Over the years Sukuk has improved to be the most acceptable form of investment not only by Islam but also in the international market. This assignment compares both Sukuk and World Bank bonds and evaluates which is riskier than the other. The methods of risk assessment are calculated by use of total return and rate of return, skew and volatility ratios, and use of beta to illustrate the risks between WB bond and Sukuk.
For calculation of beta to provide specified comparisons is calculated by use of monthly return which is done by adding End Price to Distribution per share less start price the total obtained is then divided by start price. For example, return is provided by (End price + Distribution per share – Start Price) / Start Price.
Return on investment is done to determine the profitability of investments done on bonds. Nominal yield is the interest earned by the investment of bonds which is computed based on a percent of the value of the investment. The yielded investment is mainly paid twice a year; which is computed on $1000 for other bonds and $5000 for municipal bonds. Therefore, a bond that pays 5% for a value of $1000 then the payments being done annually will be $ 50 which will be paid $ 25 semi-annually. Therefore, the return of the bond is achieved by calculating (Return/Investment) for example ($50/$100) would be equals to 5%.
Bonds are traded in the secondary market therefore they would sell more or less per value; hence it will yield interest rates which differs from the current return/yield. The current yield of bonds will be calculated by (Annual Interest Payment/Price of Bond) for example with an annual Interest payment of $60 and band worth $800 current yield would be ($60/$800) 8%.
For the taxable bonds, they are calculated for Taxable Equivalent Yield (TEY) so that they are equal to nontaxed bonds. A taxable equivalent bond is calculated by (Muni Yield/(100%-% of federal tax bracket)). Therefore for investment with a taxable bond of 4% muni yield and federal tax bracket of 28%, its TEY is (4%/(100%-28%)) which is equal 5.5% TEY.
If the return on investment is zero then it is an indicator that return on a security is viable and its earning interest. Therefore for a stock investment whose returns are more than its beta has a negative alpha. However, if the investment has a positive return it indicates that it’s doing fine.
Volatility is provided by the use of standard deviation which is used to measure the value of closing prices which are dispersed from the average. Dispersion is achieved by the difference in closing price and average value. The higher the difference between average price and closing prices the higher is the closing prices as shown by the graph below.
Comparison between Saudi Hollandi Bank Suk Vs World Bank Bonds
In recent years there have been tremendous improvement and growth for the global market of Sukuk. According to the financial records of 2003 were $8 Billion has increased to $100 Billion in 2008. Sukuk offers financial support to both the private and public sectors. It has also provided an investment opportunity that is Sharia-compliant. While word bank bonds are issued by World Bank in attempts to fund projects mainly for development by the member countries. The bonds are issued by the international bank as loans for development or reconstruction in the international capital market. Therefore, both Saudi Hollandi Bank Sukuk and World Bank bonds are used to finance investors who are seeking financial support to alleviate poverty worldwide.
Its advisable one to invest in k because it provides a return of 1.90% which is distributed bi-annually hence the Percentage returns of Sukuk is much high for its returns annually is 3.8% (Ameinfo) while, World Bank Bonds investments have an annual return of 3% with a minimum of six years investment (World Bank). The investment done to world banks bonds has a guaranteed return of 3% which makes the investors have a friendly environment to invest which has fewer risks involved.
References
AmGame infoSaudi Hollandi Bank Completes Second Sukuk Issue. 2010. Web.
World Bank. World Bank Partners with ABN AMRO to Issue Eco 3Plus Note. (2010). Web.