brainsX

it is not likely to bust with a few higher prepayments. they also v. clearly specify in that section, 2 other things

1. How much the effect is depends on when in the life of the tranche the prepayments occur and for how long. Early in life - when there are the PAC bodyguards -- support tranches -- are around and standing (in full force) - a few months of prepayments would have no impact on average life of the tranches.

if this is happening later in life, then the tranches could well be affected.

2. this is the reason why the "initial PAC Collar", which was identified at the creation of the tranche bears no meaning to the position. You need to recompute the "effective PAC Collar".

If the prepayments occur within the initial PAC collar for a short time period- nearer towards to lower end of the collar (by that I mean 90-300 collar, prepayments are nearer to 90) -- 90-300 could become 110-320 (both lower end and upper end shift upwards).

However if the prepayments occur nearer to the upper end of th initial collar - for a longer time period - the new effective PAC Collar could change to 150-240 - shrink from both sides -- and this is a definite indication that the average life of the PAC has reduced..

CP