Tranche
A portion of a larger financing deal, each with its own conditions.
Detailed Description
Tranche
What is a tranche?
A tranche is a portion of a financial instrument, like a loan or security, characterized by different risk levels, interest rates, and maturities.
What types of tranches exist?
There are senior, mezzanine, junior (subordinated), and equity tranches, each with varying risk levels and returns.
How do tranches help manage risk?
Tranches allow lenders and investors to divide total debt into smaller components, enabling them to choose segments that align with their risk tolerance.
What is the primary risk associated with tranches?
The primary risk is credit risk, which involves the possibility of borrower defaults affecting cash flows to tranche holders.
Can you provide an example of tranches in action?
In mortgage-backed securities, a bank may create senior, mezzanine, and junior tranches, with payment priorities affecting investor risk exposure.