# Perpetual Debt A Yield Coin in a Covenant Market is structured as **Perpetual Debt**: a continually refinancing zero-coupon bond. Instead of expiring at a fixed maturity, the Yield Coin's NAV (also called notional, since it represents the par debt outstanding) accretes (or, in extreme cases, decretes) over time at a rate implied by its market price. ## Price implies the rate The Yield Coin's market price `P` directly determines its implied funding rate: $$ r\_t = -\ln!\left(P\_t / D\right) $$ where `r_t` is the instantaneous funding rate and `D` is the debt duration parameter set at market deployment. Lower Yield Coin prices imply higher rates; higher Yield Coin prices imply lower rates. A holder who buys a Yield Coin at price `P` **soft-locks** the implied rate `r = -ln(P / D)` as their realized yield. The spot rate continues to float, but the Yield Coin price moves in the opposite direction. When the rate falls, the price rises. When the rate rises, the price falls. A holder's realized return (NAV accrual plus price change) tracks the entry rate even as the spot rate moves underneath. Example: a market clears on average at 10%. A holder enters when leverage demand temporarily pushes the rate to 15%. As the rate mean-reverts back to 10%, the price recovers, and the holder gains on the price even as accrual slows. The combined return tracks \~15%, soft-locking the dislocation captured at entry. ## What "duration" means here In a fixed-maturity bond, duration is the weighted average time to cash flows; in Covenant's perpetual market, the bond never matures, so that definition does not apply directly. The right operational interpretation of `D` is the **half-life of price-rate convergence**: a holder's realized yield is an exponential moving average of the spot rate set by the AMM, with characteristic timescale `D`. When the spot rate jumps, the Yield Coin's mark-to-market takes an immediate hit, and the price recoups that loss as it accrues at the new rate over a horizon on the order of `D`. Set `D` short and the holder is essentially earning the spot rate; set `D` long and the holder is earning a slow-moving average. The parameter is named `debtDuration` in the contracts and is fixed at market deployment (the aHYPER market uses `D = 3 months`). A useful limit case: as `D → 0`, tranche prices stay effectively pinned to NAV and the funding rate floats freely to balance leverage demand against senior supply. The split identity `V_B = V_Y + V_L` holds at all times, and the market behaves structurally like a **money-market tranching protocol**: the rate is the variable, prices are clamped to NAV. As `D` rises, prices acquire room to move off NAV, the realized yield smooths into an EMA, and the market takes on the characteristics of a perpetual zero-coupon bond market with a tradeable price. Covenant is the priced-debt design point on this spectrum; the duration parameter `D` is the dial. ## Notional accrual replaces coupons Traditional zero-coupon bonds accrue value by approaching face at maturity. A Perpetual Debt bond has no maturity, so the value accrual is built into the notional balance directly. The accrual mechanism is a continuous transfer of NAV between the two tranches: * the Yield Coin's NAV (notional) grows at the implied rate `r_t`; * the same amount is removed from the Leverage Coin's residual claim on the collateral pool; * the total Base Asset NAV is unchanged; only the split between Yield Coin NAV and Leverage Coin NAV moves. When `r_t > 0` (Yield Coin trading below par), the transfer flows junior-to-senior. When `r_t < 0` (Yield Coin trading above par), the Yield Coin's NAV decretes and the transfer reverses, flowing senior-to-junior. The direction is set entirely by the Yield Coin's market price. Practically, a holder of one Yield Coin at the start of a period earns interest by holding more Yield Coin notional at the end of the period (when `r_t > 0`). The mechanism is fully on-chain and continuous; there is no coupon payment, no rebase event, and no claim transaction. ## Why perpetual Perpetual Debt eliminates two friction points that limit on-chain credit markets: 1. **No fixed maturities to roll.** A holder can stay in the position indefinitely. There is no maturity date that forces a roll, no expiring-bond liquidity gap, and no off-the-run vs on-the-run distinction. 2. **No governance-set rates.** The funding rate is a continuous function of the Yield Coin's market price. Because the price is set by a market (the Latent Swap AMM), the rate is too. ## TradFi parallel Perpetual zero-coupon bonds barely exist in modern fixed income. UK consols were retired; French rentes are vestigial. The instrument is theoretically clean, but TradFi has no clearing mechanism for an asset with no natural settlement event. AMMs solve this. An AMM is, structurally, a clearing mechanism for an asset that does not need a maturity date to be priced. Covenant uses this property to make perpetual zero-coupon bonds tractable on-chain. The TradFi parallel for the priced senior tranche is a regular bond market with floating duration; the parallel for Covenant specifically is a perpetual zero-coupon bond market with the discount priced by an AMM. ## Where this connects to the rest of the protocol The Perpetual Debt mechanism is the bridge between the [Latent Swap AMM](/protocol-mechanism/latent-swap-amm.md) (which sets the Yield Coin price `P`) and the Yield Coin's economics (the rate at which its NAV accrues). The two pieces fit together: the AMM clears the price; the Perpetual Debt formula turns the price into a rate; the rate drives a continuous transfer of NAV between the two tranches in the direction the rate's sign dictates. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.covenant.finance/protocol-mechanism/perpetual-debt.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.