PPT Slide
Stripped mortgage backed securities
They are created by altering the distribution of principal and interest from
a pro rato distribution to an unequal distribution. For example, all the
interest is allocated to the IO class (interest only) and all the principal
to the PO class (principal only).
• PO securities are purchased at a substantial discount from par value.
The faster the prepayments, the higher the yield the investor will
• IO investors want prepayments to be slow. This is because when
prepayments are made, the outstanding principal declines, and less
dollar interest is received.