interest-only


Interest-Only

1. Describing a derivative in which the underlying asset is future interest payments on a pool of mortgages or other debt obligations. Interest-only derivatives are highly exposed to prepayment risk as homeowners who pay off their mortgages or loans early do not generate any more interest payments.

2. Describing a non-amortized loan. During the payment period of interest-only loans, one only pays on the interest that accumulates but not on the principal. At the end of the loan's term, the entire principal is due. An example is an interest-only mortgage, in which one makes interest payments for the term of the mortgage and then refinances in order to pay the principal at maturity.

interest-only (IO)

Of or relating to a derivative mortgage security scheduled to receive interest only from a pool of mortgages. An IO derivative security has no par value, and the owner of the security can lose money because of mortgage prepayments that reduce or eliminate interest payments. Compare principal-only.