An interest only (IO) security that pays a coupon inversely related to market rates (i.e., it moves in the opposite direction of interest rates), instead of paying a coupon corresponding to the interest payments homeowners (mortgagors) actually make. For example, the coupon might be 20% minus four times the LIBOR rate (or any money market rate). So if that rate is 3%, the inverse IO would pay:
20%- 4 x 3% = 8%
The higher the market rate, the lower the coupon, and vice versa.
It is known for short as an IIO.
