In relation to tranches of collateralized debt obligations (CMOs) and similar structures, it denotes the amount of interest defined by the excess of collateral coupon rate over a tranche coupon rate:
Excess interest = collateral coupon rate – tranche coupon rate
The excess interest is paid to the interest-only tranche (IO tranche).
The excess interest is an input in the calculation of a tranche’s notional amount (i.e., the amount on which the interest payments will be determined).
