Make Whole Call Question

[Closet_Gamer]

I'm continuing my fixed income education and I am really struggling with the math of Make Whole Calls, particularly for bonds trading below par.

Consider this bond quoted by Schwab:

CUSIP: 71654QCK6
BBB Rated
Price: $87.00
Coupon: 5.35%
Maturity: 2/12/2028
MWC Continuous
YTM: 9.1%
YTW: -- %

Current Yield: 6.1% (5.35% / $87)

Set aside the credit worthiness, just trying to understand the math. Let's also assume that the price of the bond holds at $87. (Unlikely but just trying to simplify.)

Let's say the Bond is called in February of 2026.

In Feb of 2026, I would have four payments left of $5.35.
The PAR on the bond would be $100.

When they made the call, would I then receive:

$100 (PAR) + (4 x $5.35 - time discount) = ~$120?

Is that right?

Absent a precipitous drop in a rates, struggling to understand why any company would really make the call? Seems like they are just accelerating their payments including most of the interest. Even if they could refinance at 2%, would they really benefit given that they paid out all the future interest anyways?

Thanks for any insight.

 

[aja8888]

When they call it at $100, you will be paid the face value ($100), plus any accrued dividends to date. You won't get any future dividend payments as you have not earned them as the bond was taken from you.

 

[pb4uski]

From a different thread, but relevant.

^^^ I think this is the way that the make whole works (but not in your case since it said "no").

Say you buy a $10,000 5-year 3.5% callable CD.

After 3 years the issuer calls it and at the time interest rates for 2-year CDs are 2%.

If the issuer had not called the CD then at the end of 5-years you would have received $11,877 [10,000*(1+3.5%)^5].

At the current interest rate of 2% that you would reinvest the call proceeds in, in order to have $11,877 at the end of two years you would need to receive $11,416 today [(11,877/(1+2%)^2].

The CD with accrued interest is currently $11,087 [($10,000*(1+3.5%)^3].

So when the CD is called the issuer pays you $10,000 principal, $1,087 of accrued interest and a $329 make-whole call penalty for a total of $11,416.

You reinvest the $11,416 for 2 years at 2% and at the end of 2 years have $11,877... the same as if the issuer had not called the CD... so you have been "made whole".

So if 71654QCK6 was called you would get the $100 par, plus accrued interest from the last interest payment date to the date of the call plus a make-whole call penalty.

What does the prospectus say about how the make-whole call is calculated and what the referenced interest rate is?

 

[DrRoy]

Two different answers so far.

 

[Closet_Gamer]

Thanks for the replies. It looks like I need to call Schwab's bond desk to get the prospectus? That's surprising but I can't find it online.

Let me get it and find that answer.

Thanks

 

[aja8888]

I had a brain fart in my post. The Make Whole Call payment is based on the pre-arranged formula of NPV and future payments. This is found in the prospectus. So one could get part of the lost future dividend payments. Investopedia explains it well.

 

[Closet_Gamer]

I had a brain fart in my post. The Make Whole Call payment is based on the pre-arranged formula of NPV and future payments. This is found in the prospectus. So one could get part of the lost future dividend payments. Investopedia explains it well.

Happens to all of us!

Thanks for the response!