The Credit Cliff: A cat bond can cause investors rapidly to lose most or all of their principal and any unpaid interest if a triggering event occurs. The high yield will not make investors whole if the triggering event actually occurs.

Can you short catastrophe bonds?

CAT bonds have short maturities of one-to-five years, which reduces the likelihood of a payout to the insurance company, including loss of principal.

How are catastrophe bonds priced?

A formula for the spread of Catastrophe Bonds is derived within a risk-pricing framework that deals with both systematic and non-systematic risk. The formula is as follows: Spread = (EL)^(1/ρ) Here, EL is the Expected Loss as a percentage and ρ ≥ 1, is a Risk Aversion Level (RAL).