A tranche (constituting a type of asset-backed security, ABS) that gives the investors more certain cash flows thanks to its better levels of protection from prepayment risk and extension risk. During the planned amortization period, the scheduled principal payment to the planned amortization class (PAC) tranche takes precedence over principal payments to the other tranches. In other words, as part of the structure, the PAC tranche has priority for receiving payments of principal and interest over other tranches, providing the holders with a more stable income.
Prior to the planned amortization period, all principal payments from the underlying collateral are allocated to the other tranches in terms of each respective seniority. Once the planned amortization period begins, principal payments are made to the PAC tranche as per the PAC schedule. Then, any principal payments beyond the contractual amount are allocated to the junior or support tranches, for each period. That is, if prepayments show a different pattern (from expectations), then tranche known as the support tranche receives the variable portion of the scheduled payments (income to the support tranche experiences more fluctuations, and for that very reason its yield is better.
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