Look at question 9410 in the schweser tbank. The first tranche of a CMO, the PAC tranche should have less prepayment risk and more extension risk than the support tranche, correct? I think the answer says the first tranche has less prepayment risk and less extension risk than the support tranche. If the support tranche is prepayed first ,it’s extension risk is lower than the PAC tranche?
If rates reverse it would have extension risk and the PAC tranche would remain stable. BTW, I haven’t seen the question on q-bank.
The support tranche gets it bad in both ways, prepay too fast and the prepayments get diverted to it. Prepay too slow, and some of its own principal payments get diverted to the PAC tranche. The
Your right, I never thought about that. I only thought about interest rates going down.