Make Whole Call (Provision)
What it is:
How it works (Example):
Let's say John Doe buys a Company XYZthat matures in 20 years but has a make-whole . John receives semiannual payments of $1,000 from Company XYZ.
In the 15th bond, interest rates decrease considerably and Company XYZ decides to pay the off early so that it can borrow at a lower rate. This means that John Doe is going to get his original back five years early and thus won't get the last five years of coupon payments.of the
However, because the bond has a make-whole call provision, Company XYZ must return John's and the of the $10,000 he is giving up due to the early .
Why it Matters:
A make-whole bonds early, because the costs of making those make-whole payments can be very high. Accordingly, make-whole provisions may actually ensure that a is not called.ensures that aren't left out in the cold if a borrower decides to repay early. This is particularly valuable to investors who depend on the flows from payments. However, make-whole provisions also deter companies from paying off