What is a tranche?

By Investopedia Staff AAA
A:

"Tranche" is actually a French word meaning "slice" or "portion". In the world of investing, it is used to describe a security that can be split up into smaller pieces and subsequently sold to investors.

Mortgage-backed securities (MBS), such as a collateralized mortgage obligation (CMO), can often be found in the form of a tranche. These securities can be partitioned based on their maturities and then sold to investors based on their preferences.

For example, an investor might need cash flows in the short term and have no desire to receive cash in the future. Conversely, another investor could have a need for cash flows in the long term but not right now. To take advantage of this selling situation, an investment bank could split some security or asset, such as a CMO, into different parts so that the first investor receives the early cash flows of a mortgage and the second investor has the right to receive the latter cash flows. With the creation of these tranches, a security or issue that was once unattractive may enjoy some new found marketability.

Dividing a financial product into parts can certainly increase its salability. As an investor, keep in mind that there is a vast assortment of investment vehicles at your disposal.

(For more investment ideas, check out 20 Investments Every Investor Should Know.)

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