medium · Debt Capital Markets pricing-yields-curve
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 deep 'in-the-money' for the issuing company.
- The bond gets called at once so the issuer can lock in lower interest costs.
- The investor will likely exercise an embedded right to put the bond back to the issuer for redemption.
- The make-whole price will be significantly above the market price, making a call uneconomic.
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