Risk-based securities that pay high
interest rates and provide insurance companies with a form of
reinsurance to pay losses from a catastrophe such as those caused by a
major hurricane or earthquake. In the event of such pre-defined loss, the issuer's obligation to re-pay the principal and/or interest is either greatly reduced, deferred or forgiven.
CAT bonds allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. Attractive to investors because of their high interest and lack of relation to the stock market or economic conditions, catastrophe bonds offer high yield.