Bonds: Don't let these "cats" scratch you

June 6, 2008

They're known in the financial industry as "catastrophe bonds," and they're one of those obscure investments that may be lurking in some of your mutual funds.

They're known in the financial industry as "catastrophe bonds," and they're one of those obscure investments that may be lurking in some of your mutual funds. Holders of these non-investment-grade bonds-also known as junk or high-yield bonds-stand to lose most or all of their principal and unpaid interest if certain triggering events occur in specified regions. That's exactly what happened to investors who held "cat" bonds tied to hurricane risk in the US, right after Hurricane Katrina hit, says the Financial Industry Regulatory Authority, a nongovernmental regulator of securities firms. To protect yourself from cat-bond risk, FINRA recommends you look at the prospectus and statement of additional information (SAI) for each mutual fund you own, under Investment Objectives or Investment Policies. There you'll find out whether your fund is authorized to invest in "event-linked securities" and, if so, how much.