The Financial Industry Regulatory Authority (FINRA) published an Investor Alert on catastrophe bonds, or 'cat bonds'. Cat bonds pay higher interest rates compared to the equivalent corporate bonds.
However, there are risks involved in holding cat bonds. Investors of a cat bond can lose interest and principal if the catastrophe, to which the bond is linked, occurs. Cat bonds are quite illiquid, the pricing information are generally not available to the public. Cat bonds issuers often enter into swap agreements with third parties that guarantee the payment of interest and principal to investors, so investors are subject to the credit risk of both issuers and third parties.
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