Skip to content

CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

A planned amortization class (PAC) tranche is most likely to maintain its scheduled principal payments:

A PAC tranche keeps its planned principal schedule only while prepayment speeds remain inside the specified collar range. Support tranches absorb the variability within that range. Outside the collar, or once support tranches are exhausted, the PAC loses its protection and its average life can change.

  1. Aonly if prepayment speeds stay within the initial PAC collar.Correct
  2. Bregardless of how fast or slow prepayments occur on the collateral.
  3. Conly if the support tranche is retired before the PAC tranche.

Explanation

A PAC follows its schedule as long as actual prepayment speed stays within the collar (range of PSA speeds). Support tranches absorb the excess or shortfall. If speeds go outside the range, or support tranches are exhausted, the schedule can fail. The schedule is therefore not guaranteed under all speeds.

Did you get it right without looking?

One question tells you little. A timed set on Mortgage-Backed Security (MBS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.

Practise Mortgage-Backed Security (MBS) Instrument and Market FeaturesFree diagnostic mock

More Mortgage-Backed Security (MBS) Instrument and Market Features questions