Event-Linked Bond

A A A

DEFINITION

A type of bond whose interest and principal payments are determined based on the non-occurrence of certain events, such as earthquakes and hurricanes, which are outlined in the prospectus of the bond issue. Event-linked bonds helps insurance and reinsurance companies obtain funding and at the same time mitigate risks against major claims or catastrophe. If an event - usually referred to as a "trigger event" - occurs, then the holder of the bond could see a loss of all future interest payments or a loss of most principal.

Also known as "catastrophe bonds" or "cat bonds".

INVESTOPEDIA EXPLAINS

The popularity of these bonds is expected to increase as home and asset values climb and the strength and frequency of natural disasters increase. Event-linked bonds came on the scene in the mid-1990s as insurance companies and reinsurance companies found themselves looking for ways to offset risks associated with major events, such as damage caused by a major hurricane. In fact, Hurricane Andrew, which struck Florida in 1992 and caused over $20 billion in related claims, is said to have been a major reason behind the existence of these bonds.


RELATED TERMS
  1. Act Of God Bond

    A bond issued by an insurance company, linking principal and interest to a company's ...
  2. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked and meant to raise ...
  3. Reinsurance

    The practice of insurers transferring portions of risk portfolios to other parties ...
  4. Insurance Derivative

    A financial instrument that derives its value from an underlying insurance index ...
  5. Treasury Direct

    The online market where investors can purchase federal government securities ...
  6. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default beginning in ...
  7. Event Risk

    1. The risk due to unforeseen events partaken by or associated with a company. ...
  8. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations ...
  9. Collateralized Loan Obligation ...

    A security backed by a pool of debt, often low-rated corporate loans. Collateralized ...
  10. Surrender Period

    The amount of time an investor must wait until he or she can withdraw funds ...
Related Articles
  1. The Advantages Of Bonds
    Investing

    The Advantages Of Bonds

  2. The Bond Market: A Look Back
    Mutual Funds & ETFs

    The Bond Market: A Look Back

  3. Event-Linked Bonds: Competing Against ...
    Insurance

    Event-Linked Bonds: Competing Against ...

  4. Preparing Your Finances From Natural ...
    Home & Auto

    Preparing Your Finances From Natural ...

  5. Bond Basics Tutorial
    Retirement

    Bond Basics Tutorial

  6. Herding Tendencies Among Analysts
    Investing Basics

    Herding Tendencies Among Analysts

  7. Has Stock Bias Affected Your ETF Asset ...
    Bonds & Fixed Income

    Has Stock Bias Affected Your ETF Asset ...

  8. Understanding Leveraged Buyouts
    Fundamental Analysis

    Understanding Leveraged Buyouts

  9. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  10. Where's The Market Headed Now?
    Fundamental Analysis

    Where's The Market Headed Now?

comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center