CFAI, Reading 56,P-385, Q 29. Part B In Structure I - A-E == PAC I tranches F - Support tranch of 500m@ 8.5% In Structure II - A-E == PAC I tranches F - PAC II tranch of 200m @ 8.25% G - Support tranch of 300m@ 8.67% (without schedule) CFAI text says that Average life of A-E tranches won’t change in Structure II & it affects only tranch F. But isn’t support tranch reduced to only 300m in Structure II as compared to 500m from Structure I and hence less protection & increased average life for A-E? Thanks in advance, AG
AG, No effect because in Structure 1 (A-E and F), the F support tranch provided protection of 500m. All what they have done in Structure 2 (A-E F G) is split the princial of 500m into 200m for F and 300m for G. But effectively A-E will still have a protection of 200+300m i.e 500m. So their ans is correct by saying that there will be no effect on the AL of tranches A-E.