A synthetic CDO tranche in which the CDO investor pays the notional amount of the tranche at inception, and the funds are kept in a collateral account to be invested in risk-free instruments or low-risk securities. If a default occurs, the principal will be written down. In return, the investor receives a resetting floating rate, e.g., LIBOR, plus a specific spread that is commensurate with the riskiness of the investment.
A funded tranche is particularly issued if the investor is not highly rated and therefore there is a possibility that the investor would be unable to make contingency payments.
