With all the current hoopla concerning the European debt crisis, a number of the governments inside the Euro area find that it is hard to have their finances in order. If you live in these countries, it might be risky to lend your money towards the government because default is always a chance. However for us Filipinos, lending money towards the government is an excellent chance to earn some interest income.
A good way to lend money to the government is thru buying Retail Treasury Bonds (RTB) from the Bureau with the Treasury. RTB's are government securities that are considered unconditional obligations from the sovereign state. It is supported by the entire taxing energy the federal government. Therefore, government securities are practically clear of default. Put simply, there's almost no risk in purchasing these securities.
Retail Treasury Bonds can be bought from banks such as the Development Bank from the Philippines (DBP). The minimum investment is usually 5000 pesos or more. Rates of interest for these bonds vary based on the term. For instance, the coupon interest on the 3-year bond is 8.50% each year and for the 5-year bond, 9.0%. Interests are usually paid on the quarterly basis susceptible to a withholding tax of 20%.
Because of the 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 to the coupon holder. Hence they do not end up part of the investment principal and would not have a compounding effect. Still they are good returns considering how almost risk-free the securities are.
There are numerous comparative advantages on Retail Treasury Bonds as an investment instrument.
1. Low Risk - Unless the government defaults on its debt, which hardly ever happens, the investor will not lose his money. A person's eye rate won't change even if the market collapses.
2. Liquidity - If you need the money invested, there's a secondary market where you can sell your RTB's before maturity.
3. Investment Amount - the minimum quantity of investment will go as low as 5000 pesos. As a result the securities inside the reach of most middle-class Filipinos.
4. Quarterly income - the fixed income payments are made over a quarterly basis as opposed to 12 months which makes the first 3 payments worth much more than the stated rate of interest given the added chance to invest the income.
Government borrowings is an indication that projects will be underway that really needs financing. Hopefully, the cash goes to projects that will make people's lives better.