Financial Risk Manager Part 1

Get started today

Ultimate access to all questions.

Explanation:

Correct answer: C. The life of the Companion bond will be greater than the life of the PAC bond, regardless of whether PSA is 80% or 300%

A PAC structure is designed so that, as long as prepayments stay within the PAC band, the PAC bond receives a more stable and predictable principal schedule.

A is true: the Companion/support bond absorbs the variability in prepayments.
B is true: the PAC bond has a predictable cash flow profile and average life within the band.
D is true: the Companion bond bears the prepayment uncertainty, so it has greater negative convexity than the PAC bond.
C is the exception: the Companion bond does not necessarily have a longer life than the PAC bond at every point within the band. Its life can shorten materially when prepayments are high (near 300% PSA). The key point is that the Companion is the residual piece, not that it is always longer-lived.

Therefore, C is the statement that is not always true.

Explanation:

Correct answer: C. The life of the Companion bond will be greater than the life of the PAC bond, regardless of whether PSA is 80% or 300%

A PAC structure is designed so that, as long as prepayments stay within the PAC band, the PAC bond receives a more stable and predictable principal schedule.

A is true: the Companion/support bond absorbs the variability in prepayments.
B is true: the PAC bond has a predictable cash flow profile and average life within the band.
D is true: the Companion bond bears the prepayment uncertainty, so it has greater negative convexity than the PAC bond.
C is the exception: the Companion bond does not necessarily have a longer life than the PAC bond at every point within the band. Its life can shorten materially when prepayments are high (near 300% PSA). The key point is that the Companion is the residual piece, not that it is always longer-lived.

Therefore, C is the statement that is not always true.

Comments (0)

No comments yet.

Question 107.2. A CMO planned amortization class (PAC) has only two bonds: The PAC band (Tranche A) and the Companion (aka, support) bond. The PAC bank is structured with a band range of 80% PSA to 300% PSA. If we ASSUME that the PSA level remains within the 80% to 300% range, each of the following is true EXCEPT:

Exam-Like

Community

MManit

Last updated: April 18, 2026 at 11:32

The Companion band absorbs all prepayment risk and the PAC band absorb none

50.0%

The cash flow profile and life of the PAC band is predictable

40.0%

The life of the Companion bond will be greater than the life of the PAC bond, regardless of whether PSA is 80% or 300%

10.0%

The Companion bond will have stronger (more) negative convexity than the PAC band