Event-Linked Bond

Event-linked bonds are like regular bonds, except with a dark, pessimistic temperament...the Eeyores of the fixed income world.

Also known by the far more disconcerting name of catastrophe bonds (or the gentler "cat bonds," which is only disconcerting if you happen to hate cats), event-linked bonds are fixed income securities that pay investors, unless some horrible event happens.

Usually, they are like a regular bond. You buy it and it pays you regular principle and interest payments. However, unlike a regular bond, the event-linked ones have a stipulation that if some event causes physical or economic catastrophe, the securities won't pay out the full amount.

Usually, the catastrophes envisioned are things like hurricanes or earthquakes. Insurance companies use them to limit their risk, since they are the ones on the hook when catastrophes occur.

An insurance company would raise money by issuing the cat bonds. Then, if something horrible occurs (meaning the insurance company would have to start covering its clients' losses), at least the insurance company doesn't have to worry about all those pesky cat bond payments.