ZC Bond Collateral
Understanding how Zero-Coupon Bonds can be used as collateral in the Fixed-Rate Lending Protocol
Last updated
Understanding how Zero-Coupon Bonds can be used as collateral in the Fixed-Rate Lending Protocol
Last updated
At Secured Finance, we offer our users the innovative opportunity to use Zero Coupon Bond (ZC) as collateral for borrowing. This feature allows participants to leverage yield spread trading while enjoying the benefits of lending and borrowing on our platform. However, it's important to understand the specific conditions and risks associated with using ZC as collateral.
How Zero-Coupon Bonds can be used as collateral for borrowing
How collateral valuation and utilization works with ZC Bonds
How the Loan-to-Value (LTV) calculation adjusts for ZC Bond collateral
The liquidation process and risk management for ZC Bond collateral
: How ZC Bonds are valued as collateral
: How the system prioritizes ZC Bonds as collateral
: How liquidation works with ZC Bond collateral
: Important considerations when using ZC Bonds as collateral
: Practical examples of using ZC Bonds as collateral
When leveraging Zero Coupon Bonds (ZCs) as collateral on our platform, the valuation haircut is strategically set at 20% for loans in the same currency as the ZC. Conversely, for loans in a currency different from that of the ZC, a 100% haircut is currently applied.
This nuanced approach to collateral valuation is essential for users to understand as they devise their trading strategies and manage their collateral assets effectively, with the added dimension of community-driven governance enhancing the platform's adaptability and responsiveness to user needs.
Leveraging Zero Coupon Bonds (ZCs) as collateral on our platform requires an understanding of both the collateral utilization ratio and the Loan-to-Value (LTV) ratio, especially for loans in the same currency as the ZC. Our approach aims to maximize the efficiency of your assets while maintaining a prudent risk profile.
When you secure a loan in the same currency as your ZC, our system implements a specialized collateral utilization strategy. If you're borrowing against a ZC that's denominated in the same currency, the platform prioritizes this ZC as your primary collateral. This prioritization allows for the ZC to be utilized first, up to 80% of its Present Value (PV), before any cash collateral is considered. This method ensures that your ZC assets are leveraged effectively, enhancing your borrowing capabilities. Our platform display the ZC utilization ratio for each currency by the formulaic below.
The standard formula for calculating the Loan-to-Value (LTV) ratio is:
However, when the obligation currency matches the currency of the ZC you own, the LTV calculation adjusts to incorporate the ZC collateral. The adjusted formula becomes:
In this formula, ZC Collateral is considered alongside cash collateral. We aggregate the cash and the Consumed ZC amount to cover the obligation. The system is designed to cover 125% of the obligation and utilize up to 80% of the total ZC amount.
Even without pledging any Cash Collateral, you can still borrow in the same currency to engage in Yield Spread Strategy.
In the event of a liquidation trigger, liquidators have the flexibility to choose the currency of both the obligation and the collateral, which may include the ZC. It's important to note that even if the Loan-to-Value (LTV) threshold is breached due to fluctuations in one currency, your position may be subject to liquidation in another currency along with the collateral.
This mechanism underscores the importance of vigilant collateral management. Users must be aware that the liquidation process can lead to scenarios where the collateral, including ZC, is liquidated in a currency different from the one that triggered the LTV threshold.
Utilizing ZC as collateral offers a unique avenue for capitalizing on yield spreads. However, it comes with its set of risks, primarily due to price fluctuations and the potential for liquidation in a different currency. We urge our users to exercise caution and continuously monitor their collateral positions to mitigate risks and avoid unintended liquidations.