Floaters Given a series of PAC bonds, any of the tranches can be carved up to make a floater and an inverse floater. The advantage of the PAC floater compared to a sequential-pay floater is that there is two- sided prepayment protection and therefore the uncertainty of the aver- age life is less. The trade-off is that this greater prepayment protection is not free. All other factors constant, the margin over the same reference rate offered on a PAC floater will be less than that on a sequential-pay floater and/or the cap will be the lower.   Effective Collars and Actual Prepayments As we have emphasized, the creation of an MBS cannot make prepayment risk disappear. This is true for both a passthrough and a CMO. Thus, the reduction in prepayment risk (both extension risk and contraction risk) that a PAC bond offers must come from somewhere. The prepayment protection comes from the support bonds. It is the support bonds that have principal payments deferred if the collateral prepayments are slow; support bonds do not receive any principal until the PAC bonds receive the scheduled principal repayment. This reduces the risk that the PAC bonds will extend. Similarly, it is the support bonds that absorb any principal payments in excess of the scheduled principal payments that are made. This reduces the contraction risk of the PAC bonds. Thus, the key to the prepayment protection offered by a PAC bond is the amount of support bonds outstanding. If the support bonds are paid off quickly because of faster-than-expected prepayments, then there is no longer any protection for the PAC bonds. In fact, in Deal 5, if the support bond is paid off, the structure is effectively reduced to a sequential-pay CMO. In such cases, the schedule is unlikely to be maintained, and the structure is referred to as a busted PAC. The support bonds can be thought of as bodyguards for the PAC bondholders. When the bullets fly-i.e., prepayments occur-it is the bodyguards that get killed first. The bodyguards are there to absorb the bullets. Once all the bodyguards are killed off (i.e., the support bonds paid off with faster-than-expected prepayments), the PAC bonds must fend for themselves: they are exposed to all the bullets. With the bodyguard metaphor for the support bonds in mind, lets consider two questions asked by buyers of PAC bonds:     1. Will the schedule of principal repayments be satisfied if prepayments are faster than the initial upper collar? 2. Will the schedule of principal repayments be satisfied as long as pre- payments stay within the initial collar?