Accrual Bond: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
An accrual bond is a type of bond that does not make any principal or interest payments until all earlier issued bonds have been fully paid. Instead of receiving periodic interest payments, the interest is added to the principal balance of the bond. This means that the total amount owed is paid at maturity or at a specified later date. One significant advantage of accrual bonds is that they are free from reinvestment risk, as investors do not need to reinvest interest payments. Accrual bonds are often referred to as Z-bonds and are typically the last in a series of collateralized mortgage obligations.
Legal Use & context
Accrual bonds are primarily used in the context of finance and investment law. They are relevant in discussions about mortgage-backed securities and structured finance. Investors and financial institutions may encounter accrual bonds during the issuance of mortgage-backed securities, where understanding the terms of these bonds is crucial. Users can manage their investments and related legal documentation using resources like US Legal Forms, which provide templates tailored for financial agreements and securities.
Real-world examples
Here are a couple of examples of abatement:
Example 1: An investor purchases an accrual bond with a face value of $1,000 and an interest rate of 5%. Instead of receiving annual interest payments, the interest accumulates, and at maturity, the investor receives a total of $1,500, which includes the original principal and the accrued interest.
Example 2: A financial institution issues a series of bonds, including accrual bonds, to finance a mortgage-backed security. The accrual bonds will not pay interest until the earlier bonds are fully paid off, allowing the issuer to manage cash flow effectively. (hypothetical example)