GOVERNMENT SECURITIES

By: ANTHONY S. MISOLES

GOVERNMENT SECURITIES
Are unconditional obligations of the sovereign state. It is backed by the full taxing power of the sovereignty. Therefore, government securities are practically free from default.

 The Philippine Government issues two kinds of government securities (GS): Treasury Bills and Treasury Bonds, so-called because it is the Bureau of the Treasury which originates their sale to the investing public through a network of licensed dealers. Government agencies, Local Governments and government-owned or controlled corporations may float securities but these are not labeled as Treasuries. Government securities are no longer certificated, they are known as "scripless", just like in USA, Canada, China and Korea. GS discount or coupons are subject to twenty percent final income tax which is withheld upon floatation of Treasury Bills or upon payment of the coupon for Treasury Bonds. No other tax is imposed on the secondary market buyer.

TREASURY BILLS
are government securities which mature in less than a year. There are three tenors of Treasury Bills: (1) 91 day (2) 182-day (3) 364-day Bills. The number of days are based on the universal practice around the world of ensuring that the bills mature on a business day. Treasury Bills are quoted either by their yield rate, which is the discount, or by their price based on 100 points per unit. Treasury Bills which mature in less than 91-days are called Cash Management Bills (e.g. 35-day, 42-day).

TREASURY BILLS
T-Bills do not bear interest but are rather issued and sold at a discount from face value (they cant be traded at a premium) and are redeemed at maturity for the full face value of the instrument.

[Table 1] 91-Day Treasury Bill Rates Updated 24 November 2008

LATEST: 5.69 % (July 2008) HIGH: 15.8% (November 2000) LOW: 4.4% (May 2002)

T-Bill Rates, 1999-2008 2008 Q1 Q2 Q3 Q4 10.2 9.86 9.86 5.43 6.03 7.34 6.36 5.35 3.41 3.67 not avail. 5.7 not avail. 1999 2000 2001 2002 2003 2004 2005 2006 2007

T R E A S U RY- N O T E S ( T- N O T E S )
are direct and unconditional obligations of the national government. There are currently four maturities: (1) 2-year (2) 5-year (3) 7-year (4) 10year (5). They have coupon rates like corporate bonds with the coupon payable semi-annually in arrears. Fixed Rate Treasury Notes (FXTNs) are T-Notes that have fixed coupon rates, as opposed to Floating Rate Treasury Notes (FRTNs)

which are re-priced every six months based on prevailing market rates.
These however are not issued on a regular basis.

TREASURY BONDS
are government securities which mature beyond one year. At present there are five maturities of bonds (1) 2- year (2) 5 - year (3) 7 - year 4) 10 - year and (5) 20-year. These are sold at its face value on origination. The yield is represented by the coupons, expressed as a percentage of the face value on per annum basis, payable semi-annually.

US DOLLAR BONDS ( ROPS)

are long term debt obligations of the Philippine government, denominated in United States dollars. These yield fixed rate of interest (coupon) payable semi-annually for the entire life of the securities, normally from 2 to 25 years. ROPs also come in Euro denomination.

R E TA I L T R E A S U RY B O N D S ( R T B S )
are government securities catering to the retail market, carrying a term of more than one year and can be traded in the secondary market before maturity. Currently, there are two maturities: (1) 3-year and (2) 5-year. The coupon is payable quarterly in arrears.

SECURITIES DEALER
is a financial institution organized usually as a corporation or a partnership, whose principal business is to buy and sell securities, whether registered or exempt from registration, for the dealers own account or for the account of client/s. A securities dealer before dealing in securities is required to obtain a license from SEC pursuant to the Revised Securities Act.

