Deck 7: Islamic Bonds

Question 1

The process of modelling and structuring Islamic bonds requires a basic knowledge of the major Islamic finance products such as mudarabah, musharakah, ijarah, murabahah, wakalah, istisna'a.

Answer 1

True

Question 2

Under musharakah sukuk agreement, management of the business is the sole responsibility of the entrepreneur.

Answer 2

False

Question 3

Islamic International Rating Agency IIRA. has issued investment sukuk standards which comprise of the definition, types, and characteristics of investment sukuk Standard No. 17..

Answer 3

False

Question 4

Mudarabah sukuk are usually structured as an agreement between the rabb al-mal who provides the capital and the entrepreneur which may be an investment company or a Special Purpose Vehicle SPV..

Question 5

The AAOIFI defines sukuk as "certificates that represent the holder's proportionate ownership in an undivided part of an underlying asset where the holder assumes all rights and obligations to such asset."

Question 6

Risk mitigation in mudarabah sukuk is achieved through the process of reinsurance.

Question 7

The returns and losses on mudarabah sukuk are shared and borne in accordance with the percentage of ownership of shares of each of the sukuk holders.

Question 8

AAOIFI standards contain the Sharī'ah rulings and requirements on the different types of sukuk as well as the prevailing practices in the secondary markets.

Question 9

The contract of ijarah has been used as a means of securitization of a tangible asset such as a hospital or airport which allows the issuance of sukuk to prospective investors.

Question 10

It is not permissible under mudarabah sukuk agreement to create reserves for contingencies, such as loss of capital, by deducting from the profit a certain percentage in each accounting period.

Question 11

Sukuk is an Arabic term for financial certificate, and is the Islamic equivalent of a bond asset-backed instruments..

Question 12

The musharakah certificates are treated as nonnegotiable instruments that cannot be bought and sold in the capital markets.

Question 13

The musharakah certificate given to all sukuk holders represent their proportion of ownership in the assets of the project being undertaken.

Question 14

Sukuk are singled as the best way of financing small enterprises.

Question 15

The contract of ijarah has been structured in a manner that would allow for the financing of short term small projects.

Question 16

There is only one type of sukuk regardless of the types of Islamic finance products used in their structuring.

Question 17

The mudarabah sukuk holder is given the right to transfer the ownership by selling the sukuk in the securities market at his/her discretion.

Question 18

The manager/ Special Purpose Vehicle SPV. who receives the funds collected from the subscribers to mudarabah sukuk can also invest his/her own funds.

Question 19

It is not a condition for sukuk holders to have interest or ownership in the underlying asset.

Question 20

The holder of sukuk of ownership of services may not sublease such services to a third party.

Question 21

The risk level of the regulatory, political, economic and legal atmosphere comprises a minimal factor in sovereign credit ratings.

Question 22

The rating of sukuk in the financial market is more important to the investors than to the issuer. .

Question 23

The IIRA identified 'HYPERLINK "http://www.iirating.com/methodologies/sovereign_eng.pdf" \t "_blank"sovereign ratings' and 'risk level ratings' to be among the eight major rating products in Islamic financial markets.

Question 24

The Islamic International Rating Agency IIRA. which began operations in 2009 has since been striving to ensure the expansion of the Islamic finance industry.

Question 25

The designated grades for credit rating range from 'AAA' which is considered as the lowest grade to 'C'.

Question 26

Corporate credit rating affects both the issuer and the issues.

Question 27

Islamic bonds can be rated on two bases: sovereign rating and country rating.

Question 28

The general rating of a country as a sovereign entity is carried out before the rating of particular issue or institution.

Question 29

IIRA adopts global financial practices in rating both the Islamic and conventional financial institutions.

Question 30

The owners of the investment sukuk certificates share the return and bear no losses of the business venture.

Question 31

The AAOIFI investment sukuk standards do extend to shares of stock companies, certificates of funds, and investment portfolios.

Question 32

The focus of the AAOIFI standards is the Islamic financial institutions or corporate entities offering Islamic financial services such as sukuk.

Question 33

The Sharī'ah rules for trading in investment sukuk include the structuring and classifications of the 16 different types of investment sukuk.

Question 34

A key advantage of credit rating is that it allows potential investors to make informed decisions before subscribing to debt securities.

Question 35

Sovereign credit ratings are key features considered by foreign investors when intending to invest abroad.

Question 36

Issuer rating has no impact on the credibility of the rated corporate entity.

Question 37

The rating products in Islamic financial markets cover among others: bond/ sukuk ratings, bank's financial strength ratings, and Sharī'ah quality ratings.

Question 38

'HYPERLINK "http://www.iirating.com/methodologies/insurance_eng.pdf" \t "_blank"Insurer financial strength ratings' and 'HYPERLINK "http://www.iirating.com/methodologies/bank_eng.pdf" \t "_blank"banks financial strength ratings' are among the eight major rating products in Islamic financial markets as identified by IIRA.

