Page 80 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

Session Unit 15:
53. Introduction To Asset-Backed Securities

• When prepayment speeds fall and

prepayments decrease, the support
tranche average life is significantly
longer than the average life of the

PAC I tranche. Thus, the support
tranche has significantly more

extension risk.
tanties • When prepayment speeds rise and

prepayments increase, the support
tranche average life is much shorter

than that of the PAC I tranche. Thus,
the support tranche also has

significantly more contraction risk.

• Within the initial PAC collar of 100 to
Figure 5 illustrates that the PAC I tranche has less 300 PSA, the average life of the PAC I

prepayment risk than the support tranche because the tranche is constant at 6.5 years.
variability of its average life is significantly lower.