If you are a big investor and love to invest, then you need to know about the yield to worst estimate.
Do you really know what it is?
Well, yield to worst is an estimate of the lowest possible yield that you can think of to earn from the bond on the basis of its term of the agreement. It is the lowest yield that which an investor can invest when he is investing in a bond.
It is that measure that is used which we use in place of yield to maturity with the callable bonds. Before the callable bond reaches its maturity date, you can buy it back. Yield to maturity does not give any idea about the picture of what you can expect to earn.
If you think that I can explain you better, come with me this way…
I think you will!
How Can You Calculate Yield To Worst?
If your bonds are callable, then you should know the least return that you can expect for. The callable bond means that the organization has the full right to buy back the bond early at a fixed date or the dates.
If the same happens, then the effective yield of the bond can go lower than your expectation. So, it is always advised to configure the worst case, also called as the yield to worst.
Following are the points about how to calculate the yield to worst.
Here’s is a handy information for you!
✓ The market price or the amount that you paid, of the bond.
✓ The maturity date of the bond.
✓ The par value of the bond.
✓ All of the potential call dates.
✓ The coupon rate or the yearly interest payment.
Now, how you can calculate the interest rate?
Current interest rate = Annual Interest / Market price ✖ 100
This is the bond that you yield each year based on the interest payment, and if you want to yield the remaining life of the bond then you need to multiply this rate by the number of years remaining.
Next is, if you want to calculate the yield, then you need to subtract the market price from the par value. Now, divide this by the par value and multiply by the 100.
Yield = Par Value 一 Market Price/ par value ✖ 100
This is how you can calculate the yield price.
Yield To Worst With Example
You just imagine a bond with a maturity age of 6 years, 6% coupon rate with the annual payments, and provision of 2 years to call it.
By making the use of the financial calculator, you will come to know that the yield to maturity comes out to be 5.8%. As you know that the bond can be called in 2 years, the payment with interest of the following years would be lost should the bond be called.
Now you have to make the use of your financial calculator again, you came to know that the yield to call is 4.4% for the first two years.
This is what? You got the yield to worst.
Determining The Investment Return
To determine the return on the investment, you have to seek the help of the financial calculator. You need to plug some variables to into the calculator, which is going to give you the actual return on the investment.
Let me explain you with the example:
- Face value – 10,000 Dollars
- Annual coupon rate – 7 %
- Years to call – 5
- Coupon payments per year – 2
- Call premium – 102 %
- Current price of the bond – 9,000 Dollars
When you gonna plug these figures in yield-to-plug calculator, you will get the result. In this, the yield to call of the bond is 9.9, which is the return on the investment.
One thing that you should note that; On the coupon rate, the investor gets the premium.
Words of Cessation…
In this article, we have discussed the yield to worst. I have tried to explain you with the example. After reading this, the investors can calculate the yield to worst with the help of a financial calculator.
You get the idea about yield to return also. Both the terms are linked to each other. I hope, I have helped you to add something in your knowledge.
If you want to know more, kindly ask me, and if you want to add something to my knowledge, you are pretty sure welcomed.