How Yield to Worst and Yield to Maturity Work, When They Differ, and What the Exam Tests

Yield to maturity is the annual return an investor earns if they buy a bond at today’s price and hold it until it matures, with every payment made as promised. Yield to worst is the lowest yield the investor could receive without the issuer defaulting, found by calculating the yield to every possible early redemption date, such as each call date, as well as to maturity, and taking the lowest.

For a bond with no call feature, the two are the same. For a callable bond, yield to worst is often lower than yield to maturity, and it gives a more conservative, realistic picture of what the investor can expect.

This guide covers how each yield works, how to find yield to worst, worked examples for premium and discount bonds, a client scenario, the exam traps and five practice questions with explanations. Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

Why One Yield Is Not Enough

A bond’s yield depends on what the investor pays and what they receive in return. Yield to maturity assumes the bond runs its full course, but many bonds give the issuer the right to repay early.

When an issuer calls a bond, the investor receives the call price and stops receiving interest. If the investor paid more than the call price, that early repayment can cut their return sharply.

Yield to worst solves this by asking a simple question: of all the ways this bond could end, which gives the investor the lowest return? That yield is the one a careful investor, and the exam, focuses on.

Where This Topic Appears on the Exams

Bond yield questions appear in the investment vehicles section of the Series 65 and in the SIE and Series 7. They usually ask which yield is lowest for a premium or discount bond, or which yield a broker should quote to a customer.

FRC’s Series 65 Exam Preparation course covers bond yields, call features and pricing alongside the rest of the fixed income material, and the exam requires no sponsor. The SIE Examination Preparation course introduces bond yields for candidates starting out, and the Series 7 Exam Preparation course tests them in more depth for registered representatives.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Bond yields are one of the most reliable sources of marks once the logic is clear.

The Main Bond Yields

Nominal yield, also called the coupon rate, is the fixed annual interest rate printed on the bond, based on its par value. A $1,000 bond with a 6% coupon pays $60 a year, whatever its market price.

Current yield is the annual interest divided by the bond’s current market price. If that bond trades at $1,080, its current yield is $60 divided by $1,080, or about 5.56%.

Yield to maturity takes everything into account: the interest payments, the price paid and the gain or loss when the bond matures at par. Yield to call does the same, but assumes the bond is redeemed on a call date at the call price.

What Yield to Maturity Tells You

Yield to maturity is the single rate that makes the present value of all the bond’s remaining payments equal to its current price. It assumes the investor holds the bond to maturity, receives every payment on time and reinvests the coupons at the same rate.

For an option-free bond, yield to maturity is the standard way to compare bonds with different coupons and maturities. It reflects both the income and the price change between purchase and maturity.

Its weakness is that it ignores the possibility of early redemption. For a callable bond, yield to maturity can overstate the return the investor is likely to receive.

What Yield to Worst Tells You

Yield to worst is the lowest of the yield to maturity and the yields to every call date, put date or sinking fund date the bond has. It assumes the issuer will act in the way that is least favorable to the investor.

Issuers usually call bonds when interest rates have fallen, because they can refinance more cheaply. That is exactly when investors least want their money back, since they will have to reinvest at lower rates.

Because it is the most conservative yield, yield to worst is widely used to quote callable bonds and bond funds. FRC’s guide to yield to call vs yield to maturity explains the call yield that is often the worst case.

How to Find Yield to Worst

First, list every date on which the bond could be redeemed early, along with the price the issuer would pay on each date. Many callable bonds have a first call date at a small premium above par, with later call dates at par.

Next, calculate the yield to each of those dates using the bond’s current price, coupon and the redemption price on that date. Then calculate the yield to maturity.

Finally, compare them. The lowest number is the yield to worst, and the date that produces it is sometimes called the worst date.

Worked Example: A Premium Bond

A $1,000 par bond pays a 6% coupon semiannually, matures in 10 years and trades at $1,080. It can be called in three years at $1,020, or in five years at par.

Its current yield is about 5.56%, and its yield to maturity is about 4.97%. The yield to the five-year call at par is about 4.21%, and the yield to the three-year call at $1,020 is about 3.79%.

The yield to worst is therefore about 3.79%, more than a full percentage point below the yield to maturity. An investor relying on yield to maturity would overestimate their likely return, because the issuer has a strong incentive to call a bond paying 6% when market yields are lower.

Worked Example: A Discount Bond

Now take the same bond trading at $950, with a call in three years at par. Its yield to maturity is about 6.69%, and its yield to call is about 7.90%.

For a discount bond, an early call is good news for the investor, because they receive the $1,000 call price sooner than expected. The yield to call is higher than the yield to maturity.

The yield to worst is therefore the yield to maturity, about 6.69%. Issuers rarely call bonds that trade below par, because they are paying less interest than current market rates.

The Yield Order for Premium and Discount Bonds

For a bond trading at a premium, the yields run from highest to lowest as nominal yield, current yield, yield to maturity and yield to call. Yield to worst is usually the yield to the earliest call date, unless the call premium changes the result.

For a bond trading at a discount, the order is reversed, from yield to call at the top down to nominal yield at the bottom. Yield to worst is usually the yield to maturity.

For a bond trading at par, nominal yield, current yield, yield to maturity and yield to a par call are all the same. The table below summarizes the patterns.

