Question

In 2017, the World Bank launched specialized “pandemic bonds” intended to provide
financial support to developing countries facing the risk of a pandemic. The bonds
offered investors high interest payments in return for taking on the risk of losing a
certain amount or all of their money if pandemics occur. In March 2020, the price of
these bonds plunged. Use Supply and Demand in the market for these bonds to
illustrate why the price dropped at that time.

Answer 1

Pandemic bonds were issued in 2017 because at that time there was a very low risk or almost negligible risk so, investors were undertaking those bonds in order to maximize the rate of return because they thought that there will not be any kind of pandemic in the global economy or world so the the higher interest payment led to lower risk for them at that point of time but when the pandemic hit in 2020, the price crashed because these bonds where left with very low value to pay, and it is similar like a junk Bond.

For example, if company issues the junk Bond, there is a high risk of insolvency and it keeps up on providing the higher rate of interest till it becomes insolvent, but once it becomes insolvent the principal gates wiped out, so similarly in this case of pandemic Bond there was almost Nil probability of a pandemic before 2020 and was the pandemic hit in 2020, the payment ability of these bonds were almost insignificant and hence the loss of principal was immense, so it led to crash of these bonds and falling in the prices of these bonds, so that, it is reflecting the event which is played out and contingency upon which the bond was based and hence the prices plunged.