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.

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