Investors can trade sukuk and bonds through brokerage firms, but it's essential to understand the basics before engaging in transactions to ensure sound financial decisions.
What Investors Should Know Before Trading in Sukuk and Bond
1. Face Value (Nominal Value)
This is the initial value of each sukuk or bond unit at issuance. Example: If the face value is 1,000 SAR, then each unit of sukuk or bonds is equivalent to 1,000 SAR.
2. Quantity
The quantity of sukuk and bonds is expressed in number of units. Each unit has a face value (for example, 1,000 SAR). To calculate how many units you can buy with a certain amount of money, divide your investment amount by the current market price per unit.
3. Price
The current price of sukuk or bonds is expressed as a percentage of their face value. Example: If the face value is 1,000 SAR and the current market price is 97.5% of the face value, then the market price of the sukuk or bond would be 975 SAR.
4. Yield
This represents the expected annual return at maturity if the sukuk or bond is purchased at the market price and held until maturity.
Differences Between Sukuk and Bonds
Sukuk
Sukuk are Shariah-compliant financial instruments issued by governments or companies to fund specific projects. Sukuk holders receive a share in the ownership or benefits of the project, allowing them to participate in profits or losses.
- Face Value of Government Sukuk: In Saudi Arabia, the face value per sukuk unit is 1,000 SAR.
- Purpose: The Saudi government aims to deepen the sukuk market, increase liquidity, and make it accessible to all types of investors through its sukuk issuance program.
Bonds
Bonds are financial instruments representing debt owed by the issuing party, whether a government or a private company. Depending on the type of bond, the issuer may:
- Pay fixed interest at regular intervals (Fixed-rate bonds)
- Pay variable interest based on a reference rate (Floating-rate bonds)
- Pay no periodic interest but issue at a discount to face value (Zero-coupon bonds)
The issuer is obligated to repay the principal (face value) at maturity.
Key Difference: Bonds do not grant ownership rights in any assets or projects to bondholders; they are merely debt obligations that bondholders are entitled to collect along with interest upon maturity.
The Importance of the Sukuk and Bonds Market
The sukuk and bonds market encourages savings and long-term financial planning. It enables investors to diversify their portfolios, helping to spread potential risks by balancing fixed-income securities with short-term investments. This diversification can help investors achieve stable returns over time.
