Make whole

A make whole provision lets an issuer redeem a bond at any time, but at a price calculated to leave the investor economically indifferent. The price is the present value of every remaining coupon and the principal, discounted at the yield on a comparable government bond plus a small spread written into the terms, commonly a few tens of basis points.

Two things trip candidates up. It is a single payment covering everything, principal included, rather than a premium paid on top of a separate par repayment. And there is no cap at par: whatever the discounting produces is what is owed.

The crucial feature is which rate does the discounting. Using a government yield plus a token spread rather than the bond's own yield produces a number above the traded price whenever the issuer's credit spread is wider than the make whole spread, which for a corporate is effectively always. So it is call protection through cost rather than through prohibition, and the issuer holds an option it will not rationally exercise. The gap even widens as the issuer's credit worsens, since the make whole price does not depend on the issuer's spread.

That is why investment grade issuers use make wholes almost universally and high yield issuers do not use them for a bond's whole life. High yield is built around refinancing as the credit improves, so it buys a hard non call period and a cheap fixed schedule afterwards, sometimes with a make whole covering the non call period only as an expensive escape hatch.