How to Invest in Bonds in the Philippines:
Is investing in bonds one of the best investments in the Philippines? According to a study done by the World Government Bonds, investors of bonds have been tremendously increasing in our country due to higher yields and positive spreads throughout the past 5 years. So, let’s have a more in-depth understanding of how bonds work.
What is a Bond?
A bond is a debt security and is considered an IOU (I owe you). This is where an investor/bondholder (you) lends money to a borrower/bond issuer (a company or government). Of course, when you lend your money, you will earn from it. It is a security meaning the borrower is under a legal obligation to pay for it
Ultimately, bonds are much safer than stocks. The returns on bonds are lower than the yields on stocks, but they are safer and they minimize risk. Furthermore, if you want to start investing but are too scared to expose yourself to the risks of the stock market, then invest in bonds first.
What are the types of bonds in the Philippines?
a. Corporate bonds- also called long-term commercial papers. This means you are lending money to a corporation.
b. Government Bonds- this means you are lending money to the government. Commercial Banks usually offer these for a limited period of time. They are also called Retail Treasury Bonds (RTBs) , treasury notes, and Treasury bills.
These 2 bonds differ in risks which will be discussed below along with the reasons why you should invest in bonds.
Corporate Bonds
For example, let’s say Filinvest Inc (FLI) needs P15 billion to fund several real estate projects. To raise that much money, they decided to sell corporate bonds with a coupon rate of 10% per annum for 5 years.
If you invested P100,000, then you will receive the following:
P100,000 x 10% = P10,000 per year, before taxes
P10,000 – 20% withholding tax= P8,000 per year
You will be receiving P8,000 per year for the next 5 years, then upon the 5th year, FLI will return your principal of P100,000 to you. Receiving regular interest payments is a good way to stock up your Net Worth.
Do take note that some bonds pay quarterly or semi-annually. In our example, if FLI wants to pay semi-annually then you will be receiving P4,000 (after taxes) every 6 months.
Moreover, there are also Zero-Coupon Bonds. This is a bond that is issued at a deep discount to its face value (amount paid to the investor at maturity) but pays no interest. These are sold at a lower price at face value. With this, you won’t be receiving regular interest payments.
If you buy a 5-year corporate bond at a 10% discount, zero-coupon rate, and invested P100,000 then you’ll only need to pay P90,000. After 5 years, your P100,000 will be given back to you.
The risks associated with corporate bonds are higher than with government bonds, hence one can expect higher returns from corporate bonds.
Some of the risks involved in a corporate bond is if the company goes bankrupt. In this case, bondholders have priority in receiving the proceeds from the liquidation of the company’s assets and are repaid before the stockholders receive any proceeds..
The company could also modify their coupon rate to a lower one. When this happens, investors will be given the option to redeem the par value/face value if they don’t want to continue investing with the new coupon rate.
Another risk is when the company decides to preterminate the bond, that instead of 5 years, they can just pay back the principal after 4 years.
If you are interested in investing here, you can visit the Investor’s Relations Dept of the company and ask if they are offering bonds.
Government Bonds
Government Bonds or retail treasury bonds (RTB) is considered zero-risk because it is a direct, unconditional and general obligation of the Republic of the Philippines.
If you do not want risks and volatility then investing in RTBs is one good option. RTBs are virtually zero-risks for investors since the government is the last entity that can go into bankruptcy. If this does happen (which is very unlikely), the Central Bank can just print more money or the government can increase taxes jut to pay back the bond obligations.
This is one reason why RTBs are a more popular investment instrument than corporate bonds.
If you are a conservative type of investor and you are looking for higher returns than a savings account or time deposits, then go ahead and invest in RTBs. To invest in these, you can go to any commercial bank and ask if they are selling. You can also visit the website of the Bureau of the Treasury to check for current public offerings.
Why should you invest in Bonds in the Philippines?
Here are 4 reasons why you should invest in Bonds:
a. Higher returns than Savings account and Time deposits
Some savings accounts and time deposits pay you an interest of 0.25% per annum. Bond rates, though may vary, can offer around 3% and above. This is still a higher return than savings accounts and is good news for the conservative investor
b. Minimal Risk
Bond issuers are obligated by law to pay the principal and interest on the bonds back, making bonds hold minimal to almost zero risks. Like mentioned above, for government bonds, the government can always print more money or increase taxes to pay back. As for corporate bonds, corporations are required by law to pay the bonds first before they pay dividends to stockholders.
c. Confidence in riskier investments
Now that you’ve experienced firsthand of growing your money through bonds, this fulfillment will give you the confidence to invest in more riskier instruments. If you’re still hesitant in trying the stock market then you can buy corporate bonds which comes with a little more risk than government bonds and savings account, but not as much as stocks.
d. Can be invested through UITFs and Mutual Funds
You can alternatively invest in a Bond Fund available through banks as a type of UITF (Unit Investment Trust Fund) and through Mutual Funds.
To know more about UITFs, read my post: UITFs & Mutual Funds; A beginner’s guide to investing in UITFs
Now that you know the ins and outs of bonds, you are ready to decide which bond to go for. You can invest in both to design your investment portfolio. Just remember to identify your financial objectives first before taking a step further in investing.
Is there an app to buy bonds in the Philippines?
One of the easiest ways to buy and sell Philippine RTBs is through Bonds.ph. This investment app is brought to you by UnionBank of the Philippines who has partnered with PDAX. With Bonds.PH, you can invest in risk-free treasury bonds conveniently no matter where you are in the world.
How to Invest in Bonds in the Philippines