# Chapter 2 - Yield Tokenization Basics > Course level: **#beginner** {% embed url="" %} ## TL;DR Yield tokenization means splitting a yield-bearing asset into its two components: the **principal** and the **yield** components. A yield-bearing asset is an asset that generates yield over time (e.g. stETH, Uniswap LP Token, sDAI, etc). To better illustrate this, we can look at the example of a **real estate property.** A real estate property is a yield-bearing asset, where it generates rental yield to the owner of the property. Now imagine a real estate property that’s been split into 2 components: * The rights to the ownership of the property. You can think of this as the **Principal**. * The rights to the rental income of the property, which can grant its owner the right collect all the rental income (AKA yield) generated by the property for a certain length of time. You can think of this as the **Yield**.

At any point in time, you can combine both to get the whole property: {% hint style="info" %} With stETH as an example: **Principal** (Right to Principal of stETH) + **Yield** (Rights to stETH yield) = **Yield-bearing asset** (stETH) {% endhint %} When you tokenize the yield, you can sell or trade the Yield portion even before maturity. This creates new ways to manage and even speculate on yield. Let’s say the maturity date is in 1 year:

* You can buy the Rights to Ownership at **a lower price** than an actual property. After 1 year, the rights entitle you to redeem the property. The guaranteed value appreciation from the discounted value of paper ownership → owning the property at its full value constitutes the fixed yield/income.

* You can also buy only the yield portion (the Rights to Rental Payments) to receive rent for 1 year. Assuming this costs $5000, you’ll profit when you collect more than $5000 within the year or suffer a loss when it yields less. Buying this lets you speculate on the property “yield”. Think the rental price is going up soon and you want some exposure? Buy the “yield” instead of paying the whole property price. {% hint style="info" %} 💡 Pendle is a marketplace where property owners can split and trade their principal (rights to the underlying) and yield (rights to rental payments) separately. Both Principal and Yield position can be sold anytime (no lockup) even before the maturity is up. {% endhint %} ## PT & YT in Pendle DeFi pools gives you a yield-bearing position in return for staking or depositing tokens. In Pendle, the yield-bearing position can be split into two components: * **YT (Yield Token) -> representing the yield-receivables of the position** * **PT (Principal Token) -> representing the principal amount** When yield is tokenized, there is a **maturity** associated with the tokenization, demonstrated below.

The $ value sum of PT and YT should equate to its underlying as they’re individual parts of a whole. You can redeem the underlying by depositing equal amount of PTs and YTs. On maturity, PT can be redeemed for its underlying without its YT counterpart (This is because matured YT have 0 value as they no longer generate yield). {% hint style="info" %} 💡 You can tokenize the yield-bearing tokens on Pendle by selecting any of the assets on Pendle in the Market page, and select the “Mint tab” at the left-hand side of the page. {% endhint %}

### **What are PT and YT exactly?** Here are the definitions of **PT** and **YT**: * **1 YT gives you the right to receive the yield of 1 unit of the accounting asset (e.g. 1 ETH, 1 DAI, 1 USDe, etc) until maturity, claimable in real-time.** * **1 PT gives you the right to redeem 1 unit of the accounting asset (e.g. 1 ETH, 1 DAI, 1 USDe, etc) upon maturity.** Using an example of sUSDe from Ethena, the naming convention for PT and YT is: * 1 YT-sUSDe (USDe) * 1 PT-sUSDe (USDe) With that example, the definition of PT and YT is: * 1 YT-sUSDe (USDe) -> Receive the yield of 1 USDe worth of sUSDe * 1 PT-sUSDe (USDe) -> Will be redeemable for 1 USDe worth of sUSDe * 1 YT-HLP (USDC) -> Receive the yield of 1 USDC worth of HLP * 1 PT-HLP (USDC) -> Will be redeemable for 1 USDC worth of HLP {% embed url="" %} {% embed url="" %} ### What can you do with PT & YT? #### Before Maturity: 1. PT and YT can be minted from the underlying asset.

2. PT and YT can be redeemed back into its underlying asset

3. YT holders can claim any accrued yield in real-time.

#### After Maturity * PT holders can redeem underlying asset 1:1 without YT.

#### **Anytime** You can **buy and sell PT and YT** on the open market using Pendle AMM. As such, PT and YT will always have a market price. We will talk more about trading PT and YT in the next chapters. ### **The PT / YT equation** {% hint style="success" %} PT Price + YT Price = Accounting Asset Price {% endhint %} Since **1 unit of underlying asset mints 1 PT + 1 YT** and **1 PT + 1 YT redeems for 1 unit of the accounting asset**, there is an obvious relationship between their prices: The Pendle AMM ensures that this relationship holds true at all times. *** ## Analogy of PT & YT in TradFi In TradFi, what Pendle does is similar to bond stripping. The principal and interest of bonds are separated, so PTs are equivalent to [zero-coupon bonds](https://www.investopedia.com/terms/z/zero-couponbond.asp), while YTs are the detached [coupons](https://www.investopedia.com/terms/c/coupon.asp). #### PT is the DeFi zero-coupon bond

A zero-coupon bond is a type of bond that does not pay any interest to the bondholder during the life of the bond. Instead, the bond is **sold at a deep discount** to its face value, and the **bondholder receives the full face value when the bond matures**. The difference between the purchase price and the face value is the investor’s return or profit. For example, if you buy a zero-coupon bond for $800 that has a face value of $1,000 and matures in 3 years, you will receive $1,000 at maturity and earn a profit of $200 for the 3 years of investment. {% hint style="info" %} Again, you don’t need to hold bonds to maturity, you can sell them on the open market at any time at market price. {% endhint %} #### YT is the DeFi detached coupon A detached coupon is a part of a coupon bond that has been separated from the bond and can be traded or sold separately. A coupon bond is a type of bond that pays regular interest payments to the bondholder until the bond matures. The interest payments are called coupons, and they are usually attached to the bond certificate. A detached coupon is a coupon that has been **cut off from the certificate** and **can be redeemed for cash by anyone who holds it**. For example, if you have a coupon bond that pays $50 every year for 3 years and you detach the coupons, you can sell it to someone else to wishes to claim that $150 over the 3 years. A person who buys the detached coupon below $150 makes a profit over the 3 years. {% hint style="info" %} 💡 The detached coupons can also be sold to the open market at any time at market price. {% endhint %} > Additional reading: [Coupon Bond Vs. Zero Coupon Bond: What's the Difference? (investopedia.com)](https://www.investopedia.com/ask/answers/06/zerocouponregularbond.asp) --- # 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://pendle.gitbook.io/pendle-academy/pendle-101/chapter-2-yield-tokenization-basics.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.