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Targeted Amortization Class (TAC)

Contents

Deciphering Targeted Amortization Class (TAC): A Shield Against Prepayment Risks

Targeted Amortization Class (TAC) is a financial instrument designed to shield investors from prepayment risks, offering a stable cash flow and fixed principal payment schedule. Let's delve into the intricacies of TAC and its role in asset-backed securities.

Understanding TAC: A Defense Against Prepayment Risk

TAC tranches are structured to provide investors with certainty in cash flow, particularly prevalent in collateralized mortgage obligations (CMO) and mortgage-backed securities (MBS). These tranches adhere to a predetermined principal payment schedule, mitigating the impact of prepayments and ensuring predictable returns.

TAC vs. PAC: Unraveling the Differences

While Planned Amortization Class (PAC) tranches utilize a range of prepayment rates, TAC tranches rely on a single prepayment speed assumption (PSA). Consequently, TAC investors may receive more or less principal than scheduled based on actual prepayment rates, impacting the tranches' longevity and prepayment protection.

The Impact of PAC on TAC