Is it correct to say “The value of the IO increases as interest rate increase”?
yeps!
No. Eventually, the rate to discount the cash flows will be so high that value decreases.
yes less prepayment - more principal outstanding - more interest paid?
and the value of a PO decreases…
To a certain point and then it decreases. The higher discounting rate (interest rates) start to outweight the interest payments at very high rates.
Wow. You guys are fast.
So the answer is not necessarily
For CFAi purposes yes.
Niblita75 Wrote: ------------------------------------------------------- > No. Eventually, the rate to discount the cash > flows will be so high that value decreases. Yeah, it’s only good to a certain point, right? The value increasing, I mean. Like you said, it starts to screw you after a while.
Yea the curve looks like an awkward upside down letter U a 2 year old would try to draw.
hmmm…
“2 year old would try to draw” - that is hilarious nibs.!!! hahahaha
Value of POs increase when interest rates go down 
I can see the curve flattening, but why does the value actually begin to increase? I would think even as interest rates are rising, you can invest your payments at that high rate as well. I can’t quite grasp why the value of the IO eventually begins to fall
^ I don’t think that is right
LanceTX Wrote: ------------------------------------------------------- > I can see the curve flattening, but why does the > value actually begin to increase? I would think > even as interest rates are rising, you can invest > your payments at that high rate as well. I can’t > quite grasp why the value of the IO eventually > begins to fall What are you referring to? Posts are getting crossed.
To find the value of the IO you take all the cash flows and discount them back. The fact that you can reinvest at a higher rate does not matter I think.
Why do IO’s eventually lose value as interest rates increase?
I agree. The value of any bond is just the PV of future cash flows.