TRUE FALSE One of the factors taken into account by purchas

(TRUE / FALSE) One of the factors taken into account by purchasers of an IO tranche is the purchaser’s expectation of weighted average life (WAL) of the IO bond.

Solution

One of the factors taken into account by purchasers of an IO tranche is the purchaser’s expectation of weighted average life (WAL) of the IO bond.

The above statement is false.

The weighted-average life (WAL) of the bond is the average time of the principal repayment of the bond. It does not take interest payment into account. While interest only (IO) bond requires the purchaser to deals with interest only that comes from the principal for some specific time period after that interest and principal both are paid. Therefore the purchaser’s expectation of weighted average life (WAL) of the IO bond is not a factor that is taken into account by purchasers of an IO tranche.