IDEAS home Printed from https://ideas.repec.org/a/eme/imefmp/imefm-02-2017-0040.html
   My bibliography  Save this article

Test on yields of equivalently-rated bonds

Author

Listed:
  • Mohamed Ariff
  • Alireza Zarei
  • Ishaq Bhatti

Abstract

Purpose - This paper aims to report practice-relevant anomalous investment yield behavior of two types of bonds – Type A, the mainstream bond, and Type B, which isSukuk– both having similar cash-flow-relevant characteristics. Design/methodology/approach - Bond valuation theory suggests that yields to investors of similarly rated bonds ought to be same. The authors collected time-series data on A and B bonds, all being coupon-paying bonds with similar rating and similar tenor as two matched samples traded in a bond exchange. To ensure the results are extended to different bond sectors, the data set was separated into treasury bonds as risk-free and corporate bonds as risky ones. The data set was further sub-divided into short-, medium- and long-tenor bonds. As the data straddle the Global Financial Crisis period, the authors use appropriate econometric method to control the possible effect from the crisis. Findings - The average and median yields on Type A bond are significantly different from those of Type B. The test results show significant and systematic differences: treasury bonds of Type A returns yield lower than treasury bonds of Type B; the yields of corporate mainstream bonds (A) are higher than the yields ofSukuk(B). The authors observe these findings constitute a puzzle, being anomalous to theory. Originality/value - This paper is original in that it is documenting significant differences in pricing of equivalent bonds. This has both theory and practice implications for fixed-income security market practices. The evidence is very strong to suggest that the identical types of bonds may have missing variable that contributes to the difference. Therefore, further research to identify the missing variable is necessary.

Suggested Citation

  • Mohamed Ariff & Alireza Zarei & Ishaq Bhatti, 2018. "Test on yields of equivalently-rated bonds," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 11(1), pages 59-78, February.
  • Handle: RePEc:eme:imefmp:imefm-02-2017-0040
    DOI: 10.1108/IMEFM-02-2017-0040
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/IMEFM-02-2017-0040/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://www.emerald.com/insight/content/doi/10.1108/IMEFM-02-2017-0040/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1108/IMEFM-02-2017-0040?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Awais Ur Rehman & Saqib Farid & Muhammad Abubakr Naeem, 2022. "The link between corporate governance, corporate social sustainability and credit risk of Islamic bonds," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 18(12), pages 5990-6014, May.

    More about this item

    Keywords

    Bond rating; Bond yields; Risky security; Risk-free yield; Tenor; Yields; F23; F31; G12;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:imefmp:imefm-02-2017-0040. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.