“Pull to Par” of Bond Prices

In the bond markets, the bonds will generally trade above or below the par value of the bond. When the bonds are trading above the par value they are said to be trading at a premium. However, when the market prices are below par, the bond is said to be trading at a discount.

However, as time passes, and bonds near their maturity, the prices will converge to the par value. So, the prices of bonds trading at a discount will increase, and the prices of bonds trading at a premium will fall until they equal the par value. This phenomenon is called “Pull to Par” or “Reduction of Maturity”.

This happens because of the difference in the market interest rates and the coupon of the bond.