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Home arrow Business & Finance arrow The art of RF (riba-free) Islamic banking and finance

Fixed-Income Debt Instruments in the Form of Riba-Based Bonds

Nowadays, fixed-income bonds represent an important source of funds to meet in a large way the capital needs of different entities. Bonds provide an investment vehicle for those investors who feel more comfortable and secured because they offer investors a predefined return in the form of riba- based interest rates.

Bonds are debt certificates — IOUs (which stands for I Owe You) — that represent a contract between the individual or investor and the company or the entity that needs the capital. The contract defined in the riba-based bond prospectus defines the nature of this capital contribution as being a debt that rents money in the form of capital that is to be paid back in full (called the face value of the bond) within a certain period of time (called the term of the bond, which can be paid back in full in a few months or in 1, 5, 10, or 30 years or more) at a specific date (called the maturity date), and while this debt is active the company that issued these bonds would pay the investor (the bondholders) a fixed rental rate called interest (defined as the interest rate of the bond). Riba bonds are classified as short-, medium-, or long-term bonds, depending on their maturity. Generally, short-term bonds mature in 1 year or less, medium-term bonds mature in 5 years or less, and long-term bonds mature in 10 or more years (can be as long as 30 or 40 years). The financial industry standardized the face value of a bond to be US$1,000 (or in general 1,000 units of the local currency) and the interest rate is expressed in percentage and is usually paid quarterly to the bondholder to coincide with the quarterly financial statement report of the bond-issuing entity. The issuing entity can be a government or a company.

There are three types of bonds, depending on the purpose of the intended use of the proceeds and on the issuing entity, which are discussed next.

 
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