UURS CHAT IulILe v esc Osaka Insurance Company (OIC) concentrates its underwriting in Japan. The company is concerned thatt an earthquake will cause extensive damage. affordable reinsurance is available due to the quake risk. OIc decided to issue $300 million (maturity value) of "Yankee Bonds" (U.S. dollar- denominated bonds) for sale to U.S. investors. mature in 3 years and each $1,000 (maturity value) bond will carryy a 14 annual coupon 7.4 but under 7.9 on the Richter Scale occurs in Japan during a given year, the company will only pay 60 percent off that year's interest. or greater magnitude occurs in Japan, no interest is payable that year. earthquakes of 7.4 or greater occur, then the full interest payment must be made by OIC. Limited Financial managers at These catastrophe ("cat" ) bonds will The bond indenture specifies that if at least one earthquake larger than If an earthquake of 7.9 If no The maturity value ($1,000) is payable in 3 years regardless of whether any earthquakes occur. earthquakes exceeding 7.4 in Japan in any given year, a 40 percent chance in any given year of an earthquake between 7.4 and 7.9 in Japan, and a 10 percent chance in any given year of an earthquake of 7.9 or greater magni tude. Seismologists believe there's a 50 percent chance of no Woul Cumpany Save a. How much in interest payments (total dollars) would OIC save in any year in which an earthquake occurs that is between 7.4 and 7.9 on the Richter Scale? (1 point) b. If inves tors requi re a 10 percent return on these bonds, and they are aware of the earthquake probabilities and reduced interest payment contingency; what is the most they should be willing to pay for an OIC Yankee Cat bond when issued? (2.5 points) UURS CHAT IulILe v esc Osaka Insurance Company (OIC) concentrates its underwriting in Japan. The company is concerned thatt an earthquake will cause extensive damage. affordable reinsurance is available due to the quake risk. OIc decided to issue $300 million (maturity value) of "Yankee Bonds" (U.S. dollar- denominated bonds) for sale to U.S. investors. mature in 3 years and each $1,000 (maturity value) bond will carryy a 14 annual coupon 7.4 but under 7.9 on the Richter Scale occurs in Japan during a given year, the company will only pay 60 percent off that year's interest. or greater magnitude occurs in Japan, no interest is payable that year. earthquakes of 7.4 or greater occur, then the full interest payment must be made by OIC. Limited Financial managers at These catastrophe ("cat" ) bonds will The bond indenture specifies that if at least one earthquake larger than If an earthquake of 7.9 If no The maturity value ($1,000) is payable in 3 years regardless of whether any earthquakes occur. earthquakes exceeding 7.4 in Japan in any given year, a 40 percent chance in any given year of an earthquake between 7.4 and 7.9 in Japan, and a 10 percent chance in any given year of an earthquake of 7.9 or greater magni tude. Seismologists believe there's a 50 percent chance of no Woul Cumpany Save a. How much in interest payments (total dollars) would OIC save in any year in which an earthquake occurs that is between 7.4 and 7.9 on the Richter Scale? (1 point) b. If inves tors requi re a 10 percent return on these bonds, and they are aware of the earthquake probabilities and reduced interest payment contingency; what is the most they should be willing to pay for an OIC Yankee Cat bond when issued? (2.5 points)
