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Stripped Securities

Under the instrument, securities are classifies as Interest only (IO) or Principally only (PO) securities. The IO holders are paid had, out to the interest only while the PO holders are paid out of principal repayments only. However, these secunncs are highly volatile by nature and are least preferred hy the investors. Normally, PO securities increase to value when interest rates go down it becomes lucrative to existing mortgagor :In a undertake fresh loans at lower interest rates. As a result of prepayment of mortgages, the maturity period of these securities goes down and investors are returned the money earlier that they anticipated. In contrast, IOs increase in value when interest rates go up because more interest is collected on underlying mortgages. However, in anticipation of a decline in the interest rates, prepayments of mortgages declines and maturities lengthen. These are normally traded by speculators who make money by speculating about interest rate changes.

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