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The tranches of CDOs are named to reflect their risk profiles; like, senior debt, mezzanine debt, and junior debt, depending on the individual product, the actual structure will change. <\/p>\n
When the credit rating is high the coupon rate will be low. in case of loan default, from the collateralized pool of assets, the senior bondholders get paid first. <\/p>\n
Then in the other tranches, according to their credit ratings, the bondholders will follow, finally, the lowest-rated credit will be paid last.<\/p>\n
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Since they have the first claim on the collateral the senior tranches are the safest. <\/p>\n
The senior debt offers lower coupon rates even if they are rated higher than the junior tranches. <\/p>\n
On the contrary, to compensate for their greater risk of default the junior debt offers higher coupons \/more interest, but because they are riskier, they generally come with lower credit ratings.<\/p>\n
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P.S :<\/b><\/p>\n
Senior debt <\/b>– has a higher credit rating, but lower interest rates.<\/p>\n
Junior debt<\/b> – has a lower credit rating, but higher interest rates.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t