Understanding Make-Whole Calls

If you invest in fixed-income securities, you might encounter bonds with a “Make-Whole Call” feature. Bond issuers use this feature to redeem debt long before its scheduled maturity.

Investors, however, may worry: “Will I lose money on expected interest because of this?”  

In this short guide, you will learn that while an early redemption may sound like a setback, the mechanics of a make-whole call are designed to protect investors. We explain how make-whole calls work, what they mean for your portfolio, and why answering this call won’t leave your returns adrift. 

A make-whole call is a special redemption feature that gives the bond issuer (or the borrower) the right, but not the obligation, to call the bonds or pay off its debt early during the make-whole call period.

Here is how it works:

Variable Payout: Unlike a standard callable bond, which has a predetermined, fixed call price when the issuer wants to buy back debt, a make-whole call price is not fixed from the outset. The buyout cost varies with prevailing market interest rates.

Full Payment of Remaining Value: If an issuer decides to exercise this option, they must buy back the bond at a price equal to the present value of all remaining scheduled cash flows (including both principal and interest coupons) until maturity.

Discount Rate Formula: To calculate this present value, the remaining cash flows are discounted using a benchmark rate, typically the yield on the closest US Treasury Note, plus a specified spread, or the make-whole spread. This formula ensures that bondholders are theoretically “made whole” because all remaining scheduled cash flows are discounted to the present.

In short, a make-whole call gives companies the flexibility to retire debt early while guaranteeing that bondholders are “made whole”—receiving roughly the market value of what their remaining investment would have yielded. 

No Opt-Out: Once a make-whole call is announced, bondholders have no choice but to “sell” their bonds back to the issuer at the make-whole call price.

Pricing Factors: The make-whole call price is calculated only a few days before the actual make-whole call date. However, scenarios such as lower interest rates and a longer time to maturity will lead to a higher make-whole call price.

Yield Expectations: When an issuer calls a bond early, investors can calculate the Yield to Call (YTC) to determine the precise annual return they would earn if the issuer paid off the bond on a specific date at a fixed price. Because it depends on prevailing market interest rates, bondholders cannot know the YTC in advance. 

To see how this looks in practice, we can look at two specific US dollar global bonds issued by the United Mexican States (Mexico):

Mexico 4.15% 2027 Bond (ISIN: US91087BAC46): This bond includes a make-whole call provision at a spread of 25 basis points until March 28, 2027. If Mexico opts to call this bond before that date, the buyback price would be calculated using the yield of the closest matching US Treasury note plus 0.25% (25 basis points).

Mexico 3.75% 2028 Bond (ISIN: US91087BAE02): This bond carries a tighter make-whole call spread of 20 basis points. In a call event, the discount rate applied to the remaining cash flows would be the comparable US Treasury yield plus 0.20%.

These spreads (25 and 20 basis points, respectively) are clearly defined at the time of the bond's issuance. Should the issuer exercise their option to reduce borrowing costs, these predetermined spreads guarantee that the investor receives the bond's net present value, providing fair compensation for the early redemption. 

MATTHEW A. APOSTOL is an Investment Counselor with Metrobank’s Institutional Investors Coverage Division, where he specializes in creating bespoke financial solutions for high-net-worth individuals, leveraging his experience in investment sales and a strong understanding of financial markets. Matthew holds a Bachelor of Science in Business Economics and is currently pursuing a master’s degree in applied economics at De La Salle University. He enjoys playing tennis and coaching new tennis players.