MSG Team's other articles

12994 Cryptocurrencies: A Primer

Cryptocurrencies have taken the world by storm. In the past few years, the cryptocurrency market has transformed into a mainstream financial market. Cryptocurrencies have come a long way from the time when they were used only by individuals who were digitally aware, valued their privacy, and were not comfortable with the central bank’s control over […]

10580 The ABC of Peer To Peer Credit

The financial world has not witnessed much innovation since the 2008 meltdown. This is because any innovation in this sector is scrutinized for possible systemic risks. However, during this period peer to peer lending has evolved. The industry is still in a pretty infant stage. However, in 2015, peer to peer credit accounted for over […]

9261 Extrapolation: The Root Cause behind the Bubbles

They say that there is no smoke without fire. This is true of many things and one of them is asset bubbles. It is true that all asset bubbles begin their initial upward movement based on some genuinely good positive news. However, somewhere along the way, the amount of smoke far exceeds the underlying fire […]

12278 Advantages of Defined Contribution Plans

The past couple of decades has seen tectonic shifts in the way pension plans are being funded. Investors all over the world have been encouraged to shift from defined benefit pension plans to defined contribution pension plans. In the past, defined contribution plans were not considered to be pension plans at all. Instead, defined contribution […]

10033 Investment Banks and Governments

Governments all over the world regularly engage in high-value financial transactions. They often need the help of experts in order to do so. Since investment banks have a lot of experience in mediating high-value transactions, they are often appointed by the governments to be their advisors on these matters. In this article, we will have […]

Search with tags

  • No tags available.

The recent coronavirus pandemic has fundamentally changed the way in which individuals, organizations, and even nations manage their finances.

Most people around the world now know about the devastating effects that a pandemic can have on the overall economy. This is the reason that they want to be financially prepared for such emergencies.

Many different types of financial products have come into existence in order to support this idea. Pandemic bonds are one such type of product that is marketed to fixed-income investors.

It is important to note that pandemic bonds have not been created as a result of the coronavirus pandemic. Such bonds existed at least a decade before the covid-19 pandemic took place.

For instance, the world bank had floated pandemic bonds after the Ebola fever pandemic broke out in Africa almost a decade ago. In this article, we will have a closer look at what pandemic bonds are and how they function.

What are Pandemic Bonds?

Pandemic bonds have been created by World Bank and World Health Organization to help finance the response to global pandemics.

Whenever global pandemics occur, developing countries do not have the funds required to meet the increased expenses. Hence, global bodies such as World Bank and World Health Organizations have to fund the response of these countries towards the pandemic. In order to do so, they require a lot of funds at their disposal.

The pandemic bonds have been created in order to provide these funds to global organizations. In essence, pandemic bonds work as an insurance policy. This means that private investors can buy pandemic bonds from these international bodies that issue such bonds. They need to deposit their cash upfront which will be held by the issuer till the time the bonds are in existence.

Just like all other bonds, pandemic bonds also pay a coupon rate. Sometimes, the coupon rates are significantly higher than the interest rates. Higher rates are offered to compensate for the higher risk which is being undertaken by the investors.

Now, if a pandemic does occur during the duration of the bond, then the investors stand to lose part or all of their principal payment. On the contrary, if a pandemic does not occur during the said timeframe, then the entire principal will be refunded to the investors. Since investors could lose a large amount of their capital, investment in pandemic bonds is often considered to be risky.

The indenture of these bonds contains an elaborate set of rules which need to be met before the bonds are considered to be triggered and the funds at the disposal of the investors are routed to fund the pandemic response in developing nations.

Advantages of Pandemic Bonds

Pandemic bonds have several advantages. Some of these advantages have been explained in the article below:

  • Less Reliance on Aid: Firstly, the pandemic bonds help mount a better response to the crisis situation. This is because developing countries do not have to rely on the benevolence of developed nations. Instead, the funding can be sourced from private investors. Such types of bonds are quite helpful in ensuring that adequate funds are made available to the poorest of the poor countries.

  • Funds Available at Cheaper Rates: Developing countries do not have the financial wherewithal required to raise funds in order to meet their obligations which may arise as a result of the pandemic.

    If developing countries try to raise money from the markets, they will have to pay very high-interest rates.

    The involvement of global bodies such as the World Bank as well as the uncertain nature of the event allows developing countries to purchase insurance at a lower cost.

    The premium paid can be said to be negligible in comparison to the costs which would have to be incurred in the event that a pandemic does take place.

  • Cheap Way to Diversify: There are many investors as well as investor bodies which who want to make investments in pandemic bonds. This is because such bonds have very little correlation to credit risk, market risk, interest rate risk, and such other risks which are faced by other bonds.

    Hence, these bonds are a wonderful addition to an already existing portfolio of fixed income securities since they help to stabilize the returns over a longer period of time.

  • Reduces the Possibility of a Pandemic: Pandemic bonds are an effective way of keeping the market’s attention on the possibility of a pandemic.

    Since a lot of private players invest a lot of money in these bonds, they also keep an eye on the probability of a pandemic actually occurring as well as the research which is being done to avoid the pandemic from actually taking place.

    The active participation of the financial markets draws the attention of the necessary players. This, in turn, drastically reduces the probability of a pandemic taking place.

The bottom line is that pandemic bonds are an important financial instrument. They allow global organizations as well as developing nations to respond to pandemics in a timely and cost-effective manner. They also make it possible to fund these responses independently and without the need for any charitable contributions.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Covered Bonds

MSG Team

Conditional Pass-Through Covered Bond

MSG Team

Common Restrictive Covenants in Fixed Income Securities

MSG Team