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29 Jan 2017

Gonverment Bonds
With all the current hoopla about the European debt crisis, a few of the governments within the Euro area are finding it hard to have their finances to be able. If you reside in these countries, it might be risky to lend your money to the government because default is usually possible. However for us Filipinos, lending money to the government is a great chance to earn some interest income.

A good way to lend money towards the government is via buying Retail Treasury Bonds (RTB) from the Bureau from the Treasury. RTB's are government securities which are considered unconditional obligations from the sovereign state. It really is supported by the full taxing power of the government. Therefore, government securities are practically free of default. Quite simply, there's almost no 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 generally 5000 pesos or higher. Interest rates of these bonds vary based on the term. As an example, the coupon interest on the 3-year bond is 8.50% each year as well as the 5-year bond, 9.0%. Interests are generally paid over a quarterly basis susceptible to a withholding tax of 20%.

Due to the 20% withholding tax, the 8.5% interest will give fabric 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. Therefore they do not end up part of the investment principal and do not need a compounding effect. Still they are good returns considering how almost risk-free the securities are.

There are many comparative advantages on Retail Treasury Bonds as an investment instrument.

1. Safe - Unless the government defaults on its debt, which rarely happens, the investor won't lose his money. A person's eye rate will not change set up market collapses.

2. Liquidity - If you'd like 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 low as 5000 pesos. As a result the securities inside the reach of many middle-class Filipinos.

4. Quarterly income - the fixed income debts are paid over a quarterly basis rather than 12 months helping to make the initial 3 payments worth even more than the stated interest because of the added opportunity to invest the earnings.
Gonverment Bonds
Government borrowings is a sign that projects is going to be underway that needs financing. Hopefully, the cash should go to projects that will make people's lives better.


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