PO/IO positive, remember, college, shorter, where

jbaldyga

Don't think this was asked:

Reviewing what are typically lightly-tested topics (but, who knows).

"Hedging MBS": my notes say principal-only (PO) bonds have high positive duration, interest-only (IO) high negative duration - varies depending where you are on the curve (e.g. for PO's: is negative at shorter rates, positive at medium-to-long-term rates).

Why would PO's have positive duration? I vaguely remember this concept... not sure if was L1/L2, or maybe my college bond elective.

Valores

POs are just like zero coupon bonds. High duration because as rates decline, people prepay(refinance) and you get your full principal amount earlier than expected, so you get extra reinvestment interest. This is high positive duration.

IOs are negative duration because as rates go down, people pre-pay, meaning you lose your investment completely. That's HIGH negative duration.