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CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types

A bond with a make-whole call provision is most likely to have a call price that:

A make-whole call price is the present value of the bond's remaining coupons and principal, discounted at a benchmark government yield plus a fixed spread. Because it is high when rates are low, it compensates the investor and deters the issuer from calling.

  1. Asteps down on a fixed schedule toward par
  2. Bis the present value of remaining payments at a spread over a benchmark yieldCorrect
  3. Cis fixed at par plus one year's coupon

Explanation

A make-whole call price equals the present value of the remaining cash flows discounted at a benchmark Treasury yield plus a small spread. This compensates the investor for lost interest and makes calling expensive. A fixed schedule describes a standard callable bond.

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