A bond falls under a category of investments known as debt investments. A bond is a security issued by a corporation, a government, or agency of the government that is in need of money and is willing to go into debt to borrow that money to meet its needs. In many cases, it borrows money from people like you and me. Basically, a bond is nothing more than an IOU. You are the lender, and the issuer of the bond is the debtor.
When you buy a bond, the issuer gives you a guaranteed fixed interest rate, or a coupon, for a period of time. At the end of the time period or on the maturity date of the bond, the issuer will return to you the face value of the bond or the current value if it is a zero coupon bond or savings bond. All bonds are assigned a maturity date when they are issued. The maturity date is when the issuer returns the money they owe to investors who are holding bonds with that particular maturity date.
Let us say you bought a P10,000 bond with a 6 percent coupon when it was first issued with a maturity date of June 1, 2018. This means you would get P600 in interest on these bonds yearly for 5 years. If you never sold them, in June 1, 2018 these bonds would mature and you would get back your P10,000. Some bonds make interest payments every six months.
Kinds of bonds:
The Philippine bond market can be divided into three sectors: government issued bonds (GS); government controlled-corporation issued bonds (GOCC); and corporate issued bonds (Corps). Specifically, the following are:
1. Fixed Rate Treasury Notes (FXTN)
2. Retail Treasury Bonds (RTB). The Bureau of Treasury issues bonds for small investors who want to enjoy current marker rates at par with investments that require a much higher minimum requirement. Usually, with a maturity of 3 to 5 years. Minimum investment is only P5,000.
3. Treasury Bonds. Treasury bonds are issued by the government. These bonds are exempt from taxes. At present, there are five maturities: 2-year, 5-year, 7-year, 10-year, and 20-year bonds. Investors enjoy semi-annual coupon payments.
4. Treasury Bills. Government securities which mature in less than a year. There are three tenors of T-bills: 91-day, 182-day and 364-day Bills.
5. Corporate Bonds. Securities issued by firms as an alternative way to raise capital. The bonds give investors a higher interest or yield because of its higher credit risk or higher chances of default. Corporate bonds are usually illiquid in nature, a warning.
6. Fixed Income Instruments. Examples are Long-Term Negotiable Certificate of Deposits, Tier 2 Subordinate Debt, Unsecured and Fixed Rated Bonds and Repurchase Agreements, to name a few. Among the names that have successfully issued bonds are the following: First Pacific Holdings Corp., Ayala Corporation, San Miguel Corporation, SM Investment Corp., others.
Government securities (GS), which include T-bills and T-bonds, are debt instruments (IOUs) issued by the government to raise funds to meet some of its more pressing expenses. These are considered as “risk-free” investments because they are direct and unconditional obligations by the Philippine government. Usually banks and other financial institutions are the big buyers of these securities, and they in turn sell them to individuals. Investing in T-bills or bonds is attractive because they are virtually risk-free – they are backed and guaranteed by the full taxing power of the government. Maturities are just like the regular T-bills sold to banks or 91-, 182- and 364-days. With T-bills, your investment will mature in one year or less. Bonds mature in two, five or more years.
These GS holdings are also readily marketable assets, or those which can be sold anytime in case of sudden need of cash. Another advantage is that these instruments can be used as collaterals when borrowing with a bank.
The interest rate or coupon offered by an issuing company depends on several things: the current interest rate environment at the time of issue; the safety of the issuer; and the length of maturity of bond. Obviously, when you lend someone money, you want to get the highest and safest interest rate available. The entity issuing the bond also knows that you, the investor, want to make sure that your money is safe. You also want the assurance that you’ll get your money back when the bond matures. The more speculative the issuer is, the higher the interest rate. The most speculative bonds are known as junk bonds (high-yield bonds).
There is a cardinal rule to investing in bonds. Bond prices go down as interest rates go up. And when interest rates go down, bond prices go up. Many people who invest in bonds do so because they want the income from the bond in order to meet their daily living expenses. Before you buy a bond, make sure that the issuer will not default on your bond.