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Derivatives




IO


The interest-only (OI) portion of a mortgage loan. Financial institutions, especially mortgage financing firms, separate a series of interest payment from a mortgage loan and issue securities backed by the interest-only portion (known as IOs). In other words, some mortgage pass-throughs can be decomposed into mortgage strips, each consisting of an interest or principal stream, which are interest-only (IO) and principal-only (PO) sold separately. Investors can purchase either or both strips.

An owner of IOs bets that interest rates will go up, whilst the issuer predicts a downward movement in rates.

IOs are classified as a type of interest rate derivatives, as they derive their value from interest payment on a pool of assets.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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