ryanlb

Let me rephrase the above post (my edit time expired).

If the actual prepayment is inside the collar, say PSA 200, the PAC I participant receives the minimum amount (PSA 90 or 300 as the case may be). In that case, the support tranche absorbs the contraction. Right?

If the prepayment is outside the collar, the PAC tranche absorbs the contraction or the extension, right?

What would be an example where the support tranche absorbs the extension?

- Robert

Otabek

The companion tranche absorbs the contraction or the extension risk, the payments to the PAC tranche are limited by the prepay collar.

Swanand

Regarding my question about extension risk:

If the PAC tranche is already paid at the minimum point of the collar (say PSA 90), how is extension risk mitigated by Support? PSA would have to drop below 90, and then you'd be outside the collar.

Also, are we supposed to be able to convert PSA to average maturity? I see the conversion being shown in various examples, but I haven't located a formula for doing so.

- Robert

neil1234

if the actual prepayments are below the collar, then the principal paid to the support tranche is directed to the PAC. this means that more of support bond is outstanding (or the holders of the support bond have an extension risk)

I doubt they will ask us to compute the WAL for a PAC.. you will need to compute the principal paid down every month using the 2 different psa's and pick the one with the lower payment.