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".

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
Trading Center