Introduction to Securitization

PLANNED AMORTIZATION CLASS BONDS AND SUPPORT BONDS

There are institutional investors who seek securities (bond classes) that have even greater protection against prepayment risk. Investment bankers have created a product for such investors. To under- stand how this was done by structurers for investment banking firms, look at Table 3.3. The table shows the total principal payment for selected months for our $660 million, 6% collateral assuming a prepayment speed of 100% PSA (column 2) and 250% PSA (column 3). The last column in Table 3.3 shows the minimum total principal payment for each month. That is, if the prepayment speed is constant over the life of the collateral and that constant prepayment speed is

TABLE 3.3 Total Principal Payments at 100% PSA and 250% PSA and Creation of PAC Schedule for Selected Months

between 100% PSA and 250% PSA, then the monthly total principal will be as shown in the last column. If the total of the principal in the last column is summed, it is equal to $470,224,580.

The amounts in the last column allows a structurer to create a bond class, referred to as a planned amortization class bond (more popularly referred to as a PAC), which has priority over all other bonds classes in the structure with respect to receiving the scheduled principal ...