<<< Back to Index 

Catastrophe Bonds

What is Catastrophe bonds?

Catastrophe bonds (also known as cat bonds) are risk-linked securities that transfer a specified set of risks from a sponsor to investors. They were created and first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridge earthquake.

What is an insurance linked security?

Insurance-linked securities, or ILS, are essentially financial instruments which are sold to investors whose value is affected by an insured loss event. As such the terminsurance-linked security encompasses catastrophe bonds and other forms of risk-linked securitization.

What is an indexed bond?

Daily inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation or deflation on a daily basis in terms of the official Daily CPI or monetized daily indexed unit of account like the Unidad de Fomento in Chile and the Real Value unit of Colombia. They are thus designed to hedge the inflation risk of a bond. The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780.  The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market. The inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.

What is a put bond?

A put bond is a bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value.

What is an index linked bond?

An index-linked bond is a bond in which payment of income on the principal is related to a specific price index - often the Consumer Price Index. This feature provides protection to investors by shielding them from changes in the underlying index. The bond's cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return.