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Quantitative Bond markets analysis_6

Tham khảo tài liệu 'quantitative bond markets analysis_6', tài chính - ngân hàng, đầu tư chứng khoán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | M .WIL 280 CHAPTER 12 Collateralized Mortgage Obligations and Stripped Mortgage-Backed Securities Thus whereas PAC bonds are said to have two-sided prepayment protection TAC bonds have one-sided prepayment protection. Such a bond is acceptable to institutional investors who are not overly concerned with some extension risk but greatly concerned with contraction risk. Some institutional investors are interested in protection against extension risk but are willing to accept contraction risk. This is the opposite protection from that sought by the buyers of TAC bonds. The structures created to provide such protection are referred to as reverse TAC bonds. Very Accurately Determined Maturity Bonds Accrual or z bonds have been used in CMO structures as support for bonds called very accurately determined maturity VADM or guaranteed final maturity bonds. In this case the interest accruing i.e. not being paid out on a z bond is used to pay the interest and principal on a VADM bond. This effectively provides protection against extension risk even if prepayments slow down because the interest accruing on the z bond will be sufficient to pay off the scheduled principal and interest on the VADM bond. Thus the maximum final maturity can be determined with a high degree of certainty. If prepayments are high resulting in the supporting z bond being paid off faster however a VADM bond can shorten. A VADM is similar in character to a reverse TAC. For structures with similar collateral however a VADM bond offers greater protection against extension risk. Moreover most VADMs will not shorten significantly if prepayments speed up. Thus they offer greater protection against contraction risk compared with a reverse TAC with the same underlying collateral. Compared with PACs VADM bonds have greater absolute protection against extension risk and though VADM bonds do not have as much protection against contraction risk as noted previously the structures that have included these bonds are