-In the curriculum, it states that “Investors holding PAC TRANCHE will be protected from CONTRACTION RISK and EXTENSION RISK if prepayment rates are within COLLAR.”
-PAC tranche helps investors receiving payments as scheduled, so investors will not expose Contraction risk. However, investors holding PAC tranche still expose Extension risk because they receive payments as scheduled (to reduce extension risk, investors have to receive payments earlier)
What are your opinions?
By extension risk they mean the risk that prepayments will be lower than expected.
With a minimum prepayment level, a PAC tranche reduces (but does not eliminate) extension risk.
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