EVENTLINKED 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".

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.