b) A $240 million par value PAC bond has a coupon rate of 3.75%, a 3.9% WAC, a WAM of 6 months, and an initial PAC collar of 90 – 300 PSA. The original mortgage maturity is 30 years. You may attach your Excel worksheet(s).

(1) Compute the monthly principal payment for this PAC bond, first at 90 PSA, then at 300 PSA, and finally the PAC schedule (i.e., the minimum principal payment available to PAC investors).

(2) Now consider the following CMO created out of the PAC bond above: a 3.75% coupon PAC tranche assuming 90 – 300 PSA with a par value of $168 million and a 3.75% support tranche with a par value of $72 million. Compute the average life (in years) for the PAC and support tranches assuming that the actual prepayment speed is: (i) 60 PSA, (ii) 100 PSA, and (iii) 360 PSA, respectively.

Answer rating: 100% (QA)

1 Compute the monthly principal payment for this PAC bond first at 90 PSA then at 300 PSA and finall... View the full answer