medium · Debt Capital Markets
An issuer has outstanding bonds with a make-whole call provision. The make-whole price is defined as the present value of remaining cash flows discounted at the Treasury yield plus 15 bps.
If the bond's current market credit spread is 120 bps, what is the likely status of the call?
- The call is economically 'in-the-money' for the issuer.
- The bond will likely be called immediately to save on interest costs.
- The investor will likely exercise their right to put the bond back to the issuer.
- The make-whole price will be significantly above the market price, making a call uneconomic.
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