yields: yield to maturity = 6.20%, yield to call in 3 years = 5.80%, and yield to call in 5 years = 6.50%. Assuming these are the only redemption possibilities, the bond's yield to worst is closest to:
- A6.20%
- B6.35%
- C5.80%
- D6.50%
Show answer & explanationAnswer & explanation
Correct answer: C. 5.80%
Yield to worst is the minimum of all possible yield outcomes (YTM and all YTCs) an investor could realize. Among 6.20%, 5.80%, and 6.50%, the lowest is 5.80%, so that is the yield to worst.
Why the other options are wrong
- A. This is the YTM, which is not the minimum of the possible outcomes.
- B. Not one of the given yield scenarios; not relevant.
- D. This is the highest yield scenario, not the worst case.
Yield to Worst
The lowest potential yield an investor could receive among all possible redemption scenarios (maturity or various call dates) on a bond.
- Calculated by comparing YTM to YTC at each call date
- Used as a conservative yield measure for callable bonds
- Reflects the issuer's incentive to call when advantageous to them, not the investor
Memory trick: 'Assume the worst case — pick the lowest yield among all exits'