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What are Companion Bonds?

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What are Companion Bonds?

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Companion bonds are sometimes known as support or companion tranches. The companion bond serves the function of assimilating any excess in the principal payments when a period of high prepayment speed is taking place. At the same time, companion bonds will function as a means of deferring the reception of principal payments when a period of low prepayment speeds occurs. In both situations, companions bonds help to reduce the amount of prepayment risk involved with the bond. One of the most common applications of companion bonds is found within the planned amortization class of bonds. Essentially, the bonds function with the PAC bond environment by taking as much of any excess PAC tranche prepayments and using the excess to make additional payments on the principal amount of the bond. Once the principal is paid in full, any excess payments are then applied to the PAC bond. A similar approach takes place with a CMO tranche, in that the process of companion bonds helps to regulate the pay

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