Z-Bond
Candlefocus EditorZ-Bonds are also known as the last tranche of a collateralized mortgage obligation (CMO). A CMO is a type of structured security backed by a pool of mortgages. It pays out interest to its bondholders through a series of tranches, where each tranche has its own priority claim to the cash flow generated by the underlying mortgages. The Z-Bond is created when the cash flows from the other tranches of the CMO are not enough to cover the principal and interest associated with the Z-Bond. The Z-Bond will then absorb any residual cash flow from the CMO, ensuring investors are repaid.
Due to their association with CMOs, Z-Bonds are seen as a highly speculative investment, offering higher returns overall but also carrying greater risk. Investors who purchase Z-Bonds should be aware that the bond’s value may fluctuate due to changes in the underlying pool of mortgages, meaning an investor could potentially lose money over the life of the investment.
In summary, Z-Bonds are a type of mortgage-backed security (MBS) which are generally seen as highly speculative investments due to their association with CMOs. Because they are the last bond to mature, they receive payment in the form of accrued interest added to the principal after all other bond classes have received their payments. While this type of security can offer higher returns overall, it carries greater risks and investors should be aware of the potential for losses.