Make Whole Call Provision

A make whole call provision is a clause in a bond indenture that gives the issuer the right to call the bond at a premium if the bond's credit rating falls below a certain level. The purpose of the provision is to protect the issuer from the risk of having to pay a higher interest rate on a new bond issue if the bond's credit rating declines.

The make whole call provision typically specifies a minimum credit rating for the bond, and the premium that the issuer must pay if it calls the bond. The premium is typically equal to the difference between the bond's current yield and the yield on a new bond issue with the minimum credit rating.

The make whole call provision can be beneficial for both the issuer and the bondholder. The issuer can protect itself from the risk of having to pay a higher interest rate on a new bond issue, and the bondholder can be assured that the issuer will not call the bond unless its credit rating declines significantly.

However, the make whole call provision can also be disadvantageous for the bondholder. If the bond's credit rating declines, the bondholder may be forced to sell the bond at a loss in order to avoid paying the make whole call premium.

Overall, the make whole call provision is a complex financial instrument that can have both positive and negative consequences for both the issuer and the bondholder. It is important to carefully consider the make whole call provision before investing in a bond.

Here are some additional details about make whole call provisions:

* The make whole call provision is typically triggered if the bond's credit rating falls below a certain level, such as BBB-.
* The premium that the issuer must pay is typically equal to the difference between the bond's current yield and the yield on a new bond issue with the minimum credit rating.
* The make whole call provision can be beneficial for both the issuer and the bondholder. The issuer can protect itself from the risk of having to pay a higher interest rate on a new bond issue, and the bondholder can be assured that the issuer will not call the bond unless its credit rating declines significantly.
* However, the make whole call provision can also be disadvantageous for the bondholder. If the bond's credit rating declines, the bondholder may be forced to sell the bond at a loss in order to avoid paying the make whole call premium.

It is important to carefully consider the make whole call provision before investing in a bond.