medium · Debt Capital Markets
An issuer is considering a 'make-whole' call provision for its new investment-grade bond.
How does this structure differ from a standard 'fixed-price' call?
- A make-whole call is only triggered if the issuer is upgraded to a higher credit rating category.
- A make-whole call allows the issuer to redeem the bond at par if interest rates rise significantly.
- A make-whole call requires the issuer to pay the present value of remaining cash flows discounted at a Treasury rate plus a small spread, rather than a fixed price like 102.
- The make-whole call provides negative convexity to the investor, whereas a fixed-price call provides positive convexity.
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