Event-Linked Bond


DEFINITION of 'Event-Linked Bond'

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".

BREAKING DOWN 'Event-Linked Bond'

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.

  1. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked ...
  2. Reinsurance

    The practice of insurers transferring portions of risk portfolios ...
  3. Act Of God Bond

    A bond issued by an insurance company, linking principal and ...
  4. Insurance Derivative

    A financial instrument that derives its value from an underlying ...
  5. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
  6. Rule Of 72

    A shortcut to estimate the number of years required to double ...
Related Articles
  1. Home & Auto

    Prepare Your Finances To Handle Natural Disasters

    Use these easy tips to protect your financial interests from natural disasters.
  2. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  3. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  4. Insurance

    Event-Linked Bonds: Competing Against A Catastrophe

    These debt instruments can blow new wind into your portfolio, but only if you can handle the risk.
  5. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  6. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  7. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  8. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  9. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  10. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  1. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  2. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  3. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  4. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  5. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center