A PAC bond is a class of bonds designed to reduce prepayment risk by specifying a schedule for the amortization of the principal owed to the bondholder; the reduction in the prepayment risk comes at the expense of the support bonds.

Question

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PAC (Planned Amortization Class) bonds are specifically designed to reduce prepayment risk by creating predictable cash flows for investors. The bond issuer structures the payments to investors so that they receive a specific amount of principal each month or quarter, regardless of how much the borrower actually repays. The support bonds take on additional risk to provide this certainty to PAC bondholders.

A PAC Bond Is a Class of Bonds Designed to Reduce