Page 79 - FINAL CFA SLIDES DECEMBER 2018 DAY 14
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Session Unit 15:
53. Introduction To Asset-Backed Securities
A PAC may have an initial collar given as 100 – 300 PSA. This means the PAC will make its scheduled
payments to investors unless actual prepayment experience is outside these bounds (i.e., above 300
PSA or below 100 PSA). If the prepayment rate is outside of these bounds so payments to a PAC
tranche are either sooner or later than promised, the PAC tranche is referred to as a broken PAC.
Support tranches have both more contraction risk and more extension risk than the underlying
MBS and have a higher promised interest rate than the PAC tranche.
As an example, Figure 5 shows the average life for a hypothetical structure that includes a PAC I
tanties
tranche and a support tranche at various PSA speeds, assuming the PSA speed stays at that level
for the entire life of the PAC tranche.
