What it is:
Catastrophe calls are provisions in bonds if the item built or produced by the is destroyed.that allow the to the
How it works/Example:
Let's assume ABC Town wants to build a new toll road, but it doesn't have the fund the interest and payments. If the from the toll road is insufficient, ABC Town might not be able to make timely interest and principal payments.
Let’s say ABC Town those , and now it has to make interest and principal payments for, say, the next 30 years.
Now let’s say that two years after the road is built, an earthquake occurs and the road is demolished. If the revenue bonds have a catastrophe call provision, ABC Town can the bonds, meaning it can pay off the bonds immediately instead of having to make 28 more years of interest payments. This is good for ABC Town, which avoids the added expense of all those useless interest payments. But it is bad for the people who bought the ABC Town bonds -- they got their money back (the town paid off the debt), but they’re going to miss out on getting 28 years of interest payments.
Why it matters:
Catastrophe call provisions are common in bonds to compensate for these added risks., which are municipal that are issued to specific projects that generate their own . Revenue-bond holders generally have no claim to the project’s assets (i.e., they cannot repossess the toll road if it does not generate the promised interest and payments). may also have catastrophe call provisions. Thus, bonds generally a higher than general