Retail Treasury Bonds: Guaranteed 9% and 8.5% interest

I was visiting various banks yesterday scouting for a good housing loan package (this story I’ll tell you soon), when I chanced upon an announcement at the Development Bank of the Philippines (DBP) in Buendia, Makati about the government offering of Retail Treasury Bonds.

First, what is a Retail Treasury Bond?

The Philippine Retail Treasury Bond (RTB) is a direct and unconditional obligation of the Philippine government generally considered a safe and liquid investment opportunity. The RTB, issued by the Bureau of Treasury (hence the name), is one way for the government to raise needed funds.

It is safe because it is fully backed by the government and rarely does a government, including the Philippines, defaults on a debt security such as this. It is liquid because it can be traded in the secondary market prior to maturity.

It is called Retail because at Php5,000 (US$112) minimum investment, even individuals can invest here.

The coupon interest on the 3-year bond is 8.50% per annum and for the 5-year bond, 9.0%. Interest is paid every quarter so you’ll receive four interest payments every year. It is, however, subject to 20% withholding tax. Meaning, given the following investment, the actual return would be:

• Investment Amount: Php50,000
• Invested in: 3-year RTB paying 8.50% coupon
• Gross Quarterly Interest: Php1,062.50 (Php50,000 x 8.50% x 1/4)
• 20% Withholding Tax: Php212.50
• Net Interest to be Received: Php850.00 every quarter

A Php50,000 investment in the 3-year bond yields a net quarterly interest of Php850.00. Since this is paid every quarter, the total interest receivable during the year is Php3,400 (Php850.00 x 4) which represents a net return of 6.80%.

For the 5-year RTB:

• Investment Amount: Php50,000
• Invested in: 5-year RTB paying 9.00% coupon
• Gross Quarterly Interest: Php1,125.00 (Php50,000 x 9.00% x 1/4)
• 20% Withholding Tax: Php225.00
• Net Interest to be Received: Php900.00 every quarter

Investing Php50,000 in the 5-year bond earns a net quarterly interest of Php900.00. The total interest for 1 year is Php3,600 (Php900.00 x 4) which represents a net return of 7.20%.

The returns are not that bad considering that this opportunity is virtually risk-free.

Anyway, my friends and I are planning to pool our money together so we can invest in the RTBs. We decided to open just one account especially since some of them are working abroad and won’t be able to make their own investment. For their own good (or bad LOL), they elected me to become the “fund manager” who will monitor the quarterly interest payments and make the transfer of the earnings to their individual bank account.

The only things I need to place an RTB investment are (1) a DBP savings account (the bank account where the quarterly interest will be credited); (2) an Investor’s Undertaking Form (provided by DBP); (3) a Special Power of Attorney form (also provided by DBP); (3) a valid ID; and of course (4) the money (minimum Php5,000; increments of Php5,000).

The bad thing, though, is that despite the original July 29 deadline, the government is thinking of cutting the offering period short supposedly because they have raised enough money already.

I’m still waiting for my friends’ payments from abroad which are being coursed via Western Union and wire transfer (two of them are even sending via Paypal so I still have to convert that to cash). Hopefully, I’ll receive them soon so I can make the investment before Friday, July 25.