CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Suppose that for the first five years of a CMO, prepayments are well below the initial upper PAC collar and within the initial lower PAC collar. The effective upper collar will ______ and the initial upper collar will ______.
A. increase; increase
B. decrease; decrease
C. increase; not change
Explanation: This situation indicates that there will be more support tranches to absorb future prepayments. As a result, the effective upper collar will increase.

The initial upper collar never changes.

User Contributed Comments 4

User Comment
americade lower collar will not change
danlan2 What are the upper collar and lower collar?
dblueroom Americade - is that a question or a statement. I don't know if lower collar will change. The CFA book says quote "An extended period of prepayments slower than the lower range of the initial PAC collar with raise the lower range of the effective collar" That is to say PSA falls below the lower collar.
reccy Prepayment lower than upper collar-> more than expected support tranches remain to absorb high prepayment-> upper collar ie ability to absorb high prepayment increases
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