Explain why in a reverse PAC bond structure the longest average life bond can turn out to be effectively a support bond if all the support bonds in the structure are paid off
What will be an ideal response?
By definition, the support bonds (or bodyguards) are the bonds that provide prepayment protection for the PAC tranches. In a reverse PAC bond structure, the longest average life bond performs the same function as a support bond. For example, a CMO structure requiring any excess principal payments to be made to the longer PAC bonds after all support bonds are paid off is called a reverse PAC structure. By requiring the longer PAC bonds receive any excess principal, these bonds are effectively performing the same function as the support bonds.
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