Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, April 24, 2008

FINRA Issues Alert on Event-Linked Securities

FINRA issued an alert to inform investors about event-linked securities—financial instruments that allow investors to speculate on a variety of events, including catastrophes such as hurricanes, earthquakes, and pandemics ("cat bonds").

The market for event-linked securities has grown substantially since they were first developed in the mid-1990s. At present, these products are not offered directly to individual investors. But various funds, including mutual funds and closed-end funds, have purchased or are authorized to purchase them on behalf of individual investors. While not widespread, holdings of event—linked securities in these funds—especially high income funds-are also not unusual.

Event-linked securities currently offer higher interest rates than similarly rated corporate bonds. But, if a triggering catastrophic event occurs, holders can lose most or all of their principal and unpaid interest payments.

The Alert advises investors to to find out whether any funds they own invest in cat bonds or other similar event-linked instruments and to consider whether the fund manager has adequate resources and expertise to evaluate the risks of event-linked securities and whether they are a sound investment.

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