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.