It stands for principal only tranche; a tranche, part of an IO/ OP structure, that receives only the principal repayment on the underlying securitized debt/ collateral. The total amount of all principal repayments does not change (as it is not exposed to default risk). However, timing of repayment is uncertain, whereby exposing the tranche to a repayment risk.
In the case of a mortgage, a PO tranche only receives the principal payments from an underlying mortgage, and it is part of a structure with a corresponding IO tranche that only receives the interest payments from that mortgage.
The outstanding balance of a PO tranche helps determine the interest payable on the underlying debt (as defined on the interest only (IO) tranche of the structure). The PO securities are priced at a deep discount to face value.
A PO tranche is also known as a zero-coupon tranche.
