Q1 - Is Companion and Support Trache the same thing? Which of the following explains why the companion tranches have the greatest prepayment risk in a CMO structure? The companion tranches: A) have to support any principal payments in excess of the scheduled principal payments. B) are more interest rate sensitive and therefore prepayment risk is higher. C) consist of underlying mortgages for which prepayment is allowed, as opposed to the PAC tranches. Which of the following is FALSE regarding planned amortization class (PAC) versus support tranches? A) The prepayment risk protection provided by the support tranches causes the average life to extend and contract. B) The PAC tranches have the greatest prepayment risk in the collateralized mortgage obligation (CMO) structure. C) There is an inverse relationship between the prepayment risk of the PAC tranches and the prepayment risk associated with the support tranches.
my guess A, B I’m probably wrong on both though
A. B.
I think A, B are right. I thought support and companion tranche were the same thing for a PAC
Is Companion and Support Trache the same thing though? I’m seeing different language in Schweser vs CFAI. Your answer: A was correct! There is an inverse relationship between the prepayment risk of PAC tranches and the prepayment risk associated with the support tranches. In other words, the certainty of PAC bond cash flow comes at the expense of increased risk to the support tranches Your answer: B was correct! The support tranches have the greatest prepayment risk in the CMO structure, not the PAC tranches
BiPolarBoyBoston Wrote: ------------------------------------------------------- > I think A, B are right. > > I thought support and companion tranche were the > same thing for a PAC PAC is different. Ok, that helps out. I thought it was the same, but wanted to be sure.
This is one of those topics that just drops its pants and grabs its ankles (for me, anyways). Love those kind of topics.
How deep are you guys going into this topic? Do you think we will have to construct the cash flows for a CMO or pretty much just analyze information that will be given to us?
There were q’s on support/pac last year. They were relatively easy if you knew your stuff.
adavydov inspired me to review this section earlier this week. Companion would shelter the PAC from prepayments, while a Support tranche would shelter more senior tranches from default… I think. I’m pretty sure I’ll never be confident enough about how CMO’s work to invest my own money in one.
“How deep are you guys going into this topic?” As per my post right before this question, I’d say I go balls deep each time. Easy topic.