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Retail Treasury Bonds, Investing in the Philippines
With the hoopla concerning the European debt crisis, a few of the governments inside the Euro area are finding it tough to maintain their finances so as. If you live in these countries, it could be risky to lend your cash to the government because default is always a possibility. However for us Filipinos, lending money to the government is a good chance to earn some interest income.
One method to lend money towards the government is through buying Retail Treasury Bonds (RTB) from the Bureau with the Treasury. RTB's are government securities that are considered unconditional obligations with the sovereign state. It is backed by the full taxing power the federal government. Therefore, government securities are practically free of default. Quite simply, there is certainly almost no risk in buying these securities.
Retail Treasury Bonds are available from banks such as the Development Bank of the Philippines (DBP). The minimum investment is generally 5000 pesos or more. Interest rates for these bonds vary based on the term. For example, the coupon interest about the 3-year bond is 8.50% per annum and for the 5-year bond, 9.0%. Interests are generally 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 a net 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 usually 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 as a possible investment instrument.
1. Safe - Unless the us government defaults on its debt, which very rarely happens, the investor will not lose his money. The interest rate won't change whether or not the market collapses.
2. Liquidity - If you want the amount of money invested, there is a secondary market to sell your RTB's before maturity.
3. Investment Amount - the minimum amount of investment will go only 5000 pesos. As a result the securities inside the reach of many middle-class Filipinos.
4. Quarterly income - the fixed income payments are made on the quarterly basis rather than 12 months making the initial 3 payments worth even more than the stated rate of interest due to the added possibility to invest the earnings.
Government borrowings is an indication that projects will be underway that requires financing. Hopefully, the amount of money will go to projects that make people's lives better.
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