Loading the player...
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.)

RELATED FAQS
  1. What is a Z bond in a collateralized mortgage obligation (CMO)?

    Learn about Z-bonds, which are the riskiest level of tranches in collateralized mortgage obligations, and understand how ... Read Answer >>
  2. Who bears the risk of bad debts in securitization?

    Bad debts arise when borrowers default on their loans. This is one of the primary risks associated with securitized assets, ... Read Answer >>
  3. What is the difference between a collateralized mortgage obligation (CMO) and a collateralized ...

    Both collateralized mortgage obligations (CMOs) and collateralized bond obligations (CBOs) are similar in that investors ... Read Answer >>
  4. Why do banks securitize some debts, and how do they sell them to investors?

    Learn how and why banks securitize debt, how the securitized debt is sold to other investors, and how different the different ... Read Answer >>
  5. What is the difference between a collateralized debt obligation (CDO) and an asset ...

    Discover the relationships between asset-backed securities (ABS), collateralized debt obligations (CDOs) and mortgage-backed ... Read Answer >>
Related Articles
  1. Investing

    What Are Tranches?

    “Tranche” is a French word that refers to a slice.
  2. Investing

    What are Tranches?

    Tranches often describe specific classes of bonds within a security that hold different degrees of risks and maturities.
  3. Investing

    Understanding Collateralized Mortgage Obligations

    A collateralized mortgage obligation (CMO) is a security consisting of a pool of mortgages organized by maturity and risk.
  4. Personal Finance

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
  5. Investing

    CMO vs CDO: Same Outside, Different Inside

    The concept of collateralizing and structured financing predates the market for collateralized mortgage obligations and collateralized debt obligations.
  6. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  7. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  8. Investing

    Understanding Structured Finance

    Structured finance refers to a complex financial transaction involving large financial institutions and companies with unique needs.
  9. Investing

    The Return of CDOs After the 2008 Financial Crisis

    Learn how the market for CDOs is coming back after the 2008 financial crisis, and understand how the market for these products has changed.
  10. Personal Finance

    How To Become a Mortgage-Backed Securities Analyst

    Specializing in structured or derivative credit products like mortgage-backed securities requires education and prior experience in the mortgage field.
RELATED TERMS
  1. Active Tranche

    A tranche of a collateralized mortgage obligation (CMO) that ...
  2. Tranches

    A piece, portion or slice of a deal or structured financing. ...
  3. Sequential Pay CMO

    A type of collateralized mortgage obligation (CMO) in which there ...
  4. Companion Tranche

    A class of tranche found in planned amortization class (PAC) ...
  5. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
  6. Collateralized Loan Obligation - CLO

    A security backed by a pool of debt, often low-rated corporate ...
Hot Definitions
  1. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  4. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  5. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
  6. Impaired Asset

    A company's asset that is worth less on the market than the value listed on the company's balance sheet. This will result ...
Trading Center