What is an A-note?

What is an A-note?

An A-note describes a slice of the top tranche of an asset-backed security. Asset-backed securities are categorized into tranches for quality, and an A-note is a share of the best available tranche.

Asset-backed securities include Collateralized Mortgage Obligations (see — CDOs), Mortgage-Backed Securities, Credit Card Debt, and other kinds of cash flows, especially related to debt instruments that have been pooled and sold to investors. This shifts the risk from the lending institution to the underwriters and investors in the asset-backed security.

Ratings are given to institutions and to debt issuances based on their creditworthiness, and and these might include AAA, AA, A, BBB, and so on. These pools of debt cash flows are organized into tranches based on the riskiness of the loan and partially the time horizon of the debt obligations.

The classifications of tranches are not quite as specific as the credit ratings of their underlying companies and debt issues: the class A tranche might contain all of the “A” ratings. This is the senior tranche, which is serviced before all of the other ones, and, in fact, sometimes using actual cash flows from the other tranches.

In case of a bankruptcy, the B tranche and C tranche will be serviced after the A tranche, if at all. A-notes are like shares of the class A tranche, and function like bonds.

What are Asset-Backed Securities?
What is a Treasury Note?