Dictionary of Finance and Investment Terms: Z-bond
Z-bond
the fourth (Z) tranche of bonds in the structure of a typical Collateralized Mortgage Obligation (CMO). Combining features of zero-coupon securities and mortgage pass-through securities, Z bonds receive no coupon payments until the earlier A (fast-pay), B (medium-pay), and C (slow-pay) classes have been paid off. Z holders then receive all the remaining cash flow, although interest has been added to principal as cash was used to repay earlier tranches. Some CMOs have been issued with multiple Z and Y tranches, incorporating sinking fund schedules.
