Pull to par
Encyclopedia
Pull to Par is the effect in which the price of a bond
converges to par value
as time passes. At maturity
the price of a debt instrument in good standing should equal its par (or face value
).
Another name for this effect is reduction of maturity.
It results from the difference between market interest rate
and the nominal yield
on the bond.
The Pull to Par effect is one of two factors that influence the market value of the bond and its volatility
(the second one is the level of market interest rates).
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
converges to par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
as time passes. At maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
the price of a debt instrument in good standing should equal its par (or face value
Face value
The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...
).
Another name for this effect is reduction of maturity.
It results from the difference between market interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
and the nominal yield
Nominal yield
Nominal yield or coupon yield is the coupon rate of a fixed income security, which is a fixed percentage of the par value. Unlike current yield, it does not vary with the market price of the security....
on the bond.
The Pull to Par effect is one of two factors that influence the market value of the bond and its volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
(the second one is the level of market interest rates).