Interest only (IO) refers to a type of securitisation security that only pays interest payments to investors. The principal amount of the IO security is not repaid until the end of the securitisation term.
IO securities are typically issued by securitisation vehicles that hold a pool of interest-only loans. These loans typically have a fixed interest rate and a term of 5-10 years.
There are a number of applications for IO securities in securitisation. One application is to provide investors with a predictable stream of income. IO securities typically pay a fixed interest rate, which can provide investors with a predictable stream of income.
Another application of IO securities in securitisation is to reduce the risk of default. IO securities do not have any principal repayments, which means that the securitisation issuer does not have to worry about borrowers defaulting on their loans. This can reduce the risk of default for the securitisation.
Here are some other applications of IO securities in securitisation:
- To make securitisation transactions more attractive to investors
- To reduce the cost of borrowing for the originator
- To increase the liquidity of the securitisation market
IO securities can be a useful tool for both investors and originators. For investors, it can help to provide a predictable stream of income and to make securitisation transactions more attractive. For originators, it can help to reduce the cost of borrowing and to increase the liquidity of the securitisation market.