G OV E R N M E N T S E C U R I T I E S ELIGIBLE DEALER (GSED)

is a SEC-licensed securities dealer belonging to a service industry supervised/regulated by Government (SEC, Bangko Sentral ng Pilipinas or Insurance Commission) which has met the (a) P100 M unimpaired capital and surplus account; (b) the statutory ratios prescribed for the industry, and (c) has the infrastructure for an electronic interface with the Automated Debt Auction Processing System (ADAPS) and the official Registry of Scripless Securities (RoSS) both of the Bureau of the Treasury (BTr) using Bridge Information Systems

(BIS), and acknowledged by the BTr as eligible to participate in the primary auction
of government securities.

 A List of GSEDs are included in this Primer for ease of investors who wish to buy government securities.

AU T O M AT E D D E B T AU C T I O N P RO C E S S I N G S Y S T E M ( A DA P S )
is an electronic mode by which the National Government sells government securities to a network of GSEDs which are linked to the BTr through BIS every Monday for Treasury Bills and every second and

fourth Tuesday for Treasury Bonds, whereby GSEDs tender their bids
(both competitive and non-competitive) by keying-in the amount (minimum of P10.0 M) and yield of their choice (for a maximum of seven (7) competitive bids and one (1) non-competitive bid per tenor for any amount above P10.0 M) using a BIS terminal in the GSED office.

AU T O M AT E D D E B T AU C T I O N P RO C E S S I N G S Y S T E M ( A DA P S )
Within seconds the bids are arrayed by the System in the terminals of the BTr. After the cut-off time of 1:00 P.M. the array is viewed by the Auction Committee which then decides on the award. The award

is keyed-back to the respective terminal of GSEDs.

AU T O M AT E D D E B T AU C T I O N P RO C E S S I N G S Y S T E M ( A DA P S )
Two days after the auction, the government securities are credited to the Securities Principal Account of the GSED in the Registry of Scripless Securities (RoSS) and the Demand Deposit Account of the GSED at

Bangko Sentral ng Pilipinas is debited in favor of the Treasurer of the

Philippines for the cost of the government securities awarded to the GSED concerned. This completes the trade in the primary market (from the issuer the

National Government to the licensed dealers or GSEDs). This is also

known as origination of GS.

OVER-THE-COUNTER (OTC)
) is another mode of originating GS for specific investors, namely, the Government Owned or Controlled Corporations (GOCC), the Local Government Units (LGU) and the Tax Exempt Institutions (TEI), e.g.,

pension funds, GSIS, SSS, etc.. It is non-competitive. The Over-theCounter is open every day. The applicable yield rates for Treasury Bills issued to GOCCs/LGUs/TEIs shall be based on the rate of the immediately preceding Treasury Bill auction.

OVER-THE-COUNTER (OTC)
For GOCCs, the rate shall be the lowest accepted yield rate, for LGUs, the weighted average yield rate and for TEIs, the yield shall be 90% of the weighted average yield rate.

Treasury Bonds issued to GOCCs/LGUs/TEIs shall be priced based

on the current market yield. The coupon rate for GOCCs and LGUs shall be based on the rate corresponding to the auctioned Treasury Bonds. The applicable coupon rate for TEIs shall be based on thew 90% of

the coupon rate.

R E G I S T RY O F S C R I P L E S S S E C U R I T I E S ( RO S S )
is the official Registry of absolute ownership, legal or beneficial titles or interest in GS (Treasury Bills and Treasury Bonds). Upon award of GS to a GSEDs at the auction, the securities award are electronically downloaded to the RoSS system. On issue date the Principal Securities Account of GSED are credited of the winning bids.

R E G I S T RY O F S C R I P L E S S S E C U R I T I E S ( RO S S )
The GS trades are entered by both parties in their respective trading terminals using their confidential identification and password and to activate the system and authorize every transfer instruction between 9:30

a.m. to 1:30 p.m.

The RoSS system checks the securities in the sellers securities account and earmark these for transfer. The system then sends an electronic settlement file to BSP containing

the amount to be debited and credited to the Regular Demand Deposit

Account (RDDA) of the buyer and seller.

