Definition of tranche

1. one of the classes of debt securities issued as part of a single bond or instrument, from the French word tranche, meaning slice.Securities often are issued in tranches to meet different investorobjectives for portfolio diversification. For example, a Collateralized Bond Obligation is a mortgaged-backed security issued with several different bond tranches issued under a single bond indenture, ranging from a fast-pay bond to a long-term slow-paybond (called the accrual bond, or the Z-bond). Each is paid offconsecutively; as one bond matures, the next is paid down in a steppingstone progression. Each tranche has a different coupon andmaturity, and is identifiable by a different cusip number.
2. separate borrowings or funding commitments under a term loan or other credit facility. Amulticurrency loan will be structured with a U.S.dollar tranche, a deutschemark tranche, and so on. WorldBank advances to a sovereign borrower are structured in tranches.
3. single maturity Certificate of Deposit sold by a lead bank, which is then divided into smaller denominations for placement with investors.
4. gold tranche: first 25% of a member country's contribution to the International Monetary Fund, normally in gold bullion.
5. reserve tranche: deposit balances subject to reserve requirements.

in a Collateralized Mortgage Obligation or a REMIC, a separately priced and marketed ownership interest that entitles the investor to income from a mortgage pool with an expected maturity within specified limits. This is done by assigning each tranche a priority from loan principal repayments. The higher the priority, the shorter the maturity of the tranche. For example, the typical CMO has A, B, C, and Z tranches, representing fast-pay, medium-pay, and slowpay mortgages.

a section of a Mortgage-Backed Security, differentiated by maturity or by risk.

Examples:

• Collateralized Mortgage Obligations (CMOs) were issued, backed by 30-year amortizing mortgages. The CMOs were sold in five-year tranches, with investors getting interest plus the principal back at different intervals based on which tranche they acquired.
• In the sale of CMOs, one investor group acquired the rights to the first 80% of principal retired, another group to the next 10%; the final 10% will go to investors who accepted the highest risk of repayment.