Since we were little kids, we were taught to save money and put it in the bank. Do you remember putting coins in the piggy bank that your parents gave you? As you got older, the practice of the piggy bank became depositing part of your earnings in the bank.
There’s nothing wrong with this if your purpose is to safely keep your money rather than make it earn. That is the function of a savings account.
But what if I told you that you have other options to make your savings an investment? Your money sits in the bank as a deposit, but when you choose to put it in bonds, you immediately maximize your earnings.
You still leave your savings in the bank, but your money is diversified as bonds that earn interest. Similar to a time deposit, you keep it there for some time until its maturity or the end of the contract.
Now, your savings are working for you as you build your assets faster because your savings are no longer under-utilized. Bonds earn on their own at a higher interest rate and will give you a higher yield when your bonds mature.
01 of 09What are Bonds?
Bonds are passive income investments and legitimate transaction proof that you lent money to the borrower (government or private corporation). The borrower will pay you the principal amount with additional periodic interest payments throughout the bond maturity.
Government Bonds or Sovereign Bonds are issued to the public when there is a shortage of funding for a project or program. Multiple bonds are offered to the public with the promise to pay it back several years with added interest.
A person, organization, and even foreign governments can buy into government-issued bonds, referred to as a creditor or debt-holder.
Corporate Bonds are issued by privately listed corporations registered on the stock exchange. These companies offer to the public that when they want, they are due for expansion in other areas. They can also provide these in the event of upgrading their operations and enhancing their systems to boost profitability in the market.
When the issued bond matures, the creditor or bondholder can claim the amount with the corresponding interest as agreed at the beginning of the bond purchase. Bond transactions are a legitimate form of investment instrument and a less risky alternative to buying stocks in the stock market.
Classification of Bonds
Bonds can be computed in the local currency, which is the Philippine Peso, or in the US Dollar.
- Government or Sovereign Bonds are classified as very low-risk or even risk-free because the government is the borrower of the loan.
- Corporate Bonds aim to raise capital and can be considered as stocks of a company. If the company needs to liquidate its assets, the priority payment goes straight to the bonds.
Benefits of Investing in Bonds
You are probably wondering if there is a direct benefit to investing in bonds compared to keeping your money in a savings account. The bondholder has protection for their investment because they are prioritized for payment collection. Another option is for bond value collected on face value. Here are some items to consider:
- Bonds provide better revenue on your money compared to the bank’s savings account or time deposit.
- Bonds are considered an investment tool to diversify your investments.
- Bonds allow you to preserve your capital and earn from a higher interest rate.
- Bonds give you fixed passive income depending on the bonds you are investing in.
- Bonds are less volatile compared to equities or buying stocks.
- The interest payments have smaller profits but are steady during a recession or market decline.
- Bonds are liquid in nature and tradable.
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02 of 09Safety of Bond Investment
There is no sure 100% safety risk when you invest your money. But bonds are considered one of the less risky forms of investment options. It does not require constant monitoring and has less activity for an investor.
You do not need to make instant decisions on whether to sell, as you would do for stocks or the money market.
On the rare chance, the risk you face is the possibility of a company declaring bankruptcy.
But bonds are on a high-priority payment because of the mechanism within the bond to guarantee a pay-back clause. Another way to get paid is to agree on the face value amount versus the fixed value term.
03 of 09Risks in Bond Investment
There are some risks that you have to weigh carefully when you invest in bonds. You expect a fixed nominal return when you put your money in bonds. But nothing is full-proof, and these are the main factors that will decrease your expected yield on the investment.
1. Inflation Risk
Bondholders prefer benign inflation in the financial environment. But when bonds are issued, it is affected by changes in the market rates. Rates in turn reflect inflation or expect it to happen.
2. Credit Risk
Corporate bonds are rated as viable for their creditworthiness by the issuer. Financial agencies do the credit rating based on different criteria to guide investors. Philippine Rating Services or PhilRatings is the agency that does the credit ratings. But when a company faces default on its bond obligations, this is the credit risk involved.
3. Liquidity Risk
Just like stocks in the stock market, an illiquid bond may be hard to sell. While some investors may buy your bonds to take advantage of the market inefficiencies, you might have to pay higher commissions. This is a risk when you are unable to sell your bonds immediately.
04 of 09The Decision to Invest in Bonds
Many first-time investors go through the dilemma of investing in bonds or putting their money in the stock market.
