What type of payments do Principal-only (PO) tranches receive?

Principal-only (PO) tranches specifically receive scheduled principal repayments and prepayments. This structure allows investors to receive only their share of the principal amount of the underlying loan or mortgage pools as it is repaid. Unlike other types of tranches that may receive interest payments, PO tranches focus solely on the principal component of the cash flows.

The mechanics of a PO tranche means that as borrowers pay down their mortgages, those payments flow directly to the PO tranche investors. Because PO tranches do not receive any interest payments, they tend to be structured in a way that exposes investors to greater risk in terms of prepayment speeds, meaning if the underlying loans are paid off quicker than expected, the investors may receive their principal back sooner than anticipated.

In contrast, other options such as interest payments based on notional principal or variable payments dependent on market conditions do not accurately describe the payment structure for PO tranches. Therefore, the nature of these payments being strictly principal repayments correctly identifies what PO tranches receive.