What is the difference between yield to maturity, current yield and yield to worst?
What the interviewer is testing
Yield measures and when each is used.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Current yield is just the annual coupon divided by the price. Yield to maturity is the single discount rate that makes the present value of all remaining cash flows equal the price — the return if held to maturity with coupons reinvested at the same rate. Yield to worst is the lowest yield across all possible early redemption dates of a callable bond — the yield if the issuer acts against you.
The full answer
Example
A bond with a 6% coupon trades at 102.72 with three years left.
- Current yield: 6 ÷ 102.72 = 5.84%.
- Yield to maturity: 5.00% (the rate used to price it).
- Callable at 101 in one year: yield to call = (6 + 101) ÷ 102.72 − 1 ≈ 4.17% → yield to worst 4.17%.
When each matters
- Investment-grade bonds: YTM and the spread over government bonds.
- High yield (usually callable): yield to worst.
- Current yield is a quick income measure; it ignores the pull to par.
Mistakes to avoid
Treating the coupon rate as the yield.
Follow-ups they may ask
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