We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What are Companion Bonds?

Malcolm Tatum
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

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 payment on the principal based on the current type of prepayment activity. The goal is to ensure that both the principle bond and the attending CMO bond is covered in full in a timely manner.

The function of companion bonds depends a great deal on the way that the prepayment process proceeds. As long as the speed of the prepayments remains within specified upper or lower levels of the PAC collar involved, the bonds will work in the manner intended. However, if other factors enter the picture that make it impossible to keep the speed of the prepayments in either of these extremes, the ability of companion bonds to work in conjunction with the main bond is hampered. Fortunately, circumstances of this type rarely occur.

Brokers who are used to working with bond issues can explain to an investor the relationship between planned amortization class bonds and companion bonds, and why the process works so well. While companion bonds are not automatically part of the structure for all bond issues, the application of companion bonds to the process is not uncommon. Any investor who wishes to acquire bonds should become well acquainted with the process of companion bonds.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

Malcolm Tatum

Malcolm Tatum

Writer

Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Read more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.