In 2010, Southern California Ellison issued 30 year bonds with 90 bp spread over the then 30-year Treasury yield and make-whole call provision. Suppose the bond is called on April 1, 2017. The make-whole call price will be determined based on the Treasury yield for a 30-year Treasury on April 1, 2017, plus a make-whole premium of 15 bp.

a)

If the actual spread for this issue is 45 bp, on April 1, 2017, will the bondholder be made whole, less than whole, or more than whole? In other words, will the bond holder receive the bonds fair market value at that point, less than the fair market value, or more than the fair market value? Explain why.

b)

Suppose the bond is called on April 1, 2018. Under what conditions, will the holders of these make-whole bonds be harmed, in the sense of getting less than the market value of their bonds?