What is a CDO tranche?
The CDO securities are divided and sold in “tranches” (French for “slices”), each having a different claim on the flow of cash from the loan pool: The senior tranche gets a AAA rating because it has the first call on cash flows. Successively more junior tranches (rated AA to BB or lower) have a subordinate claim on the cash flows, bringing higher risk and a higher expected return. The bottom slice gets paid last, and it is not rated at all.
