Also known as a "support tranche" or "companion tranche"
More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess prepayments from the PAC tranche as possible and uses them to repay its own principal amount. Once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond.
Conversely, in situations of low prepayment speeds, the companion bond defers the reception of any payments. The principal payments then go toward paying off the PAC bond.
As long as the prepayment speed stays within the designated upper and lower PAC collars, the companion bond will be able to operate as designed.
Investment dictionary. Academic. 2012.
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