Final answer:
A CAT bond allows the issuer to skip interest payments if certain catastrophic natural events occur, thereby causing significant losses. This type of bond is an investment in disaster risk, contrasting with other bonds where interest payments are expected unless the issuer defaults. Bonds are debt securities similar to bank loans but require convincing numerous investors.
Step-by-step explanation:
The type of bond that permits its issuer to forego paying interest payments if certain natural events cause significant losses is known as a CAT bond (Catastrophe bond). CAT bonds are a type of insurance-linked security designed to raise money in case of a catastrophe such as a natural disaster. If the specified event occurs, the bond issuer is not required to pay interest or repay the principal to the bondholders. Conversely, if the event does not occur, the bondholders receive interest payments and the return of principal at maturity.
A bond is debt security where the issuer owes the holders a debt and, depending on the terms, is obligated to pay them interest or a coupon. This similarity to a bank loan, with the major difference being the need to persuade a number of separate bondholders rather than a single bank, shows the dynamic of bond issuance.
Issuing bonds is a strategic way to raise capital for projects or operations without going to a bank for a loan. Investors' perceptions of the value of bonds fluctuate with interest rates, reflecting the risk and potential return on investment. The inability of bond issuers to meet payment obligations can prompt bondholders to force bankruptcy, but they do face investment risks such as interest rate changes and issuer default.