It stands for targeted amortization class; a type of bond class that has a schedule for repayment of principal which is protected against contraction risk for a single PSA rate. PSA (prepayment speed assumption) is estimated based on historic prepayment rates for each specific type of mortgage loan (e.g., CMO) under multiple economic conditions and across geographic areas. The yield (offering price) and market value of a loan are determined using such estimates. The PSA model assumes prepayment rates increase for the initial 30 months and then prepayment rates become constant later on.
Targeted amortization class (TAC) is a type of asset-backed security (CMO bond) that provides protection (to investors) from prepayment risk. Like a planned amortization class (PAC), this class of bonds pays according to a preset principal balance schedule, which, in turn, is determined using a single prepayment speed, rather than bands of prepayment speeds.
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