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,cash flows will vary. You must be holding a ________.

Question

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The given feature of fixed semiannual interest payments and no principal payments subject to prepayment range is characteristic of a PAC (planned amortization class) CMO, which is a type of mortgage-backed security that offers a predictable cash flow stream. PAC CMOs provide protection to investors against prepayment risk by creating different tranches with different prepayment protection, such as a prepayment range, which restricts prepayments to a certain range. If prepayments fall outside the range, PACs will experience lower cash flows, but this will not affect the cash flows of other tranches. Class C or lower sequential pay CMOs do not offer any range protections, PO securities only receive principal payments, and pass-through securities and CDOs do not offer any prepayment protections.

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