Yield To Worst - YTW

YTW: Yield to worst, as in "the worst possible (but full fruition) outcome of a bond."

Meaning that the bond doesn't go bankrupt or kaput. It isn't kneecapped. Rather, it means that, if the bond is called at the worst time in its history, this then would be the yield to worst.

So..."huh?" you ask. Yes, we feel you. Most bonds come with early call features...that is, the issuer or company selling bonds (pieces of promise-ish paper) have a caveat. After, say, 5 years, they may want to be able to pay a two percent premium over par value of the bond and buy it back. Why would companies do this? Because they believe interest rates are falling, and that they can refinance their bonds at cheaper rates later. So a given bond might have a coupon that pays 60 bucks a year on a $1,000 par value unit. If rates fall, then in five years that bond can be bought back for $1,020 by the company. Then you, the bondholder, get semi-screwed.

Why? Because you thought you were gonna get six percent yield from that bond for 20 years...but you only got the yield for five. Remember that bond values trade up and down just like stocks, so if yields had really cratered, and that six percent coupon bond traded at, say, $1,200, and it had three years until it was callable, that YTW figure could be close to zero or even negative, i.e. the 60 bucks a year in interest over three years would juuuust cover the decline in value of that bond trading at $1,200 to then be redeemed at $1,020.

And yes, if that's the worst that happens to you in your investing career, consider yourself oh so lucky.