Recall that in a stripped CMO, the IO (interest only) tranche receives the interest portion of the payments from underlying mortgage contracts, and the PO (principal only) tranche receives the principal portion. An investor, who is facing a downward-sloping spot rate curve across all maturities and believes in the Pure Expectations Theory of the term structure of interest rates, would prefer to invest in which tranche of a stripped CMO? Hint: Think about how future changes in interest rates affect mortgage prepayment/refinancing, and how prepayment/refinancing affects the interests and principals to be paid on mortgages.

Group of answer choices

IO (interest only)

PO (principal only)