A PSA range within which the underlying mortgage collateral should remain over time so that a PAC bond would stick to a prespecified schedule of principal payments. If prepayments are outside of the PAC bands, then the PAC schedule cannot be met. The PAC band represents the range from which the PAC bond is protected from prepayments. The wider the band, the more stable the bond’s cash flows. If prepayments are larger than expected, the support bonds will absorb the excess, eliminating all contraction risk. On the contrary, if the principal prepayments are lower than expected, the support bonds would absorb the extension risk. In both cases, the PAC bond will perform as originally planned.
January 5, 2025
