In relation to synthetic CDOs (collateralized debt obligations) where credit exposure is gained through credit default swaps (CDSs), it is an unfunded tranche that is bought by an investor without paying a purchase price. The CDO notes for the unfunded class constitutes a CDS in which the investor, as a credit protection seller, receives payments (CDS premium) and pays the CDS issuer, i.e., the protection buyer, for any credit losses suffered by the CDO portfolio.

In terms of the CDO structure, unfunded tranche is a class A tranche , i.e., a super-senior tranche (it involves no payment of a purchase price). The other tranches follows the usual waterfall of seniority and payment schedule, with payment of a purchase price for the CDO securities.

Unfunded tranches involves writing a CDS on the portfolio of CDO collateral. The holder of a class A tranche makes no principal investment, while receiving premium on a periodical basis for the protection provided against risk of loss on the CDO collateral.