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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.
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Investopedia explains '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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Search results for 'Z-Bond'
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http://www.investopedia.com/articles/bonds/07/pricing_conventions.asp
... For example, a 10-year planned amortization class bond might trade at a nominal
yield spread to the on-the-run 10-year Treasury, or Z-bond might trade at a ...
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