Super PO

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DEFINITION of 'Super PO'

A companion tranche structured as a Principal Only (PO) bond, which receives only principal payments from the underlying mortgages. A Super PO is designed to lend support to planned amortization class (PAC) and targeted amortization class (TAC) collateralized mortgage obligations (CMOs). Super POs are priced at deep discounts to par or face value, and investors eventually receive the full face value through scheduled payments and prepayments.

INVESTOPEDIA EXPLAINS 'Super PO'

The price of a super PO is very sensitive to interest rates, since they significantly influence prepayment rates on CMOs. When interest rates are low, high prepayment rates against the underlying PAC and TAC CMOs can significantly shorten the life of a Super PO, thereby boosting its yield because it is priced at a deep discount. Conversely, when interest rates are high and prepayments are below expectations, the life of the Super PO is extended and its yield is lowered.

RELATED TERMS
  1. Collateralized Mortgage Obligation ...

    A type of mortgage-backed security in which principal repayments ...
  2. Targeted Amortization Class - TAC

    A type of credit derivative that is similar to a planned amortization ...
  3. Tranches

    A piece, portion or slice of a deal or structured financing. ...
  4. Planned Amortization Class (PAC) ...

    A class of tranche in a planned amortization class (PAC) bond ...
  5. Principal Only Strips - PO

    A type of fixed-income security where the holder is only entitled ...
  6. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
RELATED FAQS
  1. What is the difference between a collateralized mortgage obligation (CMO) and a collateralized ...

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  2. Who bears the risk of bad debts in securitization?

    Bad debts arise when borrowers default on their loans. This is one of the primary risks associated with securitized assets, ... Read Full Answer >>
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