Compare and contrast Type II Pacs, Companions, Super & S

[Anonymous]

I was rereading this and it was not clear to me what the difference was. I would appreciate any insight.

Side question. How much abbrev. do u think is accept. for the ex?

I personally think if it looks close the word - 3 to 4 letters it's hip.

[New at pd]

Funny - I was reading this on the train this morning. Let's see what I got from it.

Companions are created to absorb prepayment volatility of the class it supports. Payment volatility is a function of the class it supports. For example, because TAC's have more prepayment volatility than standard PAC's, the companion class for a TAC has less volatility than the companion class of a PAC.

Type II PAC's were designed with the idea of creating a bond with some prepayment protection, with a higher yield than traditional PAC's. These Type II PAC's have narrower prepayment bands, and get some support from the companion class that supports the original PAC. I think that Type III PAC's were created with the same idea, and have narrower prepayment bands.

A standard PAC can be split up into a super PAC and a sub PAC, much like the way that a fixed bond can be split into a floater and an inverse floater (the total payment is the same.) The super PAC has very wide prepayment bands, hence they have a larger degree of prepayment protection than standard PACs and sub PACs.

Fire away with additions and corrections.

[zapped]

first PACs & TACs pay down principal according to a schedule. PACs pay on schedule as long as prepayments fall within lower & upper bands. PACs have contraction & extension risk protection (faster & slower than expected prepayments), but TACs only have contraction protection. thus, the companions that support them do not absorb as much risk & are less volatile & have a lower yield.

i believe that after companions are exhausted, type III PACs act like companions in supporting standard PACs. they have more risk than type II PACs and standard PACs and thus have a higher yield. and when those are exhausted, type II PACs support standard PACs. after type II PACs are exhausted, there is no more prepayment protection.

for super & subordinate, when companions are exhausted, subordinate PACs support the volatility of super PACs & standard PACs. when sub's are exhausted, super PACs support the standard PACs.....subordinates offer more protection than type II or type III PACs; thus they have more risk & a higher yield, all other things being equal.

[cartman]

to answer your question on abbreviations - the first time you use a word that you want to abbreviate, give the complete name & the abbreviation. then feel free to use the short form for the remainder of the question... do this for each question as the graders only see one question...

[chucky almendinger]

In the super sub section, they refer to FHLMNC, which has 3 yr Super, Sub, and TYPE III PAC -

Question, why is there no TYPE II PAC??

Is this a TYPE O?

Or are type II and III defined numerically by bandwidth, or, is it possible to have, say a five year type II but a 3 year type III?

I'm stumped.

chucky almendinger

average life volatility (least to most) super, sub, type II, type III, companions

[Anonymous]

I guess I was looking for a more basic explanation. My Fault. For example, if prepayments are actually at 0% PSA, then normally the PAC gets the full principal pmt. Now introduce type II PAC. Does he get paid anything? The way I read it... The answer is no. If payments are say higher than the upper band type two absorbs some of the prepayment.

Type II sounds like a companion. What is the difference?

Now under the above scenarios how do supers and subs behave?

[chucky almendinger]

A sub PAC has less average life volatility than anything but its super. Type II PACs and Type III PACs will have scheduled principal payments as long as the prepayment falls within their bands. In this sense, they're PACs. The companions should have unpredicted prepayments, even if the prepayments fall within the original PAC bands. If payment falls outside PACII band, PAC II will experience prepayments different than scheduled. But PACI might still be untouched. A sub PAC-Super PAC pair combined will have the same experience as the PAC they were made from. As such, they will be the last to be touched in the event of excessive prepayments. Only when prepayments are so high that the PAC experience deviates from schedule, only then will the Sub have any deviation from schedule. And the Super won't be touched till the sub is used up. Sorry for the long windedness, and the fact that I ignored underpayments

[Anonymous]

Thanks.