Hi All,
Would anyone be able to explain for the effective collar changes as a result of prepayment speeds? I know that:
- An extended period of time that prepayment speeds are below the upper boundary, the upper boundary increases. I assume this is because the support tranche provides a larger buffer so the PAC tranche can handle higher prepayment speeds?
- An extended period of time that prepayment speeds are below the lower boundary, the lower boundary increases. I assume this is because prepayment speeds need to rise to meet the shortfall of prepayments?
- I am curious as to what happens if prepayment speeds are above the upper boundary? Would the upper boundary decrease because the support tranche cannot provide as large of a buffer?
Thanks for all of your help!