Investments, tenth edition

  Catastrophe Bonds   

Oriental Land Company, which manages Tokyo Disneyland, 

issued a bond in 1999 with a final payment that depended on whether there had been an 

earthquake near the park. More recently, FIFA (the Fédération Internationale de Foot-

ball Association) issued catastrophe bonds with payments that would be halted if terror-

ism forced the cancellation of the 2006 World Cup. These bonds are a way to transfer 

“catastrophe risk” from the firm to the capital markets. Investors in these bonds receive 

compensation for taking on the risk in the form of higher coupon rates. But in the event 

of a catastrophe, the bondholders will give up all or part of their investments. “Disaster” 

can be defined by total insured losses or by criteria such as wind speed in a hurricane or 

Richter level in an earthquake. Issuance of catastrophe bonds has grown in recent years 

as insurers have sought ways to spread their risks across a wider spectrum of the capital 

market.