A collateralized debt obligation (CDO) that has its pool of underlying debt obligations sliced up into tranches (CDO tranches). The cash flows embodied in interest and principal payments in sequence are based on seniority of all relevant tranches in the structure. Each tranche is characterized by a different principal, interest, maturity and default risk.
Tranches CDOs are instrumental for managing and fragmenting the risks associated with pooled assets. For example, a special purpose vehicle (SPV) might have a host of credit-linked assets, and create a tranched CDO in order transfer the credit risk to the holders/ investors of the multiple CDO tranches.
A tranched CDO belongs to the broad category of f synthetic securitization transactions/ synthetic securitization products. It is also a type of tranched credit derivatives.
