When a bond is said to be "pulling to par," it means that the bond's price is rising in relation to its face value. In other words, the bond is becoming more valuable as it approaches maturity. This is typically seen as a good sign for investors, as it means that the bond is likely to be worth its full value when it matures.
Why do bonds go down when interest rates go up?
The reason that bonds go down when interest rates go up is because bonds are effectively loans, where the bondholder is lending money to the issuer. The issuer then pays the bondholder periodic interest payments, known as the coupon rate.
When interest rates in the market rise, newly issued bonds will have a higher coupon rate than existing bonds. This means that the issuer will have to pay more in interest payments to the bondholder, which decreases the overall value of the bond.
Therefore, when interest rates go up, bond prices go down.
Can you lose money on bonds if held to maturity?
A bond is a debt security, which means that it represents a loan that the bond issuer (typically a government or corporation) has made to investors. When you buy a bond, you are effectively loaning money to the issuer, and they agree to repay you the principal plus interest over a set period of time.
If you hold a bond to maturity, you will receive your principal back plus any interest that has accrued. Therefore, it is not possible to lose money on a bond if you hold it to maturity.
However, it is important to note that bonds are subject to interest rate risk, which means that their value can fluctuate in response to changes in interest rates. Therefore, if you sell a bond before it matures, you may receive less than the face value of the bond, and you could lose money.
Why are long term bonds more sensitive to changes in interest rates than short term bonds? The reason long-term bonds are more sensitive to changes in interest rates than short-term bonds is because of the time value of money. The time value of money is the concept that money is worth more now than it will be in the future. This is because money can be invested and earn a return. The longer the time period, the greater the potential return, so long-term bonds are more sensitive to changes in interest rates. Is the par value of a bond the future value? The par value of a bond is not the future value. The future value is the value of the bond at maturity, which is determined by the coupon rate and the current market conditions.
What is the meaning of zero coupon bonds?
A zero coupon bond is a debt security that does not pay interest but instead is sold at a deep discount from its face value. The bond's face value is repaid at maturity.
For example, suppose you purchase a $1,000 zero coupon bond with a 10-year maturity at a price of $500. This means that you pay $500 today and will receive $1,000 in 10 years. The $500 you pay today is your principal, or face value, and the $1,000 you receive in 10 years is also your principal.
Because zero coupon bonds make no periodic interest payments, they are sometimes referred to as "pure discount bonds."