Time value of money, if you have a PO whereby you expect to recieve $100 in one year, and instead you recieve that $100 payment in 0.5 years, it's worth more in PV terms because you are discount the cash flows over a shorter period of time.
Got it. By the way, the text also says that IO security may not realize the amount invested even if the interest rates are held to security if rates fall. How could this be the case? They can lose the original amount even if they held to maturity
If it's a floating rate IO, and rates drop, less cash is recieved.
If i buy an IO that pays me 3M Libor every quarter for 1 year, and I pay $10 for this and LIBOR goes to zero the next day for the remainder of the year, i recieve 0 cash and therefore don't even realize the $10 i invested.