A tranche is a piece or a part of something, usually money. An installment of a loan is a tranche. The noun tranche comes from the French word trancher, "to cut," which should help you remember that a tranche is a portion of something, not the whole thing.

Pooled financial securities are generally broken into three tranches: senior, mezzanine, and junior. Each tranche has a different level of risk and, therefore, a different level of return. Senior tranches have the least risk and the lowest returns while junior tranches have the highest risk and the highest returns.

Tranches are typically used in the credit and debt markets in a process called securitization, which divides up various types of debt instruments and packaged into funds to be sold to investors who want to earn the interest rate on the debt.

Senior tranches have a higher bond credit rating than junior tranches, although these ratings fluctuate once the debt is issued. Tranches with a first lien on underlying assets are also referred to as senior tranches and are safer investments, whereas those with a second lien are known as junior tranches.