Accrual Bond


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.

BREAKING DOWN '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.

  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Z-Tranche

    A special type of bond class in a sequential pay collateralized ...
  3. Accrual Rate

    The rate of interest that is added to the principal of a financial ...
  4. Accumulation Bond

    A bond issued at an original issue discount (OID). This means ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  6. Zero-Coupon Bond

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