Pull to Par: What it is and How it Works

What Is Pull to Par?

Pull to par is the movement of a bond's price toward its face value as it approaches its maturity date. Premium bonds, which trade at a higher price than their face (par) value, will decrease in price as they approach maturity. Discount bonds, which trade at a lower price than their par value, will increase in price as they approach maturity.

Understanding Pull to Par

Investors purchase bonds from issuers or from the secondary markets at par, at a discount, or at a premium. Regardless of the price paid to buy a bond, the face value of the bond at maturity will be repaid to bondholders at maturity. The face value, or par value, of a bond, is the nominal or dollar value printed on a bond’s certificate, representing the amount that an investor will receive if they hold the bond until it matures. Corporate bonds typically have a par value of $1,000, municipal bonds $5,000, and most government bonds $10,000.

When an investor buys a bond at par, it means the investor purchases the bond at its face value. If the bondholder holds the bond until its maturity date, they will be repaid the full par value of their investment—nothing more, nothing less. An investor that purchases a bond with a $5,000 par value for $5,000 will receive a full principal investment of $5,000 at maturity. In effect, the value of a par bond will hold steady at its par value.

Pull to par reflects the fact that investors require a specific return on their bond investment, given the bond's characteristics and overall market conditions.

Discount Bonds and Premium Bonds

A bond purchased at a discount is one that is issued or sold for less than its par value. As the time to maturity looms closer, the value of the bond is pulled higher until it is at par on the maturity date, at which point, the investor receives the par value of the debt security.

For example, a one-year bond with a par value of $1,000 is issued for $920. Over a period of 12 months, the bond increases gradually from $920 to $1,000. This movement is referred to as a pull to par and it describes the accretion of a discount bond.

A pull to par on a premium bond works in the opposite direction of a discount bond. A bond purchased at a premium has a value above the par value of the security. As the bond approaches maturity, its value decreases steadily until it converges toward the par value on the maturity date.

In this case, the investor will receive an amount less than what they purchased the bond at. This pull-down in the value of a premium bond is referred to as the amortization of a premium bond. Suppose an investor purchases a bond for $1,150 and holds it until it matures. The par value of the bond is $1,000 and is set to mature in two years. Over a period of 24 months, the premium bond’s value will be pulled down from $1,150 to par at the time of maturity. The bond issuer will pay the bondholder $1,000 par value on the redemption date.