Catastrophe bonds have a distinct risk profile compared with traditional bonds. This interactive simulator demonstrates how CAT bond portfolios perform under different scenarios using Monte Carlo analysis.
Disclaimer
Note: This simulator is a copy of the one found in the Riskvest article on $ILS NYSE Offering. This simulator makes very simplistic assumptions (outlined below) and is intended to be a simple tool to understand the risk profile of a portfolio of CAT bonds, not a single investment.
Simple CAT Bond Portfolio Simulator
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Initial Investment:
$9,000,000
Expected Annual Income:
$882,000
Expected Weekly Income:
$16,962
Weekly Default Risk:
0.048%
Simulation Assumptions
- All CAT Bonds are independent: Clearly this is not true, as many cover similar geographies, but it simplifies calculations to a binomial distribution.
- All Bonds are returning the average coupon rate
- Risk Free rate is 3.5%
- Each bond investment are equal lots
- A Triggered CAT Bond results in 100% of principle lost
- Average EL is 2.5%, and thus chance of default 2.5%
- Failed CAT Bonds pay 50% of their coupons