# Understanding Make-Whole Call Provisions: Benefits and Mechanisms

![Make-Whole Call Provision: A call provision on a bond allowing the issuer to pay off remaining debt early.](https://www.investopedia.com/thmb/y9q4uFRopIOzkUJ93Eh_kDS6rT0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Wholecall_final_rev-97f030fb1ba94d79896bfb137c3f3a9e.png)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> The make-whole call provision allows a bond issuer to pay off the remaining debt owed on the bond and make investors "whole" ahead of schedule.

## What Is a Make-Whole Call Provision?

A make-whole call provision on a bond enables the issuer to repay remaining debt early, usually with a lump-sum payment that reflects the net present value (NPV) of expected coupon payments and principal. This provision ensures investors are compensated fully, aligning with rare issuer invocation due to potentially higher costs when interest rates fall.

### Key Takeaways

*   A make-whole call provision allows bond issuers to repay their debt before maturity by paying investors the net present value (NPV) of future payments.
*   Make-whole call provisions are rarely exercised but offer stronger investor protection compared to traditional call provisions.
*   Bond issuers may find make-whole call provisions advantageous for refinancing, especially when interest rates fall, despite the higher costs involved.  
    
*   These provisions have grown in popularity since the 2000s, particularly among investment-grade corporate bonds.  
    
*   Make-whole calls provide investors with better compensation for early redemption compared to standard call provisions, though they introduce uncertainty.  
    

## Deep Dive Into Make-Whole Call Provisions

Make-whole call provisions started to be included in bond contracts in the 1990s. Issuers typically don't expect to use this type of call provision, and make-whole calls are rarely exercised. In the rare instances when the issuer decides to use its make-whole call provision on a bond, investors will be compensated, or made whole, for the remaining payments and principal from the bond noted in the bond's indenture.

With a make-whole call, the investor gets one payment for the NPV of all future bond cash flows. This typically includes the remaining coupon payments for the bond under the make-whole call provision. It also consists of the [par value](https://www.investopedia.com/terms/p/parvalue.asp) principal payment of the bond. A lump-sum payment paid to an investor in a make-whole call provision equals the NPV of all these future payments. The payments were agreed upon in the make-whole call provision within the indenture. The NPV is calculated based on the market discount rate.

Make-whole calls are usually used when interest rates fall, so the NPV discount rate is lower than the initial rate. That works to the benefit of the investor. A lower NPV discount rate can make the issuer's make-whole call payments slightly more expensive. The cost of a make-whole call can often be high, so such provisions are rarely invoked.

> **Important**
>
> Bonds are less likely to be called in a stable interest rate environment. Call provisions were more of an issue when interest rates declined between 1980 and 2008.

Make-whole call provisions are costly to exercise because they need a full lump sum payment. So, companies that use make-whole call provisions usually do so because interest rates have fallen. When rates have decreased or are trending lower, a company has an added incentive to exercise make-whole call provisions. If interest rates have dropped, then issuers of corporate bonds can [issue](https://www.investopedia.com/terms/i/issue.asp) new bonds at a lower interest rate. These new bonds require lower coupon payments to their investors.

## Comparing Make-Whole and Traditional Call Provisions

Make-whole and traditional call provisions both allow companies to retire debt before maturity. However, they differ substantially in their pricing structure and implications for both issuers and investors.

Once standard in callable bonds, traditional call provisions have a fixed call price that starts at a premium to par value and gradually declines over time. These provisions often include a non-call period, during which the bond can't be redeemed, providing a measure of certainty for investors. In contrast, make-whole call provisions offer immediate callability with a floating price determined by discounting remaining cash flows at a specific rate, usually tied to [Treasury](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp) yields plus a spread.

The pricing mechanisms for each type of callable bond lead to distinct sensitivities to interest rate changes. Traditional calls become more attractive to issuers when market rates fall significantly below the bond's coupon rate, potentially disadvantaging investors. Make-whole calls adjust with market rates, ensuring investors get similar value no matter when the bond is called.

This balance of flexibility and protection has contributed to the rising popularity of make-whole provisions. Since the early 2000s, they've become more common in corporate bonds, especially for investment-grade issuers. Their appeal is sweetened by the lower yield premium they typically require—between 10 and 20 basis points over non-callable bonds, compared with 45 to 65 [basis points](https://www.investopedia.com/terms/b/basispoint.asp#:~:text=A%20basis%20point%20%28BPS%29%20is,0.0001%20%280.01%2F100%29.) for traditional calls, according to academic researchers.

Issuers find make-whole provisions attractive not just for flexibility when interest rates are changing but also to facilitate refinancing, mergers, acquisitions, and cash management strategies. This versatility and immediate callability offer companies constant financial flexibility, albeit at potentially a higher cost when exercised.

As such, make-whole call provisions represent an evolution in fixed-income securities that attempts to balance issuer flexibility with investor protection.  

## Pros and Cons of Make-Whole Call Provision

Advantages

*   Offer investors decent compensation for premature redemption
    
*   Give issuers greater flexibility
    
*   Provide hedge against falling interest rates
    

Disadvantages

*   Creates uncertainty for investors
    
*   Not the most cost-effective call provision for bond issuers
    
*   Calculating redemption payments can be complex
    

## Benefits of Opting for Make-Whole Call Provisions

They're better for investors than standard calls since investors receive the NPV of future payments, not just the principal.

