this, a floor, or minimum, is placed on the coupon rate. In many structures, the floor is set at zero. Once a floor is set for the inverse floater, a cap is imposed on the floater. In Deal 3, a floor of zero is set for the inverse floater. The floor results in a cap for the floater of 10%. As noted in Chapter 7, inverse floaters have substantial price volatil- ity, a point that was unfortunately not recognized by some cash or short-duration managers who purchased them in anticipation of a decline in interest rates.   Planned Amortization Class Tranches A planned amortization class (PAC) bond is one in which a schedule of principal payments is set forth in the prospectus. The PAC bondholders have priority over all other bond classes in the structure with respect to the receipt of the scheduled principal payments. While there is no assur- ance that the principal payments will be actually realized so as to satisfy the schedule, a PAC bond is structured so that if prepayment speeds are within a certain range of prepayment speeds, the collateral will generate sufficient principal to meet the schedule of principal payments.1   1For an explanation of how a PAC schedule is created, see Chapter 6 in Frank J. Fabozzi and Chuck Ramsey, Collateralized Mortgage Obligations: Structures and Analysis (New Hope, PA: Frank J. Fabozzi Associates, 1999).     EXHIBIT 9.7 Deal 4: Structure with One PAC Bond and One Support Bond   Tranche Par amount Coupon rate (%)   P (PAC) $243,800,000 7.5 S (Support) 156,200,000 7.5   Total $400,000,000   Payment rules: 1. For payment of periodic coupon interest: Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period. 2. For disbursement of principal payments: Disburse principal payments to tranche P based on its schedule of principal repayments. Tranche P has priority with respect to current and future principal payments to satisfy the schedule. Any excess principal payments in a month over the amount necessary to satisfy the schedule for tranche P are paid to tranche S. When tranche S is completely paid off, all principal payments are to be made to tranche P regardless of the schedule.   The greater certainty of the cash flow for the PAC bonds comes at the expense of the non-PAC classes, called the support or companion tranches. It is these tranches that absorb the prepayment risk. Because