Question

Explain why IOs and POs have opposite sensitivities to the rate of prepayments. 

   Explain why IOs and POs have opposite sensitivities to the rate of prepayments.
Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 33, Problem 9 ↓

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IOs are structured to receive only the interest payments from the underlying mortgage loans, while POs receive only the principal payments. As a result, the sensitivity of IOs and POs to the rate of prepayments is opposite. When interest rates decrease,  Show more…

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Explain why IOs and POs have opposite sensitivities to the rate of prepayments.
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