R E G I S T RY O F S C R I P L E S S S E C U R I T I E S ( RO S S )
Once settlement were processed, the BSP Philippine Payment and Settlement System (PhilPASS) will send back a file message that settlement were done and the RoSS system will now transfer the earmark securities from the seller securities account to the buyer securities account. A Posted message will then send back by RoSS to the system

provided.

R E G I S T RY O F S C R I P L E S S S E C U R I T I E S ( RO S S )
Securities and cash settlement of gs transaction to the secondary market is done via DvP on a Real Time Gross trade for trade basis. Cut-off time for peso funding in the Philippine Payment and Settlement System (PhilPASS) is until 2:00 p.m. All transaction which have been unsettled after the 2:00 p.m. cutoff time will be declared failed transaction and the earmarking on the

company securities at RoSS will be lifted. .

YIELD
is the increment or interest on an investment in GS. It is the discount earned on Treasury Bills or the coupon paid to the holder of Treasury Bonds. Both the discount and the coupon are expressed as a percentage of the value of the GS on a per annum basis. Conventionally, the yield on longer dated GS are higher than the

yields of shorter-dated GS.

COMPETITIVE BID
is a tender to buy an amount of GS at a yield rate per annum that a GSED believes will wrest an award for the GSED by out-bidding other GSEDs in the primary market auction of GS.

NON-COMPETITIVE BID
Bid is a tender to buy a specified amount of GS, by a GSED in the primary auction of GS, without indicating any yield rate, on the understanding that the award shall be at the weighted average yield rate of the competitive bids awarded at the same auction

P R I C E D I S C R I M I N AT I O N O R E N G L I S H AU C T I O N
is a method in which successful competitive bidders pay the price they have bid, and all the winning bidders may pay different prices.

UNIFORM PRICE OR DUTCH AU C T I O N

Auction is a method of pegging a uniform coupon rate of a Treasury Bond at the stop-out level of arrayed amounts of bid with the corresponding yield rate tendered. Conventionally, the rate must be divisible by one-eighth of 1%.

SETTLEMENT OF TRADES
is the payment process both in the primary and secondary markets for government securities traded. Settlement of trades is undertaken by the BSP being authorized by GSEDs to debit their respective demand deposit accounts with the BSP in favor of the demand deposit account of the Treasurer of the Philippines or their counterparty GSED also with the BSP or vice versa.

SETTLEMENT OF TRADES
Price of a GS is the value based on 100 points per unit. Treasury Bills are conventionally quoted in terms of the discount rate, while Treasury Bonds are quoted in terms of the coupon rate or the price. If a Treasury Bond is quoted in terms of its price, the price is either at a discount, at par, or at a premium and the coupon is a rate in relation to the maturity date of the bond.

Formula
To determine the discount of a Treasury Bill, the formula is as follows:

Where: PP PV T D Witholding Tax = = = = = Purchase Price Principal Value of the Treasury Bill Term (tenor); Number of days to maturity (ex. 91 days) Discount 20% on the discount

To determine the semi-annual coupon amount of Treasury Bonds, the formula is as follows:

Where: K PV I M = = = = Coupon Principal Value Coupon Rate Number of conversions per year

To determine the amount of tax on the discount or the coupon, the formula is as follows:

Where: T D K R

= = = =

Tax Discount Coupon Tax rate

HOW TO INVEST?
For starters, GS can be secured from dealers, usually from banks. As such, investors are required to open bank accounts that serve as a settlement account with which investments are debited from or proceeds credited to. Trading processing timethe period in which investors can buy GSis usually until noon. The minimum amount for investing varies among dealers as well as across issuances. T-Bills, for example, can be secured for as low as P50,000 from Philippine Veterans Bank. For Banco De Oro (BDO), Bank of Commerce, Bank off the Philippine Islands (BPI), Land Bank of the Philippines (Landbank), Philippine Business Commerce Bank (PBCOM), and United Coconut Planters Bank (UCPB), minimum placement starts at P100,000. Chinabank offers T-Bills for a minimum of P200,000 while Allied Bank and PNB have a higher requirement of P500,000.

