What is an equity tranche?
Bankers call the bottom, unrated tranche of a CDO the “equity tranche.” These most junior tranches will earn the highest profits if things go well, but they are the most vulnerable to losses. In the securities industry these equity tranches are referred to as the “toxic waste,” because much of the risk of the loan pool as a whole has been shifted to this tranche. In the case of serious defaults, investors in the equity tranche can lose their entire principal even while other tranches are partly repaid.
