APPENDICES |
APPENDIX
E: Government Securitues |
What are government securities?
“On many occasions, the Philippine National Government
or its agencies, e.g., the Department of Finance (DoF) issue
debt securities to finance deficits and development projects.
These debt securities, commonly referred to as Government Securities
or GS, can be alternative forms of investments. Further, they
are either directly or indirectly backed by the full faith of
the Philippine Government. Hence, they carry lower interest
rates than those issued by private companies.” (Ateneo-EPRA
Project, 2006)
Treasury Bills
“Treasury Bills (T-bills) are direct and unconditional
obligations of the national government. They are issued by the
Bureau of Treasury (BTr) of the DoF. They carry maturity of
one year or less and can be traded in the secondary market before
maturity. As an investor you can choose between T-bills that
mature in 91, 182 or 364 days. Banks that comprise majority
of the Government Security Eligible Dealers (GSED) bid for T-bills
in the weekly auctions held by the Bureau of Treasury. Then,
the banks resell the T-bills to investors.
Treasury Bills, strictly speaking, do not bear interest. They
are issued and sold at a discount from face value and are redeemed
at maturity for the full face value of the instrument. For example,
if you buy a 364-day T-bill with a face value of PhP 100,000
at a discount of 12%, you only pay PhP 88,000 for it. After
364 days, you get repaid PhP 100,000 for a gain of PhP 12,000.”
(Ateneo-EPRA Project, 2006)
Treasury Notes
“Fixed Rate Treasury Notes (FXTNs) are direct and unconditional
obligations of the national government. They are issued by the
Bureau of Treasury (BTr). They are interest bearing and carry
a term of more than one year and can be traded in the secondary
market before maturity.
Fixed Rate Treasury Notes are considered one of the prime investment
instruments in the market. They are safe, liquid and offer attractive
returns to investors. They may mature in 2, 5, 7 and 10, years.
The interest rate is fixed for the life of the FXTN based on
the results of its auction. Interest can be payable semi-annually
or twice a year. Fixed Rate Treasury Notes are issued and sold
at a price equal to the face value. These are redeemed at maturity
for the full face value of the instrument plus interest of the
last period. For example, if you buy a 2-year FXTN with a face
value of PhP 1,000,000 at an interest rate of 12% payable semi-annually,
you will pay its face value of PhP 1,000,000. Thereafter, you
will receive interest payments of PhP 60,000 twice a year. At
the end of 2 years, you will receive PhP 1,000,000 and the last
interest payment of PhP 60,000.” (Ateneo-EPRA Prohect,
2006)
Retail Treasury Bonds
“Retail Treasury Bonds (RTBs) are like treasury notes
but are usually longer in maturity (5 years and above). They
are direct and unconditional obligations of the national government
that primarily caters to the retail market or the end-users.
They are issued by the Bureau of Treasury (BTr). They are interest
bearing and carry a term of more than one year and can be traded
in the secondary market before maturity. Retail Treasury Bonds
(RTBs) are safe, liquid and offer attractive returns to investors.
The interest coupons of treasury bonds are paid to the investor
quarterly.
Further, Retail Treasury Bonds (RTBs) serve as a critical part
of the government’s program to make government securities
available to small investors. They are issued to mobilize savings
and encourage retail investors to purchase long-term papers.
In contrast to PhP 500,000 in the wholesale market, the minimum
placement of RTBs is PhP 5,000. The payments and returns are
similar to the example on FXTNs except that the face value is
much smaller and the interest payments are made four times a
year (quarterly).” (Ateneo-EPRA Project, 2006)
Dollar Linked Peso Notes (DLPN)
“Dollar Linked Peso Notes (DLPNs) are direct and unconditional
obligations of the national government and are issued by the
Bureau of Treasury (BTr). They are interest bearing and carry
a term of more two (2) and three (3) years and can be traded
in the secondary market before maturity. The notes track the
movement of the Philippine Peso and US Dollar exchange rate.
