What Is a Catastrophe Call?

A catastrophe call is a call provision in municipal bonds that permits the instrument to be redeemed early in the case of a catastrophic event that significantly affects the project financed by the issue. The bond’s indenture will identify potential disasters, which are frequently callable at par.
It’s a special redemption clause intended to compensate for revenue lost from a municipal bond issued to support the building of a community facility that later suffers substantial damage, reducing its capacity to produce money to repay the bond. A catastrophe call, on the other hand, is a protective mechanism for investors in a collateralized mortgage obligation (CMO) that is triggered if defaults or prepayments on the underlying mortgages threaten to disrupt the investment’s cash flow.