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Sukuk and Bonds


What are Sukuk and Bonds?
Sukuk and Bonds are financial instruments issued by Governments or Corporates to raise money from investors for a period of time.

Commonly, over this period, Sukuk and bonds distribute periodic coupon payments (either at a fixed or floating rate). At the end of this period, known as maturity, issuers pay back the money raised from investors, known as principal.

 

Sukuk and Bonds vs. Stocks:

  • When a company issues stock, it is selling partial ownership in exchange for cash. However, when an entity issues Sukuk or Bonds, it is borrowing cash with an agreement/promise to repay the borrowed amount at maturity.
  • Stocks are issued by companies only, whereas Sukuk and Bonds are issued by both companies and governmental entities.
  • Sukuk and Bond prices are considered less volatile compared to equities, while the return on equities could potentially be higher than that of Sukuk and bonds.
  • Sukuk and Bonds commonly promise fixed returns as well as the repayment of the principal, while stocks does not commonly promise fixed returns, rather, it depends on the company’s performance.
  • Sukuk and Bond holders have the priority of repayment in the event of company liquidation or bankruptcy.

 

The main differences between Sukuk and Bonds:

  • Sukuk are Sharia-compliant financial certificates through which investors gain partial ownership on an issuer’s assets until maturity. While Bonds are financial certificates through which investors lend money to the issuer, indicating an obligation for repayment at maturity.
     
  • Bondholders receive regular interest payments, while Sukuk holders receive a share of the profit generated by the underlying asset.

 

What are Sukuk and Bonds used for?

  • By issuers:
    Raising capital to fund operations or development plans.
     
  • By investors:
    1. An investment opportunity to receive periodic coupon payments and potential price uplift.
    2. A diversification strategy for investors as their portfolios include Sukuk and Bonds along with other securities.

 

Trading Information

Quantity

The quantity of Sukuk and Bonds are expressed in par value terms; not number of units.

Price

The price of Sukuk and Bonds is set as a percentage of the par value.

Yield

The yield represents the annual rate of return to be received from Sukuk or Bonds if acquired at a certain price and is held until maturity.

Annual Coupon Rate

The coupon rate is a percentage of the Bond or Sukuk’s par value, which is paid annually or semi-annually by the issuer.

Accrued Coupon

Accrued coupon is the amount earned day by day on Sukuk and Bonds, but not yet collected. The coupon accumulates from the date of Sukuk or Bonds issuance until the upcoming coupon payment, then it accumulates between the coupon payment periods thereafter.

Day-count convention

Day count convention determines the calculation of accrued coupon over a period of time where the investor is holding the Sukuk or Bonds

 

The day-count convention in the Saudi Debt Market for fixed coupon is ICMA 30/360

The day-count convention in the Saudi Debt Market for variable coupon is ACT/360

Trading channels

Through brokers i.e. online, telephone or visiting the branch

Trading Time

Similar to Equity Markets  (Opens 10AM; Closes 3PM)