Makewhole

Makewhole is a provision found in some debt instruments, primarily corporate bonds and structured notes, that allows the issuer to redeem the security before its scheduled maturity while compensating the holder for the early retirement. The central idea is to “make the investor whole” by replicating the economic value of the remaining payments that the holder would have received if the security had not been redeemed.

How it works in practice: If the issuer elects to redeem early under a makewhole provision, the issuer must pay a lump-sum makewhole amount calculated to reflect the present value of all remaining scheduled payments (coupons and principal) as of the redemption date. The calculation uses a specified benchmark yield, typically a government (Treasury) yield of a maturity closest to the remaining term, plus an agreed spread. The resulting makewhole amount is intended to approximate the net present value of the remaining cash flows. In many cases, accrued interest from the last coupon date to the redemption date is paid separately.

Purpose and effects: The makewhole feature is designed to balance investor protection with issuer flexibility. It provides downside protection for bondholders against loss of expected income from early redemption, while giving issuers a way to refinance or restructure debt at potentially favorable terms. The exact mechanics, including the reference yield, spread, and whether accrued interest is included, are defined in the bond indenture and can vary by issue.

Relation to other concepts: Makewhole is one form of redemption provision, distinct from flat-call or put options. Its specifics depend on the contract terms and market practice for the instrument in question.