Dollars and Jens
Wednesday, December 10, 2008
Catastrophe bonds
A catastrophe bond — I presume one of my readers knows this, but the other may not — is a high yield bond, often issued by an insurance company, that can be repudiated in the event of a big insurable loss due to a single event. Of course, as obligations of a company, they are also subject to the credit risk of the company — if there is no qualifying catastrophe, but the company goes into bankruptcy, these bonds lose as much as any other obligation of the company — which is something that often gets ignored in normal times, as the risk of the catastrophe dwarfs the credit risk of the company.

These aren't normal times.

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