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Make Whole Call (Provision)

Make Whole Call (Provision)

What is a 'Make Whole Call (Provision)'

A make whole call provision is a type of call provision on a bond allowing the issuer to pay off remaining debt early. The issuer typically has to make a lump sum payment to the investor derived from a formula based on the net present value (NPV) of future coupon payments that will not be paid incrementally because of the call combined with the principal payment the investor would have received at maturity.

Explaining 'Make Whole Call (Provision)'

Make whole call provisions are defined in the indenture of a bond. These provisions began to be included in bond indentures in the 1990s. Issuers typically don't expect to have to use this type of call provision, and make whole calls are rarely exercised. However, if the issuer does decide to utilize its make whole call provision on a bond, then investors will be compensated, or made whole, for the remaining payments and principal from the bond as noted within the bond's indenture.

Payment to Investors

In a make whole call, the investor receives a lump sum payment from the issuer for the NPV of all of the future cash flows of the bond as agreed upon within the indenture. This typically includes the remaining coupon payments associated with the bond under the make whole call provision and the par value principal payment of the bond. A lump sum payment paid to an investor in a make whole call provision is equal to the NPV of these future payments as agreed upon in the make whole call provision within the indenture. The NPV is calculated based on the market discount rate.

Exercising a Make Whole Call Provision

While make whole call provisions can be expensive to exercise, requiring a full lump sum payment, companies that utilize make whole call provisions usually do so because rates have fallen. In an interest rate environment where rates have decreased or are trending lower, a company has added incentive to exercise make whole call provisions. If interest rates have decreased, then issuers of corporate bonds can issue new bonds at a lower rate of interest, requiring lower coupon payments to their investors.


Further Reading

Indexing a bond's call price: an analysis of make-whole call provisionsIndexing a bond's call price: an analysis of make-whole call provisions
www.sciencedirect.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

Are make-whole call provisions overpriced? Theory and empirical evidenceAre make-whole call provisions overpriced? Theory and empirical evidence
papers.ssrn.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

Make-whole call provisions: A case of “much ado about nothing?”Make-whole call provisions: A case of “much ado about nothing?”
www.sciencedirect.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

Setting the optimal make-whole call premiumSetting the optimal make-whole call premium
www.tandfonline.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

What Is the Cost of Financial Flexibility? Theory and Evidence for Make‐Whole Call ProvisionsWhat Is the Cost of Financial Flexibility? Theory and Evidence for Make‐Whole Call Provisions
onlinelibrary.wiley.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

Does the choice between fixed price and make whole call provisions reflect differential agency costs?Does the choice between fixed price and make whole call provisions reflect differential agency costs?
www.sciencedirect.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

Future investment opportunities and the value of the call provision on a bondFuture investment opportunities and the value of the call provision on a bond
www.jstor.org [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

A Reduced-Form Model for Valuing Bonds with Make-Whole Call ProvisionsA Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions
www.tandfonline.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …

The Life Cycle of Make-Whole Call ProvisionsThe Life Cycle of Make-Whole Call Provisions
papers.ssrn.com [PDF]
… When can you foresee calling bonds with a make-whole call provision … would have benefited from the cap that a make-whole call provision would have provided … not surprising that investors require the slight premium that we document for bonds with a make-whole call provision …


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Section 508

WCAG 2.0

Section 508