Agency collateralized Mortgage Obligation STRIPS

Question 1

REMIC

Answer 1

Real Estate Mortgage investment coduit

Question 2

CMO (Collateralized Mortgage obligations)

Answer 2

bond classes created by redirecting the cash flows of mortgage-related products so as to mitigate prepayment risk.

Question 3

What tranche is considered an accrual bond

Answer 3

Z tranche

Question 4

Average life for a PAC bond 90-300 PSA

Answer 4

7.26 yrs

Question 5

What is a PAC bond

Answer 5

PAC bonds have protection against both extension risk and contraction risk, they are said to provide two-sided prepayment protection with the help of a support bond

Question 6

What happens in a PAC bond

Answer 6

The prepayment protection come from the support bonds
The support bonds that forego principal payments if the collateral prepayments are slow; support bonds do not receive any principal until the PAC bonds receive the scheduled principal repayment.
This reduces the risk that the PAC bonds will extend.
It is the support bonds that absorb any principal payments in excess of the scheduled principal payment that are made.
This reduces the contraction risk of the PAC bonds.

Question 7

Does a CMO eliminate risk

Answer 7

No, it cannot eliminate prepayment risk; it can only redistribute the various forms of this risk among different classes of bonds called tranches.