Ask anyone you know where they put their hard-earned savings and I bet 90 percent of the answers will be:
As early as 5 years old, we’ve been taught to save money in our plasticky little piggy banks, then move on to big-boy (and big-girl) banks as soon as we can. Because, where else should we put our savings?
But just like our beloved piggy banks, actual banks don’t serve us much if our goal is to grow our money.
With interest rates at less than 1%, a Php100,000 investment would only get you enough earnings to buy a meal at your favorite fast food (Php250 earnings at 0.25% for 1 year).
That small, huh?
So what if I tell you that there’s another way to keep your money and at the same time earn while you sleep?
As that saying goes, “Make your money work for you.”
I’m talking about bonds.
In this article, we’ll cover all the essentials of this under-utilized investment vehicle.
Stuff like: How they work, how much they can earn you, how to start investing in them—and more. At the end of this piece, you’ll have another instrument in your financial toolbox so you can build your assets faster and gain financial freedom.
Ready? Let’s start with the most important question:
What are Bonds?
It’s like a reverse utang (loan), basically. How? Instead of the typical lender-borrower set up where the borrower approaches the lender to ask for some money, a bond will have the borrower (bond issuer) produce a contract (bond) that states the terms of payments back to the lender (bondholder).
Imagine a bond as a contract that states something like this, “In 10 years, our company will pay the owner of this bond Php50,000 (face value of the bond). We’ll also pay a 5% interest rate on a yearly basis.
In this case, the borrower is the one setting the terms, not the lender. It’s also more flexible for the borrower as they can set up bonds with multiple bondholders instead of just dealing with one.
It’s a great way of raising an enormous amount of capital without being tied to a singular lender. And this is why bonds are heavily-leveraged by the government and big corporations.
Here’s the clincher: Bonds can be traded too! If you’re a bondholder, you can actually sell your bonds in the stock market.
If you prefer not to wait for the bond’s maturity for whatever reason (or strategy), this option makes it more flexible as a financial vehicle.
Types of Bonds
Bonds are considered the most common type of fixed income securities, which is defined as debt instruments that pay a fixed amount of interest in the form of coupon payments and returns the principal to the investor (bondholder in the case of bonds) upon maturity.
1. Maturity-based bonds
Bonds categorized based on the length of time it will mature.
- Treasury Bills (T-bills) – Bonds that mature in less than 1 year (short term). The most common tenors (length of maturity) for T-bills are 91 days, 181 days, and 364 days.
- Matures in less than a year (shorter investment time frame)
- Sold at a discount from their face value but the investor will get the full amount upon maturity (works like a zero-coupon bond)
- Doesn’t pay income or coupon interest
- Treasury Bonds (T-bonds) – Bonds that have tenors of more than 1 year. The most common maturity lengths for T-bonds are 2-year, 5-year, 7-year, 10-year, 20-year, and 30-year bonds.
- Pays investor coupon interest (fixed income) at fixed intervals for the duration of the bond
- Can present a higher risk due to the longer length of time before it matures
2. Issuer-based bonds
These are bonds that are classified according to who issued it:
- Treasury Securities – Bonds issued by the Bureau of Treasury
- Low(er) risk since investment is backed by the full faith and credit of the government (vs other fixed income investments)
- The lower risk comes with a lower yield potential compared to other fixed income instruments
- Government Bonds – Bonds that are issued by various government agencies like HDMF, Government National Mortgage Association (GNMA), Federal National Mortgage Association, and others.
- Low(er) default risk (similar with Treasury Securities)
- Favorable tax treatment
- Interest rate risk. Gov’t bonds may lose value if market interest rates rise beyond the bond’s face value
- Municipal Bonds – Bonds issued by the local government units (LGUs).
- Low(er) default risk
- Low volatility
- Corporate Bonds – Bonds issued by public and private companies.
