Waterfall & Tranching Basics

Yield & Returns · Lesson 5.3

A waterfall sets the order in which cash from a pool of assets is paid out. Interest and principal go to the senior tranche first, then to the mezzanine tranche, and whatever is left goes to the junior or equity tranche. Losses run the other way: the junior tranche absorbs them first, and senior holders take losses only after the tranches below them are used up. That is why one loan pool can offer a lower-yield senior token and a higher-yield junior token backed by the same collateral. The extra yield pays for the extra risk.

Wally’s note: junior gets paid more because junior gets hit first

The same collateral can carry very different risk. Check which tranche you are buying.

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