Explanation:
Planned Amortization Class (PAC) tranches are structured to offer a predictable and stable cash flow over a specific range of prepayment speeds (known as the PAC collar). They are supported by companion (or support) tranches that absorb the excess volatility. As long as the prepayments stay within the collar, the PAC tranche protects investors from both faster-than-expected prepayments (contraction risk) and slower-than-expected prepayments (extension risk) relative to the underlying mortgage-backed security.
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Q.47 In a planned amortization class (PAC) collateralized mortgage obligation (CMO), when compared to the underlying mortgage-backed security, the planned amortization class (PAC) tranches have:
A
Reduced contraction risk
B
Reduced extension risk
C
Both reduced contraction risk and reduced extension risk
D
None of the above