 |
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.
|
-
Learn the basic rules that govern how bond prices are determined.
Read More »
-
Find out more about these dangerous and exciting cousins to regular bonds.
Read More »
-
Exposure to different asset classes is required to generate income, reduce risk and beat inflation. Find out how bonds can help.
Read More »
-
-
This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation.
Read More »
-
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
Read More »
-
If you want a diversified portfolio and steady cash flow, check out this fixed-income strategy.
Read More »
-
They may not be sexy, but bonds do have a place in every balanced portfolio. Find out why.
Read More »
-
Investing in bonds - What are they, and do they belong in your portfolio?
Read More »
|
|
