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Make-Whole Call

Category — Bond Option Types
By Konstantin Vasilev Member of the Board of Directors of Cbonds, Ph.D. in Economics
Updated October 11, 2023

What Does a Make-Whole Call Mean?

A Make-Whole Call, often referred to as a Make-Whole Call Provision, is a feature commonly found in corporate bonds and occasionally in municipal bonds. The bond issuer can redeem or "call" the bonds before their scheduled maturity date.

Unlike standard call provisions, which allow issuers to call bonds early at a predetermined call price, Make-Whole Calls are a bit different. With a Make-Whole Call provision, if the issuer decides to call the bonds, they must make a lump sum payment to bondholders that reflects the net present value (NPV) of the future coupon payments and the principal payment they would have received if the bond had not been called.

This NPV calculation considers the remaining coupon payments, future interest payments, and the bond’s remaining cash flows, discounting them to present value terms using a specified discount rate, often based on a reference Treasury rate. The idea behind the Make-Whole Call is to compensate bondholders for the early call and any potential reinvestment risk they might face in future payments if interest rates fall.

In summary, a Make-Whole Call is a call provision in bonds that allows the issuer to call the bonds early, but they must make a lump sum payment to bondholders based on the present value of the remaining cash flows, ensuring that bondholders are "made whole" as if the bonds had continued to their original maturity date.

How Do Make-Whole Call Provisions Work?

A Make-Whole Call Provision is a contractual clause, often found in financial agreements like bond indentures or loan contracts, that serves a crucial purpose in the world of finance. This provision primarily benefits the bondholder or lender while mitigating the issuer’s interest rate risk and potential losses due to the global interest rates or a decrease in prevailing interest rates, particularly in the case of corporate bonds and loans.

When a Make-Whole Call Provision is invoked, the issuer is obligated to make a lump sum payment to the bondholder or lender. This payment is carefully calculated to represent the net present value (NPV) of the remaining future cash flows the bondholder would have received if they held the bonds until their maturity date. In essence, this compensation ensures bondholders are "made whole" as if the bonds had reached their originally scheduled maturity date.

Various factors can influence the decision to exercise a Make-Whole Call Provision. These may include the issuer’s desire to mitigate risks stemming from contractual violations, bolster cash reserves, take advantage of more favorable debt financing opportunities, or embark on a capital restructuring effort. Activating this provision involves triggering or exercising the call option after any applicable call protection period.

Calculating the Make-Whole Call amount considers several components, including the principal amount, unpaid coupons, and accrued interest payments. The critical factor in this calculation is the discount rate, which is typically determined by comparing it to the yield of an equivalent bond, often referred to as the reference Treasury rate. This discount rate and the Make-Whole Call spread play a pivotal role in determining the Make-Whole Call premium, which represents the compensation to bondholders for the interest income they would have earned if the bonds were held until maturity.

In summary, Make-Whole Call Provisions are essential in financial contracts, providing both issuers and bondholders with a structured framework for handling early redemptions of bonds or debt securities while ensuring bondholders are fairly compensated for their investments.

Make-Whole Calls Explained

A Make-Whole Call (MWC) represents a particular type of call option that grants the issuer the authority to redeem a bond prematurely on any day within a predefined timeframe.

In contrast to an American call option, an MWC typically lacks a lock-up period commencing from the settlement date. Additionally, the MWC’s strike price is not static; rather, it is determined as the greater of the following:

  • 100% of the bond’s face value

  • The sum of discounted payments related to the bond, encompassing both the face value and all coupon payments

The MWC discount rate is derived from the yield of specific government bonds, adjusted by a predetermined number of basis points.

The expiration date of an MWC often aligns with the commencement date of an American option, in bond markets such as in the case of the UnitedHealth Group’s 3.875% bond due on August 15, 2059, denominated in USD. Alternatively, an MWC may extend throughout the entire maturity period of a bond, culminating on its maturity date, as exemplified by the UnitedHealth Group’s 3.85% bond maturing on June 15, 2028, also in USD.

All else being equal, it’s important to note that an MWC diminishes the value of the bond at a slower rate compared to an American call option, making it a more favorable choice for the bondholder.

Advantages and Disadvantages of Make-Whole Calls


  1. Compensates Debtor for Premature Redemption. Make-Whole Call provisions offer bondholders the advantage of receiving compensation based on coupon payments’ Net Present Value (NPV). This compensation helps offset the loss of future interest income when bonds are called early.

  2. Higher Return. Bondholders benefit from higher-than-normal returns through Make-Whole Call premiums when issuers invoke this provision. This can enhance the overall yield on their investments.

  3. Enhanced Flexibility for Issuers. Make-whole calls provide issuers with greater flexibility in managing their debt obligations. When interest rates decline after bond issuance, issuers can take advantage of lower rates by redeeming the bonds early and refinancing at more favorable terms, potentially lowering their borrowing costs.

  4. Lower Borrowing Costs. Financial instruments with Make-Whole Call provisions often attract more investors, allowing issuers to secure funding at more competitive interest rates. This can reduce their borrowing costs and make financing more cost-effective.

