The CDO tranche spread that is defined by a number of factors, mainly including: attachment point, tranche width, swap maturity, default correlation, portfolio/ underlying collateral credit quality. For example, an attachment point represents the degree of subordination below the tranche. The higher the attachment point, the more defaults a tranche can sustain in terms of principal losses, and the lower the tranche spread.

Likewise, the tranche width also determines its ability to absorb losses: the wider the tranche for a fixed attachment point, the more losses it can cover, and the wider its exposure is expected to be. However, the spread decreases due to a declining incremental risk (associated with the capital structure).

In relation to credit quality of collateral pool, the lower the quality of the underlying assets, measured by spread or rating, the larger the risk of all tranches due to the higher default probability, and as a result, the higher the tranche spread.