Tranche A, B n C with C being the support tranche.
A has a lower contraction/ extension risk than B?? Or both?
Need more information. CMO? CDO? special features?
In a sequential pay CMO, tranche A has more contraction risk, but less extension risk (Tranche A gets all principal repayments before the other tranches, whether planned or early)
If it’s a CMO with tranche A as a PAC (planned amortization class), it has lower contraction and extension risk (Tranche A gets planned repayments before other tranches, but the support tranches get early repayments - this support tranches get the contraction/reinvestment risk as well as extention risk).
Generally, CMOs are to apportion prepayment risk, CDOs are to apportion credit risk
I believe a CDO is like a sequential pay CMO, but can’t really clarify that from the curriculum 
Ok the exact question:
$200 mil of mortgage passthroughs will be used as collateral for three tranches.
First twotranches r planned amortization class tranches: $110 mil of bonds of tranche U n $50 mil of bonds of tranche V.
Third tranche consists of the holders of the $40mil of bonds in tranche W, which is a support tranche.
Which of the following is most correct?
A. U have less extensive risk but not less contraction risk than the V bonds.
B. u bonds have less contraction risk n less extension risk than the V bonds.
C. u bonds have less contraction risk but not less extension risk than the V bonds.
its between U n V, not W…
contraction risk = get principal too early (borrower chooses early repayment)
extension risk = get principal too late (borrower can’t meet repayment schedule)
PAC get less of both. I.e. contraction and extention risks go together, so answers A and C are impossible.
I guess U is superior to V so it’s risks must be lower. B must be the answer. Bit of a guess, but since A and C are impossible, it must be B.
B is correct, n precisely, have to cross out the wrong ones to get the answer…
n I thought CDO is not confined to CMO?
So it seems lIke a secondary PAC subordinates to a higher PAC, just like a support tranche subordinates to a single… A CMO is technically a special kind of CDO (but generally treated as separate things)