catastrophe bond

Popular Terms
Asset based security (ABS) which pays an high interest rate (coupon) at the time of issue but which falls upon the occurrence of a stated type of catastrophe (such as an earthquake or hurricane of a certain magnitude that hits a specified geographical region). Floated usually by a government agency or insurance company, it may have treasury bonds as the underlying assets or reinsurance premiums as the underlying income stream. Catastrophe bonds are traded on the New York Catastrophe Exchange and serve as the instrument through which capital markets can participate in sharing the risks of natural disasters.
Also called act of God bonds. See also catastrophe equity put option.

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