A tranche (specifically, a CMO tranche) that is designed to protect investors from prepayment risk. … The support tranche receives extra premium (higher yield) in view of the greater risk exposure in the cash flows. It is also known as a companion tranche.

How are tranches paid?

Tranches are paid sequentially starting from the senior tranches to the junior tranches. Senior tranches have a higher bond credit rating than junior tranches, although these ratings fluctuate once the debt is issued. … Subordinated debt will absorb losses before senior debt does.

How do loan tranches work?

Tranches are a collection of securities that are separated and grouped based on various characteristics and sold to investors. Tranches can have different maturities, credit ratings, and yields—or interest rates. … For example, several baskets of loans could be offered that have varying interest rates.