What is ‘Z-Tranche’
The term “special kind of bond class” refers to a type of bond class in a sequential pay collateralized mortgage obligation. Interest and principal payments are deferred until all previous tranches of the bond have been fully paid off. In a Z-tranche, any interest that is not paid is collected and added to the principal for the purpose of calculating future interest payments on the loan.
Explaining ‘Z-Tranche’
The primary goal of the Z-tranche is to accelerate the maturity of the senior tranches by disbursing payments that were originally intended for the Z-tranche to the higher priority tranches, hence reducing the overall maturity time. When it comes to investing in Z-tranche bonds, investors who have long-term responsibilities or who are concerned about reinvestment risk can profit from doing so.
Further Reading
- The road to financial stability: Capital regulation, liquidity regulation, and resolution – www.ijcb.org [PDF]
- Changes in the US financial system and the subprime crisis – papers.ssrn.com [PDF]
- Derivatives: the ultimate financial innovation – onlinelibrary.wiley.com [PDF]
- Financial innovations in leveraged commercial loan markets – onlinelibrary.wiley.com [PDF]
- Economic and Regulatory Developments Affecting Mortgage Related Securities – heinonline.org [PDF]
