Accrual bond, Financial Management


It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some point, the bond starts to pay both principal and interest on the basis of the accrued principal and interest to that point. 

When the bond starts to pay principal and interest on the basis of accrued principal and interest at that point then this is called as a Z tranche and is ordinary in collateralized mortgage obligations (CMOs). In a CMO that involves a Z tranche, the interest payments that else would be paid to the Z-tranche holder are utilized to pay down the principal of the other tranche. After that tranche is paid off, the Z tranche starts to pay down based on the original principal of the tranche added with the accrued interest. 

Parallel to a zero-coupon bond, an accrual bond or Z tranche has partial or no reinvestment risk. Though, accrual bonds, by definition, have a longer duration than bonds with the equal maturity that create regular interest or principal and interest payments. As such, accrual bonds are exposing to greater interest rate risk than bonds that make periodic payments over their full terms.





Posted Date: 7/27/2012 7:51:17 AM | Location : United States

Related Discussions:- Accrual bond, Assignment Help, Ask Question on Accrual bond, Get Answer, Expert's Help, Accrual bond Discussions

Write discussion on Accrual bond
Your posts are moderated
Related Questions
Q. What do you mean by Gross working capital? Gross working capital: - Gross working capital demotes to firms investment in current assets. Current assets are the assets which

The capital structure of Wild West Inc. is as follows: Debts: $5,000,000 (face value) bonds with coupon rate at 8.00% and current price at par Preferred shares: $2,000,000

What are the primary requirements for a successful JIT inventory control system? For a JIT system to be victorious the supplier must be willing and able to deliver materials im

Now we can calculate the yield for each possible call or put date. In addition, we can also calculate the yield to maturity. The lowest yield of all these possibl

Prevention of Risk - Method of risk management In case of this method, the business avoids risk by taking appropriate steps for prevention of business risk or avoiding loss, su

Explain about the equity claims in the financial security. Equity classifies claims to shares into the net income and assets of a firm, and they do not contain a maturity date.

Compounding or Future Value Concept: - Under this process of compounding the future worth of all cash inflows at the end of the time horizon at a particular rate of interest are fo

I keep getting different answers in excel and the financial calculator. is there someone who can walk me through this problem step by step: You plan to buy a new house for $250,0

Explain the meaning of Buy-ins This  is  when  third  party  management  team  make  a  takeover  bid  and  then  run  business themselves. Finance sources are same as to buy-o