With the majority of CDOs being backed by mortgages, the principal-only tranche has a known future cash flow, but at a variable rate of return, while the interest-only tranche has both an unknown cash flow and an unknown rate of return on that cash flow.

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Yes, says Strathclyde's Mr Hughes Hallett, but the stock of existing home loans (as opposed to the flow of new ones) is still mostly at a variable rate.

ECONOMIST: s for EMU | The Economist