PAC bonds are a municipal bond feature unique to housing bonds. The bond structure of municipal housing bonds allows for homebuyers with mortgages originated from the bond proceeds to prepay their mortgages at any time. Since the mortgages may be prepaid or repaid earlier than the maturity date, the bonds that sourced the mortgages must be repaid earlier as well. As a result, housing bonds are routinely sold with special provisions for mandatory redemptions from prepayments.
Certain institutional municipal bond investors find PAC bonds to be an attractive investment for their bond portfolios because this particular class of bonds is protected from prepayments in a more predictable way. Based on the prepayment speed of the underlying mortgage portfolio, the investor has greater certainty with respect to how long their bonds would remain outstanding. In return for this greater certainty, the PAC investor receives a lower yield than is offered to investors of other housing term bonds, providing significant savings for a housing bond issuer.