What Is Targeted Amortization Class?
Targeted amortization class (TAC) is a type of asset-backed security that is designed to protect investors from prepayment risk. A targeted amortization class tranche is designed to pay according to a defined principal balance schedule that is created using a prepayment speed assumption (PSA). A TAC tranche is similar to a planned amortization class (PAC) tranche in that it protects investors from prepayment, providing steady, stable cash flow and a fixed principal payment schedule. However, targeted amortization class tranches are structured differently than PAC tranches in that they only use one PSA rather than a range, as PAC tranches do.
Understanding Targeted Amortization Class (TAC)
Targeted amortization class tranches are structured products that increase cash flow certainty. TAC tranches can be created with any asset-backed security with a payment schedule, but they are most strongly associated with collateralized mortgage obligations (CMO) and mortgage-backed securities (MBS). The targeted amortization class tranche is essentially a bond under a CMO or MBS. For the TAC tranches, the principal is paid on a predetermined schedule. Any prepayment that occurs is amortized in order to maintain the schedule, stretching the cash flow predictably rather than returning capital in what is likely to be a lower interest environment than when the product was created.