Question: a) What is the major factor that drives prepayment risk? b) Can a CMO be structured to eliminate prepayment risk from the mortgages? c) In

a) What is the major factor that drives prepayment risk?

b) Can a CMO be structured to eliminate prepayment risk from the mortgages?

c) In a transaction that consists of PAC bonds and support bonds, list the following in the order of the variability of their average lives (from the greatest amount of variability to the least): (i) the collateral; (ii) the PAC bond; (iii) the support bonds. Please explain your answer.

d) Is modified duration a good estimate for the percentage price change for mortgage securities? Why? How can it be improved?

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