Question 39

The insurer ratings consider qualitative as well as quantitative factors.

Question 40

The methodology adopted in the ratings of sovereign sukuk is purely qualitative.

Question 41

Which of the following factors is considered by 'Euromoney Country Risks' as essential in the ranking of countries by risk?

A) debt indicator and credit ratings
B) access to bank finance
C) access to capital markets
D) all of the above

Question 42

Sukuk have been generally classified as:

A) tradable and non-tradable
B) short term and long term
C) debt based and equity based
D) A and C

Question 43

The followings are basic categories used by IIRA in analysing sovereign sukuk and the likelihood of any default on debt obligations at maturity EXCEPT:

A) politics and policy continuity
B) accessibility to capital markets
C) the economy -structure and growth prospects
D) budgetary and fiscal policy

Question 44

Musharakah sukuk can be used for the mobilization of funds that can be used:

A) for new project
B) to develop an existing project
C) to finance a huge business activity based on joint venture contracts
D) all of the above

Question 45

Which of the following factors is not considered by 'Euromoney Country Risks' as essential in the ranking of countries by risk?

A) political risk
B) economic performance/projections
C) structural assessment
D) all of the above

Question 46

Which of the following statements regarding rating agencies is/are true?

A) there are over 50 rating agencies that have been established across the world.
B) the leading global rating agencies include HYPERLINK "http://en.wikipedia.org/wiki/Moody%27s" \o "Moody's"Moody's, HYPERLINK "http://en.wikipedia.org/wiki/Standard_%26_Poor%27s" \o "Standard & Poor's"Standard & Poor's, and HYPERLINK "http://en.wikipedia.org/wiki/Fitch_Group" \o "Fitch Group"Fitch Rating.
C) the Islamic Development Bank IDB. took the initiative to establish an international rating agency known as the Islamic International Rating Agency IIRA..
D) all of the above

Question 47

IIRA's rating on real estate pertains to the rating of the individual projects rather than to the overall rating of the developer.

Question 48

____________is issued with aim of conferring the right of usufruct in the sukuk holders where they become joint owners.

A) sukuk of ownership in leased assets
B) sukuk of ownership of usufructs of leased assets
C) sukuk of ownership of usufructs of assets
D) sukuk of ownership of services

Question 49

The following rules are valid and must be followed when selling mudarabah sukuk EXCEPT:

A) if the mudarabah capital is in the form of money, the trading of mudarabah sukuk will be like the exchange of money for money and it must satisfy the rules of bai' al Sarf
B) if the mudarabah capital is in the form of debt, it must be based on the principles of debt trading in Islamic jurisprudence
C) mudarabah capital cannot be a combination of more than two types of capital such as cash, receivables, goods, real assets and benefits
D) none of the above

Question 50

The most common tradeable investment sukuk in use are

A) sukuk al-mudarabah
B) sukuk al-ijarah
C) sukuk al-salam
D) a and b

Question 51

The following statements regarding the AAOIFI Standards on Islamic Bonds are true EXCEPT:

A) the standards contain the Sharī'ah rulings and requirements on the different types of sukuk as well as the prevailing practices in the secondary markets
B) the scope of the investment sukuk is clearly specified with the enumeration of the fourteen types of Sukuk structures Table 7.2 of the textbook.
C) the AAOIFI investment sukuk standards are extended to shares of stock companies, certificates of funds and investment portfolios
D) the focus of the standards is the Islamic financial institutions or corporate entities offering Islamic financial services such as sukuk

Question 52

The Sharī'ah quality rating aims at informing the investing public on the level of compliance of certain corporate entities with the requirements of the Sharī'ah.

Question 53

Islamic bonds can be rated on two bases:

A) long term and short-term
B) sovereign and corporate
C) public and private
D) none of the above

Question 54

HYPERLINK "http://www.iirating.com/methodologies/bank_eng.pdf" \t "_blank"Banks financial strength ratings place emphasis on the ability of financial institutions to make profits and pay dividends.

Question 55

Which of the following is not a form of ijarah sukuk?

A) sukuk of ownership in leased assets
B) sukuk of ownership of usufructs of assets
C) sukuk of ownership of services
D) sukuk of ownership in leased with option to buy assets

Question 56

Best practices in the corporate governance rating of corporate entities are used as benchmarks for the assessment rather than using the standards of particular country or jurisdiction.

Question 57

This form of ijarah sukuk is issued to subscribers for the purpose of conferring the ownership in such services to the sukuk holders:

A) sukuk of ownership in leased assets
B) sukuk of ownership of services
C) sukuk of ownership of usufructs of assets
D) none of the above

Question 58

______________ has been structured in a manner that would allow for the mobilisation of funds for the development of long term infrastructure projects.

