Did you ever wonder how the government of the Philippines goes about raising money to fund its various activities?
If you have reached the age of 18 and you are able to vote, you should get some idea.
But to make that job easier, let’s lay them down here.
The government raises money by:
- Imposing and collecting taxes – this is the government’s main source of “income” paid mostly by its own people. It’s one of those inescapable things in life.
- Borrowing from financial institutions – paid by YOU, of course.
- Issuing Government Securities – sometimes referred to as Treasuries, these are almost similar in nature to corporate bonds. In other words, the government borrows money from you and promises to pay you back.
Let’s discuss Government Securities in details and what’s in store for investors like you.
Philippine Government Securities 101
According to the Bureau of Treasury Website, “Government securities are unconditional obligations of the State, and backed by its full taxing power, making them practically free from default.”
Now, that “unconditional obligations” term simply means that the government is borrowing money from the public – it’s an IOU thing.
For the investor, this type of investment is virtually risk-free due to the inherent power of the government to impose taxes on its people.
So if you are looking for a sure-thing investment, this is one of those.
Treasury Bonds (T-Bonds)
- Matures beyond one year. At present, there are T-Bonds that mature in 2, 5, 7, 10 and 20 years
- Pays coupons (interest) quarterly. Coupon rate is expressed as percentage of the face value (the amount borrowed) on a per annum basis.
Treasury Bills (T-Bills)
- Matures in less than 1 year, making it the shortest term debt instrument issue of the government. Maturity tenors of T-Bills are 91 days, 182 days and 364 days.
- Don’t have coupons. Instead, they are sold at a discount from their face value. You (investor) earn “interest” through the difference of the discount price and the face value paid to you at the maturity date.
In the past, the government also issues Treasury Notes, which are practically similar to T-Bonds and only creates confusion in terms.
Q & A on Government Securities
1. Why Invest In Government Securities?
Quick Answer: To help the Philippine Government.
“Help the what?”
Now, I know what you’re thinking. Unless your name is Dr Jose Rizal, you probably won’t care. 🙂
But, think about T-Bills and its beautiful attributes:
- Short-term… as short as 3 months for 91-Day T-Bills.
- Virtually risk-free. The government won’t probably run away.
- Pays better than your usual savings account at the bank.
Can you think of anything else that’s good about these investment instruments from the government?
2. Okay, so how can I actually invest in those types of debt instruments offered by the Republic of the Philippines?
Don’t contact your Network Marketing up-line. He may be full of hot air, but he is prohibited from selling this type of investments.
You should be looking out for Government Securities Eligible Dealers such as the following financial institutions:
- ABN-Amro Bank
- All Asia Capital & Trust Corporation
- Bank of the Philippine Islands
- China Banking Corporation
- East West Banking Corporation
- First Metro Investment Corporation
- ING Bank
- Union Bank of the Philippines
Please check out from the Bureau of Treasury Website for a complete list of dealers.
3. Since these are government issued securities, are they tax-free also?
Good question (by me)! 🙂
Unfortunately, they are still subject to 20% withholding tax, unless you belong to a tax-exempt institution. Withholding tax is applied this way:
- T-Bills – on the spread of the face value and the buying price.
- T-Bonds – on the coupons.
In the previous article, you’ve learned the basic concepts of stocks and corporate bonds. When companies wanted to raise money, they may do so by issuing bonds and stocks to the public.
In this article, we’ve discussed the concepts of Treasuries or Government Securities. These types of investments are considered almost risk-free, since they are back by the full taxing power of the Republic of the Philippines.
Risk is an inherent feature, which you can’t separate from any investment instrument. But with Treasuries, you are almost guaranteed to get your money back by the time it reaches maturity date. Therefore, if you are a conservative investor, you have to make sure that your investment portfolio should have a mix of Government Securities in it.