Posted in Finance, Accounting and Economics Terms, Total Reads: 160
Definition: Catastrophe Call
Catastrophe call is an option of calling back the bonds issued that an issuer of the bond can exercise, if the property or the object for which bond was issued is destroyed. All the disastrous events for which bonds can be called back are mentioned on the bond certificate.
Bonds with Catastrophic call option are generally issued by government bodies to raise funds for the government projects and have high rate of return as compared to other general bonds as the risk associated with catastrophic bond is high and can be called back by the issue, in case of natural calamity and the object is destroyed
Example – If government issues a bond with catastrophic call option to raise funds for the construction of a dam, But due to earthquake, The Dam so build get destroyed and government cannot generate any revenue from the Dam .In this case the government will exercise the catastrophe call option and bond will be called back by the government.