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Z-Tranche


A tranche that has some similarities to a zero-coupon bond. A Z tranche (zero tranche) consists of Z bonds. By definition, it is an accrual tranche of a collateralized mortgage obligation (CMO), usually one of the last segments to be paid off in cash (it gets whatever is left over after previous tranches, A, B, and C, from the same CMO are retired). That is, it pays neither interest nor principal until the preceding tranches are paid. Once its turn is up, it receives accrued interest and principal payments as they are received by second-step special purpose entity (SPE). Obviously, it is the most risky tranche.

Normally, the Z tranche has longer duration than the preceding tranches.

It is also known as an accrual bond or Z bond.



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