Chasing the Dying

WSJ explains:

Billions of dollars in corporate bonds sold to retail investors come with an unusual provision that could be used to generate a fast profit. There's just one catch: Investors must team up to buy the bonds with someone who is about to die.

American International Group Inc., Bank of America Corp., Caterpillar Inc., General Electric Co.'s GE Capital unit and other major U.S. companies often issue bonds with what is known as a survivor's option.

In a little-known practice, investors can recruit a terminally ill person and together they can scoop up these bonds on the open market at a discount. When the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit.

Companies have typically included the macabre provision as a way to allay fears among ordinary individual investors—elderly couples who might worry that one spouse could die before the bonds mature, possibly exposing the survivor to a loss.

But the market's turmoil has made this arrangement more attractive for professional investors, since some bonds are trading at a steep discount. Legal and financial experts say there is nothing to prevent investors from buying the bonds with a dying relative or even a stranger who is terminally ill.