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Catastrophe Bond - CAT
What does it mean?
A high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either deferred or completely forgiven.
In Other Words...
Advantages of CAT bonds are that they are not closely linked with the stock market or economic conditions and offer significant attractions to investors. For example, for the same level of risk, investors can usually obtain a higher yield with CAT bonds relative to alternative investments. Another benefit is that the insurance risk securitization of CATs shows no correlation with equities or corporate bonds, meaning they'd provide a good diversification of risks.
Related Links
Catastrophe - Bonds Come of Age - An article outlining the benefits of CAT bonds to issuers and investors, as well as an example of an actual CAT bond offering.
Bond Basics Tutorial - What are bonds and do they belong in your portfolio? Get all the answers in this comprehensive tutorial.
Related Terms
Bond | Reinsurance | Risk
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