Accrual Tranche Question because, interest, receive, payments, concerned

noel

I was wondering if someone could explain this to me. Its from the CFA Fixed Income Textbook, page 388 at the bottom.

The accrual tranche has appeal to investors who are concerned with reinvestment risk. Since there are no coupon payments to reinvest, reinvestment risk is eliminated until all other tranches are paid off.

-> is this because the accrual tranche doesn't receive any interest payments.. so essentially no reinvestment risk.

thank you.

kickthatcfa

the accrued interest generated from this tranche is used to reduce the outstanding balance of the superior tranches, hence once those are paid in full, the accrual tranche is then paid, the payments to the accrual are at the very end of the life

tobeornottobe

is accrual tranche only principal repayment?

if interest rate falls down, does it mean prepayment risk is high and reinvestment is low?

yodacaia

accrual tranche's principal repayment amount increases while its interest payments are diverted to the Senior tranches. Once all senior tranches are paid off, it receives both interest and principal for the remainder of its life.

Reinvestment risk is avoided on the accrual tranche since no interest is paid on the tranche. So there is no question of reinvestment of the amount till such time it is the only tranche.

CP

ayaz_mahmud369

thanks, but in your comment, you mention Z tranche receives both interest and principal , you also mentioned no interest is paid on the tranche, very confusing.

received the interest definetly have reinvest risk, if interest rate higher, reinvestment risk is huge

Houjichasan

z receives both int. and principal AFTER OTHER TRANCHES HAVE BEEN PAID OFF....

In the initial phase while it is offering protection to senior tranches - no interest payment, no reinvestment risk .

Later it receives both principal and interest payments. (once the senior tranches have been completed). Read the example in the text book (not sure about the page numbers - but there is a numerical example with numbers showing the behavior of an accrual tranche).

CP

madaochenggong

so can i say Z tranche receives only principal, the interest before game over is given to senior tranche? no re-investment risk, but not happy
at the end, z tranche receives the leftover, which includes both interest and principal, very happy. but have re-investment risk because interest rate may be higher.

WarrenB1

It is just a matter of preferences.

I as an investor may want to lend money and may NOT want to receive any interim payments. Ofcourse, at maturity I will want all accrued interest and principal. And receiving all amount at maturity is not called reinvestment risk.

And you as an investor, may want to lend money and want to receive regular cash flows from it.

So, you as an investor may want to buy a Senior tranche and i as am investor would want to buy an accrual tranche.

zephyranalyst

do not look at things from a tranche perspective. tranches are created to "meet the needs of the investors behind the tranches".

Some one is not satisfied with receiving money slowly at the pace that the PAC Bond receives. They want it faster. While another investor wants it slower.

PLEASE READ Rus1Bus's explanation.

CP

flyinggirl

for the comment: Some one is not satisfied with receiving money slowly at the pace that the PAC Bond receives. They want it faster. While another investor wants it slower.

do you mean PAC receives slowly and Z tranche receives faster? Z tranche is the guy who receives the slowest(at the end), why people buy z tranche?


again my question is not answered. why senior tranche needs additional money from z tranche? after all, the accrual interest will still be paid to z tranche, what 's benefit to senior tranche using z tranche?