What is a make-whole call provision, and why is it more bondholder-friendly than a traditional call?

A make-whole call is a special type of call provision that compensates bondholders for the full present value of lost future cash flows — making it much more protective than a traditional call.

Traditional Call vs. Make-Whole Call:

Feature	Traditional Call	Make-Whole Call
Call price	Fixed (e.g., par + 1-3% premium)	Calculated at time of call
Call price formula	Predetermined in indenture	PV of remaining cash flows at Treasury + spread
When issuer calls	Rates fall below coupon	Rarely — too expensive
Bondholder protection	Moderate (fixed premium)	High (compensated for lost yield)

Make-Whole Call Price Calculation:

Make-Whole Price = PV of remaining coupon payments + PV of par value

Discounted at: Treasury yield for matching maturity + a small fixed spread (e.g., T + 20 bps)

The spread is intentionally small, so the discount rate is low and the present value (call price) is high — making the call expensive for the issuer.

Worked Example: Atlantic Infrastructure issues 10-year bonds at 5.5% coupon. The make-whole call uses the corresponding Treasury yield + 25 bps. Three years later, 7-year Treasuries yield 3.2%.

Make-whole discount rate: 3.20% + 0.25% = 3.45%

Remaining cash flows: 7 years of $55 coupons +$1,000 par PV at 3.45%: $55 x PVIFA(3.45$1,000 x PVIF(3.45%, 7) PV = $55 x 6.213 +$1,000 x 0.786 PV = $341.72 +$786.00 = $1,127.72

The make-whole call price is $1,127.72 per bond — far above the$1,000 par. This is so expensive that the issuer would almost never call.

With a traditional call at 102: Call price would be only $1,020. The issuer saves$107.72 per bond by having a traditional call instead of make-whole.

Why Issuers Use Make-Whole Calls:

1. Lower coupon — Bondholders accept a lower yield because the make-whole protection is valuable
2. Flexibility — The issuer retains the technical ability to retire debt early (e.g., if selling the company)
3. Market standard — Investment-grade corporate bonds now overwhelmingly use make-whole calls

Exam Tip: Understand that make-whole calls are protective because the discount rate is low (Treasury + tiny spread), producing a high call price. The traditional call's fixed premium is cheaper for issuers in a falling-rate environment.

Practice with our CFA Level I fixed income question bank.