Interest-only strip


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Related to Interest-only strip: IO Strips

Interest-only strip (IO)

A security based solely on the interest payments from a pool of mortgages, Treasury bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop, and the value of the IO falls to zero.

Interest Only Strip

A derivative security whose cash flow derives exclusively from interest payments on various debt securities. That is, the underlying asset of an interest-only strip is interest paid on debt securities, rather than the debt securities themselves. Many interest only strips are backed by mortgage interest, but some are also backed by Treasury securities and other debt securities. Interest-only strips are derived from bonds whose coupons are legally separated, or "stripped", from the bonds themselves.
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Entity A's accounting for the loan sale with servicing and interest-only strip receivable retained are calculated as follows.
Pursuant to paragraph 14 of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, certain MBSs that are subject to substantial prepayment risk, such as interest-only strips, cannot be classified as held-to-maturity securities.
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6) The first is credit-enhancing, interest-only strips.
Since these residuals, called retained interest-only strips, are reported on a bank's balance sheet, they overstate the bank's book value if they are overvalued.