Quick Definition

Tranches are portions or segments of debt or security offerings that are structured to divide risk or other characteristics in ways that are appealing to different investors.

Examples

• 1A mortgage-backed security (MBS) divided into various tranches based on the risk of default, with higher interest rates offered to tranches with higher risk.
• 2A corporation issuing bonds in tranches, where each tranche has a different maturity date, catering to investors with different time horizons.
• 3Structured investment vehicles (SIVs) using tranches to allocate different levels of capital protection and yield, attracting both conservative and aggressive investors.
• 4A collateralized debt obligation (CDO) segmented into senior, mezzanine, and equity tranches, each with varying degrees of risk and return.

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