An issuer is considering the following two CMO structures:AppendixLO1 Tranches A to E are a sequence of
Question:
An issuer is considering the following two CMO structures:AppendixLO1
Tranches A to E are a sequence of PAC Is, Fis a PAC II, and G is a support bond with- out 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 aver- age 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? 21.a. What is the role of a lockout in a CMO structure?
b. Explain why in a reverse PAC bond structure the longest average life bond can turn out to be effectively a support bond if all the support bonds in the struc- ture are paid off.
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