There are cases when make-whole call provisions don't provide any benefits. Suppose an investor buys a bond at par value when first issued. If the bond is immediately called, then the investor gets the principal back and can reinvest it at the same prevailing [open-market rate](https://www.investopedia.com/terms/o/open-market-rate.asp). The investor doesn't need any more payments to be made whole.

> **Fast Fact**
>
> Since 2001, most corporate bonds have included a make-whole call provision. This feature has become more common than both non-callable and fixed-price callable bonds.

The advantages of make-whole calls are most apparent once interest rates fall. Suppose an investor bought a bond at par value and interest rates declined from 10% to 5% after the investor held a 20-year bond for 10 years. If the investor receives only the principal back, the investor will have to reinvest at the lower 5% rate. Here, the make-whole call provision's NPV compensates the investor for reinvesting at a lower rate.

Secondary market investors recognize the value of make-whole calls. With all else equal, such bonds trade at a premium over standard call bonds. Investors pay less for bonds with standard call provisions because they have more [call risk](https://www.investopedia.com/terms/c/callrisk.asp).

## Practical Example of a Make-Whole Callable Bond

Suppose Company ABC issues a 10-year corporate bond with the following characteristics:

*   Par value: $1,000
*   [Coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp): 5% a year
*   Maturity: 10 years
*   Make-whole call provision: Included
*   Reference Treasury yield: 2%
*   Make-whole spread: 0.30%

The make-whole call provision allows Company ABC to redeem the bond before maturity, but it must pay the bondholders a price that makes them "whole." This price is typically calculated as the present value of the remaining scheduled payments (both interest and principal), discounted at a specific rate (often the yield of a comparable Treasury security plus a small spread).

Suppose interest rates have fallen significantly after five years, and Company ABC wants to refinance its debt. The Treasury rate for a five-year bond (the remaining life of the original bond) is 2%, and the make-whole provision specifies a spread of 30 basis points (0.30%).

Here's what's needed to calculate the make-whole price:

*   Remaining payments: Five years of $50 interest payments (5% of $1,000) plus the $1,000 principal at maturity.
*   Discount rate of 2% (Treasury rate) + 0.30% (spread) = 2.30%

The present value of these payments, discounted at 2.30%, would need to be calculated. Using our bond platform's calculator, we find that the present value of the interest payments plus the present value of the principal is $1,132.93.

This means that even though interest rates have fallen, Company ABC would have to pay a premium over the par value to call the bonds early.  

## What Are the Advantages of a Call Provision?

Call provisions help bond issuers to hedge [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp). If interest rates fall, the issuer can refinance its debt more cheaply by paying off its original debt and reissuing a new bond at a lower coupon rate. For investors, the advantage would be higher interest rate payments for assuming the risk of the bond potentially being paid off early.

## How Can a Call Provision Affect the Price of a Bond?

When a bond issuer adds a call provision, it generally has to compensate investors by paying them a slightly higher interest rate. Investors demand more because these bonds could suddenly be canceled at any time, which would put them in the position of having to quickly find an alternative investment and source of income—potentially during a period when payouts are lower.

## What Is the Difference Between a Make-Whole Call and a Regular Call?

The main difference between these types of call options is the payment offered. When a make-whole call provision is activated, investors receive the NPV of future payments. Regular calls are less generous. When they are activated, investors just get their principal back.

## The Bottom Line

Make-whole call provisions enable bond issuers to retire their debt early by compensating investors with the net present value (NPV) of remaining payments, thus "making them whole." This provision allows issuers to benefit from declining interest rates by refinancing at lower costs, although the expense of executing a make-whole call tends to be higher than that of traditional call provisions. Despite their cost, make-whole provisions are increasingly preferred by issuers because they provide financial flexibility and better protection for investors compared to standard call options.  

> **Article Sources**
>
> 1.  Raymond James. "[Make-Whole Calls (MWC)](https://www.raymondjames.com/wealth-management/advice-products-and-services/investment-solutions/fixed-income/bond-basics/callable-bonds/make-whole-calls#)."
>     
> 2.  H. Richelson. "[Bonds: The Unbeaten Path to Secure Investment Growth](https://www.wiley.com/en-us/Bonds%3A+The+Unbeaten+Path+to+Secure+Investment+Growth-p-9780470885178)," Pages 79 and 97. John Wiley & Sons, 2017.
>     
> 3.  S.K. Parameswaran. "[Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange,and Derivatives](https://onlinelibrary.wiley.com/doi/book/10.1002/9781119816621)," Pages 165–167. John Wiley & Sons, 2022.
>     
> 4.  Brown, S., and E. Powers. "[The Life Cycle of Make-Whole Call Provisions](https://doi.org/10.1016/j.jcorpfin.2020.101772)." _Journal of Corporate Finance_, vol. 65, 2020.
>     
> 5.  U.S. Securities and Exchange Commission. "[Interest Rate Risk: When Interest rates Go up, Prices of Fixed-rate Bonds Fall](https://www.sec.gov/files/ib_interestraterisk.pdf)."