DEFINITION of 'Active Tranche'

An active tranche is the portion of a collateralized mortgage obligation (CMO) that is currently receiving principal payments. The principal payments are passed through to the CMO tranche's investors.

BREAKING DOWN 'Active Tranche'

A tranche becomes the active tranche during the period when it is receiving (and paying out to investors) principal payments as per the schedule, in addition to interest. A tranche is a section of a CMO that is scheduled to receive principal payments at a particular time. While interest is paid on all tranches of a CMO when it is first issued, principal payments on each tranche are made according to a set schedule that is defined in the CMO prospectus. Generally, the later the tranche is scheduled to start receiving principal payments, the more risky the tranche is considered to be. After an active tranche in a CMO receives the last principal payment, it is retired. The next tranche then becomes the active one. The process continues until all tranches in the CMO are retired.

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RELATED FAQS
  1. What is a tranche?

    A tranche is a security, like a collateralized mortgage obligation, that can be split up into smaller pieces and subsequently ... Read Answer >>
  2. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
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