PAC tranche confusion

I don’t feel that the rules of a PAC tranche are propely explained. Please refer to P395 of V5 Question 1- I understand that if the actual prepayment speed in month 1 is 200PSA, then a PAC investor would receive 508169. What happens If the actual prepayment speed jumps to 210PSA in month 2? Would a PAC investor still receive the lower of the 2 pmts, namely 569843? I’m lookng for more clarity on what happens if prepayment speeds vary within the initial PAC collar. Question 2- If the actual prepayment speed in mnth 1 is 310PSA, what payment would a PAC investor receive? Question 3- If the actual prepayment speed in mnth 1 is 80PSA, what payment would a PAC investor receive?

Just trying to stir things up a bit, good questions. Question 1- I understand that if the actual prepayment speed in month 1 is 200PSA, then a PAC investor would receive 508169. What happens If the actual prepayment speed jumps to 210PSA in month 2? Would a PAC investor still receive the lower of the 2 pmts, namely 569843? I’m lookng for more clarity on what happens if prepayment speeds vary within the initial PAC collar. ------> That’s my understanding…you get paid at the minimum of that band. Question 2- If the actual prepayment speed in mnth 1 is 310PSA, what payment would a PAC investor receive? ------> Could it be that he gets paid at the larger amount based on the three speeds (90, 300, 310), since that is not within what he contracted for? Question 3- If the actual prepayment speed in mnth 1 is 80PSA, what payment would a PAC investor receive? ------> Could it be that he gets paid at the larger amount (same as above) based on the three speeds (80, 90, 300), since that is not within what he contracted for?

Per my understanding: The investor receives the minimum of the two payments as laid out in exhibit 13, regardless of the prepayment speed. In other words, whether the prepayment speed is 200 PSA in month 1, 210 in month 2, 310 PSA in month 1 or 80 PSA in month 1 (in your questions) the investor will receive \$508,169 in month one and \$569,843 in month two. HOWEVER… The PAC tranche is structured assuming a CONSTANT prepayment rate throughout its planned life. So if the actual prepayment in mnth 1 is 310 PSA, the PAC may bust before the end of life if the actual prepayments remain high. This is explained further in the section on “effective PAC collars” (I think they were called). So if your first few months pay out at 310 PSA, your effective PAC collar may move from 90-300 PSA to something like 90 - 280 PSA. So if your first few months are high, but then the prepayments drop to something low (e.g. 95 PSA) and stay there, you might be ok.

it is not likely to bust with a few higher prepayments. they also v. clearly specify in that section, 2 other things 1. How much the effect is depends on when in the life of the tranche the prepayments occur and for how long. Early in life - when there are the PAC bodyguards – support tranches – are around and standing (in full force) - a few months of prepayments would have no impact on average life of the tranches. if this is happening later in life, then the tranches could well be affected. 2. this is the reason why the “initial PAC Collar”, which was identified at the creation of the tranche bears no meaning to the position. You need to recompute the “effective PAC Collar”. If the prepayments occur within the initial PAC collar for a short time period- nearer towards to lower end of the collar (by that I mean 90-300 collar, prepayments are nearer to 90) – 90-300 could become 110-320 (both lower end and upper end shift upwards). However if the prepayments occur nearer to the upper end of th initial collar - for a longer time period - the new effective PAC Collar could change to 150-240 - shrink from both sides – and this is a definite indication that the average life of the PAC has reduced…

---------- If the prepayments occur within the initial PAC collar for a short time period- nearer towards to lower end of the collar (by that I mean 90-300 collar, prepayments are nearer to 90) – 90-300 could become 110-320 (both lower end and upper end shift upwards). ----------- What does 90-300 mean? Correct me as I delve into uncharted territory… If prepayments occur at speeds between 0.9xPSA and 3xPSA you get extra principal payment (a prepayment) based on the lower value of the two. I the collateral continues to prepay at speeds within this range, you will get your principal back in the expected time (according to the schedule of payments that you purchased). If speeds go above 3xPSA, there is higher prepayments coming in, and you have to take them in (your expected maturity will go down). So, is it correct then to say, if the speed is above 3xPSA you will get that much, and your schedule of principal repayments will be shorter in duration? The support tranches take the hit if the speed is within 90-300PSA, if not you take the hit.

90-300 meant 90 PSA to 300 PSA there is an example in the text that talks of the effective collar - you might want to read up on that, dreary. it is a couple of pages… well worth the trouble.

I will cpk, I just want to know if my initial understanding is correct. Specifically, is it correct to say if the speed is above 3xPSA you will get that much in prepayments, and your schedule of principal repayments will be shorter in duration? The support tranches take the hit if the speed is within 90-300PSA, if not you take the hit.