Definition of PAC Bond

acronym for planned amortization class bond, PAC is a tranche class offered by some Collaterized Mortgage Obligations (CMOs) which is unlike other CMO classes in that (1) it has a sinking fund schedule that is observed as long as the prepayments on underlying mortgages remain within a broad range of speeds and (2) its ability to make principal payments is not subordinated to other classes. PAC bonds thus offer certainty of cash flow except in extreme prepayment situations, and because of this they trade at a premium to comparable traditional CMOs.