Question

Planned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches?A. Eliminate pre-payment risk for tranche holders.B. Match the pre-payment risk of plain vanilla tranches.C. Reduce pre-payment risk for tranche holders.

Answer 1

Answer: Reduce pre-payment risk for tranche holders.

Step-by-step explanation:

A planned amortization class CMO simply offers protection from extension risk and also from prepayment. A planned amortization class can simply reduce but it should be noted that it can't eliminate the prepayment risk for the tranche holders.

The companion tranches possess higher prepayment risk due to the fact that they absorb most of prepayment risk.