Question: Suppose that $1 billion of pass-through is used to create a CMO structure with a PAC bond with a par value of $700 million (PAC I), a support bond with a schedule (PAC II) with a par value of $100 million, and a support bond without a schedule with a par value of $200 million.
a. Will the PAC I or PAC II have the smaller average life variability? Why?
b. Will the support bond without a schedule or the PAC II have the greater average life variability? Why?