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