Catastrophe bonds, or cat bonds, are financial instruments used by insurance companies and governments to transfer the risk of natural disasters, like hurricanes or earthquakes, to investors. When a catastrophe occurs, the bond's principal is used to cover the losses, providing immediate funds for recovery efforts. If no disaster happens during the bond's term, investors receive their principal back along with interest. These bonds are appealing to investors because they offer higher returns compared to traditional bonds, compensating for the risk of loss. They also help insurers manage their exposure to large-scale disasters, ensuring they can meet their obligations to policyholders.