With all the hoopla in regards to the European debt crisis, a number of the governments in the Euro area are finding it hard to maintain their finances to be able. If you reside in these countries, it would be risky to lend your cash for the government because default is definitely a chance. But also for us Filipinos, lending money towards the government is a great possibility 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 from the Treasury. RTB's are government securities that are considered unconditional obligations of the sovereign state. It is supported by the full taxing power of the federal government. Therefore, government securities are practically clear of default. Quite simply, there's hardly any risk in purchasing these securities.
Retail Treasury Bonds can be purchased from banks such as the Development Bank from the Philippines (DBP). The minimum investment is usually 5000 pesos or more. Interest levels because of these bonds vary based on the term. For example, the coupon interest on the 3-year bond is 8.50% per annum but for the 5-year bond, 9.0%. Interests are usually paid on a quarterly basis susceptible to a withholding tax of 20%.
As a result of 20% withholding tax, the 8.5% interest gives fabric return of 6.8% while a 9% interest will yield a 7.2% return. These interest earnings, however, are paid immediately towards the coupon holder. Therefore they do not end up part of a purchase principal and do not need a compounding effect. Still they're good returns considering how almost risk-free the securities are.
There are many comparative advantages on Retail Treasury Bonds being an investment instrument.
1. Safe - Unless the federal government defaults on its debt, which very rarely happens, the investor will not lose his money. The interest rate will not change even if the market collapses.
2. Liquidity - If you need the money invested, there exists 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. This makes the securities inside the reach on most middle class Filipinos.
4. Quarterly income - the fixed income debts are paid on the quarterly basis instead of 12 months helping to make the first 3 payments worth even more than the stated interest due to the added chance to invest the earnings.
Government borrowings is an indication that projects will probably be underway that needs financing. Hopefully, the amount of money goes to projects that make people's lives better.