Catastrophe bonds

A catastophe bond is typically issued by an insurance company to allievate the financial risks of a particular type of disaster occurring. The insurance company issues a bond for a fixed term that behaves as follows:

If no disaster of a stipulated type occurs over a given interval, a coupon is paid to the bond holders. At the end of the bond's lifetime, pricinpal is repaid to the investors as for an ordinary bond.
If a disaster does occur, the bond holdsers recieve no further futher coupons and principal, and the bond issuer uses the funds to pay their claimants.

Catastrophe bonds may have fixed or floating coupons. Due to their inherent riskiness they carry a low credit rating.

Depending on the bond's terms and conditions, a catastophe bond may either be treated as equity or as a floating rate note. The latter case may be appropriate when the coupon is calculated as some floating reference rate, such as LIBOR, plus a fixed spread.