MSG Team's other articles

9972 What is Internal Rate of Return (IRR) ?

The Internal Rate of Return (IRR) is another very important metric that can be used to determine whether or not a company must invest its resources in a project. If the company does decide to invest its resources in all the projects then the IRR can help us understand what should be the priority of […]

11548 Third-Party Risks in an Infrastructure Project

In the previous few articles, we have come across the various types of risk which are present in an infrastructure project. We have discussed the risk of cost overruns as well as the risks of revenue delays and everything in between. However, all the risks we discussed were directly applicable to the infrastructure company or […]

10505 Open Banking – Meaning, Need, Advantages and Disadvantages

The field of commercial banking is undergoing many technological changes simultaneously. Open banking is one such technological change. Open banking is unique in the sense that this change has been initiated by regulators in most parts of the world. Generally, technological changes are adopted by commercial banks themselves with a view to increasing their productivity […]

9560 How a Cram Up Works in Bankruptcy?

In most bankruptcy cases, senior classes of creditors have more power as compared to junior classes of creditors. This means that the re-organization plans are generally meant to satisfy the needs of senior classes of creditors. However, there are some cases in which companies give importance to the needs of junior stakeholders as well. There […]

9496 Green Pensions

The amount of money that is managed by pension funds is huge. Since pension funds have large amounts of money which they can use to invest in the market, they are known for being trendsetters in the investment community. It is for this reason that pension funds are being used by governments all over the […]

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