A class or category of bonds contained within a larger bond offering, usually
posing varying degrees of risk to an investor. For example, a bond could be
issued with two separate tranches, each containing its own unique risk characteristics.
Tranche "A" might be structured so that none of the bond principal is at risk,
thus earning an investment grade rating from one or more of the rating agencies.
Tranche "B" may be designed to carry additional risk (e.g., the principal is
fully or partially at risk) and would therefore not qualify for an investment
grade rating. Separate tranches are created to conform to the needs of individual
investors. A catastrophe bond with only one tranche (and therefore one risk
profile) will attract only those investors for which that risk profile is attractive.
However, by structuring multiple tranches, an issuer can significantly broaden
a bond's appeal to investors.