VADM or Very Accurately Defined Maturity Bonds

  • VADM structures were created to limit extension risk if rates rise and prepayments slow down.
  • In a VADM bond, payments are scheduled within a prepayment band; however, the range includes 0% PSA.
  • There generally is no extension risk and VADMs mature on their stated maturity date.
  • VADM structures are found only in CMOs with Z bonds. This is because all of their cash flows come from the period of lockout from the Z bond while the interest is creating accretion.
  • If the Z bond is large enough to support a VADM class, then one will exist.
  • A VADM bond comes before the Z bond in the priority structure, but after the senior bonds and PACs in the cash flow waterfall.

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