A PO is a 'principal only' MBS and an IO is an 'interest only' MBS. As prepayments increase, the following happens: choose one)
A) Both the PO and IO become more valuable.
B) The PO becomes more valuable and the IO becomes less valuable.
C) The PO becomes less valuable and the IO becomes more valuable.
D) Both the PO and IO become less valuable.

Question

Quizplus · Accepted Answer

When prepayments increase, the principal of the mortgage-backed securities (MBS) is paid off faster, which increases the value of the Principal Only (PO) securities because they receive their principal back sooner. However, this reduces the amount of time interest payments can be collected, thereby decreasing the value of the Interest Only (IO) securities.

A PO Is a 'Principal Only' MBS and an IO