Retail Treasury Bonds, Investing in the Philippines

Gonverment Bonds

With all the current hoopla concerning the European debt crisis, a few of the governments within the Euro area find it tough to keep their finances in order. If you live in these countries, it could be risky to lend your cash to the government because default is always possible. However for us Filipinos, lending money to the government is an excellent opportunity to earn some interest income.

One way to lend money for the government is through buying Retail Treasury Bonds (RTB) issued by the Bureau of the Treasury. RTB's are government securities which are considered unconditional obligations from the sovereign state. It really is supported by the entire taxing power of the us government. Therefore, government securities are practically free from default. Put simply, there is certainly hardly any risk in investing in these securities.

Retail Treasury Bonds can be purchased from banks such as the Development Bank of the Philippines (DBP). The minimum investment is usually 5000 pesos or more. Interest rates of these bonds vary depending on the term. For example, the coupon interest about the 3-year bond is 8.50% each year as well as the 5-year bond, 9.0%. Interests are generally paid on a quarterly basis susceptible to a withholding tax of 20%.

Due to the 20% withholding tax, the 8.5% interest would give an internet return of 6.8% while a 9% interest will yield a 7.2% return. These interest earnings, however, are paid immediately for the coupon holder. Hence they don't become part of the investment principal and would not have a compounding effect. Still they're good returns considering how almost risk-free the securities are.

There are many comparative advantages on Retail Treasury Bonds being an investment instrument.

1. Safe - Unless the us government defaults on its debt, which hardly ever happens, the investor is not going to lose his money. The eye rate won't change even if the market collapses.

2. Liquidity - If you'd like the amount of money invested, there exists a secondary market where you can sell your RTB's before maturity.

3. Investment Amount - the minimum quantity of investment will go only 5000 pesos. As a result the securities within the reach of most middle-class Filipinos.

4. Quarterly income - the fixed income payments are made on a quarterly basis instead of 12 months making the first 3 payments worth much more than the stated interest rate due to the added chance to invest the income.

Government borrowings is an indication that projects will probably be underway that needs financing. Hopefully, the money goes to projects which make people's lives better.

Gonverment Bonds


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