Illustrator CS Compound Path -- overlapping shapes

Hey there.

I'm trying to cut a rectangle out of circle in Illustrator, where the shapes only partly overlap. I need the cut out shape (the rectangle) to be transparent. When I use Make Compound Path, however, the part of the rectangle that was outside the circle becomes the same colour as the circle, rather than transparent.

The end result should be akin to the end of a wrench, where the wrench has colour but the background is transparent.

Could anyone kindly tell me what I'm doing wrong? It must be so simple. I'm using Illustrator CS.

Thank you so much.

Leigh.