scarecrow

>
> 1. Yes, not just the support tranche's principal
> but their interest as well can be held off and
> sent to the PAC tranches if principal payments are
> slow.
>
Don't think it is correct. You can only "hold back" the principal. The interest is calculated based on beginning outstanding balance for each tranche.

The promised PAC payment is calculated in advance = MIN CF from principal payment from underlying both in the lower prepayment and higher prepayment schedule, so as long as prepayment is still within this PSA band --> can still afford to pay principal to PAC bond using principal payment from underlying.

You hold back interest only for the Z tranche.


> 2. Yield changes --> volatility in rates --> large
> increases in Vcall and Vput ---> causes large(r)
> changes in Vcallable bonds. Vnoncallable bonds
> change as well with changes in yield, but the
> effect is not as large since it is not impacted by
> call and put volatility.
>
> Accurate?

Think you understand the key points, but you seem to mix between volatility and resulted yield change. Yield can change but volatility does not change necessarily, i.e., change within historical volatility or vice versa, a lot of volatility but no net change, i.e., yield jumps up and down widely but ends up with the same value.

volatility impacts only option-embedded bonds.
Net yield change impacts both. Whether it is more on one vs the other depends on the volatility changes.