A Z-bond is a type of bond that is the last tranche of a collateralized mortgage obligation (CMO). As the last portion of the debt security, it receives payment last. Unlike other tranches of a CMO, a Z-bond does not distribute payments to its holder until all of the separate tranches are paid. However, the interest will continue to accrue throughout the life of the mortgage. Thus, when the Z-bond does finally pay off, its holder can expect a hefty sum. The bond will pay both principal and interest.
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