With all the hoopla in regards to the European debt crisis, a number of the governments within the Euro area find that it is hard to maintain their finances to be able. If you live in these countries, it might be risky to lend your hard earned money towards the government because default is always possible. But also for us Filipinos, lending money towards the government is a good chance to earn some interest income.
A good way to lend money for the government is via buying Retail Treasury Bonds (RTB) issued by the Bureau with the Treasury. RTB's are government securities that are considered unconditional obligations from the sovereign state. It is backed by the full taxing energy the government. Therefore, government securities are practically free from default. In other words, there is certainly almost no risk in investing in these securities.
Retail Treasury Bonds can be purchased from banks such as the Development Bank with the Philippines (DBP). The minimum investment is usually 5000 pesos or maybe more. Rates of interest for these bonds vary based on the term. As an example, the coupon interest on the 3-year bond is 8.50% per annum but for the 5-year bond, 9.0%. Interests are generally paid on the quarterly basis susceptible to a withholding tax of 20%.
Due to the 20% withholding tax, the 8.5% interest would give fabric 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. Hence they usually do not become part of the investment principal and do not need 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 being an investment instrument.
1. Safe - Unless the government defaults on its debt, which very rarely happens, the investor will not lose his money. A person's eye rate won't change whether or not the 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 amount of investment can go as little as 5000 pesos. As a result the securities inside reach of most middle class Filipinos.
4. Quarterly income - the fixed income payments are made on the quarterly basis rather than 1 year helping to make the first 3 payments worth much more than the stated interest given the added opportunity to invest the earnings.
Government borrowings is an indication that projects will probably be underway that needs financing. Hopefully, the money should go to projects that make people's lives better.