The coverage limit that constitutes the pre-specified maximum level a protection buyer (in a credit-linked instrument/ arrangement such as a collateralized debt obligation, CDO, or  a similar structured product) is paid as protection against losses. It represents the excess of credit losses on the reference portfolio.

A tranche’s notional amount is the difference between the detachment point (U) and the attachment point (L) of a tranche. Attachment and detachment points are expressed as a percentage points of the notional amount. If losses in the underlying basket (reference portfolio) exceed the limit defined by the attachment point the return on the investment for the protection seller decreases, and if losses go beyond the detachment point, the protection seller will have to pay the entire notional amount of the tranche.

For example, if L is 3% and U is 7%, the tranche notional is

Tranche notional amount = detachment point – attachment point

Tranche notional amount = 7% -3% = 4%

When an investor sells protection on the tranche, any realized losses on the tranche will be covered to the benefit of the protection buyer. In return, the protection seller is paid a premium, at regular intervals by the protection buyer, during the life of the transaction. The tranche notional constitutes a prespecified limit to the excess amount of credit losses over a threshold.

Tranche notional amount is also known as a tranche size.