Worst-case insurance draw
$83.9mAssumes the options sleeve loses its full value.
The issuer is selling a $100m bond with a 10-year maturity to institutional purchasers seeking floating rate US10Y + 2% (principal and interest paid at maturity). $80m of the bond proceeds will be allocated to US10Y. The remaining $20m will be deployed into a Bitcoin options strategy.
- Issuance
- $100m
- Principal raised from bond investors
- Maturity
- 10 years
- Bullet repayment, nothing paid before maturity
- Guaranteed yield
- US10Y + 2%
- 7.00% at the modeled 5.00% Treasury rate
- Maturity payment
- $196.7m
- Principal and accrued interest together
Use of proceeds
- US 10-year Treasuries
- $80m / 80%
- FL Spread Bitcoin Options Strategy
- $20m / 20%
Treasuries are held to maturity.
Settlement upside split
- UBTC
- 40%
- Issuer
- 40%
- Insurer
- 20%
Share of surplus after bondholders are paid.
Repayment
The $4m annual Treasury coupon pays a $1.2m insurance premium first. The remaining $2.8m is reinvested in treasuries at an assumed rate of 3.50%. Treasury principal and retained coupons are projected to provide $112.8m at maturity. Options proceeds cover the remaining obligation, with insurance covering any shortfall.
Modeled maturity outcomes
Options funding hurdle
15.41%Net annual return needed to avoid an insurance draw.
Base-case surplus
$20.8mAt an 18% net annual options return, before distribution.
Flow of Funds
Illustrative base case
Maturity settlement
Base case. At an 18% net annual return, the $20m options sleeve grows to $104.7m. Together with $112.8m from Treasury principal and retained coupons, the issuer has $217.5m at maturity. Bondholders receive $196.7m and the insurer makes no payment.
Insurance draw. If maturity assets fall below $196.7m, insurance covers the difference. If the options sleeve is entirely lost, Treasury funding still provides $112.8m, leaving an $83.9m claim.
Surplus distribution. The $20.8m base-case surplus is split 20% to the insurer and 40% each to UBTC and the issuer.