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Why capital-back structures change the maths

31 July 2023 · Market note

Why capital-back structures change the maths

A holding that returns capital at maturity behaves differently from one that pays a rate forever with no principal return. When the principal comes back, total return is bounded and the risk window is defined. That makes the position easier to plan around than an open-ended yield.

The trade-off is duration. A weekly settlement over twenty-six periods is a six-month commitment, and the earnings rate reflects that. Longer durations pay more because the platform can hold the underlying position without churning it.

For a holder building a ladder, the useful move is spacing maturities: open one position each month and the returns arrive continuously after the first half year. Capital recycling then funds the next position instead of waiting for a single lump sum.

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