Indexing a Bond's Call Price : An Analysis of Make-Whole Call Provisions

We analyze a new form of call provision known as a quot;make-wholequot; call which utilizes a floating call price based on the level of current interest rates. As rates drop (rise), the call price increases (decreases). Typically, a floor at par value prevents the call price from dropping below $1,000. This provision effectively eliminates the reinvestment rate risk associated with investing in bonds with fixed-price call provisions. Survey results indicate a majority of CFOs believe make-whole call provisions are quot;costless.quot; Our analysis of 318 recent make-whole call bonds indicates that this provision is indeed priced. On average, the at-issue yield-to-maturity of a make-whole call bond is 11.2 basis points higher than the yield of a comparable straight bond