A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Question

Quizplus · Accepted Answer

A principal only (PO) mortgage-backed strip pays only the principal portion of the mortgage payments received from the underlying pool of mortgages. As interest rates decrease, homeowners are more likely to refinance their mortgages, which results in a higher rate of prepayment of the underlying mortgages. This leads to faster repayment of the principal portion of the mortgages, which in turn benefits PO strip holders. Therefore, PO strips are attractive to investors who believe that interest rates will decrease.

A Principal Only (PO) Mortgage-Backed Strip Is Attractive to Investors