With the hoopla in regards to the European debt crisis, a number of the governments in the Euro area are finding it tough to have their finances so as. 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 towards the government is a good chance to earn some interest income.
One way to lend money for the government is via buying Retail Treasury Bonds (RTB) issued by the Bureau of the Treasury. RTB's are government securities which are considered unconditional obligations with the sovereign state. It is supported by the total taxing power the federal government. Therefore, government securities are practically clear of default. In other words, there's very little risk in investing in these securities.
Retail Treasury Bonds are available from banks like the Development Bank with the Philippines (DBP). The minimum investment is normally 5000 pesos or more. Interest levels because of these bonds vary with respect to the term. For example, the coupon interest about the 3-year bond is 8.50% per annum and for the 5-year bond, 9.0%. Interests are generally paid on the quarterly basis susceptible to 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. Therefore they don't end up part of the investment principal and will not have a compounding effect. Still they're good returns considering how almost risk-free the securities are.
There are numerous comparative advantages on Retail Treasury Bonds as a possible investment instrument.
1. Low Risk - Unless the us government defaults on its debt, which rarely happens, the investor will not lose his money. The eye rate is not going to change set up 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 only 5000 pesos. As a result the securities inside reach of most middle-class Filipinos.
4. Quarterly income - the fixed income payments are made over a quarterly basis instead of One year making the first 3 payments worth much more than the stated rate of interest due to the added possibility to invest the earnings.
Government borrowings is an indication that projects is going to be underway that needs financing. Hopefully, the amount of money should go to projects that will make people's lives better.