Companion (Support) bond
Asset-Backed Securities glossary · Tranching & Structural Mechanics
Definition
A CMO tranche that absorbs prepayment variability so that PAC bonds can maintain their planned schedule.
Companion (Support) bond in plain English
When people pay off a mortgage early (say, they refinance or sell), the investors who bought that loan get their money back sooner than expected — which is annoying if you were counting on a steady, predictable payout. A CMO splits investors into groups (called tranches), and the companion bond is the volunteer who agrees to soak up all that unpredictability. Like a shock absorber on a car, it takes the bumps so that a favored group — the PAC bonds — gets a smooth, planned schedule. In exchange for that rougher ride, companion-bond investors are usually paid a bit more.
Also called: Support
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