Final answer:
The CMO tranche with the longest maturity which does not provide monthly income and is paid last is called the Z-tranche or accrual bond tranche.
Step-by-step explanation:
The CMO tranche with the longest maturity, which is the last to be paid and does not provide monthly income, is known as the Z-tranche or accrual bond tranche. This tranche receives no cash payments for a period of time until the preceding tranches are retired. Instead of cash payments, interest that would have been paid is accrued and added to the principal amount of the Z-tranche, causing it to grow in size until the earlier tranches are fully paid off. The Z-tranche is then paid both principal and interest, often making its payout significantly larger compared to when it began.
This mechanism serves to defer interest payments and thereby increases the leverage of the Z-tranche, making it more sensitive to changes in interest rates compared to earlier tranches. Due to its unique characteristics, the Z-tranche can be an attractive investment for certain investors, particularly those looking for a potentially higher return at a later date, while also willing to accept the associated risks, like the extension risk due to changing interest rates and the prepayment risk involved with Collateralized Mortgage Obligations.