  5. Mitigates Reinvestment Risk for Investors. Investors who purchase bonds with Make-Whole Call provisions are partially protected against interest rate risk. If interest rates rise significantly, the issuer is less likely to call the bonds early, allowing investors to continue receiving higher interest payments until maturity.

  6. Transparency and Predictability. Make-whole calls provide transparent and predictable guidelines for early redemption. The predetermined formula for calculating the redemption payment ensures transparency and eliminates ambiguity, making it easier for investors to understand the terms.


  1. Rarely Exercised. Make-whole call provisions are infrequently executed because they impose a significant premature redemption cost on issuers. As a result, they are typically used sparingly.

  2. Potential Loss to Investors. Early redemption through a Make-Whole Call provision may lead to potential losses of interest income for investors. The redemption payment may not fully compensate them for the lost future interest income, especially if interest rates have fallen significantly.

  3. Lacks Stability. The presence of Make-Whole Call provisions can make investors hesitant to commit to long-term investments because they are unsure of the bond’s redemption. This uncertainty can impact the stability of these investments.

  4. Complexity. Calculating the redemption payment under a Make-Whole Call provision can be complex. Investors may require professional assistance to assess the potential risks and rewards before investing in securities with such provisions.

  5. Redemption Risk. The issuer’s decision to redeem the bonds early through a Make-Whole Call provision can be sudden and influenced by various factors that investors may find difficult to interpret. This introduces an element of uncertainty for investors.

Make-Whole Call Provisions vs. Other Call Provisions

  • Traditional Call Provision. These provisions allow issuers to repurchase bonds at a predetermined price after a specified period. They provide a level of predictability for both issuers and bondholders. However, they may not fully account for the current market conditions, potentially leading to situations where bondholders receive less compensation than they might expect.

  • Make-Whole Call Provisions. In contrast, Make-Whole Call Provisions grant issuers the flexibility to call bonds at any time. However, the compensation they require issuers to provide to bondholders is what sets them apart. Under a Make-Whole Call, the issuer must compensate bondholders for the present value of future interest payments. This compensation is designed to "make the bondholder whole," ensuring they receive the full value of their investment as if the bonds had reached their original maturity date. This provision offers more robust protection for bondholders.

  • Callable and Non-callable Bonds. Callable bonds provide issuers with the right to repay the bond before its maturity, while non-callable bonds do not offer this option. Make-whole call Provisions are typically found in callable bonds. They provide an extra layer of protection for investors, as the compensation mechanism helps mitigate potential losses associated with early redemption.

  • Yield-To-Call and Yield-To-Worst. Yield-to-Call calculates the yield assuming that a bond is called at the earliest possible date, providing insight into the potential return if the issuer decides to exercise the call option. On the other hand, Yield-to-Worst calculates the lowest yield, whether it’s yield-to-maturity or yield-to-call. With a Make-Whole Call Provision in place, an investor is likely to receive more than the yield-to-call and potentially closer to the yield-to-maturity. This enhanced yield can be attractive for investors seeking stable and predictable returns.

Exploring the Legal and Regulatory Aspects of Make-Whole Call Provisions

Legal and regulatory aspects of Make-Whole Call Provisions are primarily governed by contract law in the United States, with specific terms and conditions outlined in bond indentures or loan agreements. These provisions establish the rules and mechanisms for how Make-Whole Calls are executed and what compensation bondholders are entitled to when bonds are called early.

It’s essential to understand that Make-Whole Call Provisions are contractual agreements between bond issuers and bondholders. As such, they are subject to the terms and conditions specified in the bond’s indenture or the loan agreement. If there are disputes or disagreements related to these provisions, they can be taken to court.

One notable legal case highlighting the significance of Make-Whole Call Provisions in the U.S. legal landscape is the Energy Future Holdings case of 2016. In this case, the company’s bankruptcy proceedings raised questions about the enforceability of Make-Whole Call Provisions and whether bondholders were entitled to the full compensation specified in the provisions.

The outcome of this case and similar legal disputes can set precedents for how Make-Whole Call Provisions are interpreted and enforced in future situations. It underscores the importance of clear and well-defined language in bond indentures and loan agreements to minimize ambiguity and potential legal conflicts.


Assume the following details for a bond with a Make-Whole Call provision:

  • A recent coupon payment has just been made.

  • There are exactly five years until the bond matures.

  • The bond has a face value of $1,000 and a 5% annual coupon rate.

  • The reference Treasury bond is currently yielding 1%.

  • The Make-Whole Spread, which is an additional compensation factor, is 0.5%.

To calculate the net present value (NPV) of the remaining cash flows, we use a discount rate of 1.5%, which is the sum of the Reference Treasury yield (1%) and the Make-Whole Spread (0.5%).

If the Make-Whole Call provision is exercised today, the issuer would need to pay bondholders $1,167.40 for each bond. This payment represents the compensation to bondholders for the lost future interest income they would have earned if the bonds were held until their original maturity date. It ensures that bondholders are "made whole" and receive the full value of their investment as of the exercise date.


  • What is a make-whole call provision in a bond?

  • What is a make-whole call at par?

  • What does a make-whole call at 50 mean?

  • How is a make-whole call calculated?

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