A tranche of a CMO, companion classes absorb the excess cash flow generated by faster prepayments so that the other tranches in the structure, such as PACs and TACs have more stable cash flows. Further, when prepayments are slow, the companion classes will extend so that the PACs and TACs in the structure can receive the required cash flows. Companion classes have the most volatile cash flows in a CMO structure, even more so than the underlying collateral.
