A Make Whole Call Provision (MWCP) is a clause in a bond or debt security that allows the issuer to call the bond before its maturity date, but requires the issuer to pay the bondholder a premium to compensate for the loss of future interest payments.
Typically, when a bond is called before its maturity date, the bondholder receives the principal amount plus any accrued interest up to the call date. However, with a MWCP, the bondholder is also entitled to receive a premium payment that compensates for the loss of future interest payments that would have been received if the bond had been held to maturity. The premium payment is calculated based on a formula that takes into account the remaining term of the bond, the current market interest rate, and the original coupon rate of the bond.
MWCPs are often included in bonds with high interest rates or in cases where the bond issuer expects interest rates to decline in the future. By including a MWCP, the issuer can take advantage of lower interest rates by calling the bond and issuing new debt at a lower interest rate, while still compensating the bondholders for the loss of future interest payments.
For investors, MWCPs can offer a degree of protection against the risk of early bond call and the associated reinvestment risk. However, the inclusion of a MWCP may also result in a lower yield or higher purchase price for the bond, as investors are effectively paying for the additional protection provided by the clause.
Overall, MWCPs can be a useful tool for both bond issuers and investors, offering flexibility and protection in the event of an early bond call. However, investors should carefully consider the potential benefits and drawbacks of MWCPs when evaluating bonds for investment.
