Planned Amortization Class (PAC) Tranche

AAA

DEFINITION of 'Planned Amortization Class (PAC) Tranche'

A class of tranche in a planned amortization class (PAC) bond that receives a primary payment schedule. As long as the actual prepayment rate is between a designated range of prepayment speeds, the life of the PAC tranche will remain relatively stable. This tranche of the PAC bond receives some measure of protection against prepayment risk.

INVESTOPEDIA EXPLAINS 'Planned Amortization Class (PAC) Tranche'

The measure of prepayment risk protection, which includes both contraction and extension risk, is limited by the size of the companion bond and the speed of prepayment. If the speed of repayment is too slow (below the lower PAC collar), the life of the PAC tranche is extended; if the speed of repayment is too fast (above of the upper PAC collar), the life of the PAC tranche is shortened.

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

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

    A class of tranche found in planned amortization class (PAC) ...
  3. Contraction Risk

    The risk faced by the holder of a fixed income security when ...
  4. Extension Risk

    The risk of a security's expected maturity lengthening in duration ...
  5. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  6. Tranches

    A piece, portion or slice of a deal or structured financing. ...
Related Articles
  1. Profit From Mortgage Debt With MBS
    Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

  2. Understanding The Mortgage Payment Structure
    Credit & Loans

    Understanding The Mortgage Payment Structure

  3. What is a Ginnie Mae security?
    Retirement

    What is a Ginnie Mae security?

  4. What is a tranche?
    Investing

    What is a tranche?

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center