the text says the average life of asset in PAC collar will reduced, so is it very bad? as i know, if more prepayment, then averge life will reduce. secondly, can any guru here explain why average life will reduce when apply PAC collar? also PAC collar is actually lower PSA bound and higher PSA bound, so wouldn’t it be more apporiate to call as PSA collar?
It will reduce because the subordinate tranches abosrb the prepayment faster. The more prepayments, the higher that collar effectively gets and in some extreme cases, is completed removed (busted pac) from the subordinate tranches maturing faster.
why subordinate tranche abosorb the prepayment faster in PAC collar compared with normal PAC tranche without PAC collar? is PAC collar same as PAC window, what’s the difference between the two?
francisgy Wrote: ------------------------------------------------------- > why subordinate tranche abosorb the prepayment > faster in PAC collar compared with normal PAC > tranche without PAC collar? A PAC tranche will always have a collar. > > is PAC collar same as PAC window, what’s the > difference between the two? No. A PAC window is the length of time over which expected principal repayments are made.
Thanks for your reply. If A PAC tranche will always have a collar. why subordinate tranches abosrb the prepayment faster? If A PAC window is the length of time, people will always choose Small PAC window securities. who wants the principal repayments to be slow. Am I right?
francisgy Wrote: ------------------------------------------------------- > Thanks for your reply. > If A PAC tranche will always have a collar. why > subordinate tranches abosrb the prepayment > faster? That what they are for. > > If A PAC window is the length of time, people will > always choose Small PAC window securities. who > wants the principal repayments to be slow. > > Am I right? It depends on what you want to invest in. How you want your cash flows to be.