effective pac collar

Computing the effective collar after 10 yrs of passage of the CMO, is this part of our curriculum? Assuming you re given the tranches and the remaining support tranche balance.

the only questions i’ve seen where you’re supposed to determine the effective collar is when they’ll give you two columns of average life variations for two tranches. the tranche with less variability for any given PSA speed is the PAC tranche, and the effective collar is the range of PSA speeds over which average life variability is constant or minimal.

Ridge, As a side note, I think Schweser notes say that even if prepayment speeds are within the effective collar, but varying even a bit, then the principal amortization schedule will not be met. Pepp, I don’t see any of the reading 56 LOS that state that we should know how to calculate the effective collar after a certain amount of time. As long as you know how to calculate CPR and SMM based off a given PSA rate, I think you are covered as far as these calculations go. CPR = 6% x (m/30) x (PSA/100) I believe, then SMM = 1-(1-CPR)^(1/12)

if the prepayments are within the collar, then why wouldn’t the schedule met? isn’t that precisely the goal of the collar, that as long prepayments are in the collar, the schedule will be met. o’bligh me.

I find it kind of strange as well, but given the likelihood of this coming up on the test I just took it at face value and moved on Schweser Book 5 pg 124 towards the end of first paragraph.

I’m having trouble with this topic as well and I remember seeing a related question on one of the CFA Mock exams. So the wider the collar the better ‘chance’ you have an meeting your specified prepayment schedule? If so, I would guess that the only way you could go off your schedule is if you have multiple competing PAC tranches?