Mohamed Ariff

Test on yields of equivalently-rated bonds

Purpose This paper aims to report practice-relevant anomalous investment yield behavior of two types of bonds – Type A, the mainstream bond, and Type B, which is Sukuk – both having similar cash-flow-relevant characteristics. Design/methodology/approach Bond valuation theory suggests that yields to investors of similarly rated bonds ought to be same. The authors collected time-series data on A and B bonds, all being coupon-paying bonds with similar rating and similar tenor as two matched samples traded in a bond exchange. To ensure the results are extended to different bond sectors, the data set was separated into treasury bonds as risk-free and corporate bonds as risky ones. The data set was further sub-divided into short-, medium- and long-tenor bonds. As the data straddle the Global Financial Crisis period, the authors use appropriate econometric method to control the possible effect from the crisis. Findings The average and median yields on Type A bond are significantly different from those of Type B. The test results show significant and systematic differences: treasury bonds of Type A returns yield lower than treasury bonds of Type B; the yields of corporate mainstream bonds (A) are higher than the yields of Sukuk (B). The authors observe these findings constitute a puzzle, being anomalous to theory. Originality/value This paper is original in that it is documenting significant differences in pricing of equivalent bonds. This has both theory and practice implications for fixed-income security market practices. The evidence is very strong to suggest that the identical types of bonds may have missing variable that contributes to the difference. Therefore, further research to identify the missing variable is necessary.

Sukuk announcement effects during financial crisis: the case for Indonesia

The effects of capital-raising announcements have long been used as an indicator of increased shareholder wealth (Brown and Warner, 1985). Studies on bond announcements, for example, have been largely inconclusive. However, when effects are measured based on bond underlying structure, “straight and convertible bonds”, then the results are more conclusive (Abdul Rahim, 2012). Furthermore, issuances around crisis period are expected to result in negative market reaction as investors prefer liquidity (Fenn, 2000).,Sukuk are bond-like instruments that are issued based on the Sharia guidelines and perceived to be less risky due to their risk sharing attribute. Sukuk are issued by the governments and also corporations. Sukuk can either be debt-based or equity-based. The former resembles the conventional bond, and equity-based Sukuk resembles the convertible bonds. It is interesting to ascertain the market reaction to issuance of both type of Sukuk. This study determines the wealth effects of debt-based Sukuk issuances in Indonesia, around crisis period. Sukuk issues have steadily increased in Indonesia, and it is the second largest issuer in 2015 (Zawya, 2015a, 2015b).,The market reaction to corporate Sukuk issuance by Indonesian firms is yet to be documented, and the findings of this study address this issue, especially during the crisis period when the risk aversion is high and investors prefer liquidity. The Bai and Perron’s (2003) multiple breakpoint analysis was applied to determine the crisis period, which was between 2007 and 2010.,The findings suggest that the market reacts positively and significantly to debt-based Sukuk issuance during the crisis period, contrary to the theory that postulates a negative market reaction. Though these findings seem to be unique, it is possible that it is a behavioral effect of investors requiring less liquidity premium during crisis, contrary to expectations (Chen et al., 2007; Amihud and Mendelson, 1986).

Issues in waqf and zakat management: Theory and Practice

Zakat is charity payable each year on the excess wealth beyond that needed for one’s station in life. This is mandated as a duty of believers to give to charity a small portion ranging from as low as 2.5% on the excess to 7% (in the case of ornaments of precious items). It is given voluntarily by the faithful to whoever they wish to give and that includes the poor among the family. The sum is unknown and it is thought to be very large because these sums of money are supporting mosques, education, hospitals, and orphanages and support for the needy. Zakat is to be paid first before the balance of wealth could be invested to earn more wealth, which in turn will mandate further zakat payments in the ensuing year. This is pertinent to wealth management because the faithful is to have professional advice on how to compute this amount each year. We believe this is part of wealth management advisory services.

Wealth effect of sukuk issuance announcement in two markets: Theory and Practice

Debt issuances traditionally attracts a negative sentiment, so the corporation’s shares decline in prices around the time of the issuances. Sukuk being another form of debt, none the less, structured differently from a conventional bond, should have some effect on the shares when sukuk are issued and traded. We explore this aspect in the chapter only to find that the market appears to generally favour sukuk issues as good news, so the share prices go up. However, during the Global Financial Crisis era, sukuk issuances attracted negative sentiments.

Wealth as understood in economics and financ: Theory and Practice

Adam Smith traced the source of opulence of nation, which he called capital, to the uninterrupted efforts of every man to better his condition. Today we define wealth as the item that has some economic substance, a value such that this wealth can be used for several intended purposes, in modern economics, for consumption as theoretically glorified by the Utility Maximization Theorem (Arrow-Debreu). In this chapter, the reader is introduced to the modern idea of net wealth held by households and entities. The amount of wealth as at 2017 is given as US

Significant Difference in the Yields of Sukuk Bonds versus Conventional Bonds

250 trillion after all liabilities are subtracted from total wealth. In this context, Calvin’s contribution of wealth as God’s gift to man is referred to, which provides a continuity with Islam’s claim that wealth belongs to God, and He apportions who begets it.

Impact of seasoned equity and private placement disclosures on derivative prices: are the spot and option markets integrated?

Bond yields of Treasury and corporate bonds are observed in a listed exchange. This article reports the findings on the market yield behaviour of two types of debt securities in the same exchange, the sharia-compliant sukuk bonds and the normal conventional bonds. There are 17 exchanges where sukuk bonds are traded, and the outstanding value is estimated at US

The Islamic debt market for Sukuk securities : the theory and practice of profit sharing investment

1,200 billion. The average yields of sukuk Treasury bonds are significantly higher (premium) than that of conventional Treasury bonds. On the other hand, investors in the sukuk corporate bonds receive slightly lower returns (discount) of about 25 basis points in the case of long-term sukuk bonds. To the best of our knowledge, this is the first study to verify these differences using appropriate advanced econometric methods. These results have far-reaching implications for the market practices as well as for teaching of bond pricing behaviour since this new form of debt markets is growing at about 17 per cent a year. JEL Classification: F23, F31, G12

Challenges and Future Developments

This paper reports evidence of significant abnormal returns in call and put options in the New York Stock Exchange around the disclosure time of two equity funding events. The delta values as risk of options are used to adjust gross returns of calls and puts to obtain adjusted abnormal returns. Theory suggests any stock price increases around private placement announcement dates would make calls to become in-the-money, so call prices should increase: conversely, puts would become out-of-money so put prices should be unaffected. Stock price declines around seasoned equity announcement dates would make put prices to increase since puts become in-the-money: call prices, having become out-of-money, would not change. Further, if the spot to the derivative market price impact is due to both markets being fully integrated, a trading strategy could yield profits. To test this, we apply cointegration and Granger-causality tests: we find there is no predictable spot-to-option-market integration in either direction. The empirical evidence of option price changes reported here and also evidence of no integration provide support for the idea that spot and option prices are being formed independently of each other, therefore prices are consistent with the efficient market hypothesis and the option pricing model.