DEFINITION of 'Z-Bond'

The final tranche in a series of mortgage-backed securities that is the last one to receive payment. Used in some collateralized mortgage obligations (CMO), Z-bonds pay no coupon payments while principal is being paid on earlier bonds. Interest that would have been paid on Z-bonds is used instead to pay down principal more rapidly on the earlier series of bonds.

BREAKING DOWN 'Z-Bond'

Interest payable on a Z-bond is added to the principal balance and becomes payable once claims on all prior bond classes have been satisfied. A Z-bond is similar to a zero-coupon bond, since it accrues interest rather than paying it out. Therefore, the final tranche is considered the most risky for the CMO class structures.

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RELATED FAQS
  1. What is a Z bond in a collateralized mortgage obligation (CMO)?

    Learn about Z-bonds, which are the riskiest level of tranches in collateralized mortgage obligations, and understand how ... Read Answer >>
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    Find out how a collateralized mortgage obligation (CMO) is similar to a collateralized debt obligation (CDO), as well as ... Read Answer >>
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    Find out more about collateralized mortgage obligations and mortgage-backed securities and the difference between the two ... Read Answer >>
  4. What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security ... Read Answer >>
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