Catastrophe bond

A high-yield bond whose full payout is dependent on a given natural disaster not happening.

This has the effect of providing insurance-like financial protection to the bond issuer. If the particular catastrophe happens, the issuer pays less - or in the extreme case nothing at all - on the bond.

The investor enjoys a higher yield, in exchange for accepting the catastrophe risk effectively transferred from the issuer.

Also known as a Cat bond.

See also

• Bond
• ILS
• Climate change: testing the resilience of corporates’ creditworthiness to natural catastrophes