Extension Spread

A reduced premium paid by the sponsor of a cat bond during an extension period.

Should a bond’s maturity date be extended and involved parties enter into an extension period, the sponsor must still pay a premium, although this is at a reduced rate when compared to the risk premium corresponding to the risk spread.

An extension period typically occurs when a catastrophe bond is nearing its maturity but the sponsor wants to ensure the collateral remains available to it as its losses develop and rise towards the attachment point.