💠Zero-Coupon Bonds
Understanding Zero-Coupon Bonds as the standardized instrument in the Fixed-Rate Lending Protocol
Overview
Zero-Coupon bonds are debt securities that do not pay interest (coupons) but are traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. The Secured Finance platform uses Zero-Coupon bonds as the standardized instrument for fixed-rate lending and borrowing.
How It Works
The Zero-Coupon standard was chosen for its cost efficiency, simplicity, and low risk. With only two cash flows involved in the transaction - the initial and final exchanges - it saves on gas and operational costs. Investors can enjoy the simplicity of not having to track or reinvest coupon payments. The frequency of transactions is minimized, reducing operational risks.
Zero-Coupon bonds are traded at a discount to their face value and redeemed at full face value at maturity. On the Secured Finance platform, bonds are redeemable at 100.
The platform streamlines the borrowing and lending process by allowing users to specify the desired 'Price' and 'Amount' parameters. The system instantaneously calculates the implied Annual Percentage Rate (APR), interest accrual, estimated $ value, and transaction fee upon submission. For further information on ZC Bond Price to Yield conversion, please consult the relevant materials.
Key Parameters
Bond Par Value
The value at which bonds are redeemed at maturity
100
Maximum Bond Price
The maximum price allowed for bond orders
100.00
Minimum Bond Price
The minimum price allowed for bond orders
Varies by asset
Price Precision
Decimal precision for bond prices
2 decimal places
Examples
Example 1: Lending with Zero-Coupon Bonds
Bob wants to lend 1,000 FIL for 1 year at a 25% APY:
He navigates to the lending interface and selects the 1-year maturity market
For a 25% APY, he sets his price at 80.00 (calculated as: 100 / (1 + 0.25) = 80)
He places a limit order to buy Zero-Coupon bonds at this price
When the order is filled, he pays 800 FIL (1,000 × 80.00 / 100)
At maturity, he receives 1,000 FIL, earning 200 FIL in interest
This represents a 25% return on his initial investment of 800 FIL
Example 2: Borrowing with Zero-Coupon Bonds
Alice needs to borrow FIL for 6 months and is willing to pay a 20% APR:
After depositing sufficient collateral, she navigates to the borrowing interface
For a 20% APR on a 6-month term, the price would be approximately 90.91 (calculated as: 100 / (1 + 0.20 × 0.5) = 90.91)
She places a market order to sell Zero-Coupon bonds at this price
When the order is filled, she receives 909.1 FIL upfront (1,000 × 90.91 / 100)
At maturity, she will need to repay 1,000 FIL
The effective interest paid is 90.9 FIL on a loan of 909.1 FIL for 6 months
Common Questions
Why use Zero-Coupon bonds instead of traditional interest-bearing loans?
Zero-Coupon bonds offer several advantages: they're simpler to implement on-chain (only two cash flows), more gas-efficient, eliminate reinvestment risk for lenders, and provide clear, upfront terms for both borrowers and lenders. The discount-to-par structure also makes yield calculations transparent and intuitive.
How do I calculate the yield on a Zero-Coupon bond?
For bonds with maturity less than 1 year: APR = (100/BondPrice - 1) × (365/DaysToMaturity)
For bonds with maturity greater than 1 year: APR = (100/BondPrice)^(1/YearsToMaturity) - 1
Can I sell my Zero-Coupon bond before maturity?
Yes, you can sell your position before maturity by taking an opposite position in the market. For example, if you initially lent (bought bonds), you can exit early by borrowing (selling bonds) of the same maturity. This effectively closes your position, though market conditions at the time will determine whether you realize a gain or loss.
What happens at bond maturity?
At maturity, Zero-Coupon bonds reach their par value (100), but the protocol does not have automatic settlement functionality. Users must manually unwind their positions by taking the opposite action in the market. Lenders who want to receive their funds must sell their positions, and borrowers must repay their loans by buying back their positions. The protocol does not handle this settlement process automatically.
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