Z bond

Z bond or accrual tranche, is often the last tranche in a CMO structure and receives no interest payments until the other tranches are paid off.  The interest used to pay down the earlier tranches accrues to the Z bond and is added to the principal amount.

Z-spread

Also known as zero-volatility spread or static yield spread.  1). A spread that is added to a benchmark curve, such as the government or swaps curve.  The calculation uses zero coupon rates, therefore, there is no reinvestment risk.  Since the spread is added to the entire curve, it is considered a superior relative value gauge, as compared to a nominal spread, as it captures yield curve risk.  In addition, by keeping interest rate volatility at zero, the investor can use this spread to quantify other factors, such as credit risk and liquidity risk, when comparing and valuing different bonds.  2). It is assumed that if the investor owns the security until maturity, they will earn the Z-spread.  The disadvantage of the z-spread is that it doesn’t take into account changes in prepayments and the optionality of the security.

Zero coupon bond

Also called a zero.  A bond that does not pay periodic coupons.  In lieu of periodic coupons such bonds are sold at a steep discount from par and redeemed at par.

Zero coupon-for- floating swap

A variant of the fixed-for-floating interest rate swap in which the fixed-rate paying party pays all interest upon the termination of the swap.

Zero Rate

Also called spot rate.  An interest rate that represents a yield to maturity when there are no interim coupons paid between the initial payment for the instrument and the final redemption.

Zero Volatility Spread

See Z-spread

Zero-coupon yield curve

A graphic portrayal of the relationship between yield and maturity when the instruments involved are zero-coupon bonds.  Usually drawn for Treasury-based zeros.