Reference no: EM132179165

Question - As well as flights, QANTA also offers insurance against natural disasters. The Qatari government decides to obtain insurance from QANTA to protect their 2022 World Cup football stadiums from damage caused by an earthquake. If an earthquake were to occur this would cause billions of dollars of damage to the football stadiums. In order to ensure that QANTA can afford to cover the cost of damage from an earthquake, QANTA issues a catastrophe debt security to investors with the following terms:

QANTA borrow $10 billion on the initiation date. The $10 billion is enough for QANTA to be able to cover the costs of damages should an earthquake occur.

The nominal interest rate associated with the catastrophe bond is the Reserve Bank of Australia cash rate (as at July 31 2018) plus a margin of 3.50%. This interest rate is compounded monthly and is fixed from the initiation date.

A minimum interest payment of $1 million is due in each financial year.

The maturity date of the debt security is four years.

Assume that today is July 31 2018 (initiation date). Also assume the following payments are made by QANTA:

Monthly repayments of $250 million at the end of each month beginning on June 30 2019 until September 30 2021 (inclusive).

October 31 2021: a single payment of $250 million.

January 31 2022: a single payment of $500 million.

Based on the information about the debt security and QANTA repayments your job is to determine the outstanding value of the catastrophe debt security on the maturity date. Hint: you do not need to create an amortization schedule to solve this question.