Companion Bond


DEFINITION of 'Companion Bond'

A class of tranche found in a planned amortization class (PAC) bond that is responsible for protecting the PAC tranche from both contraction and extension risk. The companion bond is designed to absorb excess principal payments during times of high prepayment speeds and defer receiving principal payments during times of low prepayment speeds.

Also known as a "support tranche" or "companion tranche"

BREAKING DOWN 'Companion Bond'

More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess prepayments from the PAC tranche as possible and uses them to repay its own principal amount. Once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond.

Conversely, in situations of low prepayment speeds, the companion bond defers the reception of any payments. The principal payments then go toward paying off the PAC bond.

As long as the prepayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed.

  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Collar

    1. A protective options strategy that is implemented after a ...
  3. Extension Risk

    The risk of a security's expected maturity lengthening in duration ...
  4. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  5. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  6. Tranches

    A piece, portion or slice of a deal or structured financing. ...
Related Articles
  1. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  2. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Investing Basics

    Diversify with These Four Alternative Assets

    In times of market volatility, investors add alternative assets to their portfolios--highly illiquid, but profitable investments like art, land or precious metals.
  4. Investing

    How To Build a Currency Hedged Strategy?

    We are still unsure of how to implement a currency hedge strategy based on the dollar's movement. So let’s focus on what’s easier to measure: time horizon.
  5. Mutual Funds & ETFs

    Top 3 Emerging Markets Bond Mutual Funds

    Discover detailed analysis of the top three mutual funds offering exposure to the emerging markets bonds, and learn about the suitability of these funds.
  6. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  7. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  8. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  9. Investing Basics

    Are ETFs the Best Way to Diversify with Bonds?

    Are bonds safe or risky right now? It depends on the type of bond and how you invest in them.
  10. Investing Basics

    3 Alternative Investments the Ultra-Rich Usually Own

    Learn about the ultra rich and what normally comprises their net worth; understand the top three alternative investments usually owned by the ultra rich.
  1. What is a Ginnie Mae security?

    A Ginnie Mae, or Government National Mortgage Association security, functions similarly to the process of lending someone ... Read Full Answer >>
  2. What is a tranche?

    "Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security ... Read Full Answer >>
  3. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!