Event-Linked Bond

AAA

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.

RELATED TERMS
  1. Act Of God Bond

    A bond issued by an insurance company, linking principal and ...
  2. Catastrophe Bond - CAT

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

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

    A financial instrument that derives its value from an underlying ...
  5. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
  6. Net Premium

    The expected present value of a policy’s benefits less the expected ...
Related Articles
  1. Preparing Your Finances From Natural ...
    Home & Auto

    Preparing Your Finances From Natural ...

  2. The Advantages Of Bonds
    Investing

    The Advantages Of Bonds

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

    The Bond Market: A Look Back

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

    Event-Linked Bonds: Competing Against ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center