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b) Define what an IO and PO tranche of a MBS are? If prepayments increased sharply what would happen to the value of the IO
b) Define what an IO and PO tranche of a MBS are? If prepayments increased sharply what would happen to the value of the IO and PO? If prepayments slowed sharply what would happen to the value of the IO and PO? c) Suppose the underlying collateral is a 6% level payment mortgage. Suppose, that instead of an 696 IO tranche, your clients have asked for a "floater" and an "inverse floater" IO tranche. Describe, and diagram, how you would create the floater and inverse floater tranches? Can you explain the "rate view" of why someone would want an IO inverse floater? (hint: shape of the yield curve)
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