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“Pull to par” refers to the change in present value of a credit instrument as it approaches maturity, often associated with bond issues. The current attraction to par is based on the relationship between the market interest rate and the nominal yield of the bond, allowing investors to assess risk and potential returns. Assessing par attractiveness is especially important for floating interest rate bonds, as changes in the market can affect the amount of yield earned. Selling the bond and investing in a more profitable security may be necessary if the bond is not likely to generate the desired level of return.
Sometimes known as drawdown to maturity, “pull to par” is a term used to describe the change that occurs in the stated present value of a credit instrument as that instrument approaches maturity. This term is often associated with bond issues, especially those that are formulated to pay the face value of the bond plus interest once the maturity date is reached. Within the context of this type of activity, par refers to the par value that is eventually reached, noting that as time passes and the maturity date approaches, the present value of that bond gets closer to that par value. nominal or final.
The current attraction to par is based on the relationship between the current market interest rate and the nominal yield associated with the bond. The nominal yield, also sometimes known as the coupon rate, is simply the stated interest rate that is associated with the bond issue itself. By comparing this interest rate to the market interest rate, it is possible to determine how much force is exerted on the bond. This also allows investors to get an idea of what type of risk is associated with the bond issue itself.
While bond issues generally tend to have less volatility than many other types of investments, there is still the potential that anticipated returns may not be realized, sometimes due to changes in the market. This is particularly true when the interest rate applied to the bond issue is floating rather than fixed. In this scenario, assessing par attractiveness is especially important, as it can be used to assess changes in the market that are affecting the interest rate charged on the bond and thus have some influence on the amount of yield that the bond actually earns for the investor If there is reason to believe that the bond will earn less interest during the remainder of the time between the current date and the maturity date, the investor may do well to sell the issue now and invest in some other security that more likely to generate the desired level of return.
Smart Asset.
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