With all the current hoopla concerning the European debt crisis, some of the governments within the Euro area find that it is hard to maintain their finances in order. If you live in these countries, it would be risky to lend your money towards the government because default is always a possibility. But for us Filipinos, lending money towards the government is an excellent chance to earn some interest income.
One method to lend money to the government is via buying Retail Treasury Bonds (RTB) issued by the Bureau from 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 us government. Therefore, government securities are practically clear of default. In other words, there is certainly hardly any risk in purchasing these securities.
Retail Treasury Bonds can be bought from banks such as the Development Bank of the Philippines (DBP). The minimum investment is generally 5000 pesos or more. Interest rates of these bonds vary based on the term. For instance, the coupon interest on the 3-year bond is 8.50% per annum as well as the 5-year bond, 9.0%. Interests are usually paid over a quarterly basis subject to a withholding tax of 20%.
Due to the 20% withholding tax, the 8.5% interest will 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 do not become part of the investment principal and would not have a compounding effect. Still they are good returns considering how almost risk-free the securities are.
There are numerous comparative advantages on Retail Treasury Bonds as an investment instrument.
1. Safe - Unless the federal government defaults on its debt, which very rarely happens, the investor is not going to lose his money. The eye rate is not going to change set up market collapses.
2. Liquidity - If you need the cash invested, there's a secondary market where you can sell your RTB's before maturity.
3. Investment Amount - the minimum level of investment may go as low as 5000 pesos. As a result the securities within the reach on most middle class Filipinos.
4. Quarterly income - the fixed income payments are made on the quarterly basis as opposed to 1 year making the very first 3 payments worth even more than the stated interest due to the added opportunity to invest the earnings.
Government borrowings is a sign that projects will be underway that needs financing. Hopefully, the cash will go to projects that will make people's lives better.