HOW TO INVEST?
RTBs, on the other hand, are offered only by a limited number of banks, and are subject to availability, usually when issued by the government. Investors can get RTBs for as low as P5,000 from BDO and Landbank, and P50,000 from Allied Bank.

For FXTNs, dealers generally have higher minimum amount to open but some
have the same amount as T-Bills for better affordability. BDO, Bank of Commerce, PBCOM, and UCPB offer FXTNs as low as P100,000; Chinabank at P200,000;

Allied Bank, Metrobank, and PNB starts at P500,000; and Metrobank starting at
P1,000,000

HOW TO INVEST?
RTBs, on the other hand, are offered only by a limited number of banks, and are subject to availability, usually when issued by the government. Investors can get RTBs for as low as P5,000 from BDO and Landbank, and P50,000 from Allied Bank.

For FXTNs, dealers generally have higher minimum amount to open but some
have the same amount as T-Bills for better affordability. BDO, Bank of Commerce, PBCOM, and UCPB offer FXTNs as low as P100,000; Chinabank at P200,000;

Allied Bank, Metrobank, and PNB starts at P500,000; and Metrobank starting at
P1,000,000

HOW TO INVEST?
For US-Dollar denominated ROPs, minimum starts at $10,000 for Planters Development Bank, with PNB starts at $25,000. Chinabank, Veterans Bank, and UCPB offer a minimum of

$50,000, while PBCOM is at the higher end of $100,000.

HOW TO EARN?
The investor can earn from GS in two ways: either by holding on to maturity or selling. The simplest way to earn is by the former, with the latter a bit more complicated. Remember that bonds have coupon payments, basis of which is the face value. To refresh, imagine a bond worth P100,000 face value with a coupon payment of, lets say, 5%, payable annually for five years. For an investor buying on issuance date, this means that every year, he gets P5,000 (5% of P100,000) every year for the duration of five years life of the bond, plus the face value of the bond, which is P100,000. This is the simplest way to earn from bonds. Buy, hold, and wait for the coupon payments and the face value upon maturity.

HOW TO EARN?
But bond interest rates vary almost every issuance. And with new issuances come differences in the interest coupon figures from the year prior. From the foregoing example, lets say that the year after the issuance of the 5% coupon bond, a new bond is issued at 10%. As an investor, you would not want to remain with a lower-yielding instrument. You would want to sell your bond in exchange for a higher-yielding one. But no investor would want to buy a lower yielding one such that you would sell your bond at hand at a lower price than originally purchasedat a discount. Similarly, if the tables have been turned, the one with a higher-yielding bond would be able to sell his bonds more than what he paid forsince buyers would be willing to exchange their low-yielding instrument at a higher one. This is called selling at a premium.

HOW TO EARN?
Since bonds are very liquid instruments and are readily tradable, the client can sell the security any time at the prevailing market interest rate. The prevailing rates, however, change daily according to the movements of the market.

As a rule of thumb, investors should check the trend of interest rates.

Increasing interest rates are not good for bondholders that bought in at low rates; falling interest rates, on the other hand, makes the bondholder happier and may cash in on their gains through trading. The Web sites of Bangko Sentral ng Pilipinas (www.bsp.gov.ph) and National Statistical Coordination Board (www.nscb.gov.ph) offer statistical trends of interest rates as well as forecasts in order to help the investor.

HOW TO EARN?
On a final note, it is recommended that the prospective investor check with the dealer the indicative rates of the instrument. Indicative is the term used because while GS offer fixed returns, yields to maturity (YTM) often change according to market conditions.

Moreover, check the taxes charged on interest income. There is a 20%

withholding tax on interest income for peso-denominated bonds while ROPs are not subject to tax. Also, management fees are charged so that prospective investors must check the

indicative yield to maturity net of taxes and fees for a clearer picture of the return.

 Sources:

www.treasury.gov.ph moneysense.com