Question

Consider two cmo structures using the same $1 billion balance of mbs pools:

structure 1: 5665 million pac class, $335 million companion class
structure 2: s734 million pac class, s266 million companion class

which structure offers the most prepayment protection to the pac class?

Answer 1

To determine which structure offers the most prepayment protection to the PAC class, compare the proportions of the PAC class and the companion class in each structure. Structure 1 has a positive cushion, while Structure 2 does not.

Step-by-step explanation:

In order to determine which structure offers the most prepayment protection to the PAC class, we need to compare the proportions of the PAC class and the companion class in each structure. Structure 1 has a PAC class of $5665 million and a companion class of $335 million, while Structure 2 has a PAC class of $734 million and a companion class of $266 million.

To calculate the prepayment protection, we need to find the cushion, which is the excess amount of the companion class over the PAC class. For Structure 1, the cushion would be $335 million - $266 million = $69 million. For Structure 2, the cushion would be $266 million - $734 million = -$468 million (negative because the companion class is smaller than the PAC class).

Therefore, Structure 1 offers more prepayment protection to the PAC class because it has a positive cushion, while Structure 2 does not.