What are Treasury Bonds?

Treasury Bonds or T-Bonds are government securities similar to Treasury Bills except that they have periods of maturity longer than one year. At present there are five maturities of bonds offered by the Philippine government: 2-year, 5-year, 7-year, 10-year, and 20-year. In general, consumers cannot buy T-Bonds directly from the government. However, the government does offer Retail Treasury Bonds (RTBs) through selected Government Securities Dealers (see list of GSEDs as of February 17, 2011)

T-Bonds are sold at its face value on origination. The yield is represented by the coupons, expressed as a percentage of the face value on a per annum basis, payable on a fixed number of periods per year. Let’us take an example for clarity. Just recently the government offered to sell 10-year RTBs with a 6% coupon to be paid quarterly. If you bought RTBs at a face value of P100,000, your yield is initially 6% or P6,000, to be paid quarterly. Thus, your investment of P100,000 will earn you P1,500 every quarter for the next 10 years while you hold the bond.

Note that the price of the bond that you bought fluctuates through the years depending on market conditions. If the price goes down to P80,000, your yield goes up to 7.5%. This happens because you are getting the same guaranteed P6,000 on an asset that is now worth P80,000 (P6,000/P80,000). Conversely, if the bond price goes up to P120,000.00, your yield shrinks to 5.0% (P6,000/P120,000).

What are the risks in investing in Treasury Bonds?

The primary risk in any bond market is interest rate risk. By buying a bond, you are committed to receiving a fixed rate of return for a fixed period. Should the market interest rates rise, the bond’s price will fall accordingly. Thus, your bond will be trading at a discount to reflect the lower return that an investor will make on the bond. Note that you will still get the fixed income on a regular basis. However, your money could have earned a better through some other investments available at that time when the interest rates have risen.

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