Exit Early

Fixed-rate, fixed-term positions on Tenor can be exited at any time before maturity if there is sufficient liquidity for the user to transfer his position to another user.

Repay a borrow position early

Borrowers can always repay their position in full before maturity if needed by repaying the full amount due at maturity. Borrowers would preferably want to sell their position to another borrower when repaying early to minimize the impact of having to repay the interest due in full.

Example (early repayment covering the full debt)

A user borrows 1,000 USDC at 5% APR for 1 month. The interest owed is:

$$1{,}000 \times 5\% \times \frac{1}{12} = 4.17 \text{ USDC}$$

If the user wants to repay his position instantly, he will need to repay 1,004.17 USDC (principal + interest) to net off his debt.

Example (Lending to close the borrow position)

A user borrows 1,000 USDC at 5% APR for 1 month. The interest owed is:

$$1{,}000 \times 5\% \times \frac{1}{12} = 4.17 \text{ USDC}$$

The borrower can lend USDC to close his borrow position, effectively repaying the debt. The borrower can either lend at the current market rate by matching against an existing lend offer, or create a lend limit order at their preferred rate and wait for it to be filled. If there is an outstanding lend offer at 5% APR for 1 month, the borrower can lend 1,000 USDC at 5% APR for 1 month against that offer to exit immediately. Note that if the rate at which the borrower lends to close his position is different from the rate at which he initially entered the position, he will have a gain or a loss due to the difference in interest rates.

Resell a lend position early

Lenders can exit their position early by borrowing against their lend position, effectively transferring the lend position to another lender. The lender can either borrow at the current market rate by matching against an existing borrow offer, or create a borrow limit order at their preferred rate and wait for it to be filled.

Example (Borrowing to close the lend position)

A user lent 1,000 USDC at 5% APR for 1 month and will receive 1,004.17 USDC at maturity.

The lender can borrow USDC to close their lend position. If there is an outstanding lend offer at 5% APR for 1 month, the lender can borrow 1,000 USDC at 5% APR for 1 month against that offer to exit early. Note that if the rate at which the lender borrows to close their position is different from the rate at which they initially entered the position, they will have a gain or a loss due to the difference in interest rates.

Impact of rates on the value of a position

Borrowers and lenders can sell their position to another user who is willing to take it over. When selling a position, borrowers and lenders may realize a mark-to-market gain or loss depending on how interest rates have moved since their position was opened.

• If rates have risen
  • Borrowers: holding a position they entered at a lower rate than the rate at which they exit, they will realize a gain by selling their position.
  • Lenders: holding a position they entered at a lower rate than the rate at which they exit, they will realize a loss by selling their position.
• If rates have fallen
  • Borrowers: holding a position they entered at a higher rate than the rate at which they exit, they will realize a loss by selling their position.
  • Lenders: holding a position they entered at a higher rate than the rate at which they exit, they will realize a gain by selling their position.

Example: Rates Increase from 5% to 7%

Borrower

A user borrowed 1,000 USDC at 5% APR for 1 month, owing 1,004.17 USDC at maturity.

To exit early at the current market rate of 7%, the borrower needs to lend enough USDC to cover their 1,004.17 USDC debt at maturity. At 7% APR, the amount they need to lend today is:

$$\frac{1{,}004.17}{1 + \frac{7\%}{12}} = 998.34 \text{ USDC}$$

The borrower initially borrowed 1,000 USDC and only needs to lend 998.34 USDC to exit, resulting in a gain of 1.66 USDC (1,000 - 998.34). The borrower's gain is due to exiting at a higher rate (7%) than the rate at which they entered the position (5%).

Lender

A user lent 1,000 USDC at 5% APR for 1 month, earning 1,004.17 USDC at maturity.

To exit early at the current market rate of 7%, the lender needs to borrow 1,004.17 USDC (the amount they will receive at maturity). At 7% APR, the cost to borrow this amount today is:

$$\frac{1{,}004.17}{1 + \frac{7\%}{12}} = 998.34 \text{ USDC}$$

The lender initially lent 1,000 USDC but only receives 998.34 USDC when exiting, resulting in a loss of 1.66 USDC (1,000 - 998.34). The lender's loss is due to exiting at a higher rate (7%) than the rate at which they entered the position (5%).

Example: Rates Decrease from 5% to 3%

Borrower

A user borrowed 1,000 USDC at 5% APR for 1 month, owing 1,004.17 USDC at maturity.

To exit early at the current market rate of 3%, the borrower needs to lend enough USDC to cover their 1,004.17 USDC debt at maturity. At 3% APR, the amount they need to lend today is:

$$\frac{1{,}004.17}{1 + \frac{3\%}{12}} = 1{,}001.67 \text{ USDC}$$

The borrower initially borrowed 1,000 USDC but needs to lend 1,001.67 USDC to exit, resulting in a loss of 1.67 USDC (1,001.67 - 1,000). The borrower's loss is due to exiting at a lower rate (3%) than the rate at which they entered the position (5%).

Lender

A user lent 1,000 USDC at 5% APR for 1 month, earning 1,004.17 USDC at maturity.

To exit early at the current market rate of 3%, the lender needs to borrow 1,004.17 USDC (the amount they will receive at maturity). At 3% APR, the cost to borrow this amount today is:

$$\frac{1{,}004.17}{1 + \frac{3\%}{12}} = 1{,}001.67 \text{ USDC}$$

The lender initially lent 1,000 USDC and receives 1,001.67 USDC when exiting, resulting in a gain of 1.67 USDC (1,001.67 - 1,000). The lender's gain is due to exiting at a lower rate (3%) than the rate at which they entered the position (5%).