Suppose that $1 billion of pass throughs is used to create a CMO structure with a PAC bond with a par value of $700 million and a support bond with a par value of $300 million Answer the below questions (a) Which of the following will have the greatest average life variability (i) the collateral, (...

a The support bond will have the greatest average life variability because its purpose is to reduce variability in the cash flows and thus the variabi ...

Suppose that $1 billion of pass-throughs is used to create a CMO structure with a PAC bond

Question:

Suppose that $1 billion of pass-throughs is used to create a CMO structure with a PAC bond with a of $700 million and a support bond with a of $300 million.
Answer the below questions.
(a) Which of the following will have the greatest average life variability: (i) the collateral, (ii) the PAC bond, or (iii) the support bond? Why?
(b) Which of the following will have the least average life variability: (i) the collateral, (ii) the PAC bond, or (iii) the support bond? Why? Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...