However, ratings can fluctuate after the debt is issued and even senior tranches could be rated below investment grade (less than BBB).

Tranches with a first lien on the assets of the asset pool are referred to as senior tranches and are generally safer investments.

The senior tranches get paid back first, the subordinated tranches later.

Losses will first affect the equity tranche, next the junior tranches, and finally the senior tranche.

In contrast, senior tranches are usually unfunded as the risk of loss is much lower.

In some cases, investors utilize leverage and hope to profit from the excess of the spread offered by the senior tranche and their cost of borrowing.

In addition, the underwriter was generally expected to provide some type of secondary market liquidity for the CDO, especially its more senior tranches.

Foreign countries, such as China and Brazil, as well as private investors, would be invited to invest in the senior and mezzanine tranches.

The subordinated tranches function as protective layers of the more senior tranches.

If an asset in the pool defaults, losses thus incurred are allocated bottom up (from the most junior to the most senior tranche).