Question: Suppose that $1 billion of pass-through 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.
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?