Both interest-only strips and principal-only strips sell for substantial discounts to par value.

Question

Quizplus · Accepted Answer

Interest-only (IO) and principal-only (PO) strips are typically sold at a discount to their par value because they are separated from the principal and interest payments of mortgage-backed securities, and their value is derived from the expected cash flows, which are uncertain and subject to prepayment risks.

Both Interest-Only Strips and Principal-Only Strips Sell for Substantial Discounts