A make-whole call provision is a type of call provision that applies to bonds, giving their issuer the options to pay off the debt early. This type of call provision is beneficial to bondholders since larger payments are usually received if the issuer chooses to exercise this provision. This is because the payment received is based on the net present value (NPV) of all the previously scheduled coupon payments and the principal that would have been received if the bond had not been called.

The investor typically receives more money with a make-whole call provision than with a standard call provision, as the issuer must pay a premium that’s based on the NPV of the payments. For example, if a bond had a face value of $100 with a coupon of 6%, the principal plus coupon payments would have been $106 upon maturity. If the issuer chooses to exercise the make-whole call provision, the investor would receive the $106 plus a premium depending on the NPV of the remaining payments.

Although issuers have this call provision as an option, they rarely choose to exercise it. This is because they must pay the mentioned premium and it may not be economically feasible for them to do so. As such, investors don’t take into account the likelihood of the issuer exercising their make-whole call provision when considering buying a particular bond.

In conclusion, the use of make-whole call provisions benefits investors and serves as a financial safeguard for bond buyers. The decision of an issuer to exercise the make-whole call provision depends on the economic feasibility of doing so. Typically, issuers do not use this provision as the premium they must pay is usually too high, though investors still take advantage of the extra financial protection it provides.