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Glossary

Z

Zero-coupon bond
A bond which does not make periodic interest payments; instead the investor receives one payment, which includes principal and interest, at redemption (call or maturity). See discount note.
Zero-cost collar
A transaction in which a position in the underlying is protected by buying a put and selling a call with the premium from the sale of the call offsetting the premium from the purchase of the put. It can also be used to protect a floating-rate borrower against interest rate increases with the premium on a long cap offsetting the premium on a short floor.
Zero-premium collar 
A hedging strategy involving the simultaneous purchase of puts and sale of call options on a stock. The puts are struck below and the calls are struck above the underlying’s market price.
Z-tranche
Often the last tranche in a CMO, the Z-tranche receives no cash payments for an extended period of time until the previous tranches are retired. While the other tranches are outstanding, the Z-tranche receives credit for periodic interest payments that increase its face value but are not paid out. When the other tranches are retired, the Z-tranche begins to receive cash payments that include both principal and continuing interest.
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