Explanation:
A PAC tranche is structured to make predictable payments, regardless of actual prepayments to the underlying MBS. The PAC tranches have both reduced contraction risk and reduced extension risk compared to the underlying MBS.
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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
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