You own a mortgage-backed security and you will receive fixed semiannual interest payments and no principal payments as long as prepayments remain within a given range. If prepayments move outside the range,you will receive prepayments. You must be holding a ______________________.

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PAC CMOs (Planned Amortization Class Collateralized Mortgage Obligations) offer tranches with stable, predictable cash flows even if prepayments exceed or fall below a certain rate. These securities bifurcate the prepayment risk between the investors of different tranches. So, if prepayments remain within the given range, the holder of the security will receive fixed semiannual interest payments and no principal payments. But if prepayments move outside the set range, the holder will receive prepayments.

You Own a Mortgage-Backed Security and You Will Receive Fixed