Bond indentures and credit agreements often restrict a borrower’s ability to voluntarily prepay its debt. The restrictions seek to protect the lender’s bargained-for stream of interest payments at a specified rate over a specified period of time.
Some debt instruments contain “no-call” provisions that prohibit prepayment, others have “make-whole” provisions requiring payment of a premium to offset interest lost to the lender from prepayment, while others contain a hybrid of these two, prohibiting payment for a number of years and then allowing it in later years subject to a make-whole.
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