of interest as the underlying mortgages. The tranches could be either fixed rate or floating rate. If they have floating coupons, they would have a formula that make their total interest equal to the collateral interest. For example, with collateral that pays a coupon of 8%, you could have two tranches that each have half of the principal, one being a floater that pays LIBOR with a cap of 16%, the other being an inverse floater that pays a coupon of 16% minus LIBOR. A special case of parallel tranching is known as the IO/PO split. IO and PO refer to Interest Only and Principal Only. In this case, one tranche would have a coupon of zero (meaning that it would get no interest at all) and the other would get all of the interest. These bonds could be used to speculate on prepayments. A principal only bond would be sold at a deep discount (a much lower price than the underlying mortgage) and would rise in price rapidly if many of the underlying mortgages were prepaid. The interest only bond would be very profitable if few of the mortgages prepaid, but could get very little money if many mortgages prepaid. Unlike sequential tranche securitization, an IO/PO split is a parallel tranche securitization in that each simply represents a separate claims on a different portion of the cash flows from the collateral pool (e.g. mortgages bonds). Unlike sequential tranche securitization, the payments to each tranche of a parallel securitization are not predicated on the prior payment to a more senior tranche of the pool. Absent any subordination of one tranche to the other, neither tranche of an IO/PO split (parallel securitization) would be deemed to be leveraged. Z bonds This type of tranche supports other tranches by not receiving an interest payment. The interest payment that would have accrued to the Z tranche is used to pay off the principal of other bonds, and the principal of the Z tranche increases. The Z tranche starts receiving interest and principal payments only after the other tranches in the CMO have been fully paid. This type of tranche is often used to customize sequential tranches, or VADM tranches. Schedule bonds (also called PAC or TAC bonds) This type of tranching has a bond (often called a PAC or TAC bond) which has even less uncertainty than a sequential bond by receiving prepayments