# How to calculate worst case yield

There’s a lot more to investing in bonds than just looking at the stated interest rate, or coupon. Many bonds are *callable*, which means that the issuing company has the right to redeem the bonds early on one or more predetermined dates. If this happens, your actual return from holding the bond could potentially be lower than you expected, so it’s important to analyze the worst-case scenario, known as the bond’s return. *give in to the worst*. Here’s how to calculate that for your bonds.

**Calculate the worst-case yield**Before you begin, you’ll need to have a few things handy, including:

- The price you paid, or the market price, for the bond.
- The face value of the bond.
- All potential call dates.
- The bond’s maturity date.
- The annual interest payment, or coupon rate.

Now determine the bond’s current annual interest rate based on the price you paid. You can do this by dividing the annual interest payment by the price you paid or the current market value of the bond. Then multiply by 100 to convert to a percentage.

This is the bond’s annual yield based solely on interest payments. So, to find the yield over the remaining life of the bond, multiply that rate by the number of years remaining. Do the same for each call date.

Next, you need to determine the yield that comes from the market price of the bond by subtracting the price you paid from the face value of the bond. Divide this result by the face value of the bond and multiply by 100. Remember that this return may be negative if you paid more than the face value of the bond.

Finally, add the two types of yield – interest rate and bond price – for each of the possible call dates along with the maturity dates. Divide by the number of years to convert to an annual rate. The lower rate is the worst yield for your bond.

**An example**Suppose you bought a bond with a face value of $1,000 and a coupon rate of 5%, and paid $1,030 for it. And we’ll say the bond matures in five years, with possible redemption dates in two years and four years.

Based on this information, we can see that the surety pays $50 per year. So we can calculate its current interest rate like this:

If the bond is held to maturity, five years of interest would produce a total return of 24.25%. Or, if the bond were called after two or four years, you would have a total return of 9.7% or 19.4%.

Then, since you bought the bond at a premium, we need to factor in that contribution to the total return.

Finally, we can calculate the worst-case yield using a table like this and comparing the annual returns of each call date:

Date of purchase/maturity |
Total interest return |
Price difference Yield |
Total return |
annualized |
---|---|---|---|---|

2 years |
9.7% |
(3%) |
6.7% |
3.35% |

4 years |
19.4% |
(3%) |
16.4% |
4.1% |

5 years (maturity) |
24.25% |
(3%) |
21.25% |
4.25% |

So in this case, the earliest possible redemption date would produce the worst possible return. As a bond investor, this is an important number to use when considering an investment, as it tells you the lowest possible return (other than a default) you can expect.

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