An issuer is considering the following two CMO structures:

Tranches A to E are a sequence of PAC I’s, 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?

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Structure I Par Amount Tranche (in millions) Coupon Rate (%) A $150 6.50 B 100 6.75 C 200 7.25 D 150 7.75 E 100 8.00 F 500 8.50 Tranches A to E are a sequence of PAC I's and F is the support bond.