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Islamic vs Modern BOND

Islamic vs Modern BOND

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Islamic vs. ModernBond Market
PROF. DR. MOHD. MA’SUM BILLAH
(e-mail:
)
INTRODUCTION
A bond is a "security" whichgives the holder a financial claim on theissuer. This claim protects the holder incircumstances in which the issuer isunable to pay the amount due. Bonds bear certain similarities to savingsaccounts. When an investor depositsmoney in a savings account, in effect,that investor is lending the bank money.The bank pays the investor interest onthe deposit. Similarly, the investor who buys bonds lends the issuer money inreturn for interest payments. When the bonds mature (come due), the investor will receive the principle amount of the bonds back, as he would have if he hadwithdrawn the amount from the savingsaccount. The major difference betweensavings accounts and bonds is thatinvestors can sell their bonds before theymature to other investors. Savingsaccounts cannot be sold to otheinvestors.
i
 The legal documentation for a bond is required to specify the terms for  both interest and principal payments.Interest can be paid monthly, semi-annually or annually. This makes adifference to the compounding of theinterest and will affect the trading of a bond. Most bonds are pay interest semi-annually in North America."Eurobonds", which trade in Europe, payinterest annually. Mortgage-BackedSecurities (MBS) and Asset-BackedSecurities (ABS) are pay interestmonthly, reflecting the payment terms of the underlying mortgages and loans. Thecurrency of payments is important. Some bonds have the coupon paid in onecurrency and the principal in another.Bonds which pay part of their principal before maturity are said to "amortize"
 
their principal, this is the case with manymortgage bonds.Bond market comprises o primary market and secondary market.The primary bond market is where the bonds are initially issued, while thesecondary market where the bonds areresold to other investors. Islamic bondsare also having primary and secondarymarkets. The main difference, however,is the way the bonds are issued andtraded afterwards. In the process of Islamic bond issuance bay’ al-‘Inah isused to securitize the instrument in the primary market, while in the secondarymarket, bay’ al-Dain is used in order tolegalize reselling of the bonds. Such process is mostly used in the Malaysianmarket, while most of the Middle-Eastern countries do not accept it. The proposed alternative is Islamic bonds based on Muqaradah.
CONVENTIONAL BONDMARKET
 Primary market 
: A financial market inwhich new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or governmentagency borrowing the funds. Theinvestment bank underwrites securitiesand then sells them to the public.
Secondary Market 
: A financial market inwhich securities, that have been previously issued, can be resold. It could be an organized market, such as KLSE,or over-the counter (OTC) market inwhich dealers at different locations standready to buy or sell securities over thecounter to whoever accepts their price.Bonds generally can be tradedanywhere in the world as long as a buyer and a dealer can strike a deal. There isno central place or exchange for bondtrading, as there is for publicly tradedstocks. The bond market is known as an“over-the-counter” market, rather thanan exchange market. There are someexceptions to this however. For example,some corporate bonds in the UnitedStates are listed on the exchange. Also, bond futures and some type of bondoptions are traded on exchanges. But themajority of the bonds do not trade onexchanges.
MARKET PARTICIPANTS
 Dealers
: While investors can trademarketable funds among themselveswhenever they want, trading is usually

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