Why Bond Pull to Par Does Not Necessarily Narrow Credit Spreads

Summary

This exchange explains why a bond trading below par can rise toward its redemption value as maturity approaches without its credit spread narrowing. The spread compares the risky bond’s yield with a risk-free reference yield of similar maturity; it is not simply the bond’s discount from par. If the reference bond is already priced at par, the risky bond’s discount can shrink over time while still representing the same yield spread over the shorter remaining term.

The example considers two one-year bonds with the same coupon, with the risky bond initially below par and the reference bond at par. After six months, the risky bond has moved closer to par, yet the remaining discount can still correspond to the original spread. This is an illustrative explanation rather than a general pricing calculation: it does not derive the spread from cash flows or address changes in credit risk, rates, coupon structure, or reference-curve conventions.

Key ideas

• Pull to par describes price movement toward redemption value as maturity approaches.
• A bond’s discount to par is not itself its credit spread.
• Credit spread compares yields against a suitable risk-free reference.
• A shrinking price discount can coexist with a stable yield spread.

Tags

# How do you calculate pull to par effect on z-spread?


# How do you calculate pull to par effect on z-spread?












Currently bonds are widening almost across all maturities and sectors.

I'm looking at some senior bonds with maturities of less than 1 year, that have widened more than 100bps. This happened even though there is a pull to par on the bonds.

How can I calculate the pull to par effect?

Thank you

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/69822

I assume you are talking about credit spreads ( ie the difference in yield between your bond and some risk free reference bond of the same maturity). As you approach maturity, both bonds will pull to par but the yield spread does not. For example let’s say both bonds are 1 yr maturity with 1% coupon. The risk free bond is already priced at par whereas the risky bond is at 99, implying a 100bp yield spread. That bond will pull from 99 to 100 over time, but the yield spread can stay at 100. After 6 months it might be at 99.5 but that half point discount represents 100bp over the remaining 6 months.

Is that what you were asking ?

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