Next video:
Loading the player...

A make-whole call enables a bond’s issuer to pay off a bond before it reaches its maturity date. It also requires the issuer to pay the lender an amount equal to the coupon payment’s net present value so the lender does not forgo money to which they’re entitled.

In other words, the lender will be made whole if the bond’s issuer decides to recall the bond because interest rates decline.

It works like this: Sally buys a $1,000 bond from Big Corporation that matures in 10 years. She receives two payments a year for lending Big Corporation the $1,000 that total $60. The bond pays a 6% coupon each year. The bond includes a make-whole call provision.

In year eight, interest rates drop suddenly and sharply. Big Corporation realizes it can finance its debts at a lower rate. So it decides to repay Sally her $1,000, plus, since the two agreed upon a make-whole call provision in the contract, the value of what she would have received for the final two years of coupon payments. Sally is made whole.

Make-whole payments are determined by a formula based on the net present value of the future coupon payments that won’t be paid.

Make-whole calls are commonly included in a bond’s contract, but they’re rarely invoked because costs can be high. They can be valuable to bond investors who rely heavily upon money they’re paid from coupon payments, however.

Related Articles
  1. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  2. Investing

    An Introduction to Individual Bonds

    Individual bonds are better than bond funds and can be a key component to one’s investment strategy.
  3. Financial Advisor

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  4. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  5. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  6. Investing

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  7. Investing

    If I Buy A $1,000 10-Year Bond With A 10% Coupon, Will I Receive $100 Each Year?

    Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default.
  8. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center