But if you are a conservative investor who does not want to gamble in the stock market and prefers a safe investment, then investing in bonds is a fit for you.
It is suited for those who expect a predictable passive income from the periodic interest that bonds receive.
- Buying bonds is the preferred investment choice of:
- First-time Investors
- People who want a safe and long-term investment.
- People can expect periodic income to help with household overhead expenses.
- Retirees can expect additional periodic income.
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05 of 09Types of Bonds
Bonds are considered a common type of fixed-income securities. It is a debt instrument that pays a fixed amount of interest through coupon payments. The principal amount is returned to the investor or the bondholder upon its maturity due date.
1. Maturity-based Bonds
There are two kinds of maturity-based bonds that are valued on the length of time the bond will have its maturity due date: Treasury Bills and Treasury Bonds.
2. Issuer-based Bonds
The list below is classified by who issued the bonds.
3. Bond Funds Managed by an Institution
The pooled investment managed by an institution allows you to participate in mutual funds or unit investment trust funds. Profits from authorized financial institutions or companies come from bond investments.
- Callable or Redeemable bonds have a higher rate, wherein the issuer may redeem the bonds before the maturity date. They do this if market rates move lower, and they redeem to re-borrow at a lower rate.
- Puttable Bonds have a lower rate than regular bonds because it allows the holder to demand early repayment of the principal on a specified date.
- Zero-Coupon Bonds trade at a deep discount, with the maturity date redeemed at face value. You do not get the regular interest, but paid the difference value of the purchase price and the face value.
- A Convertible Bond provides the investor with a right or obligation to exchange the bond for a fixed number of shares during the bond’s lifetime. It is a hybrid security that combines debt and equity.
- A Junk Bond carries a higher interest rate due to a perceived higher default risk.
06 of 09How To Invest In Bonds
It is easy to invest in bonds. The Bureau of Treasury periodically offers bonds to investors, but many use Retail Treasury Bonds (RTB)- issuing banks to invest. The convenient way is to go through a selling agent, be it banks, stockbrokers, or through an online transaction using bonds.PH.
Most banks will require you to submit the following requirements:
- 2 valid government identification cards
- Tax Identification Number
- Bank Account information like a checkbook, passbook, or monthly statement of transactions
Once your documentation has been completed, you need to choose what kind of bonds you want to buy and how much initial investment you will deposit. Below is a summary of the bonds and the initial investment.
07 of 09Banks That Offer Bonds
Most banks offer fixed-income products. They will have retail treasury bonds, T-Bills, and Fixed Rate Treasury Notes (FTNs). They also have dollar sovereign bonds and dollar corporate bonds.
Amongst the Philippine banks that offer bonds are
- Banco de Oro (BDO)
- Bank of the Philippine Islands (BPI)
- Bank of Commerce
- China Bank
- Development Bank of the Philippines (DBP)
- Land Bank of the Philippines (LandBank)
- PB Com
- Philippine National Bank (PNB)
- Rizal Commercial Banking Corporation (RCBC)
- Security Bank
08 of 09Online Bond Investment
If you’re one of those people who transact everything with your Smartphone, you can do the same with online bond investments. The first digital platform that can be used for investing in government bonds is Bonds.PH.
It is an online app launched by the Bureau of Treasury with UnionBank and the Philippine Digital Asset Exchange (PDAX).
Easy Features of Bonds.PH can be used by OFWs or anyone who registers with the Bonds.PH. It is accessible 24/7 for you to buy or sell individual investment RTBs on your own timeline.
You do not need to register your bank account, but you can pay through a debit card, InstaPay, PESONet, GCash, PayMaya, bank deposit, or Bitcoin.
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09 of 09Final Notes
Buying bonds is something you should seriously consider giving the mix of lower risk with a higher yield over a fixed period of time.
Instead of keeping your money in a savings account, you might as well invest in short-term Treasury Bills that will give you a higher interest rate for your minimal investment.
There are also the Retail Treasury Bonds that only require a PHP 5,000 minimal investment with a higher interest rate than the savings account.
However, if you have a sudden windfall and have a chunk of money that you need to park, then put that into Treasury bonds that have a higher rate than Treasury Bills. You are almost 99% sure to be paid upon bond maturity because of the nature of a sovereign bond.
Keep in mind that your investment becomes an active assistance to the government with its programs and projects. Lastly, bonds can be passed on from one generation to the next, as passive income that will not be depleted until its maturity.
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