As in investor’s perspective, what are the adv and disadv of this make whole call provision?
Thank you!
call provisions has the value to the issuers so they can redeem debt at more favorable price than i.e. market price
for investors cons is the fact that when bond price rises issuer can retire the bond, investor losses convexity advantage
Reinvestment risk is higher - if somebody bought a bond that I hold with proceeds from sale I can replace that one with more expensive bond…
pros - investor collected proceeds from the call sales in the form of lower price paid for the bond , to attract smart investors issuer must offer lower price/ more attractive price thus higher yield YTM remember formula YTM= Coupon/Price to compensate for the risk that the bonds might be called early.
make whole provision - is what it says- issuer pays more (PV of coupons and price not paid out so far) than actual price of the bond if the bond was held till maturity. Discount rate used must be predetermined in bond indenture
offers investors significant insulation from losing bonds before maturity since it penalizes the issuer who would might otherwise benefit by refinancing higher coupon debt.
i.e.
the issuer with an option to call the bonds at any time can exercise the option by paying the max of ( par or “ the sum of present values of the remaining scheduled payments of principal and interest…discounted at the adjusted rate plus i.e. X bp
hope this helps