I’m reading the CMO material, and I don’t get this stuff where it says that a early tranche (A) has higher contraction risk than the later tranches? If there is a higher prepayment speed then expected, the support tranche absorbs all the extra principal payments, so its average life shortens quicker that the A tranche. This (on my opinion) means that support tranche has higher contraction risk, but in a book they say otherwise. What am I missing???
> I’m reading the CMO material, and I don’t get this stuff where it says that a early tranche (A) has higher contraction risk than the later tranches? This is correct because tranche A always gets paid first, including prepayments. The other question you ask is about support tranches which is a different concept.
Its perfectly fine to say that Tranch A has a high contraction risk if it’s a Sequential Pay CMO?
Dreary pointed out your concern correctly. You have mixed up the PAC, Support Tranch, Z Tranch, Equity Tranch, PAC, CMO Tranch concepts. … Not that I have a clear cut distinction amongst them at this point in time. But we will beat it to brutality once ‘the forum’ reaches FI.
I see now what you are saying. I mixed sequential pay and PAC tranches. Thx guys!
Level 1 material, yo!