The Theory and Practice of Profit Sharing Investment
Foundations of Islamic Finance series
Edited by Mohamed Ariff, Munawar Iqbal and Shamsher Mohamad
Chapter 11: Bond Pricing Practices in the Sukuk Market in Malaysia
Meor Amri Ayob 11.1 INTRODUCTION Conventional bonds are issued as pure debt instruments to fund investments by individuals, corporations – meaning legal personae – agencies of governments and governments in what are highly developed conventional bond markets with four centuries of experience in funding borrowers’ demand for cash. The total value of the international bond market is estimated to be about US$67 trillion, while that of national bond market capitalizations is about US$87 trillion, and the bonds are traded in a large number of markets. The investor (the funder) receives a fixed interest payment during the economic life of a bond, and the initial fund is paid back at the end of the maturity period as being equal to the par value of the bond at the time of the issue. Variations to fixed coupon payment bonds are found in variable interest-rate bonds benchmarked to some basic market rates such as minimum lending or the London Interbank Offer Rate (LIBOR). The conventional debt market is essentially one that follows this structure with some minor modifications such as the pure discount bonds or bills or convertible bonds. The conventional bond market is very old, and recorded history shows that bonds have been issued by kings for thousands of years. The five factors in such a bond issue are: (i) a fixed face value; (ii) a payment of a sum of money at regular intervals to investors as coupons, be it a fixed sum or variable if tied to a benchmark; (iii)...
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