In a revenue bond, what is a catastrophe call provision?
What will be an ideal response?
In revenue bonds there is a catastrophe call provision that requires the issuer to call the entire issue if the facility is destroyed. More information on the retirement structure of municipal bonds including call provisions is given below.
Municipal bonds are issued with one of two debt retirement structures, or a combination. Either
a bond has a serial maturity structure or it has a term maturity structure. A serial maturity structure requires a portion of the debt obligation to be retired each year. A term maturity structure provides for the debt obligation to be repaid on a final date. Usually, term bonds have maturities ranging from 20 to 40 years and retirement schedules (sinking fund provisions) that begin 5 to 10 years before the final term maturity. Municipal bonds may be called prior to the stated maturity date, either according to a mandatory sinking fund or at the option of the issuer. In revenue bonds there is a catastrophe call provision that requires the issuer to call the entire issue if the facility is destroyed.
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