The last tranche in a collateralized mortgage obligation (CMO). Periodic interest accrues on a Z-tranche but no cash payments will be made until previous tranches from the same CMO are retired. Interest payments on a CMO are disbursed to the A-tranche, B-tranche, C-tranche, floater, and inverse floater each month, based on the amount of principal outstanding at the beginning of the period. The Z-tranche is the only tranche that doesn’t receive interest each month; rather interest accrues and is added to the principal balance. The Z tranche consists of Z- bonds. A Z-bond receives no payments until all previous tranches are paid back. Although a Z bond carries an explicit coupon rate, the payable interest is accrued and added to the principal balance of the tranche (that is why Z-bonds are also known as accrual bonds or accretion bonds).
The Z-tranche is also known as an accrual tranche.
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