A redemption provision that lets the issuer call a bond early only by paying the present value of all remaining cash flows discounted at a small spread over Treasuries.
Because the discount spread is deliberately thin, typically 15 to 50 basis points, the redemption price is well above par when rates have fallen. Exercising is expensive, so make-whole calls are almost never used opportunistically; they exist to allow clean redemptions in a merger or refinancing.
For valuation purposes, a bond with only a make-whole call is treated as close to a bullet. Its option-adjusted-spread barely differs from its z-spread, unlike a genuine par call.
Example: a bond has five years left and 5% coupons. The matched Treasury yields 4.00%, so the make-whole discount rate at plus 25 basis points is 4.25%. The present value works out near 103.4, so the issuer must pay 103.4 rather than 100 to retire it.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
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