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Principal Only (PO) Obligation
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A special purpose CMO tranche created from a mortgage pool, POs pay holders only from the principal payments made by mortgagees. The value of an early payment PO can increase if interest rates fall and mortgagees exercise their prepayment options at a faster than anticipated rate. Conversely, if rates rise, principal payments may be much slower than anticipated and the value of early payment POs will decline. Various PO tranches will have different characteristics in different environments. See also Collateralized Mortgage Obligation (CMO), Companion Collateralized Mortgage Obligation, Interest Only (IO) Obligation, Planned Amortization Class (PAC) Bond, Tranche, Mortgage-Backed Securities, Stripped Mortgage-Backed Security (SMBS).
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