A make-whole provision is a call provision attached to a bond/ loan. The borrower must make a payment to the lender which is equal to the net present value (NPV) of the coupon or interest payments that the lender will lose should the borrower pay off the bonds/loan early. Example 1. Take an example where the lender is in receipt of annual interest payments of €100 assuming 5 year term. 2. Assume that at the end of the 3rd year, market conditions have changed substantially and this has lead to ; a) a decrease in interest rates, b) a loosening up of credit, and c) an increase in property values. 3. Because of the changed market conditions the borrower decides to pay loan off early and seek to refinance at a lower rate. 4. In such a scenario the lender gets their investment back 2 years early however as a consequence they won’t benefit from the final 2 years of interest payments ie €200 (€100 x 2 years). 5. To protect against this they make seek to insert a make-whole call provision. In the above scenario this would mean the borrower must return the outstanding principal at the end of year 3 together with the present value of the €200 (i.e the final 2 years scheduled interest payments).

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