hard · Asset-Backed Securities Collateral & Cash Flow Modeling
An investor owns a 'PAC Companion' tranche priced at 94.00 (Discount).
If prepayments in the pool slow down to the bottom of the PAC band, the 'Companion' tranche will likely:
- Increase in price, since slower prepayments reduce the probability of a PAC band breach event occurring.
- Stay right on schedule for its own WAL profile, since it stays fully protected by the PAC band.
- Benefit from contraction risk, since it receives extra principal to hold the deal's overall WAL near target level.
- Suffer from extension risk, as it must absorb the 'slack' to keep the PAC tranche on its planned schedule.
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