Bond is nothing but an instrument usually issued by the giant firm/corporation/govt. etc.

aiming to raise
fund from the investor. Bond is a capital market instrument as it is issued for long term. Basically the
corporate those have very strong goodwill are used to issue bonds for raising fund. Corporations are
preferred to issuing bond over issuing equity instrument (share) due to some attractive features.

- It’s easier to issue bond that that of using other ways of raising funds

- Allow to collect huge fund

- Cost effective (interest on bond usually lower than the borrowing cost from Banks)

- Corporate tax benefit

- Does not impact over ownership (Provides corporations with a way to raise capital without
diluting the current shareholders' equity).

Bond also has some disadvantages too for the issuer, such as…

- It’s a fixed obligation, corporation must pay profit / interest on due date to the purchaser of bond
without considering the profitability of the company.

- A Bond holder (purchaser/investor) gets the priority over the share holders in case of
liquidation/bankruptcy.

Types of bond: There are two types of Bond considering the interest payment behavior, such as

1. Coupon Bond: This types of bonds are allowed to pay periodic (half yearly / yearly) interest to the
purchaser / investor of the Bond. Coupon payments are calculated based on rate offered and face value
of the bond.

2. Zero Coupon Bonds: Zero coupon bonds does not allow any periodic payment rather it provides
full value (face value) at maturity. Zero Coupon Bonds are sold at lower price than that of face value.
Thus, it is also called discounted bond.

Bond in Islamic Banking: Islamic principles discourage debt in general; interest payments on debt owed
are viewed as usury, exploitative of the debtor, and are thus prohibited / haram. Islamic principles
therefore prohibit investment in conventional bonds and other debt securities that generate interest
income.

However, in Islamic Banking “sukuk” is an Islamic financial certificate, similar to a bond that complies
with Islamic religious law commonly known as Sharia. The issuer must also make a contractual promise
to buy back the bond at a future date at par value. Islamic securities (Sukuk) are hybrid securities
bearing features of stocks and bonds, altogether. Similar to stocks, they indicate a type of partner- ship
and holders of Sukuk will be considered as the owners of underlying asset or project for finance of which
Sukuk have been issued. A sukuk technically represents an interest in an underlying funding
arrangement structured according to sharia, entitling the holder to a proportionate share of the returns
generated by such arrangement. Usually the funding mode in the Sukuk is in Mudaraba form.

In short the difference between Conventional Bonds and Islamic Bonds (Sukuk): While Bonds are
financial certificates through which investors lend money to the issuer, indicating an obligation for
repayment at maturity. Bondholders receive regular interest payments, while Sukuk holders receive a
share of the profit generated by the underlying asset.

Please make addition / correction on the above for gaining further extra.

We shall keep continuing sharing and gathering knowledge over different topic/terms related to
financial market, instruments etc., INSHALLAH

Source -

-Books of International Financial Management

- Class notes International Financial Management, MBA

- Web content