How do Targeted Amortization Class (TAC) tranches typically differ from Planned Amortization Class (PAC) tranches?

Targeted Amortization Class (TAC) tranches are structured with a focus on specified cash flows but are designed to absorb prepayment risk differently compared to Planned Amortization Class (PAC) tranches. The characteristic that sets TAC tranches apart is that they have narrower and more complex payment ranges, which means they are more sensitive to prepayment speeds and interest rate changes. While PAC tranches provide more stable cash flow and have a wider band of acceptable prepayment speeds, TAC tranches are based on a tighter range of expected cash flows but can experience variability depending on actual prepayment behavior. This aspect of TAC tranches results in an increased complexity in their payment structures, as they are designed to sacrifice some degree of payment stability for targeting a specific average life and enhancing return potential under certain market conditions.