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Companion Tranche

A tranche (specifically, a CMO tranche) that is designed to protect investors from prepayment risk. To that end, it absorbs a substantial deal of the impact of collateral prepayment variability, and hence will help stabilize the principal payment schedule for a planned amortization class (PAC) or targeted amortization class (TAC) tranche in the same offering. This tranche “supports” different tranches including sequential-pay tranches, floater and inverse floater tranches, and accrual tranches. As a result , there are sequential-pay companion tranches, floater and inverse floater companion tranches, and accrual companion tranches.

The companion tranche receives extra premium (higher yield) in view of the greater risk exposure in the cash flows.

It is also known as a support bond or a companion bond.


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