Index Amortizing Note - IAN

A type of structured note or debt obligation where principal is repaid for a time interval that increases or decreases in accordance with an amortization schedule connected to a particular index, such as the LIBOR (London Interbank Offered Rate), the CMT (Constant Maturity Treasury), or the mortgage interest rate.

An Index Amortizing Note's maturity period extends when interest rates increase. As interest rates decline, the maturity period shortens. Index Amortizing Notes are structured to reduce the holders' interest rate risk. Despite the ability to alter the notes' maturity periods, the IAN has a specified maximum maturity date by which time any remaining principal is paid.

The maturities of index amortizing notes often act in a manner that is similar to those of collateralized mortgage obligations (CMOs) that have embedded prepayment options. As mortgage prepayment rates decline in response to increasing market interest rates, the maturity of an IAN will lengthen; as mortgage prepayment rates increase in response to decreasing market interest rates, the maturity of an IAN will shorten. As with other mortgage-backed instruments, an IAN's connection to interest rates creates a negative convexity exposure.


Investment dictionary. . 2012.

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