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Definition: Targeted Amortization Class
Target Amortization class are a specific class of Collateralized Mortgage Obligation (CMO). The adjoining figure shows a CMO structure. Each structure is made up of tranches. These tranches receive regular interest payments while the principle received is made to first tranche alone until it runs out of its lifetime. Once the first tranche runs out of its due course of time, the principle is applied to the second tranche till its life time and so on, in this way the process continues.
TAC tranches in a similar fashion are made up of tranches and they have cash flow certainty with a fixed principle payment schedule. The prepayment rate is fixed. If it is higher than the defined rate then TAC bondholders will receive more prepayment where as if the rate is below defined rate holders get less amount. The performance of this kind of class is dependent on its priority in the CMO structure as well as the presence of other specialized CMO structures like Planned Amortization Class(PAC). Presence of a PAC structure reduces the cash flow certainty where as a structure without a PAC will have some prevention mechanism of accelerating the prepayment and early return of principle.
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