Business Glossary

one class of a Collateralized Mortgage Obligation (CMO) which is paid off first when the underlying mortgages are prepaid as interest rates fall. When interest rates rise and there are fewer prepayments, the principal on companion bonds will be prepaid more slowly. Companion bonds therefore absorb most of the prepayment risk inherent in a CMO, and are therefore more volatile. In return, they pay higher yields than the other class within a CMO, called planned amortization class (PAC) bonds.