Payments of interest and principal are linked to the movement
of the exchange rate and computed based on the foreign exchange
factor. So if the dollar goes up compared to the peso, the return
on these instruments goes up. If the dollar goes down compared
to the peso, the return will go down.” (Ateneo-EPRA Project,
2006)
How can I purchase government securities?
“Institutions that buy these government securities include
mutual funds, pension funds, insurance companies, commercial
banks, corporations, state and local governments, central bank,
and international investors.
You can buy or hold government bonds through unit investment
trust funds (UITFs), mutual funds, or pension plans. Those who
opt to purchase government securities through these channels
tend to look for dependable income, relative safety, and diversification
(BusinessWorld, 2005). Retail investors may also purchase government
securities (GS) such as Retail Treasury Bonds (RTBs) through
eligible/qualified dealers or commercial banks.
Although government bonds are the safest and are relatively
“risk-free”, it does not mean they are immune from
credit/default risk, credit spread risk, or downgrade risk.
Credit or default risk is the possibility the issuer will fail
to meet the terms of the obligations with respect to the timely
payment of interest and principal. Credit spread risks refer
to the probability of an increase in the spread of the bond
over a default-free security (i.e., US Treasury security) and
a decline in the price of that bond. Downgrade risks pertain
to the chance a credit rating firm (e.g., Fitchratings, Moody’s,
or Standard and Poor’s) will lower the rating of a bond.
In this regard, downgrade risks are closely associated with
credit spreads risks. “ (Ateneo-EPRA Project, 2006)
APPENDICES |
APPENDIX
F: Government Securitues |
(Taken
from Taken from “Primer on Savings and Investment Instruments
in the Philippines”, 2006, Ateneo-EPRA Project)
What
are the different kinds of mutual funds?
Depending
on the investment objectives, professional managers buy, hold
and sell assets in equities, fixed-interest instruments like
bonds, and money-market deposits. In the Philippines, mutual
funds fall under the following:
a)
Equity fund. This fund is largely placed in stock market and
has wide fluctuations. Nonetheless, in the long run, say,
5-10 years, equity funds tend to perform better than fixed
income funds.
b) Index fund. This fund consists of several stocks in the
same proportion as that of the index the fund tracks (e.g.,
PSE Composite index), and has less risk than the equity fund.
c) Balanced fund. This makes investment in a balanced portfolio
of stocks and fixed income securities. It both has the earning
power of stocks and the stability and income of bonds.
d) Bond fund. This describes a type of investment company
that primarily invests in long-term bonds and other types
of debt securities. Earnings do not fluctuate as much as the
other types of funds.
e) Money market fund. This refers to fund that makes investment
in short-term fixed income instruments (i.e., those securities
with less than one year of maturity). This portfolio has the
lowest risk.
In the Philippines, banks are not allowed to sell mutual funds
for the announced reason that it gives “impression that
the investor is dealing with the parent bank” (USAID-AGILE,
1999). Unlike UITFs, mutual funds are distributed and sold
by insurance companies and asset management companies and
regulated by the Securities and Exchange Commission (SEC)
under the Investment Company Act. In February 2001, the SEC
allowed Philippine-registered mutual funds to invest 20% of
their portfolio in foreign funds or securities in response
to weakness in the local equities market. (EIU, 2004)
Since
mutual funds are professionally managed, investors need to
pay specific fees called sales fee/load. Like UITFs, the actual
price of each share is calculated defined by what is called
Net Asset Value Per Share (NAVPS), which is the value of all
assets held by the fund (less any liabilities) divided by
the number of shares sold. To realize earnings on a mutual
fund, an investor should compare the current NAVPS of the
fund with its NAVPS at the time he/she bought it, and also
take account of cost of sales and redemption fees. The NAVPS
of mutual funds is regularly published in BusinessWorld,
Philippine Daily Inquirer, and Philippine Star.
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