An interest only (IO) (from a fixed-rate mortgage) which allows bondholders to receive a fixed coupon while the amount of change in the weighted average coupon (WAC) is passed on to the IO holders. It is an IO security that is created from the excess interest from underlying mortgages (the amount by which the coupon rate is in excess of the rate an issuer wants to pay on a specific issue- the latter is known as the remittance rate). For example, a 1% IO is stripped off an 8% collateral WAC, and the coupon to the bond classes is 7%. In this case, the change in the collateral WAC will impact the IO coupon to the effect that if the loan with the high coupon prepays, the WAC IO coupon gets lower, and if the loan with the low coupon prepays, the coupon on the WAC IO gets higher.
Finance
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