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A debt obligation with many characteristics similar to the fixed rate side of an index amortizing swap. In the case of the note, the principal is repaid according to an amortization schedule linked to a specific index (usually LIBOR). Index amortizing notes are usually designed to behave similarly to a collateralized mortgage obligation with an embedded prepayment option. As market interest rates increase and, presumably mortgage prepayment rates decline, the maturity of an index amortizing note will extend. As rates decline and mortgage prepayment rates increase, the average life of an index amortizing note will contract. In common with many mortgage-backed instruments, the prepayment characteristic linked to interest rates gives the holder of the note negative convexity. See Amortization.
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