🏍️ZC Bonds as Collateral

Use your lending positions as collateral for yield-spread strategies

Your Zero-Coupon bond holdings (lending positions) can serve as collateral for borrowing — you don't need to sell a position to unlock liquidity from it. This is the foundation of yield-spread strategies: lend at one maturity, borrow against the position at another, and capture the spread.

Valuation rules

Situation	Haircut
Borrowing in the same currency as the ZC bond	20% — the bond counts for up to 80% of its present value
Borrowing in a different currency	100% — cross-currency ZC collateral is not currently accepted

ZC bonds are consumed as collateral first, before your cash collateral, up to 80% of their PV. The system tracks this as the ZC utilization ratio:

$$\text{ZC Utilization} = \frac{\text{Obligation}}{\text{Total ZC}}$$

When ZC collateral is in play, LTV incorporates it alongside cash:

$$\text{LTV} = \frac{\text{Obligation}}{\text{Cash Collateral} + \text{Consumed ZC Collateral}}$$

You can borrow in the same currency without any cash collateral at all — a ZC bond alone supports borrowing up to 80% of its PV.

Worked example

User A holds a ZC bond with a present value of 1,000 USDC and no cash collateral:

1. Maximum borrow: 800 USDC (80% of PV). They borrow the full 800 USDC.

2. ZC utilization: 800 / 1,000 = 80%.

3. The borrowed 800 USDC itself sits in the protocol vault, so overall collateral utilization is 800 / (1,000 + 800) ≈ 44% — a more comfortable overall position than the ZC utilization alone suggests.

Liquidation scenario: if the ZC bond's price falls and utilization exceeds the threshold, 50% of the obligation (400 USDC) can be liquidated — or 100% if utilization deteriorates past the full-liquidation threshold — with the standard liquidation fee taken from the ZC collateral. The same rules apply as for any other collateral (Liquidation, current values in Protocol Parameters).

Risks to understand

• Rate risk — ZC bond prices move inversely to yields; a rate spike lowers your collateral value.

• Cross-currency liquidation — liquidators may choose which obligation and which collateral currency to act on. A breach triggered in one currency can result in liquidation involving another.

• Maturity drift — as bonds approach maturity their price rises toward par, which generally helps collateral value, but rolls restate positions at market rates.

Related

• Collateral — the general collateral framework

• Liquidation — thresholds and process

• Fixed Maturity & Auto-Roll — what happens to collateralized positions at maturity