In a western bank will receive interest earnings on

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Microeconomics: Private and Public Choice
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Chapter ST3 / Exercise 6
Microeconomics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
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in a Western bank will receive interest earnings on that deposit regardless of the profitability of the bank and of the bank’s associated investments. Under Sharia law, however, an Islamic bank cannot pay interest to depositors. Therefore, the depositors in an Islamic bank are, in effect, shareholders (much like credit unions in the West), and the returns they receive are a function of the profitability of the bank’s investments. Their returns cannot be fixed or guaranteed, because that would break the principle of profit and loss being shared. Recently, however, a number of Islamic banking institutions have opened in Europe and North America. A Muslim now can enter into a sequence of purchases that allows him to purchase a home without departing from Islamic principles. The buyer selects the property, which is then purchased by an Islamic bank. The bank in turn resells the house to the prospective buyer at a higher price. The buyer is allowed to pay off the purchase over a series of years. Although the difference in purchase prices is, by Western thinking, implicit interest, this structure does conform to Sharia law. Unfortunately, in both the United States and the United Kingdom, this “implicit interest” is not a tax-deductible expense for the homeowner as interest would be. Ratings. Rating agencies, such as Moody’s and Standard and Poor’s (S&P), provide ratings for selected international bonds for a fee. Moody’s ratings for international bonds imply the same creditworthiness as for domestic bonds of U.S. issuers. Moody’s limits its evaluation to the issuer’s ability to obtain the necessary currency to repay the issue according to the original terms of the bond. The agency excludes any assessment of risk to the investor caused by changing exchange rates. Moody’s rates international bonds at the request of the issuer. Based on supporting financial statements and other material obtained from the issuer, it makes a preliminary rating and then informs the issuer who has an opportunity to comment. After Moody’s determines its final rating, the issuer may decide not to have the rating published. Consequently, a disproportionately large number of published international ratings fall into the highest categories, since issuers that receive a lower rating do not allow publication.
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Microeconomics: Private and Public Choice
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Chapter ST3 / Exercise 6
Microeconomics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
Expert Verified
Purchasers of eurobonds do not rely only on bond-rating services or on detailed analyses of financial statements. The general reputation of the issuing corporation and its underwriters has been a major factor in obtaining favorable terms. For this reason, larger and better-known MNEs, state enterprises, and sovereign governments are able to obtain the lowest interest rates. Firms whose names are better known to the general public, possibly because they manufacture consumer goods, are often believed to have an advantage over equally qualified firms whose products are less widely known.

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