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