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Source: Investopedia
This Article has been Edited for Accessibility


What is '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.

Explaining '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.

Additional Resources

  1. Page 1 14.02 Principles Of Macroeconomics Problem Set 2 *solution ... []
  2. The Time Value Of Money (contd.) []
  3. Economics 175_______professor Marjorie Flavin []
  4. Mortgage Backed Securities []
  5. Chapter 25 Factors Affecting Bond Yields []
  6. Economics 330 []
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