Gonverment Bonds With the hoopla in regards to the European debt crisis, a number of the governments within the Euro area find it hard to keep their finances in order. If you live in these countries, it could be risky to lend your money to the government because default is always a possibility. But also for us Filipinos, lending money to the government is a great possibility to earn some interest income.
One method to lend money towards the government is via buying Retail Treasury Bonds (RTB) issued by the Bureau with the Treasury. RTB's are government securities that are considered unconditional obligations from the sovereign state. It is supported by the total taxing power of the government. Therefore, government securities are practically clear of default. Put simply, there is certainly very little risk in investing in these securities.
Retail Treasury Bonds are available from banks including the Development Bank from the Philippines (DBP). The minimum investment is usually 5000 pesos or higher. Interest levels because of these bonds vary with respect to the term. For instance, the coupon interest about the 3-year bond is 8.50% each year and for the 5-year bond, 9.0%. Interests are generally paid on a quarterly basis at the mercy of a withholding tax of 20%.
Because of the 20% withholding tax, the 8.5% interest gives a net return of 6.8% while a 9% interest will yield a 7.2% return. These interest earnings, however, are paid immediately to the coupon holder. Hence they do not become part of a purchase principal and do not need a compounding effect. Still they're good returns considering how almost risk-free the securities are.
There are several comparative advantages on Retail Treasury Bonds being an investment instrument.
1. Low Risk - Unless the government defaults on its debt, which very rarely happens, the investor will not lose his money. The interest rate is not going to change set up market collapses.
2. Liquidity - If you'd like the cash invested, there exists a secondary market where one can sell your RTB's before maturity.
3. Investment Amount - the minimum amount of investment will go only 5000 pesos. As a result the securities within the reach of many middle-class Filipinos.
4. Quarterly income - the fixed income debts are paid on a quarterly basis as opposed to 12 months helping to make the first 3 payments worth even more than the stated interest because of the added possibility to invest the gains.
Government borrowings is a sign that projects is going to be underway that requires financing. Hopefully, the money goes to projects that will make people's lives better.