With all the hoopla about the European debt crisis, a few of the governments in the Euro area are finding it hard to keep their finances in order. If you live in these countries, it would be risky to lend your money to the government because default is always a possibility. But for us Filipinos, lending money to the government is a good opportunity to earn some interest income.
One way to lend money to 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 of the sovereign state. It is backed by the full taxing power of the government. Therefore, government securities are practically free from default. In other words, there is very little risk in investing in these securities.
Retail Treasury Bonds can be bought from banks such as the Development Bank of the Philippines (DBP). The minimum investment is usually 5000 pesos or higher. Interest rates for these bonds vary depending on the term. For example, the coupon interest on the 3-year bond is 8.50% per annum and for the 5-year bond, 9.0%. Interests are usually paid on a quarterly basis subject to a withholding tax of 20%.
Because of the 20% withholding tax, the 8.5% interest would give 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. Therefore they do not become part of the investment principal and would not have a compounding effect. Still these are good returns considering how almost risk-free the securities are.
There are several comparative advantages on Retail Treasury Bonds as 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 will not change even if the market collapses.
2. Liquidity – If you need the money invested, there is a secondary market where you can sell your RTB’s before maturity.
3. Investment Amount – the minimum amount of investment can go as low as 5000 pesos. This makes 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 1 year which makes the first 3 payments worth much more than the stated interest rate given the added opportunity to invest the earnings.
Government borrowings is an indication that projects will be underway that needs financing. Hopefully, the money will go to projects that make people’s lives better.