Answer: Equity tranche; Mezzanine tranche; Senior tranche

## Explanation Asset-backed securities are divided into tranches to distribute risk according to the following structure: ### Risk Hierarchy: - **Equity Tranche (Riskier)**: This is the riskiest tranche as it is the **first to absorb losses** when there are defaults on the underlying assets. Often referred to as the 'first loss' piece, this tranche takes the initial hit before any other tranches are affected. - **Mezzanine Tranche (Medium Risk)**: This tranche is less risky than the equity tranche but riskier than the senior tranche. It **absorbs losses only after the equity tranche has been completely wiped out**. It serves as a buffer between the equity and senior tranches. - **Senior Tranche (Least Risky)**: This is the safest tranche as it is the **last to absorb losses**. It is protected by both the equity and mezzanine tranches, which must be completely exhausted before the senior tranche experiences any losses. ### Correct Order: From the riskiest to the least risky: **Equity tranche → Mezzanine tranche → Senior tranche** This tranching structure allows investors to choose their preferred risk-return profile, with equity tranche investors receiving higher potential returns for taking on more risk, while senior tranche investors accept lower returns for greater safety.

Author: Tanishq Prabhu