This document discusses interest-only (IO) and principal-only (PO) mortgage-backed securities. IOs receive interest payments and POs receive principal payments from underlying mortgage pass-throughs. IO prices are very sensitive to prepayment speeds, as faster prepayments reduce interest payments, while PO prices benefit from faster prepayments. Investors use IOs and POs to take positions on or hedge prepayment risk. The market for stripped IOs and POs structured into trusts is an active part of the agency MBS market. However, pricing IOs and POs is challenging due to their sensitivity to prepayment assumptions.
This document discusses interest-only (IO) and principal-only (PO) mortgage-backed securities. IOs receive interest payments and POs receive principal payments from underlying mortgage pass-throughs. IO prices are very sensitive to prepayment speeds, as faster prepayments reduce interest payments, while PO prices benefit from faster prepayments. Investors use IOs and POs to take positions on or hedge prepayment risk. The market for stripped IOs and POs structured into trusts is an active part of the agency MBS market. However, pricing IOs and POs is challenging due to their sensitivity to prepayment assumptions.
This document discusses interest-only (IO) and principal-only (PO) mortgage-backed securities. IOs receive interest payments and POs receive principal payments from underlying mortgage pass-throughs. IO prices are very sensitive to prepayment speeds, as faster prepayments reduce interest payments, while PO prices benefit from faster prepayments. Investors use IOs and POs to take positions on or hedge prepayment risk. The market for stripped IOs and POs structured into trusts is an active part of the agency MBS market. However, pricing IOs and POs is challenging due to their sensitivity to prepayment assumptions.
This document discusses interest-only (IO) and principal-only (PO) mortgage-backed securities. IOs receive interest payments and POs receive principal payments from underlying mortgage pass-throughs. IO prices are very sensitive to prepayment speeds, as faster prepayments reduce interest payments, while PO prices benefit from faster prepayments. Investors use IOs and POs to take positions on or hedge prepayment risk. The market for stripped IOs and POs structured into trusts is an active part of the agency MBS market. However, pricing IOs and POs is challenging due to their sensitivity to prepayment assumptions.
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The key takeaways are that IOs and POs are created by stripping interest and principal payments from agency pass-throughs and allocating them to separate classes, allowing investors to take leveraged views on prepayments. They also have unusual duration and convexity characteristics that appeal to different types of investors.
Interest-only (IO) and Principal-only (PO) mortgage-backed securities are created by stripping the interest and principal payments from Agency pass-throughs and distributing these payments to separate classes. This allows investors to express a "leveraged" view on prepayments relative to the underlying collateral.
The cash flows of an IO or PO are more sensitive to prepayment projections than the underlying collateral, so the investment risks are similar but magnified. IO/PO prices are also highly exposed to interest rates, curve shape, prepayment model forecasts, mortgage spreads, and volatility.