Qoate notes B4 p244: Within PACI and II tranches, the early tranches have lower prepayment risk than the later.
I think this is a wrong statement. The correct one would be: Within PACI and II tranches, the early tranches have lower EXTENSION risk than the later, and the later have lower CONTRACTION risk than the earlier.
Am I right??
PAC tranches have lower both extension and contraction risk, untill support tranches are not paid off. Only after all support tranches are paid off then PAC tranches are allocated prepayments from the one currently receiving paymnet (ie. probably PACI). Only then the higher the PAC in a structure the greater the contraction risk.
please see my question carefully, I mean WITHIN each PAC, Means different tranches within the same PAC.
The earlier PAC trances will have lower prepayment risk becasuse the protection available from from the support tranches is greater. With time if prepayments are greater than effective collar, this support can degrade (due to the support tranch grtting paid off) thus increasing the prepayment risk of the later PAC tranches.
Thank you, kc. That makes a lot sense. So even within the same PAC, say PAC I (A) has more protection than PAC I (B) cuz A can use the full support tranch while B only can use the rest.
Yes, you are right !!! And you r welcome…