Projecting Annual Percentage Rates (APRs)
Introduction to APR
The Annual Percentage Rate (APR) represents the annual rate of return on an investment, excluding the effects of compounding interest. To calculate the APR for both fixed and variable tranches within Nexara, an understanding of their respective yields over specified periods is essential.
Stages of Interest Rate Products
Interest rate products within Nexara navigate through three distinct stages, each affecting the yield and subsequent APR calculations:
OPEN Stage:
At this stage, interest-rate products are open for subscription by investors. Funds have not yet been deployed, and the yield is purely estimated based on the anticipated performance of the underlying assets.
INVESTED Stage:
Once funds are deployed into the underlying yield-bearing positions, the APR calculation involves both estimated and realized yields. During this stage, yield has started to accrue and will continue to accumulate until the end of the investment period.
WITHDRAWN Stage:
In this final stage, the interest-rate products have matured, and APR is calculated based solely on the realized yield. At this point, funds have been withdrawn from the underlying positions, providing a clear and definitive yield outcome.
Liquidity Pool (LP) Yield Estimation
The process of estimating yields, especially in decentralized finance, varies significantly across different Automated Market Makers (AMMs). Each AMM may use a unique approach to estimate the potential returns from liquidity pools. It's crucial for investors to understand these differences as they reflect on the potential APR of investments in different environments.
Considerations in Yield Calculation
When projecting APRs for Nexara's tranches, several factors are considered:
Risk Exposure: The level of risk associated with the underlying assets directly influences the yield, particularly for the variable tranches.
Market Conditions: Fluctuations in market conditions can impact the realized and estimated yields, affecting the overall APR.
Investment Duration: The length of time funds are invested plays a critical role in determining the yield, as longer durations may offer higher returns due to compounding effects, notwithstanding the non-compounding nature of APR.
Conclusion
By methodically navigating through these stages and considering various factors affecting yield, Nexara aims to provide a transparent and efficient way to calculate APRs for its diverse range of interest-rate products. This structured approach ensures that investors have clear insights into potential returns, aligning with their investment strategies and risk preferences.
Last updated