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 7:52:02 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
T he acquisition strategy The most important strategic consideration is the size of the acquisition. The completion of smaller series should be considered in the beginning tha

Q. Cost of Equity Share Capital? Cost of Equity Share Capital: - The cost of equity is the utmost rate of return that the company should earn on equity financed position of its

Control ratios: Three important ratios are usually used by the management to find out whether the variations from budgeted results are unfavorable or favorable.  These ratios are

The question to be answered is : "Since the 1990 opening of stock exchanges, China started to use financial statements to determine the performance of listed companies. What were c

Buying and Selling Securities One of the key features that may occur while investing in financial markets is that sometimes investors overlook the essential factors they should c

Futures Contract It is an obligation to purchase or sell an asset at an agreed-upon price on an exact future date. The buyer commits himself or herself to buy the asset, and th

State the second element of capital budgeting decision The second element of capital budgeting decision is the analysis of risk and uncertainty. As the benefits from investment

need to understand some basics of changes in working capital

Select a publicly traded company (preferably manufacturing oriented; do not use a financial services company such as a bank or a bank holding company) and obtain a copy of their mo

Definition of 'Hedge Fund': An aggressively managed portfolio of investments that uses advanced investment strategies define as leveraged, short, long and derivative positions