Listen to a Business English Dialogue About Planned amortization class bonds
Naomi: Hey Claire, have you ever heard of planned amortization class (PAC) bonds?
Claire: No, I haven’t. What are they?
Naomi: PAC bonds are a type of mortgage-backed security that provides investors with a predictable payment schedule by prioritizing the repayment of principal and interest.
Claire: I see. So, how do PAC bonds work exactly?
Naomi: Well, they are structured to provide a predetermined schedule of principal payments, which helps mitigate prepayment risk and provide more stability for investors.
Claire: That sounds interesting. Are there any specific characteristics that distinguish PAC bonds from other types of mortgage-backed securities?
Naomi: Yes, one key feature is the creation of “tranches” or classes of bonds with varying levels of prepayment protection, allowing investors to choose the level of risk and return that suits their investment objectives.
Claire: So, investors can select tranches based on their risk tolerance and income needs?
Naomi: Exactly. Some tranches offer more protection against prepayment risk, while others may offer higher yields but with increased volatility.
Claire: Are PAC bonds commonly used by investors?
Naomi: Yes, they are popular among investors seeking stable income streams and protection against prepayment risk, particularly in uncertain economic environments.
Claire: I see. So, they can be a useful tool for diversifying an investment portfolio?
Naomi: Absolutely. Including PAC bonds in a portfolio can help investors manage risk and achieve their investment goals.
Claire: Thanks for explaining, Naomi.
Naomi: No problem, Claire. Understanding the features and benefits of different types of securities is essential for making informed investment decisions.