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.
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Finance: What is Term To Maturity?12 Views
finance a la shmoop what is term to maturity alright people well it's kind
of a lifecycle of a bond like a bond is issued or sold it has an assay a 15 year [Bond timeline appears]
duration somebody's written that money for 15 years its term to maturity when
it first was issued was 15 years but if you bought that bond nine years into it
some you know maturation process when all the hairs growing in funny places [Hairs grow out of bond]
then at that point it would have six years current maturity well what goes on
between these years interest payments and then eventually at the very end the
issuer pays back the principal to the investor who bought the bond and [Money transfers from issuer to investor]
everyone goes away happy-ish well bonds carry gradations in short medium and
long term terms to maturity like short term generally is considered one to five [Different types of bond appear]
years mid term medium term and something like that is like five to a dozen years
and long term is like up to you know thirty or even a hundred years after
that dozen or so no hard lines here they're all dotted and yeah Disney [Man discussing bonds at DisneyLand]
actually sold a hundred year bonds at one point and they are of course the
happiest bonds on earth [Disney bonds appear]
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