An interest-only bond (tranche) that receives the excess interest (difference between the coupon rate on the underlying tranches and the coupon payment on the collateral) on each underlying tranche’s remaining balance. The excess interest is no more being paid to the CMO residual (equity class). The holder of a structured IO is entitled to receive varying strips of coupons from different tranches depending on the structured IO structure. Structured interest only can be used to hedge positions in mortgage-backed securities (MBS) because when interest rates increase, the value of MBSs drops but the value of a structured interest only increases (for long positions), and vice versa (for short positions).
It is also called a structured IO or notional interest-only.
