Make Whole Call is one of several possible covenants in bond agreements. The clause states that the issuer has the right to call the bond before the original maturity date. However, the issuer must then pay investors some kind of compensation in the form of a premium for the earlier redemption of the bond. If the issuer actually makes use of the make whole call clause, it must then also pay all interest that would have accrued until the actual maturity of the bond. However, this is then discounted to the present value at the time of the early redemption of the bond.
The Make Whole Call clause allows the issuer of the bond to repay the remaining debt earlier than initially planned. For U.S. bonds, this clause often applies, whereas for European bonds it is rarely included in the bond terms and conditions.
Prior to issuance, the issuer sets a reference interest rate, on which it then pays a premium of often 20-60 basis points if it calls the bond early. In order to calculate the redemption price of the bond, the present value is first determined, on which the respective premium is then added. To determine the present value, the interest rate for U.S. government bonds is used in the United States. However, since the interest rates of U.S. bonds are generally lower than those of the respective corporate bonds with the make whole call option, the issuer often has to pay a high premium compared to the current market value if it wishes to call the bond early. The bondholder usually benefits from the higher redemption price compared to the current market price. For example, if the bond is redeemed at a premium of 0.50 %, this is then indicated as “Call Make-Whole + 50 basis points”.
