Question: from the manager of saving&loan association portfolio, which MBS is better:
1. Passthrough security with a WAM of 310 months or
2. PAC tranche CMO with average life = 2years
Answer from book: choice 2 with shorter average life, due to less extension risk.
Why only extension risk?作者: laurab 时间: 2013-4-2 11:22
PAC Tranche gets scheduled payments only. Any additional payments (prepayments beyond the scheduled principal) - would go to the support tranche.
So it will have less extension risk. And given the structure and the size of support available, it is unlikely to contract as well.作者: d2rockstar 时间: 2013-4-2 11:22
My thought process.
The question asked which one would probably be better from an ASSET/LIABILITY point of view.
They both have prepayment risk but option ii has lower extension risk.
