How Are the Cash Flows Allocated When Actual Prepayments Fall

question 16

Multiple Choice

How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?

• A)The entire cash flow is paid to the non-PAC support bonds until those bonds are paid in full.
• B)The cash flows are divided between PAC and non-PAC bonds on a pro-rata basis.
• C)PAC payments are recomputed to a reduced fixed amount.
• D)The entire cash flow is paid to the PAC bondholders.
• E)The interest income is paid to the non-PAC bondholders with all principal amounts paid to the PAC bondholders.

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Definitions:

Fed

The Federal Reserve System, which is the central banking system of the United States, responsible for monetary policy.

Loans

Money, goods, or services provided to an individual or entity with the expectation of repayment over time with interest.

Interest Rates

The cost of borrowing money, typically expressed as an annual percentage of the loan amount.

Savers

Individuals or entities that set aside a portion of their income for future use, often by depositing it in financial accounts.