What type of prepayment protection is afforded a TAC bond?
What will be an ideal response?
A targeted amortization class (TAC) bond resembles a PAC bond in that both have a schedule of principal repayment. The difference between a PAC bond and a TAC bond is that the former has a wide PSA range over which the schedule of principal repayment is protected against contraction risk and extension risk. A TAC bond, in contrast, has a single PSA rate from which the schedule of principal repayment is protected. As a result, the prepayment protection afforded the TAC bond is less than that for a PAC bond.
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