accrual tranches senior, payments, principal, understood, interest

ruchita

i thought i understood this, but i'm not sure anymore.

If the senior tranches are lacking principal payments, i know accrual tranches do not get their principal, but do they not get their interest as well?

yalo

The accrual tranches do not get paid anything (interest or principal) until the other tranches have been paid off.

xilinx_altera

hey-so if accrual tranches don't get paid anything until the other tranches get paid off, then wouldn't this statement, "interest payments are paid to each bond class periodically" be incorrect. it was one of the choices on the sample exam and this statement was true according to the answer key.

MiniMe7

Did the statement relate to a CDO? If it was for a CMO, then maybe it disregarded the accrual tranche. All tranches receive interest payments (except accrual) and principal payments go to the most senior tranche. Once all of the senior tranches are paid off, the accrual tranche begins to receive its interest and principal.

One of the benefits of the accrual tranche is that it doe not have any reinvestment risk because it does not receive cash flows until the other tranches have been retired.

Otabek

interest from the accrual tranche is paid to the most senior tranche, its not split up amounts the other tranches.

YAhmed

theCFAway Wrote:
-------------------------------------------------------
> hey-so if accrual tranches don't get paid anything
> until the other tranches get paid off, then
> wouldn't this statement, "interest payments are
> paid to each bond class periodically" be
> incorrect. it was one of the choices on the sample
> exam and this statement was true according to the
> answer key.


It is correct. All they are saying is that interest is not paid off to the aaccrual tranch as cash, it gets added to principal, but it does get paid just like all other tranches.