Support Tranche and Interest Rates Rise

CFA Level II
#1

In the Richer case, they ask what to recommend to a customer who is concerned by a modest rise of mortgage rates (+1%):

  • A - PO strip

  • B - PAC tranche

  • C - Support tranche

Solution is the PAC tranche.

I understand that it cannot be a PO strip because its value gets lower when rates rise, but why can’t it be a Support Tranche ?

#2

The support tranche will take the burden of slowing prepayment speeds (extension risk)

#3

Thanks it is crystal clear … The PAC will not suffer because the support will be used to remove the burden off the PAC.