PAC Bond

(redirected from PAC Bonds)

PAC Bond

Stands for Planned Amortization Class bond. A tranche class offered by some CMOs that has a sinking fund schedule and an ability to make principal payments that are not subordinated to other classes.

PAC Bond

A collateralized mortgage obligation that seeks to protect investors from prepayment risk. PACs do this by setting a schedule of payments; if prepayments of the underlying mortgages exceed a certain rate, the life of the PAC is shortened. If they fall below a certain rate, the life of the tranche is extended. This helps protect investors in case the holders of the underlying mortgages do not pay off their mortgages as expected.
References in periodicals archive ?
Unrestricted prepayments are first applied to redeem series 1998S PAC bonds according to a schedule; second to redeem any series 1998 E-2, 1998 Q, non-PAC series 1998 R, and 1998T bonds until these bonds are redeemed in full; and finally, to redeem series 1998R PAC and 1998S PAC bonds.
Two possible explanations for the recent deterioration of this relationship are the increased use of CMO PAC bonds to provide stable cash flows over a wide range of prepayment scenarios, and valuation problems with the implied volatility measure itself.