Tranche

What it means

One slice of a securitisation with a defined priority of payment, so that losses hit the junior slices before the senior ones.

The exam angle

Subordination is the credit enhancement. Correlation between the underlying loans is what determines whether the senior tranche is really safe.

Where it appears in the syllabus

• Fixed IncomeCFA Level I · exam weight 11–14% · Pricing, yield measures, duration, convexity, credit spreads.
• Credit Risk Measurement & ManagementFRM Part II · exam weight 20% · Merton and reduced-form models, credit VaR, counterparty risk, CVA, CDOs.

Related terms

• Credit spreadThe extra yield a borrower pays over a risk-free benchmark of the same maturity, compensating for default and…
• Interest coverage ratioEBIT divided by interest expense — how many times earnings cover the interest bill.
• Prepayment riskThe risk that borrowers repay mortgage principal early, most often when rates fall and refinancing becomes attractive.
• SecuritisationPooling loans and issuing securities backed by their cash flows, usually through a bankruptcy-remote special purpose…
• Callable bondA bond the issuer may redeem early, usually when rates have fallen.
• ConvexityThe curvature of the price–yield relationship — how duration itself changes as yields move.