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Sometimes known as reduction to maturity, "pull to par" is a term used to describe the change that occurs in the current stated value of a credit instrument as that instrument moves closer to maturity. This term is often associated with bond issues, especially ones that are formulated to pay off 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 that face value that is eventually reached, and notes that as time passes and the maturity date approaches, the current value of that bond is pulled closer to that par or final face value.
The current pull 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 rate of interest that is associated with the bond issue itself. By comparing this rate of interest with the market interest rate, it is possible to ascertain how much pull is being exerted on the bond. This also allows investors to have some idea of what type of risk is associated with the bond issue itself.
While bond issues in general tend to carry less volatility than many other types of investments, there is still some potential that the anticipated return will not be realized, sometimes due to changes in the marketplace. This is particularly true when the rate of interest applied to the bond issue is floating rather than fixed. In this scenario, evaluating the pull to par is especially important, as it can be used to assess changes in the marketplace that are affecting the rate of interest applied to the bond and thus exerting some influence on how much of a return the bond actually produces for the investor. If there is reason to believe that the bond will generate less interest for 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 is more likely to generate the desired level of return.
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