sequential-pay CMO

For many sequential pay CMO structures, the last tranche to be paid principal also does not receive current interest until the other tranches have been paid off. This tranche is called the Z-tranche or accural tranche. The interest that would ordinarily be paid to the accrual tranche is applied against the outstanding principal of the other tranches. THE DIVERTED INTEREST FROM THE ACCURAL TRANCHE ACCRUES. THAT IS, IT IS ADDED TO THE OUTSTANDING PRINCIPAL BALANCE OF THE Z-TRANCHE. I dont understand the last sentence, i thought the interest that should be paid to the accural tranche is applied against outstanding principal of other tranches. BUT the last sentence says it is added to the outstanding prinicipal of the z-tranche!! sorry -p. 123 schweser, book 5!

the principal of the accrual tranche increases since it is not being paid anything. (It is accruing interest all along). the payments to the other tranches include the payment of interest from the z-tranche. both happen simultaneously.

Agreed with CP Look at it this way - all the interest from the mortgage payments (principal + interest net of fees) goes to the first tranche. The interest that was SUPPOSED to go the Z tranche is accrued (or added) to the Z tranche principal outstanding. Its sort of like a student loan - when you’re not paying off the interest, it gets added to the principal amount. Say I owe $8 dollars of interest on oustanding $100. If I don’t pay it, it gets added to the $100 so next month the principal is $108. Schweser is alittle confusing because right before they talk about the Z tranche, they show an example where the second tranche gets the its share of the interest payment.