Should the value of a support tranche go up when prepayments decline? If interest rates rise, prepayments decline then shouldnt it outperform the PAC tranche?
Anyone?
It depends if the tranche is trading at a premium (over par) before.
If its trading at a premium and prepayment slows down then the investor benefits from a higher coupon for a longer period and postpones the capital loss from the prepayment (this is straight from the curriculum)