The tranches in a collateralized mortgage obligation (CMo) that are most likely to provide protection for investors against both extension and contraction risk are:
A) planned amortization class (PaC) tranches.
B) support tranches.
C) sequential-pay tranches.

Question

Quizplus · Accepted Answer

PaC tranches are structured to provide protection to investors against both extension and contraction risk. They are designed to pay principal and interest according to a predetermined schedule, which helps to reduce the variability of cash flows and limit the potential impact of prepayments on investors. Support tranches are designed to absorb losses and provide credit enhancement, while sequential-pay tranches are structured to provide a specific priority of payment based on their order of priority. While both support and sequential-pay tranches may offer certain benefits to investors, they do not provide the same level of protection against extension and contraction risk as PaC tranches.

The Tranches in a Collateralized Mortgage Obligation (CMo) That Are