Catastrophe bond

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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