With all the hoopla concerning the European debt crisis, some of the governments inside the Euro area are finding it hard to have their finances so as. If you live in these countries, it could be risky to lend your cash for the government because default is always a chance. But also for us Filipinos, lending money towards the government is an excellent chance to earn some interest income.
One method to lend money towards the government is via buying Retail Treasury Bonds (RTB) from the Bureau of the Treasury. RTB’s are government securities that are considered unconditional obligations of the sovereign state. It really is backed by the full taxing power the us government. Therefore, government securities are practically free of default. In other words, there is certainly hardly any risk in purchasing these securities.
Retail Treasury Bonds can be purchased from banks including the Development Bank of the Philippines (DBP). The minimum investment is usually 5000 pesos or higher. Rates of interest of these bonds vary with respect to the term. For example, the coupon interest around the 3-year bond is 8.50% per year but for the 5-year bond, 9.0%. Interests are often paid on a quarterly basis at the mercy of a withholding tax of 20%.
As a result of 20% withholding tax, the 8.5% interest gives fabric return of 6.8% while a 9% interest will yield a 7.2% return. These interest earnings, however, are paid immediately towards the coupon holder. Hence they usually do not end up part of the investment principal and do not need a compounding effect. Still they are good returns considering how almost risk-free the securities are.
There are many comparative advantages on Retail Treasury Bonds as an investment instrument.
1. Low Risk – Unless the federal government defaults on its debt, which very rarely happens, the investor is not going to lose his money. A person’s eye rate won’t change whether or not the market collapses.
2. Liquidity – If you need the amount of money invested, there’s a secondary market where one can sell your RTB’s before maturity.
3. Investment Amount – the minimum quantity of investment can go as little as 5000 pesos. This makes the securities inside reach of most middle class Filipinos.
4. Quarterly income – the fixed income debts are paid over a quarterly basis instead of One year which makes the very first 3 payments worth much more than the stated rate of interest because of the added possibility to invest the gains.
Government borrowings is a sign that projects is going to be underway that really needs financing. Hopefully, the cash goes to projects which make people’s lives better.