Looking at SS15. It’s clear to me a PAC bond is basically a tranche with a sibling tranche that gives up principal to the PAC upon contraction or extension. The collar is explicitly defined based on PSA. What am I missing?
If you have a simple, sequential CMO, tranche A will get all principal prepayments (beyond the required interest payments to the other tranches) until it is paid off.
A PAC bond, on the other hand, will receive principal prepayments only within the prescribed band, taking money from the support tranche should the prepayments fall short of the lower limit and giving money to the support tranche should the prepayments exceed the upper limit.
1 Like