A make-whole redemption call is a type of call provision that essentially guarantees that the investor cannot lose money when a bond is redeemed early. With a typical call provision, the issuer pays off bonds early at their par value or their par value plus a call premium.
For example, an issuer may call in $50 million of 20-year bonds once 10 years have passed, and pay investors the bonds’ par value, or $50 million.
If interest rates have dropped since the bonds were issued, however, the market value of the bonds may be worth more than $50 million. As a result, when the bonds are called early at their par value, the investor loses money, as they could have sold the bonds for more than $50 million on the secondary market.
If interest rates have dropped and the bond is trading at a premium, as in the above example, the second option will be higher. In this case, the investor is “made whole” and basically receives the same amount of money from the issuer as they would have if they had sold the bonds to another investor. Because make-whole redemption calls can be expensive for the issuer, they are rarely exercised.