Every CMO that has PAC or TAC tranches will also have complementary tranches, which absorb the prepayment variability that is eliminated from the PAC and TAC tranches. Once the capital is paid to the active PAC and TAC tranches according to the schedule, the remaining excess or deficit is reflected in the payments to the active supplementary tranche. The half-life of a complementary tranche can vary widely, increasing when interest rates rise and decreasing when rates fall. To compensate for this variability, complementary tranches offer the possibility of obtaining higher expected returns when prepayments remain close to the rate assumed at the time of purchase.Like type II and type III PACs, TAC sections can serve as complementary sections for PAC sections.
These lower-priority PAC and TAC tranches, in turn, will have complementary tranches lower in the main payment priority. Supplemental tranches are often offered for sale to retail investors who want to earn higher incomes and are willing to take a greater risk of having their capital returned sooner or later than expected. The Z tranches are structured so that they do not pay interest until the lockout period ends and they begin to pay the principal.On the other hand, a Z tranche is credited with “accrued interest” and the nominal amount of the bond increases at the coupon rate indicated on each payment date. During the accumulation period, the outstanding principal amount increases at a compound rate and the investor does not run the risk of re-investing at lower rates if market returns fall.
Typical Z sections are structured as the last section of a series of sequential or PAC and complementary sections and have a half-life of 18 to 22 years. However, the Z sections can also be structured with a medium-term half-life.Once the previous bonds in the series have been withdrawn, holders of the Z tranche begin to receive cash payments that include both principal and interest. In recent years, data science has become increasingly important for CMOs as they seek to extract information from CRM and business intelligence systems to develop content. As such, CMOs now have a wide range of responsibilities, from customer experience (CX) to product strategy, innovation, communications, and all traditional marketing functions.