A fraction of the total collateral pool (pool of underlying collateral in a securitized structure). It represents the amount of money that the originator is required to pay per annum (usually on a quarterly basis) in order to insure to a respective tranche. This amount is calculated as the spread multiplied by the tranche size.

In a synthetic CDO, the tranche carrying the highest credit risk (i.e., equity tranche) entails that, in case of no default, the holder (investor the tranche/ that is, the protection seller) receives, every quarter, a fixed premium rate (i.e., the tranche spread) on the tranche’s principal amount, which is set as a specific percentage (e.g., 4%) of the total notional principal. In the case of default, this holder is obliged to pay the protection buyer an amount equal to the losses from default up to 4% of the total notional principal. Accordingly, the tranche’s principal amount is reduced to correspond to the default losses.

Likewise, an investor in a mezzanine tranche will bear losses between, for example, 4% and 8% of the total notional principal, while investors in the other tranches (senior tranche and the super-senior tranche) have to assume losses at higher percentages (e.g., between 8% and 12%, 12% and 18%, and 18% and 30% of the total notional principal, respectively.

In a standard CDO contract, the attachment point and detachment point for each tranche converge for the entire contract period. This entails that an originator makes the same payments every period (if the tranche experiences no default).