Yield to Worst and Customer Disclosure

Because a callable bond’s yield to maturity can overstate the likely return, brokers commonly quote callable bonds on a yield-to-worst basis. For municipal securities, MSRB rules generally require customer confirmations to show the lower of the yield to call and the yield to maturity, which in effect is the yield to worst.

The principle behind this is fair dealing. A customer comparing two bonds should see the realistic return, not the most flattering one.

For an investment adviser representative, quoting yield to worst on a callable bond is consistent with the fiduciary duty to give clients accurate information. FRC’s guide to fiduciary standard vs suitability standard explains that duty in full.

Yield to Worst and Bond Funds

Bond funds and indexes often report a portfolio-level yield to worst, which is the weighted average of each holding’s yield to worst. It gives a conservative estimate of what the portfolio may earn if issuers redeem early where they can.

This is especially common for high-yield bond funds, which hold many callable bonds. FRC’s guide to investment-grade vs high-yield bonds covers the credit side of that market.

Yield to worst still assumes no default. A bond’s yield to worst is the lowest return without a default, not the lowest return in every possible outcome.

Yield, Duration and Call Risk

Call features affect not just yield but also interest rate risk. A callable bond’s price rise is limited when rates fall, because investors expect it to be called.

That is why analysts use effective duration rather than modified duration for callable bonds. FRC’s guides to key rate duration vs effective duration and callable vs non-callable bonds cover how call risk changes a bond’s behavior.

Puts, Sinking Funds and Other Redemption Dates

Call dates are not the only dates that count. A putable bond gives the investor the right to sell it back to the issuer at a set price on certain dates, and a sinking fund requires the issuer to retire part of the issue on a schedule.

Each of these creates another possible end date, with its own yield. Yield to worst compares them all, alongside the call dates and maturity.

A put works in the investor’s favor, so the yield to a put date is usually not the worst case. Sinking fund redemptions, like calls, can cut short a premium bond’s life and produce a lower yield.

The Reinvestment Assumption

Both yield to maturity and yield to worst assume that every coupon is reinvested at the same rate as the yield itself. In practice, coupons are reinvested at whatever rates are available when they are paid.

If rates fall after purchase, the investor’s actual return will usually be lower than the quoted yield, because coupons are reinvested at lower rates. This is reinvestment risk, and it is greatest for long-term, high-coupon bonds.

Zero-coupon bonds avoid reinvestment risk during their life, because they pay no coupons to reinvest. That is one reason they are used when an investor needs a known amount on a specific future date.

Client Scenario: Chasing a High Yield to Maturity

An investment adviser representative’s client wants income and has found a callable corporate bond trading at $1,100, with a yield to maturity of 5.2%. Similar non-callable bonds yield about 4.5%.

The adviser checks the bond’s call schedule and finds it can be called in two years at par. The yield to that call date is much lower than 5.2%, and it is the yield to worst.

The adviser explains that the 5.2% is unlikely to be earned if rates stay where they are, because the issuer has a strong reason to call the bond. Comparing yields to worst, the non-callable bonds may offer the client a better and more predictable return.

The Exam Traps

The first trap is assuming yield to maturity is always the most conservative yield. For a premium callable bond, yield to call is usually lower, and that is the yield to worst.

The second trap is forgetting that the order reverses for discount bonds. When a bond trades below par, yield to maturity is usually the yield to worst.

The third trap is checking only the first call date. If later call dates have different call prices, one of them may produce the lowest yield. The fourth is thinking yield to worst accounts for default risk, when it assumes the issuer makes every payment.

For more traps like these across all four sections of the exam, see FRC’s guide to Series 65 exam traps and common mistakes. The Series 65 investment vehicles questions guide covers the fixed income traps in more depth.

A Memory Aid

Remember “premium punished early.” When an investor pays a premium, an early call takes that premium away fastest, so the yield to the earliest call is the worst case.

For discount bonds, remember the reverse: an early call gives the discount back faster, so the investor’s worst case is waiting until maturity.

Practice Questions

Question one: a non-callable bond has a yield to maturity of 4.8%. What is its yield to worst? 4.8%, because a bond with no early redemption dates has a yield to worst equal to its yield to maturity.

Question two: a callable bond trades at a premium. Which yield is usually its yield to worst? The yield to the earliest call date.

Question three: a callable bond trades at a discount. Which yield is usually its yield to worst? The yield to maturity.

Question four: a bond’s yield to maturity is 5.0%, its yield to the first call is 4.1% and its yield to the second call is 4.4%. What is its yield to worst? 4.1%, the lowest of the three.

Question five: does yield to worst reflect the risk that the issuer defaults? No, it assumes every payment is made and measures only the effect of early redemption.

Related Questions

Bond yields connect closely to several other fixed income topics on the exams. FRC’s guide to Macaulay duration vs modified duration covers how price sensitivity is measured, and the guide to what happens when a bond is downgraded explains how credit changes affect price and yield.

Together, they give you a complete picture of how bond prices, yields and risks fit together.

Get Exam-Ready

Yield questions are among the most dependable marks on the exam once the premium and discount patterns are clear. The FRC Series 65 playlist linked at the top of this guide covers every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE, the Series 7 or all three, structured exam preparation turns topics like bond yields into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

Yield to maturity assumes a bond is held until it matures. Yield to worst is the lowest yield across maturity and every early redemption date, and for a premium callable bond it is usually the yield to the earliest call.

Remember “premium punished early,” and you will be ready for every version of this question the exam can ask.