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Stripped Mortgage-Backed Security (Stripped MBS)

Definition - What does Stripped Mortgage-Backed Security (Stripped MBS) mean?

Stripped mortgage-backed securities are mortgage-backed securities that are divided into two "strips." These strips consist of an interest strip and a principal strip. Investors can choose which strip they would like to invest in. In the context of the law, mortgage holders are legally obligated to repay the mortgageā€”that is where the cash flow comes from for the stripped mortgage-backed securities.

Justipedia explains Stripped Mortgage-Backed Security (Stripped MBS)

Stripped mortgage-backed securities are an alternative to other types of mortgage-backed securities that offer the principal and the interest in a combined format. These types of securities can be significantly influenced by current interest rates. Interest rates often change, and they can dramatically impact how much a borrower will have to pay in interest. This, in turn, can affect how much a potential investor would be paid in cash flow from the security.

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