Accrual Bond

AAA

DEFINITION of 'Accrual Bond'

A bond that does not pay periodic interest payments. Instead, interest is added to the principal balance of the bond and is either paid at maturity or, at some point, the bond begins to pay both principal and interest based on the accrued principal and interest to that point. 

INVESTOPEDIA EXPLAINS 'Accrual Bond'

When the bond begins to pay both principal and interest based on the accrued principal and interest at that point, this is known as a Z tranche and is common in collateralized mortgage obligations (CMOs). In a CMO that includes a Z tranche, the interest payments that otherwise would be paid to the Z-tranche holder are used to pay down the principal of another tranche. After that tranche is paid off, the Z tranche begins to pay down based on the original principal of the tranche plus the accrued interest.

Similar to a zero-coupon bond, an accrual bond or Z tranche has limited or no reinvestment risk. However, accrual bonds, by definition, have a longer duration than bonds with the same maturity that make regular interest or principal and interest payments. As such, accrual bonds are subject to greater interest rate risk than bonds that make periodic payments over their entire terms.

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  4. Z-Tranche

    A special type of bond class in a sequential pay collateralized ...
  5. Accumulation Bond

    A bond issued at an original issue discount (OID). This means ...
  6. Accrual Rate

    The rate of interest that is added to the principal of a financial ...
Related Articles
  1. Mutual Funds & ETFs

    4 Steps To Building A Profitable Portfolio

  2. Investing

    The Advantages Of Bonds

  3. Investing Basics

    How To Create A Modern Fixed-Income ...

  4. Bonds & Fixed Income

    How Bond Market Pricing Works

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center