With all the current hoopla about the European debt crisis, some of the governments in the Euro area are finding that it is hard to maintain their finances to be able. If you reside in these countries, it might be risky to lend your hard earned money towards the government because default is definitely a chance. But also for us Filipinos, lending money towards the government is a good chance to earn some interest income.
One method to lend money for the government is thru buying Retail Treasury Bonds (RTB) issued by the Bureau from the Treasury. RTB’s are government securities that are considered unconditional obligations with the sovereign state. It really is supported by the full taxing energy the government. Therefore, government securities are practically clear of default. In other words, there is certainly almost no risk in buying 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 maybe more. Interest levels because of these bonds vary depending on the term. For instance, the coupon interest on the 3-year bond is 8.50% per year as well as the 5-year bond, 9.0%. Interests are often paid over a quarterly basis subject to a withholding tax of 20%.
As a result of 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 to the coupon holder. Therefore they usually do not join an 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 a possible investment instrument.
1. Safe — Unless the us government defaults on its debt, which hardly ever happens, the investor won’t lose his money. The eye rate won’t change set up market collapses.
2. Liquidity — If you want the money invested, there is a secondary market where you can sell your RTB’s before maturity.
3. Investment Amount — the minimum quantity of investment can go as little as 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 the quarterly basis instead of One year which makes the first 3 payments worth even more than the stated interest due to the added opportunity to invest the income.
Government borrowings is a sign that projects will probably be underway that needs financing. Hopefully, the amount of money will go to projects that make people’s lives better.