medium · Debt Capital Markets pricing-yields-curve
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 can only be triggered in the specific event that the issuer is upgraded into a higher credit rating category by one of the major rating agencies.
- A make-whole call permits the issuer to redeem all of the outstanding bonds at par value whenever benchmark interest rates happen to rise sharply above the original coupon level.
- 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 structure hands negative convexity to the investor, whereas a conventional fixed-price call instead hands the investor favorable positive convexity over its life.
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