Business | Economy

Fact file: Bond and Sukuk

While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt

  • By Nadia Saleem, Staff Reporter, Gulf News
  • Published: 00:00 December 14, 2009
  • Gulf News

  • Image Credit: Gulf News

While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al Istithmar).

Sukuk can be structured alongside different techniques. While a conventional bond is a promise to repay a loan, Sukuk constitutes partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al Istithmar).

What is a Sukuk?

Islamic fixed-income securities structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Sukuk ("legal instrument, deed, cheque") is the Arabic name for a financial certificate, but commonly refers to the Islamic equivalent of bond.

What is a bond?

A certificate issued by a government or a public company promising to repay borrowed money at a fixed rate of interest at a specified time. A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity.

Who issues bonds?

Bonds are issued by public authorities, credit institutions, companies and institutions in the primary markets. The most common process of issuing bonds is through underwriting.

Who underwrites bonds?

In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. However government bonds are instead typically auctioned.

Primary issuance is arranged by bookrunners who arrange the bond issue, have the direct contact with investors and act as advisors to the bond issuer in terms of timing and price of the bond issue.

Different types of bonds:

Fixed rate bonds have a coupon that remains constant throughout the life of the bond. Floating rate notes have a variable coupon that is linked to a reference rate of interest, such as LIBOR. Inflation linked bonds, in which the principal amount and the interest payments are indexed to inflation.

Other indexed bonds, for example equity-linked notes and bonds indexed on a business indicator (income, added value) or on a country's GDP. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities, collateralised mortgage obligations and collateralised debt obligations.

Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors.

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