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This question is about what a finance advisor does.
What is a tranche in finance?
A tranche in finance is a pooled collection of securities, typically debts, that are divided up according to risk or other factors in order to be considered marketable to a number of different investors.
Every piece of a structured or securitized product is just one of several similar securities offered at one time. However, these pieces or tranches have varying factors related to rewards, risks, and maturities. This helps them have a wide range of appeal from different investors.
The term "tranche" is a French word that means portion or slice. Tranches are most commonly found in asset-backed securities (ABS) or mortgage-backed securities (MBS). They are also regularly found in securitized products like CDOs and CMOs.
Tranches are a somewhat recent development in the world of structured finance. They were brought about because of the increased use of securitization to divide up oftentimes risky financial-based products that have steady cash flows to then make sales on these portions to other possible investors.
There are two types of tranches, senior tranches, and junior tranches. Senior tranches hold the first lien on assets, meaning they are in line to be repaid first in the event of a default. Junior tranches hold the second lien, or in some cases, no lien at all.
Here are some examples of financial products that can be divided into tranches:
Mortgages
Insurance policies
Loans
Bonds
Other forms of debt
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