how do io and po payments relate? how do senior trenches and junior trenches relate to...

how do io and po payments relate? how do senior trenches and junior trenches relate to each other? How do they pay investors?

Expert Solution

io and po payments-

Principal only strips are fixed income securities and it is spilt into interest only strips that feeds investors the interest from underlying payments.
In principal only strip investors will get linked with mortgage backed securities. They will get benefits from faster repayment option.
In interest only strips investors will receive monthly payment of underlying mortgages. So both io and po payments are related to mortgage payments.

Senior and junior trenches- (pay to investors)

Senior trenche is the highest trench of a security. It pays lowest rate of interest among all the trenches. Because total value of the security is large here.
It generates high bond ratings and more secure than junior trenches due to its repaying ability.
Junior trenche is the lowest trench of a security and it pays highest rate of interest. It is also considered as more risky than others.
Interest is linked with both the trenches whether it is high or low. But both the trenches needs to pay interest according to their value and market volatility.
Investors will get more benefited in case of senior trenches due to lower interest payment and good returns. But junior trenche will provide less risk to the investors during the maturity period.

jeff jeffy answered 1 year ago

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