Make-Whole Call
Quick Definition
A call provision requiring the issuer to pay bondholders the present value of remaining cash flows, discounted at a Treasury rate plus a spread.
Key Takeaways
- Compensates bondholders with present value of all remaining payments
- Discount rate is typically a Treasury rate plus a small spread
- More bondholder-friendly than traditional fixed-price call provisions
- Rarely exercised due to the high cost to the issuer
What Is Make-Whole Call?
A make-whole call provision allows a bond issuer to retire bonds early by paying investors a premium equal to the net present value of remaining coupon and principal payments, discounted at a specified Treasury rate plus a small spread (typically 15–50 basis points). Unlike traditional call provisions with fixed call prices, make-whole calls are designed to "make whole" the bondholder by compensating them for lost future income. Because the make-whole amount is usually close to or above the bond's market value, issuers rarely exercise these provisions except in special circumstances like mergers, acquisitions, or major corporate restructurings.
Make-Whole Call Example
- 1A company acquiring another firm may exercise make-whole calls on the target's bonds to refinance the debt under its own credit profile
- 2If Treasuries yield 4% and the make-whole spread is 25 bps, remaining cash flows are discounted at 4.25% to determine the call price
Related Terms
Callable Bond
A bond that gives the issuer the right to redeem it before maturity at a specified price, typically when interest rates fall.
Call Protection
A period during which a callable bond cannot be redeemed early by the issuer, protecting bondholders from premature loss of their investment.
Bond Indenture
The legal contract between a bond issuer and bondholders that specifies the bond's terms, covenants, and the rights and obligations of each party.
Embedded Option
An option feature built into a bond that gives either the issuer or the bondholder certain rights, affecting the bond's pricing and risk profile.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
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