the pro- tection coming from tranches A and B.   Accrual Tranches In Deal 1, the payment rules for interest provide for all tranches to be paid interest each month. In many sequential-pay CMO structures, at least one tranche does not receive current interest. Instead, the interest for that tranche would accrue and be added to the principal balance. Such a bond class is commonly referred to as an accrual tranche or a Z bond (because the bond is similar to a zero-coupon bond). The interest that would have been paid to the accrual tranche is then used to speed up pay down of the principal balance of earlier tranches. To see this, consider Deal 2, a hypothetical CMO structure with the same collateral as Deal 1 and with four tranches, each with a coupon rate of 7.5%. The difference is in the last tranche, Z, which is an accrual tranche. The structure for Deal 2 is shown in Exhibit 9.5.   Payment rules: 1. For payment of periodic coupon interest: Disburse periodic coupon interest to tranches A, B, and C on the basis of the amount of principal outstanding at the be- ginning of the period. For tranche Z, accrue the interest based on the principal plus accrued interest in the previous period. The interest for tranche Z is to be paid to the earlier tranches as a principal paydown. 2. For disbursement of principal payments: Disburse principal payments to tranche A until it is completely paid off. After tranche A is completely paid off, disburse prin- cipal payments to tranche B until it is completely paid off. After tranche B is com- pletely paid off, disburse principal payments to tranche C until it is completely paid off. After tranche C is completely paid off, disburse principal payments to tranche Z until the original principal balance plus accrued interest is completely paid off.     It can be shown that the expected final maturity for tranches A, B, and C will shorten as a result of the inclusion of tranche Z. The final payout for tranche A is 64 months rather than 81 months; for tranche B it is 77 months rather than 100 months; and for tranche C it is 112 months rather than 178 months. The average lives for tranches A, B, and C are shorter in Deal 2 compared to Deal 1 because of the inclusion of the accrual tranche. For example, at 165 PSA, the average lives are as follows:     Structure Tranche A Tranche B Tranche C   Deal 1 3.48 7.49 11.19 Deal2 2.90 5.86 7.87     The reason for the shortening of the non-accrual tranches is that the