Question 10.7: What are structured notes and stripped securities? What unus...

Structured notes usually are packaged investments assembled by security dealers that offer customers flexible yields in order to protect their customers’ investments against losses due to inflation and changing interest rates. Most structured notes are based upon government or federal agency securities.

Stripped securities consist of either principal payments or interest payments from a debt security. The expected cash flow from a Treasury bond or mortgage-backed security is separated into a stream of principal payments and a stream of interest payments, each of which may be sold as a separate security maturing on the day the payment is due. Some of these stripped payments are highly sensitive to changes in interest rates. In particular, stripped securities offer interest-rate hedging possibilities to help protect an investment portfolio against loss from interest-rate changes.