A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an equal basis to two classes of securityholders.

Question

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A stripped mortgage-backed security is created by separating the interest and principal payments from the underlying mortgages into separate securities, called interest-only (IO) and principal-only (PO) securities. These securities are then sold to investors who either want to receive only the interest payments or only the principal payments, rather than a combination of both.

A Stripped Mortgage-Backed Security Is Created by Distributing the Principal