# Priced markets vs NAV Covenant prices each tranche continuously relative to its net asset value (NAV) rather than pegging tranches to NAV directly. The Yield Coin trades at a discount price to NAV (its NAV is also called notional, since it represents the par debt outstanding), and the discount *is* the yield. The Leverage Coin captures the residual Base Asset NAV at the corresponding price. Both tranches clear on the Latent Swap AMM. This page explains what the priced-market design is and what it unlocks. ## How a priced market works In a priced market, the senior tranche has a market price that can sit below, at, or even above NAV depending on the balance of supply and demand for the tranche. * If a Yield Coin with a debt duration of one year trades at `$0.95` against `$1.00` of NAV (par notional), the implied rate is roughly `5.3%` (`r = -ln(P / D)`). * A holder who buys at that price soft-locks \~5.3% as their realized return. NAV accrual plus mark-to-market on the price will track the entry rate even as the spot rate moves (the offset mechanism is described in [Perpetual Debt](/protocol-mechanism/perpetual-debt.md)). The Latent Swap AMM clears the price continuously: every swap moves Yield Coin and Leverage Coin prices along the curve, so the rate is always set by the marginal trade. ## What priced markets unlock Three properties drop out of the priced-market design. **Soft-lock a rate.** A Yield Coin holder buys at a price and soft-locks that rate as their realized return. The spot rate continues to float, but the Yield Coin price moves in the opposite direction, offsetting changes in the rate. A holder entering at a temporarily high rate captures the dislocation as the rate mean-reverts. **Trade above or below NAV.** A market price can express things accounting cannot. If a holder believes the underlying is impaired in a way the protocol's NAV has not yet recognized, the holder can sell at a price below NAV. The discount widens, the implied rate spikes, and the market price-discovers the actual risk before the oracle catches up. If the market believes the underlying is stronger than NAV reflects, the senior trades closer to (or above) NAV and the implied rate compresses. The market is allowed to disagree with the oracle, and that disagreement is informative. **Tranche assets without native yield.** Because the senior earns funding paid by the junior tranche rather than a slice of the underlying's yield stream, a Covenant Market does not require the underlying to produce a yield. As long as someone is willing to hold a leveraged claim against the Base Asset and pay funding for it, the senior earns that funding. Raw ETH, WBTC, and any other oracle-priced asset can be tranched even when the asset itself produces nothing. ## Mark-to-market is the signal The trade-off of a priced market is that the senior tranche's value moves with the implied rate. A holder entering at one rate and exiting at a higher rate realizes a mark-to-market loss on the price change, even if the holder's rate accrual was positive. This is the same dynamic that fixed-income desks live with on every bond: duration is real, and a higher rate later means a lower price now. For users who want to manage that exposure, the Latent Swap AMM offers a pair-redeem path that exits both tranches against fresh collateral with no AMM slippage. For users who want to lean into it, the priced market is the structure that lets a credit allocator own a duration position rather than just a floating-rate balance. The duration parameter `D` is the dial. As `D → 0`, tranche prices stay effectively pinned to NAV and the funding rate floats freely to balance the market: the same structural behavior as a NAV-pegged tranching design. As `D` rises, prices acquire room to move off NAV and the priced-market properties above (soft-lock, mark-to-market, dislocation capture) become available. Each Covenant Market chooses its `D` at deployment to suit the underlying. See [Perpetual Debt](/protocol-mechanism/perpetual-debt.md) for the full treatment of `D`. The Latent Swap AMM is the clearing mechanism for this priced market. It is described next. --- # 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/priced-markets-vs-nav.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.