medium · Corporate Credit Analysis covenants
An analyst is evaluating an 8% coupon bond with an NC-3 (non-call 3-year) provision. The bond is currently in its second year. If the issuer wishes to refinance today due to a drop in market rates, they must pay a 'make-whole' premium.
How is this premium typically calculated?
- The current secondary market trading price of the bond plus a fixed 50 bps convenience fee to compensate dealers for trading friction.
- The sum of all remaining scheduled coupon payments plus 100% of outstanding principal, without discounting for the time value of money.
- The original issue price plus an additional 1% premium for every full year remaining until the bond reaches its final scheduled maturity date.
- The greater of 101% of par or the present value of remaining interest and principal discounted at the Treasury rate plus a specified spread.
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