The tranche of a CDO (collateralized debt obligation) that has its own risk characteristics and loss-absorption priority (seniority). There are four types of tranches, literally: senior, mezzanine, subordinate and equity). Losses are covered first by the classes that rank low (equity or junior tranches).

From every layer or tranche, a specific issue of securities is created (out of the underlying pool of collateral), varying from a very risky equity debt to a relatively risk-free senior debt. A CDO tranche is specified by its attachment and detachment points as percentages of the total pool of collateral. Attachment point represents the lower tranche boundary, while the detachment point marks the upper tranche boundary. The CDO tranche loss arises when the cumulative collateral loss exceeds the tranche’s attachment point.

The attachment point is the minimum of pool-level losses at which a given tranche becomes liable for losses. On the other hand, the detachment point reflects the amount of pool losses that would completely wipe out the tranche.