With all the current hoopla in regards to the European debt crisis, a few of the governments inside the Euro area are finding it hard to have their finances in order. If you reside in these countries, it might be risky to lend your money towards the government because default is usually possible. But also for us Filipinos, lending money for the government is an excellent chance to earn some interest income.
One method to lend money towards the government is thru 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's supported by the entire taxing energy the federal government. Therefore, government securities are practically clear of default. Put simply, there is certainly hardly any risk in buying these securities.
Retail Treasury Bonds can be purchased from banks including the Development Bank with the Philippines (DBP). The minimum investment is usually 5000 pesos or more. Interest levels because of these bonds vary with respect to the term. As an example, the coupon interest on the 3-year bond is 8.50% per year but for the 5-year bond, 9.0%. Interests are generally paid on the quarterly basis at the mercy of a withholding tax of 20%.
As a result of 20% withholding tax, the 8.5% interest gives 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 don't join a purchase principal and would 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 government defaults on its debt, which rarely happens, the investor won't lose his money. The eye rate will not change set up market collapses.
2. Liquidity - If you want the money invested, there exists a secondary market where you can sell your RTB's before maturity.
3. Investment Amount - the minimum level of investment will go as little as 5000 pesos. This makes the securities inside the reach of most middle class Filipinos.
4. Quarterly income - the fixed income debts are paid over a quarterly basis instead of 1 year helping to make the initial 3 payments worth much more than the stated interest rate due to the added opportunity to invest the income.
Government borrowings is a sign that projects will probably be underway that requires financing. Hopefully, the amount of money should go to projects that will make people's lives better.