MCQs for Chapter 5 Islamic Bonds and Derivatives

1. _______ are securities representing debt owed by the issuer to the investor with a promise to
pay the par, face or maturity value of the bond at the maturity date and a periodic interest
payment.
a) Swaps
b) Bonds
c) Futures
d) Forwards
e) Options

Correct answer: b) Bonds raise finance through debt with a promise to repay the amount borrowed
plus a periodic interest payment. They can be issued by governments, municipals and corporations.
Incorrect answers:
a) Swaps are agreements between two parties to exchange a series of cash flows for a set period of
time.
c) Futures are standardized agreements between two parties to exchange, in the future, a specified
asset with a known standardized quantity and quality at a price agreed today.
d) Forwards are non-standardized agreements by two parties to involve in the future sale of an asset
at a price agreed on the spot.
e) Options are derivatives that give the holder the option to buy or sell an underlying asset at a
specified price within a specific period of time.

2. Which of the following is NOT an important economic agent involved in sukuk?

i) originator
ii) intermediaries
iii) investors
iv) special purpose vehicle

a) i and ii
b) i only
c) ii only
d) iii only
e) iv only

Correct answer: c) Intermediaries are not an important economic agent. The originator is the body
needing funds, the special purpose vehicle is an entity set up to raise capital and the investors are
subscribers that own the underlying asset.
Incorrect answers:
a) Intermediaries are not an important economic agent. The originator is the body needing funds.
b) The originator is the body needing funds raised by the sukuk.
d) Investors are subscribers that own the underlying asset.
e) The special purpose vehicle is an entity set up to raise capital within the sukuk.

3. True or false:
Each sukuk represents a share of debt, with the price based on the issuer’s credit worthiness.

Correct: False. Each sukuk represents a share of the underlying asset, with face value based on
market value of said asset. A conventional bond is a share of debt.

Written by Matthew Pinnock

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA
Incorrect: True. A conventional bond is a share of debt, each sukuk represents a share of the
underlying asset, with face value based on market value of said asset.

4. Sukuk provided investors the opportunity to deploy their _______ with confidence in their
_______and profitability, while contributing to the circulation of_______.
a) debt, return, wealth
b) capital, return, wealth
c) capital, security, wealth
d) wealth, security, finance
e) wealth, capital, finance

Correct answer: c) Sukuk involves the use of capital and is in small denominations and so investors
can be confident of their security, and since it provides an equitable distribution of wealth it
contributes to the circulation of wealth.
Incorrect answers:
a), b), d) and e) Sukuk involves the use of capital and is in small denominations and so investors can
be confident of their security, and since it provides an equitable distribution of wealth it contributes
to the circulation of wealth.

5. True or false:
The use of sukuk Al-Salam is uncommon due to its non-tradability feature.

Correct: True. In a salam contract the asset is delivered on a future date in exchange for full advance
spot payment to the seller. This is allowed if the asset exists and is in the physical or constructive
possession of the seller.
Incorrect: False. Other types of sukuk require a tradable feature, in a salam contract the asset is
delivered on a future date in exchange for full advance spot payment to the seller. This is allowed if
the asset exists and is in the physical or constructive possession of the seller.

6. True or false:
A sukuk Al-Mudarabah is a lease contract, allowing for mobilization of funds for long-term
construction projects and a means of securing a tangible asset in exchange for rent.

Correct: False. A sukuk al-mudarabah is an equity partnership sukuk.

Incorrect: Trues. A lease contract is known as al-ijarah and is one of the most popular forms of
sukuk.

7. Under which terms could a sukuk al-istithmar be undertaken?

a) When it is not possible to identify a tangible asset and the business of the obligator is largely
intangible.
b) When we simply wish to entrust another party to act on our behalf.
c) When partners wish to remain silent.
d) When it is not possible to identify a tangible asset for the underlying asset.
e) When huge sums are required.

Correct answer: a) Rights to contracts (including other types of sukuk) can be sold as an investment
and the income generated used to make payments to the investors.
Incorrect answers:
b) This is a sukuk awakalah or agency contract.
c) This is a sukuk al-mudarabah or equity partnership.

Written by Matthew Pinnock

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA
d) This is a sukuk al-murabahah or deferred payment.
e) This is a sukuk al-musharakah or joint venture.

8.True or false:
Corporate credit rating refers to the national government taking into account the regulatory,
political, economic and legal environment.

Correct: False. This is a sovereign credit rating.

Incorrect: True. Corporate credit ratings refer to the creditworthiness of the issuer.

9. True or false:
Speculation refers to the act of engaging in financial transactions as a proactive measure to reduce
exposure to risk.

Correct: False. Speculation is the act of engaging in derivatives for profitable gain. Hedging is the act
of limiting exposure to risk.
Incorrect: True. Hedging is the act of limiting exposure to risk; speculation is the deliberate act to
make profit from derivatives.

10. An Islamic ______________ is a derivative where two parties exchange one financial
instrument for another backed with an underlying asset for the mutual benefit of the parties.
a) promissory forward
b) option
c) forward
d) swap
e) future

Correct answer: d) A swap involves an exchange of financial instrument, such as foreign currency or
profit rates.
Incorrect answers:
a) A promissory forward contract reflects the concept of wa’ad.
b) An option is a contract to buy or sell an asset at a predetermined price at a future date.
c) A forward has a deferment in price and asset transfer to a future date.
e) A future is similar to a forward, but the buyer and seller are required to make a physical
settlement upon expiry of a specified time.

Written by Matthew Pinnock

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA