Define Tranches In Simple Terms
A Tranche is a segment of a pooled collection of securities, typically debt vehicles, that are split up by risk, time to maturity, or other characteristics to be appealing to different investors.
The tranches of a larger asset pool are defined in transaction documentation and are assigned a different class of notes and different credit ratings.
What are Tranches In Finance?
An example of a financial product that may be divided into tranches is a mortgage back security, or MBS.
An MBS is made up of several mortgage pools with varying degrees of risk and times to maturity.
Therefore, the MBS may be divided into tranches in order to offer slices of the portfolio to different investors.
For example, the portfolio may have tranches with one year, two year, five year, and twenty year maturities, all with varying yields.
Example of Other Securities
Examples of other securities that may be split up into tranches are bonds, mortgages, loans, and insurance policies.