- Potentially higher returns vs gov’t-issued banks
- Highly liquid
- Multiple options
- Higher risk compared to gov’t-issued bonds
Benefits of Investing in Bonds
- Provides better returns on your money compared to banks
- Serves as another investment tool for diversifying your investments
- Lets you preserve your capital and earn interest from it at the same time
- Generally viewed as safer than stocks as its less volatile in nature (especially short and medium-length bonds)
- Bonds are tradeable (liquid)
- Bondholders receive some form of protection for their investment, when a company goes bankrupt, the bondholders typically receive a portion (if not the face value) of their investment
- There are different types of bonds that you can choose from
How Can You Make Money From Investing in Bonds?
As an investor, the first step would be to buy bonds when the government or a private/public company announces a bond offering.
Details as to how you can purchase them may vary, the key is to position yourself for purchase once announcements have been made.
Government and companies announce bond offerings a few months before the actual release, giving investors enough time to make the necessary arrangements.
You make money from bonds via the interest gained on the face value (price of bond) of your investment.
Coupon payments are the “earnings” paid to the bondholder at certain periods of time. For example, a company issues a bond with a 5% interest rate.
Depending on the designated frequency, the bondholders will receive a portion of that 5% per annum rate, say, on a monthly or quarterly basis.
And since bonds can be traded, you also have the option to sell and earn via markup from your original purchase price.
Some bondholders might also want to free up their capital sooner and choose to liquidate by selling the bond before it matures, allowing them to be more flexible in their investment strategy.
Is It Safe to Invest in Bonds?
While there’s no absolute 100% safe investment that exists, bonds are considered to be one of the less risky ways of growing your money.
Aside from being less risky, say, compared to stocks, it also requires less activity from an investor’s standpoint.
The only real risk that comes with investing in bonds is if the company that issued the bond declares bankruptcy. While rare, it’s still a possibility and hence considered as risk.
However, there are mechanisms within the bond itself that will guarantee some form of payment back to the investor in such events.
How to Invest in Bonds in the Philippines
Investing in bonds in the Philippines is fairly easy. Most transact through an RTB-issuing bank to make their investment.
Most banks and financial institutions require:
- 2 valid IDs
- Tax Identification Number
- Documents that provide bank account information (e.g check book or pass book)
- Minimum initial investment
Once initiated, you’ll be provided with the appropriate forms to complete and will be given instructions if other additional documents or requirements will need to be submitted.
The minimum investment required varies depending on the type of bond being purchased.
- For Corporate Retail Bonds, for example, the typical minimum investment is Php50,000.
- Retail Treasury Bonds, on the other hand, can be purchased for as low as Php5,000 minimum capital.
- Treasury Bills (T-Bills) typically require a minimum of Php50,000 investment as well.
For corporate bonds, some banks advise the general public through their official website and/or mailing list. Information and requirements for investing in bonds are typically posted on their website.
For example, a recent email newsletter from a bank announced the availability of a certain company’s corporate bond with the following details:
Tenor: 7 years
Interest Rate: 5.2757 gross p.a
Denomination: Minimum of Php50,000 (increments of Php10,000 thereafter)
Interest Payment: Quarterly
Interested parties will be required to submit their initial contact info so an agent from the bank can follow-up and provide them with instructions on how to proceed.
For Government bonds like T-bonds, you can visit the Bureau of Treasury website for updates and listings for any upcoming public offerings. Here’s a sample announcement for one of their recent offerings (2019).
You can also reach out to banks and check if they have any government bond offerings.
Either way, you’ll be transacting with your RTB-issuing bank (see list below) to initiate the investment.
Like with corporate bonds, they’ll provide you with details and instructions along with the paperwork to complete should you wish to proceed with the investment.
List of Banks That Offer Bonds in the Philippines
Most banks in the Philippines offer various fixed income products like Retail Treasury Bonds, T-Bills, Fixed Rate Treasury Notes (FXTNs), Dollar Sovereign Bonds, and Dollar Corporate Bonds, among others.
Here’s a suggestion: Check with your existing bank if they offer any fixed income products. You’ll likely receive a Yes for an answer, so it will really just be a matter of preference when it comes to choosing which RTB-issuing bank you’ll want to use.
Some of the more popular banks known to offer bonds and other fixed-income products include:
- Security Bank
- Bank of Commerce
- China Bank
- Development Bank of the Philippines (DBP)
- PB Com