Tranche
A tranche is a portion of a structured financing issue with its own rights to cash flows and exposure to losses. Senior and junior tranches can have different payment priorities, expected yields and credit risks under a contractual waterfall. The priority can provide credit support to senior investors, but it cannot remove the risk of severe losses, structural defects or weak collateral. Analyse the underlying pool, assumptions and legal terms rather than relying only on a rating or label.
Worked example
A vehicle issues $80 million of senior notes and $20 million of junior notes. Under the stated rules, initial losses are allocated to the junior class before the senior class, while receipts are distributed according to the agreed waterfall.
Common mistake
Assuming senior means risk-free or that all structured issues use the same loss-allocation rules.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |