hard · Asset-Backed Securities
A 'Targeted Amortization Class' (TAC) bond is designed to provide protection against contraction risk.
If prepayments accelerate beyond the 'target' speed, where is the excess principal typically redirected?
- To a companion or support tranche, which absorbs the excess principal to keep the TAC on its targeted schedule.
- To the residual holder, as excess principal is considered a form of 'excess spread'.
- To the senior-most tranche in the next series, to maintain the master trust's invested amount.
- It is held in a reserve account to be used if prepayments later slow down (extension risk).
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