What do the three tranches mean?

Tranches represent segmented portions of a consolidated pool of financial assets, typically loans or mortgages. These segments are designed to allocate risk and investment returns among various investors.

The concept of tranches stems from the French word "tranche," which translates to "slice." This terminology aptly describes how financial instruments are divided into smaller, manageable pieces.

In the realm of finance, tranches facilitate the distribution of risk by offering investors varying degrees of exposure to the underlying assets. Higher-risk tranches may offer higher potential returns, while lower-risk tranches provide more stability.

Tranches are commonly utilized in structured finance products, such as asset-backed securities (ABS) and collateralized debt obligations (CDOs). These products pool together various loans or mortgages and then divide them into tranches based on credit quality and risk profile.

Each tranche within a structured finance product has its own unique characteristics, including risk level, coupon rate, and maturity date. Investors can choose to invest in tranches that align with their risk tolerance and investment objectives.