Market Risk

The most significant risk PT holders face is market risk if they need to sell their position before the maturity date. While PTs are designed to be redeemable for their full face value at maturity, their market price before that date can fluctuate based on several factors.

Interest Rate Sensitivity

PTs exhibit what financial analysts call "duration risk" or "interest rate risk." When market interest rates change, the present value of a future fixed payment (your principal at maturity) also changes:

• If market interest rates increase after you purchase PTs, the market value of your PTs will likely decrease, potentially resulting in a loss if you sell before maturity.

• If market interest rates decrease, the market value of your PTs might increase, potentially allowing for profit if you sell before maturity.

This relationship between interest rates and PT prices creates a fundamental trade-off: the longer the time until maturity, the more sensitive PT prices will be to interest rate changes.

Real-World Example

Let's illustrate this with a simplified example:

Imagine you purchase PTs that will be worth 100 TON at maturity in 1 year. If the current market yield rate is 5%, the present value (and likely market price) of these PTs would be approximately 95.24 TON (100 TON ÷ 1.05).

Now, let's say that one month later, market yields suddenly increase to 8%:

• The new present value would be approximately 92.43 TON (100 TON ÷ 1.08^(11/12))

• If you needed to sell your PTs at this point, you might experience a loss of around 2.95% compared to your purchase price

Conversely, if market yields decreased to 3%:

• The new present value would be approximately 97.56 TON (100 TON ÷ 1.03^(11/12))

• Selling at this point might result in a gain of around 2.44%

This example demonstrates how changes in market conditions can affect PT values before maturity, creating potential gains or losses depending on when you enter and exit your position.

Time Decay Effect

PT prices generally follow a predictable trajectory toward their face value as maturity approaches. This creates what's known as a "pull to par" effect. The practical implication is that market risk gradually decreases as the maturity date approaches:

• PTs with 1 year to maturity might experience significant price volatility

• The same PTs with only 1 month to maturity would typically experience much less price volatility

• As maturity approaches, the market price increasingly converges toward the face value

Risk Management Strategies for PT Holders

Understanding this time-dependent risk profile is crucial for PT holders when planning their investment strategy and potential exit timing.

Given these risk factors, PT holders can employ several strategies to optimize their experience:

For Market Risk:

• Consider your investment time horizon in relation to PT maturity dates

• Be aware of how changing market interest rates might affect PT values

• Understand that PT price volatility generally decreases as maturity approaches

• Consider using PTs with maturity dates that align with your expected need for funds

By understanding these dynamics and employing appropriate risk management strategies, PT holders can make more informed decisions about how these specialized tokens fit within their broader investment approach.