Uranus08

Accrual tranches shorten the lives of prior tranches. The interest payments meant for the accrual tranche are instead diverted to pay down earlier tranche principal. It creates a shorter life group of tranches and a long (accrual) tranche. I guess in this case the lower tranches provide protection against extension risk, and according to the text, the z tranche is providing protection against reinvestment risk.

I suppose reinvestment risk would be similar to prepayment risk, because the fundamental risk behind contraction is reinvestment risk.


See page 387-388 CFAI fixed income book