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Unfunded Tranche


A synthetic CDO tranche in which the CDO investor doesn’t pay the notional amount of the tranche at inception, that is no money changes hands at the beginning of the transaction. If a default occurs, the principal will be written down. Instead, the protection seller (investor) receives a specific spread and is required to pay out in the event that a default in the reference portfolio affects the seller’s own tranche.

An unfunded tranche is particularly issued if the investor is highly rated and therefore its making of contingency payments is taken for granted.



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