Elan Mock I Morning- Q 13~ Fixed Income

CFA Level II
#1

The anser I have no idea what this is talking about. Can someone please explain it to me?

Tranche Initial PAC Collar Effective PAC Collar Expected Principal Paydown Window

PAC I 220-340 220-360 11 months

PAC II 235-315 235-330 14 months

Q: The uniform prepayment rate experienced by the collateral thus far would be closest to:

A 330 PSA

B 305 PSA

C 210 PSA

Answer B

Nofice that the upper bank of the effective collars for both PAC tranches is higher than the upper bank of their initial collar. This suggests that the repayment rate on the collateral has been lower than the upper bands of both the tranches’ iniital collars. ( I don’t understand…I thought the higher the number the faster the speed?) 305 PAS is the only prepayment rate that satisfies the condistion.

A prepayment of 330 PSA would result in increase in the upper band of teh initial collar for the PAC I, but not for PAC II

A prepayment of 210 PSA would result in increase in the lower bands of the initial collar for the both.

#2

If the prepmt rate was 205, the lower bands of the 2 tranches would have increased (because you have been paying at a slower rate than you were supposed to so you need to speed up your minimum prepmt to keep up with the PAC schedule).

If the prepmt rate was 330, the higher band of the PAC II would have decreased (because you have been paying at a faster rate than you were supposed to, you have used up more cushion than planned so you need to slow down to satisfy the schedule)

If the prepmt rate was 305, since your prepmt rate is within the initial collar, meaning you have not utilized all of the possible cushion to satisfy the PAC. Therefore, the extra cushion saved is reflected on the upper band (you are now allowed to prepay a little faster due to the extra cushion without busting the PAC)

#3

SPOT ON