Accrual tranche (Z bond) cash flow possible, interest, increase, principal, understand

torontoanalyst

Hi all,

Let's suppose a CMO with 2 tranches, A and Z during the first two months

During the month 1, the interest of Z tranche is added to the principal of 2 --> ok
During the month 2, the same "saved" interest is used to increase the outstanding principal of Z tranche --> ok

Taken separately (and exclusively), i understand the logic ( \o/ ) but the fact is that the "saved" interest is really added TWICE...that's where i'm confused and don't understand how this could be possible


Thanks by advance for your help

5566

Stupid question.
The amount to increase the month 2 principal of the accrual tranche is taken from the beginning principal of the normal tranche (A).

economicz

If I understand your question, there is a diversion of cash flow from Tranche Z to Tranche A, i.e. Tranche A gets the money and Tranche Z doesn't. Hence there is no double counting