Keen investors like you have probably heard about retail treasury bonds or RTBs. There are banks out there that are offering RTBs for this week. You’ve probably also heard that they’re relatively low-risk. But what are they in the first place?
Let’s break down each word in it to get a better picture.
Retail?
First, “retail” means they’re available to regular people like you and me. The opposite of retail is “wholesale” which is buying things in huge quantities. To put it in perspective, when you buy from a supermarket, that’s retail. When the supermarket buys from their suppliers, that’s wholesale.
So what does this have to do with RTBs?
There are investments that take a lot of money to invest in. Some take hundreds of thousands of pesos. Ordinary people don’t have that kind of money but financial institutions like banks do. So what happens is banks buy these investments and then offer it to people at more affordable levels.
Treasury?
Next, “treasury” means they’re investments that are issued by the Bureau of Treasury — which means they’re backed by the Philippine government.
The Bureau of Treasury keeps track of how much money the government has. If they’re asking to borrow money in the form of bonds, then that means that they project that they can pay back everyone they owe money to when the bonds mature.
Bond?
This brings us to our last word, bonds. As mentioned, governments borrow money in the form of bonds. This means a bond is actually a proof of debt (or a debt paper) where the bond issuer owes you money. This is why bonds are are called “government securities.”
In return for letting them borrow your money, the government pays you interest. Instead of paying you the interest back together with your principal (the initial amount you invested), you get a bit of interest in the form of coupons.
For government bonds, you get paid the interest quarterly (every 3 months). When the maturity period comes, you get paid back your principal.
So what does it all mean?
Putting all of the words together retail bonds are:
- Available through banks that make them available to people after investing in them in bulk from the government
- Pay interest quarterly through coupons
- Pay the money you invest on the maturity date
What do you need to know to invest in retail treasury bonds?
1. Know your issuer
Why do people say retail treasury bonds are relatively low risk? It’s because they’re mainly exposed to one type of risk: credit risk.
Also called “default risk,” credit risk is the chance that you won’t get paid your interest or your principal.
So, before you invest with anything that has credit or default risk, try to see if you’re confident that they can pay you back. How much money does the issuer make? Is there any chance of them closing down?
In the case of retail treasury bonds, the chances of a government totally running out of money is very low under normal circumstances. Government defaults have happened multiple times across the world throughout history. Don’t worry though. It normally happens under extreme circumstances like war, economic crises, or self-destructive government leaders.
2. Know the bond
When evaluating a bond, you have to look at a few things to know what you can expect from it:
Face value — This is how much money was originally invested in the bond and how much will be returned on the maturity date.
Denomination — This is multiple you’re allowed to invest in. So for example a bond has a denomination of P5,000, you can only invest in multiples of that number like P5,000, P10,000, P15,000, and so on.
Interest / coupon rate — This is the rate of interest that will be given every year. Note though that each time interest comes in, it’s subject to 20% withholding tax.
Tenor — This is how long the bond takes to mature.
Maturity date — This is the date the face value will be given to the bondholder. This is also when the bond stops giving coupons.
With these terms in mind Here are some fast-facts about the government’s latest retail treasury bond:
- Denomination: P5,000
- Interest/coupon rate: 6.25%
- Tenor: 5 years
- Offer period: February 26 — March 8, 2019
- Maturity date: March 12, 2014
If you’re getting your bond through an issuer outside of the banks, then you might have to pay a bit more or a bit less because you’re paying at a price the bondholder wants to sell it for.
Yield — This is how much money the bond will make when it matures compared to how much money it cost to buy it.
Yield-to-maturity — This is how much money the bond will make when it matures but then you factor in how many coupons it has left.
What can you do with retail treasury bonds?
Retail treasury bonds are for investors who prefer to grow their money through interest that come every quarter. You can actually use that interest to invest in other things.
You can invest in retail treasury bonds through one of the banks that offer them. Normally, when the government wants to offer retail treasury bonds, the banks come in and bid how much they want to invest and at how much interest.
If you hold a retail treasury bond but you suddenly need to take your investment out, you can actually ask the bank you bought it from to sell it for you. Of course, you might get something lower (or higher) depending on market conditions. (That’s a topic for another day.)
Are there other things like treasury bonds?
Besides retail treasury bonds, there are other government securities like fixed rate treasury notes (or FXTN) and treasury bills. Unlike bonds though, they’re more like time deposits because instead of giving you coupons, they give you interest together with your principal at maturity.
There are also corporate bonds which are almost exactly like retail treasury bonds but instead of the government, the issuer is a corporation. These normally have higher interest rates than government bonds because a corporation running out of money is more probable than a government shutting down.
Finally, you can invest in bond funds. There’s a bit more to unpack when it comes to those so that’s a topic for another day.
