Tranche
A slice of a securitisation with its own place in the queue for losses or for principal. Subordination is what lets ordinary loans support a high rating.
Where you will meet it
Tranche appears in 9 learning outcomes on the CFA syllabus. A few of them:
- Work out earnings per share on a basic and a diluted basis
“Basic earnings per share divides income available to common shareholders — net income less preferred dividends — by the weighted average number of common shares outstanding, weighted by the portion of the year each tranche was outstanding.”
- Explain how securitisation works and the role of the special purpose entity
“The benefits are cheaper funding for the originator and access for investors to loan exposures they could not otherwise buy, in tranches matched to their risk appetite.”
- Contrast analysing corporate debt for credit risk with the analysis that securitized debt requires
“The waterfall, credit enhancement and tranche seniority determine who absorbs losses.”
- Explain how structured products can stand in for corporate bonds in a credit portfolio
“Tranching redistributes credit risk: senior tranches carry high ratings and little default risk, while mezzanine and equity tranches absorb losses first and pay higher yields.”
Practise it
Practise tranche until it is automatic: questions that explain every wrong option.
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