A) the contract of ijarah
B) the contract of musharakah
C) the contract of wakalah
D) the contract of mudarabah

Question 59

____________ are certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or in the ownership of. the assets of particular projects or special investment activity.

A) alternative investments
B) Sukuk
C) Islamic stocks
D) charitable endowments

Question 60

The following Sharī'ah requirements. must be observed in the process of issuance of investment sukuk:

A) it is not permissible to issue investment certificates, on the basis of any of Sharī'ah-compliant investment contracts
B) it is permissible to issue securities for trading in tangible assets, usufructs, or services
C) the contract of issue must be governed, after closing date and allocation of the certificates, by the interpretation of the issuer
D) the two parties of the contract of issue are the issuer and the management

Question 61

_________________ comprises issuer and issue ratings where a reliable third party gives an opinion on the feasibility of the repayment of the issuer or an issue of its financial obligations within the record time.

A) issuer ratings
B) bond/sukuk ratings
C) HYPERLINK "http://www.iirating.com/methodologies/sovereign_eng.pdf" \t "_blank"sovereign ratings
D) HYPERLINK "http://www.iirating.com/methodologies/sharia_methd_eng.pdf" \t "_blank"Sharī'ah quality ratings

Question 62

In order for corporate entities to win the confidence of prospective investors, they must:

A) reduce their risk level
B) demonstrate their ability to meet all financial obligations
C) offer their employees generous compensation packages
D) a and b

Question 63

Assessing the level of compliance of a financial institution or corporate entity with the requirements of the Sharī'ah include the following major elements.:

A) HYPERLINK "http://www.iirating.com/methodologies/corporate_governance_eng.pdf" \t "_blank"corporate governance framework
B) code of ethics adopted by the institution
C) monetary policy and flexibility
D) all of the above

Question 64

Discuss briefly the general benefits of sukuk as presented by Muhammad Taqi Usmani.

Question 65

Which of the following sets of fundamentals are considered in the assessment of the banks' financial strength?

A) market assessment
B) liquidity and funds management
C) capital adequacy
D) all of the above

Question 66

The ratings of the issuer of sukuk places particular emphasis on:

A) the level of compliance of certain corporate entities with the requirements of the Sharī'ah.
B) the investment quality and/or credit worthiness
C) the issuer continued ability to fulfil its debt obligations to the stakeholders particularly the investors
D) all of the above

Question 67

The real estate rating methodology designed by IIRA evaluates:

A) all on-going projects of the developer
B) the developer's activities such as the performance of its architects, engineers, and contractors
C) the level of fairness, transparency, responsibility and accountability of the developer
D) a and b

Question 68

_______________ promote stability and sustainability in the financial industry.

A) corporate credit ratings
B) sovereign credit ratings
C) country risk ratings
D) credit ratings

Question 69

Describe the different variations of ijarah sukuk.

Question 70

Describe the most common classifications of the types of sukuk structures.

Question 71

Corporate ratings in the Islamic financial markets involve:

A) bank's financial strength ratings
B) Sharī'ah quality ratings
C) corporate governance ratings
D) all of the above

Question 72

What are the Sharī'ah requirements for the issuance of investment sukuk?

Question 73

Describe how profits and losses are treated under mudarabah and musharakah sukuk.

Question 74

Real estate rating is assigned after taking into account:

A) market characteristics
B) effectiveness of the top management team
C) liquidity and funds management
D) all of the above

Question 75

What are the major differences between sukuk and bonds?

Question 76

The key subject headings in IIRA's asset quality analysis are:

A) banking environment
B) risk management practices
C) lending history and performance
D) all of the above

Question 77

Which of the following categories are used by IIRA in analysing sovereign sukuk and the likelihood of any default on debt obligations at maturity?

A) monetary policy and flexibility
B) the external accounts
C) internal and external debt
D) all of the above

Question 78

Quantitatively, the strength of the balance sheet of the company and its operating performance are methodically evaluated when instigating

A) issuer ratings
B) insurer HYPERLINK "http://www.iirating.com/methodologies/insurance_eng.pdf" \t "_blank"financial strength ratings
C) HYPERLINK "http://www.iirating.com/methodologies/corporate_governance_eng.pdf" \t "_blank"corporate governance ratings
D) real HYPERLINK "http://www.iirating.com/methodologies/commercial_real_estate_eng.pdf" \t "_blank"estate ratings

Question 79

The main issue considered in the banks' financial strength ratings is the:

A) investment quality and/or credit worthiness
B) strength of the balance sheet of the bank
C) operating performance of the bank
D) rate of return on investment

Question 80

Which of the following is not a set of fundamentals that are considered in the assessment of the banks' financial strength?

A) liquidity and funds management
B) asset/liability management
C) number of bank outlets
D) adjustments to achieve economic reality