Stripped securities offer the following advantages):
A)they reduce informational asymmetry by partitioning the securities' cash flows based on the degree of information sensitivity.
B)they help to better manage interest rate risk.
C)they help to better manage default risk.
D)only b and c
E)only a and b

Question

Quizplus · Accepted Answer

Stripped securities separate the cash flows of a security into different components, such as principal and interest. This partitioning of cash flows based on the degree of information sensitivity reduces informational asymmetry, which is an advantage of stripped securities.

Furthermore, by separating the principal and interest cash flows, stripped securities can be used to manage interest rate risk, as investors can choose which component they want to invest in based on their interest rate outlook.

Therefore, options A and B are both advantages of stripped securities, making choice E the best answer.

Stripped Securities Offer the Following Advantages)