The tranche in a series of mortgage-backed securities that is the last one to receive payment. The Z-Bond is typically considered a high-risk investment.
As the holder of a Z-Bond, you won’t receive any periodic payments. Instead, you get all the accrued interest paid out in a lump sum.
In the context of collateralized mortgage obligations (CMO), a Z-Bond is a bond that pays no coupon payments to the holder as long as the principal is left to be paid on earlier bonds. Instead of paying out interest on the Z-Bond, the money is used to amortize the principal on the earlier series of bonds more quickly. The interest payable on a Z-Bond is added to its principal balance and becomes payable once there are no more payments to make on all the earlier series of bonds.