UFC officials announced on Thursday that Barao and McDonald will meet Feb. 16 at Wembley Arena in London.
Barao-McDonald becomes official days after handlers for lineal 135-pound champion Dominick Cruz revealed that he'd undergone a second surgery on a torn anterior cruciate ligament.
Cruz suffered the injury in May while preparing to defend his title against Urijah Faber and underwent surgery in July. His July 7 bout with Faber was called off.
He underwent surgery last week after reinjuring the ACL during a light workout session.
Cruz (19-1) is expected to be out of action indefinitely.
He has not fought since successfully defending his title with a unanimous decision over Demetrious Johnson in October 2011. Johnson has since become the UFC flyweight champion.
With Cruz unable to compete, Barao met Faber on July 21 for the interim bantamweight title. Barao (29-1 with one no-contest) defeated Faber by unanimous decision.
The 21-year-old McDonald has a professional mixed martial arts record of 15-1. He has won eight fights in a row.
McDonald put himself in the title picture with an impressive first-round knockout of former WEC champion Miguel Torres on April 21.
If McDonald defeats Barao he would become the youngest UFC champion in history.
That distinction is currently held by light heavyweight titleholder Jon Jones, who captured the belt on March 19, 2011, with a third-round TKO of Mauricio "Shogun" Rua.
Jones was 23 years and eight months old when he became champion.