principal payments. It is important to understand that the PAC schedule may not be satis- fied even if the actual prepayments never fall outside of the initial collar. This may seem surprising since our previous analysis indicated that the average life would not change if prepayments are at either extreme of the initial collar. However, recall that all of our previous analysis has been based on a single PSA speed for the life of the structure. If we vary the PSA speed over time rather than keep it constant over the life of the CMO, we can see what happens to the effective collar if the prepayments are at the initial upper collar for a certain number of months. For exam- ple, if one computed the average life two years from now for the PAC bond in Deal 4 assuming that prepayments are 300 PSA for the first 24 months, one would find that the average life is stable at six years if the prepayments for the following months are between 115 PSA and 300 PSA. That is, the effective PAC collar is no longer the initial collar. Instead, the lower collar has shifted upward. This means that the protection from year 2 on is for 115 PSA to 300 PSA, a narrower band than initially, even though the earlier prepayments did not exceed the initial upper collar.   Support Bonds The support bonds are the bonds that provide prepayment protection for the PAC tranches. Consequently, support tranches expose investors to the greatest level of prepayment risk. Because of this, investors must be particularly careful in assessing the cash flow characteristics of sup- port bonds to reduce the likelihood of adverse portfolio consequences due to prepayments. To see this, consider a short-term, 7% coupon support bond issued by Freddie Mac (Class BA, Series 2279) in January 2001. Exhibit 9.11 presents a Bloomberg Security Description screen for this security. This support bond makes coupon payments monthly on the fifteenth day of each month. Lets analyze this support bonds exposure to prepayment risk using Bloombergs PT (Price Table) function in Exhibit 9.12. Suppose at current interest rates, the underlying mortgage collateral prepays at 210 PSA and the securitys current price is 100-07. Note at the bottom of the screen, given a prepayment speed of 210 PSA, the average life is 0.22 years. If we shock the current U.S. Treasury yield curve by 100, 200,     300 basis points, respectively, and feed those shocks into a prepayment model, what will happen to the prepayment speed of the collateral and the average life of this support bond? As can be seen from the Price Table, if interest rates rise, prepayment speeds will decrease and the securitys average life will extend from 0.22 years to 7.17 years for a 100 basis point upward parallel shift in the yield curve. Of course, this is a concern to an investor who thought that they were purchasing a money market-