Bonds

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.

Peso Cost Averaging

Peso cost averaging is an investment practice whereby you invest an unchanging peso amount at regular intervals of your choice (preferably every month) into a specific investment vehicle(s). This method puts time, your money, and the market all on your side, regardless of what stock market does over the short term.

Some people think they can time the market, that is: buying low and selling high. But many have lost a lot of money trying to outguess it. If you took all the money and made an outright purchase of stocks, you will not be as big a winner as you had used the peso cost averaging technique. Let us say you have P12,000 you want to invest, and you know which stock you want to buy. You have been watching it for some time, and you have seen it go as high as P15 a share. Recently it has taken a tumble to P10. You think to yourself, now is the time to buy. You invest all P12,000 at once making an outright purchase of 1,200 shares at P10 a share. One year later, your stock is selling at P5 a share. You are down P5 a share, or you now have a paper loss of P6,000.

If you had taken that same P12,000 and invested it using peso cost averaging, you’d have invested the same amount of money month in, month out, regardless of what market was doing. Here is how you would have come out in this exact same scenario.

Month	Price	Shares Bought
1	P10	100
2	9	111
3	8	125
4	7	143
5	8	125
6	9	111
7	6	167
8	8	125
9	7	143
10	6	167
11	5	200
12	5	200

Summary:  P12,000 invested; 1,717 shares bought

As you can see, by using peso cost averaging, you are able to buy more shares of stock when the price is low. So after one year you have a total of 1,717 shares, and even though the price per share is still down, at P5, your holdings are worth P8,585 and your loss on paper is only P3,415, or about P2,585 less than if you had purchased the stock outright.

Comparison:

P3,415 loss with peso cost averaging

P6,000 loss with outright purchase

In upward market, your investment of that same amount in peso cost averaging increases. When the price of the stock goes back to P10 a share, here is the comparison. With the outright purchase, you investment will be worth the original P12,000. But with peso cost averaging, you had accumulated 1,717 shares, or 517 more than if you had made an outright purchase. In this scenario, when your share price is back up to P10, your, 1,717 shares will be worth P17,170. This is P5,170 more than your original P12,000 investment, or about a 43% on your money. With peso cost averaging, you limit your loss in a down market, and when the price per share goes back up, you make more as well. The key to this is that you are always buying more shares of your investment at a lower price, as the above table shows.

PSE index reaches 2014's all time high yet

Share prices reached higher during the closing of PSE on Tuesday (May 13, 2014), with the main index recording the highest for the year as the market rode on investors’ confidence on the improving the country's economy fundamentals. The Philippine Stock Exchange index (PSEi) gained 41.47 points to 6,852.81, while all other sub-indexes were nearly increased. The main index also reached its highest in 11 months when the PSEi closed at 6,875 points on June 10 last year.

The Metropolitan Bank and Trust Company, simply known as Metrobank, stated that the optimism over the recent credit-rating upgrade of the Philippines had a spill over in this week’s sessions. This was further echoed by the continuing release of first-quarter earnings.

“Expect to see more first-quarter results releases moving toward the May 15 deadline,” Metrobank said. Other sub-indices were mostly up, led by the All Shares that gained 30.35 points to 4,135.98. The Financials index bagged 4.18 to 1,613.53, the Industrial index was up 63.13 to 10,339.94 and the Holding Firms index rose 63.88 to 6,275.33. The total volume of trade was at 1.79 billion shares which translated to P9.7 billion. Gainers edged losers 126 to 61, with 36 stocks were calm.

Lucio & Susan Co-led supermarket chain - Puregold Price Club Inc. - was the day’s most traded share and reached its highest since its listing. Its share price gained 4.3 percent, up P2 to close at P48. Puregold chair Lucio Co shared his plans to consolidate the operations of privately-held Puregold DutyFree stores in Clark and Subic into Puregold.

Philippine Long Distance Telephone Co. (PLDT) was down P8 to P2,894; Ayala Land Inc. gained P0.25 to P32; Alliance Global Group Inc. lost P0.60 to P29.80; Metrobank rose P0.05 to P86, while the lightly traded Bright Kindle Resources and Investments Inc. barged into the mostly traded and increased 31.25 percent, or from P0.75 to P3.15.

         Overall, the local market got a boost from S&P’s fresh credit rating upgrade on the Philippine government, which is now a notch higher than the minimum investment grade rating at S&P’s scale.

Investment Portfolio

A portfolio is the securities held by an investor; that is the investments that you own. The key to a successful portfolio is balance and foresight in planning the appropriate mix of investment vehicles that to suit one’s income and needs for the moment and the future. One should diversify only within his risk tolerance in order to meet the return targets he has set for himself.

        All investors would like to go for maximum yields and minimize risk. In general, however, riskier investments offer greater potential rewards while safer investment havens have much less yield. Government bonds, for example, are backed by the government and are stable but their yields are the lowest. Stocks, on the other hand, can double your money but you can lose shirt twice as fast.

        In building your investment portfolio, your age and your investment objectives should be taken into account. If you are over sixty, your main concern should, ideally, be the safety of your investment and the income you can derive from it. This means you should put your money in investments that are relatively safe and which produce enough income to pull you through during the years when you are no longer earning. If you are a working middle-aged person (40 to 60 years old), your investment portfolio should allow more growth since your future is not totally behind you. You are slowly but surely shifting your investment from high growth areas to those which are nearer the safety and income corners. If you are younger than both categories, chances are you may need a smaller amount of fixed income and safety in your investment and a higher potential for growth compared to an older person. This means you should allow for relatively equal degrees of growth, income, and safety potential in your portfolio.

        A typical conservative portfolio would have a lot more bonds than equities and non-traditional investments. While this will assure capital protection, it might not offer much in terms of growth. In contrast, a high growth fund will have more equities than bonds. It will not ensure the safety of capital but it could offer substantial yields. A balanced fund will be somewhere in between.

        Remember that all investments vehicles – time deposit, bonds, or stocks – are affected by a variety of factors such as economic growth, foreign exchange changes, inflation, interest rates and even political changes.