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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 ppayment speeds and defer receiving principal payments during times of low ppayment speeds. Also known as a "support tranche" or "companion tranche"
|||More specifically, in situations of high ppayment speeds, the companion bond takes as much of the excess ppayments 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 ppayment 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 ppayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed. |
