In business finance, tranches are essentially slices of a larger financial instrument, like a loan or a pool of assets. Imagine cutting a pie into sections – each section is a tranche.

Each tranche can have different characteristics, like:

  • Risk – Some tranches are considered riskier than others.
  • Return – Riskier tranches typically offer higher interest rates.
  • Maturity – Tranches may have different payback timelines.

This allows financiers to create products that appeal to a wider range of investors, with varying risk appetites. It’s a common strategy in products like mortgage-backed securities.