PAC (Planned Amortization Class)
Asset-Backed Securities glossary · Tranching & Structural Mechanics
Definition
A CMO tranche designed to receive principal on a planned schedule across a range of prepayment scenarios, with companion bonds absorbing the variability.
PAC (Planned Amortization Class) in plain English
In a CMO, one big pool of mortgages is sliced into "tranches" — separate bonds that get paid in a set order. A PAC tranche is the VIP slice: it's promised a steady, predictable payback schedule even though borrowers prepay at random speeds. That reliability is possible because a paired "companion" bond volunteers to soak up all the timing chaos — getting extra cash when prepayments surge and less when they slow. Picture a carpool where one rider is guaranteed a fixed pickup time every day, and a flexible buddy agrees to absorb every early or late swing so the schedule stays rock-solid — as long as prepayments stay within an expected range.
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