Where to put your money (Part 3)

PATIENCE is a virtue. An essential ingredient, it is, for a marriage being tested by the distance that separates the overseas-working husband from the children-doting housewife. Patience helps the farmer bear the long wait for the next harvest. It keeps an employee striving and testing new waters until he breaks into his dream job. In money talk, it gets the money rolling especially when coupled with thrift and industry.

Tight budgets more often dictate investors to stick to 30-day placements as this term gives one the flexibility of withdrawing interest income. Funds that can stay longer than one year should, however, be given the benefit of higher-earning interest by investing them in longer tenors.

Aside from the commonly spoken time deposit, bonds have other long-term instruments available in their treasury departments. As "long-term" usually implies a maturity of more than a year, the virtue of patience is needed to keep the principal intact for the rest of the term. Bonds are good long-term investments as they normally offer higher interest rates than the prevailing 30-day instruments. A 3% premium over the 30-day instruments is a good price for bond rates.

Simply put, a bond is an interest-bearing security issued by either the government or a corporation, promising the bondholder a specific interest rate given the number of years until the bond matures. By all means, a bond is still a form of debt or IOU of the issuer to the bondholder or the purchasing client of the bank.

Common practice indicates that the bond issuer usually pays out the bondholder interest income in specific intervals, for example, quarterly or semi-annually. This interest payout is either issued to one's bank account or can be drawn against a manager's check depending on a client's arrangement with his personal banker.

When the business section of the newspaper announces that the government of the Philippines is issuing a five-year bond, for example, it means that the government needs funds to finance a certain project by borrowing from the public. Of late, the Philippine government floated LGU Bonds as a venue of getting more funds to finance local government projects. This type of bond is collateralized by assets of the local government unit and is often backed by their countryside development fund or what is notoriously known as the pork barrel.

Aside from getting a loan from the bank, big companies also issue bonds in order to raise funds for additional working capital requirements. Some of the top corporations in the Philippines have also issued corporate bonds that promise investors attractive interest rates. The issuing corporation secures the bond issuance to the public with a corresponding collateral such as real estate. Essentially, this gives the investing public the sense of security that guarantees repayment to investors in case the company defaults. The collateral can be liquidated by underwriting agents in order to repay the investors.

In the case of unsecured bond or debenture, however, the issuance is backed by the full faith on the issuer even without any collateral. Here, the investor only relies on the solidity of the issuing corporation as evidenced by its business track record as well as its financial strength.

Tip: Deciding which bonds to pick will be easier if you ask your personal banker about the purpose by which the proceeds of the bond issuance will be used for and whether the business prospects of the issuer looks profitable in the long-run. Upon credit of the interest to your account, re-invest this small amount in other small-denominated instruments even for a short-term. This compounds your earnings further. Don'ft be in a hurry to get your interest. Have patience, will earn more!*

Renzi is a graduate of Economics with a Masters Degree in Business Administration from the University of St. La Salle. While working full-time in the Trust & Investments Division of one of the 10 largest banks in the Philippines, she dabbles into writing and does mountain biking as her weekend hobby. You may email the author at renzijuarez@philippinestoday.net

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