where the floater is a linear function of the index, with unit slope and a given offset or spread. In the example, the 8% coupon of the '8 off 6' is cut into a floater coupon of: (indicating a 0.40%, or 40, spread in this example) The inverse formula is simply the difference of the original premium fixed rate coupon less the floater formula. In the example: The floater coupon is allocated to the premium fixed rate tranche principal, in the example the $75mm '8 off 6', giving the floater tranche of '$75mm 8% cap + 40 LIBOR SEQ floater'. The floater will pay LIBOR + 0.40% each month on an original balance of $75mm, subject to a coupon cap of 8%. The inverse coupon is to be allocated to the PO principal, but has been generated of the notional principal of the premium fixed rate tranche (in the example the PO principal is $25mm but the inverse coupon is notionalized off $75mm). Therefore, the inverse coupon is 're-notionalized' to the smaller principal amount, in the example this is done by multiplying the coupon by ($75mm /$25mm) = 3. Therefore, the resulting coupon is: In the example the inverse generated is a '$25mm 3 times levered 7.6 strike LIBOR SEQ inverse'. Other structures Other structures include Inverse IOs, TTIBs, Digital TTIBs/Superfloaters, and 'mountain' bonds. A special class of IO/POs generated in non-agency deals are WAC IOs and WAC POs, which are used to build a fixed pass through rate on a deal. Attributes of IOs and POs Interest only (IO) An interest only (IO) tranche may be carved from collateral securities to receive just the interest payments from a pool of mortgages. IO holders are only entitled to the actual amount of interest paid, as it is paid, on a pool of mortgage collateral. Since mortgages allow for prepayment, there is no assurance how much interest will actually be paid. Once all an underlying debt is paid off, that debt's future stream of interest is terminated and the IO expires with no terminal value. Therefore, IO securities are annuity-like securities but the amount and timing of payments is uncertain as payments are based on the total interest payments paid on all the underlying mortgages in the collateral pool. Generally speaking, mortgage prepayments tend to slow down as general interest rates increase. Therefore, IOs prices generally increase as interest rates increase