The coverage limit that constitutes the pre-specified maximum level a protection buyer (in a credit-linked instrument/ arrangement such as a collateralized debt obligation, CDO, or a similar structured product) is paid as protection against losses. It represents the excess of credit losses on the reference portfolio.
A tranche’s notional is the difference between the detachment point (U) and the attachment point (L) of a tranche. For example, if L is 3% and U is 7%, the tranche notional is
Tranche notional = detachment point – attachment point
Tranche notional = 7% -3% = 4%
When an investor sells protection on the tranche, any realized losses on the tranche will be covered to the benefit of the protection buyer. In return, the protection seller is paid a premium, at regular intervals by the protection buyer, during the life of the transaction. The tranche notional constitutes a prespecified limit to the excess amount of credit losses over a threshold.
Tranche notional is also known as a tranche size.
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