Make-Whole Premiums

Make-whole call premiums are prevalent in high-yield debt instruments. The feature allows an issuer to avoid entirely the call structure issue by defining a premium to market value that will be offered to bondholders to retire the debt early. The lump sum payment will be composed of the following: the earliest call price and the net present value of all coupons that would have been paid through the first call date, which is determined by a pricing formula utilizing a yield equal to a reference security (typically a U.S. Treasury note due near the call date), plus the make-whole premium. According to Standard & Poors, the make-whole premium is typically 50 bps.

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