21. An issuer is considering the following two CMO structures: STRUCTURE I: Par Amount Coupon Rate Tranche (in millions) (%) A $150 6.50 100 6.75 200 7.25 150 7.75 100 8.00 500 8.50 Tranches A to E are a sequence of PAC Is and F is the support bond. STRUCTURE II: Par Amount Coupon Rate Tranche (in millions) (%) ABCDEFO $150 6.50 100 6.75 200 7.25 150 7.75 100 8.00 200 8.25 300 ?

Tranches A to E are a sequence of PAC Is, F is a PAC II, and G is a support bond without a PAC schedule.

a. In structure II, tranche' G is created from tranche F in structure I. What is the coupon rate for tranche G assuming that the combined coupon rate for tranches F and G in structure II should be 8.5%?

b. What is the effect on the value and average life of tranches A to E by including the PAC II in structure II?"

c. What is the difference in the average life variability of tranche G in structure II and tranche F in structure II?AppendixLO1