A financial structure/ product that is constructed by isolating the interest payment steam a debt security (debt-backed security) from the repayment stream associated with its principal. An interest only strip (IO strip or I/O strip) is a security that is created solely from the interest payments flowing from a pool of mortgages, Treasury bonds, or other types of debt securities.

It is a strip that represents the non-principal portion of the regular payments on the underlying debt instrument. This constitutes a contractual right to receive a certain portion or all of the interest due on a bond, mortgage loan, collateralized mortgage obligation (CMO), or other interest-bearing securities, or a mix thereof.

The main impetus of creating such strips is to confine performance to the movement in the interest rate environment. The value of these strips is based on the present value of the estimated future cash flows from the underlying debt securities or securitized debts- for example, in the case of securitized receivables this means the present value of the estimated future cash flows from any excess finance charges and past-due fees over the amount of the return paid to security holders, estimated contractual servicing fees and credit losses.

Examples of interest-only strips include interest only bonds (I/O bonds), interest only mortgage backed securities (I/O MBS).