What are Fixed-Income Securities?

With the temperament of today's economy, finding stable and reliable investment options is important in securing your financial future. And while other equities often steal the spotlight, learning what fixed-income securities are and what they bring to the table is worth considering. It serves as a compelling alternative that offers consistent returns and reduced market volatility.

But, how can we say this is true?

In this guide, we dive into the basics of fixed-income securities in the Philippines, explore their benefits, and provide practical tips on how to include them in your investment portfolio. Whether you're a novice investor or a seasoned pro, understanding fixed-income securities can empower you to make sound investment decisions and achieve your financial goals.

Understanding Fixed Income Securities

Also known as fixed-income investments or bonds, fixed-income securities are debts owed to you by corporations, municipalities, or the government with steady returns through interest fees. These securities represent loans with regular payments and the return of the principal amount at maturity.

Some key characteristics of fixed-income securities are:

• Regular Interest Payments: Fixed-income securities typically pay interest to investors at regular time frames like semiannually or annually. The interest rate, also known as the coupon rate, is predetermined at the time of issuance and remains fixed throughout the life of the bond.

• Fixed Maturity Date: Unlike other types of investments in the Philippines, fixed-income securities have a specified maturity date when the principal amount is repaid to the investor. Maturity dates can range from a few months to several decades, depending on the type of bond.

• Principal Repayment: At maturity, the issuer of the bond repays the principal amount to the investor. This return of principal is typically guaranteed, assuming the issuer does not default.

• Issuers: Fixed-income securities can be issued by various entities, including governments (treasury bonds, municipal bonds), corporations (corporate bonds), government agencies (agency bonds), and international organizations (international bonds).

• Credit Risk: The creditworthiness of the issuer plays a significant role in determining the risk associated with fixed-income securities. Bonds issued by governments or government agencies are often considered safer (with lower credit risk) than those issued by corporations or municipalities.

• Interest Rate Risk: Fixed-income securities are sensitive to changes in interest rates. When interest rates rise, the value of existing bonds typically decreases, and vice versa. These fluctuations are known as interest rate risk.

• Yield: The yield of a fixed-income security represents the return on investment, taking into account both the interest payments and any changes in the bond's price. Yield can be calculated in various ways, including current yield, yield to maturity, and yield to call.

To simplify, let's say we have a corporation (issuer) that takes a loan worth ₱100,000 at a 5% coupon rate payable in 5 years.

As the investor who loaned the ₱100,000, the corporation owes you this through your investment bond and promises to pay the interest yearly. So for 5 years, you will receive the 5% coupon rate amounting to ₱5,000 per annum as your fixed income.

At the end of the investment bond, you will get back the principal amount of ₱100,000. By then, you will have received ₱25,000 worth of interest on top of the ₱100,000 you initially invested.

Types of Fixed-Income Securities

In the Philippines, there's a variety of fixed-income bonds issued by the government, corporations, and financial institutions. Here are some of the examples of fixed-income securities you can expect as an investor:

Government Bonds

These are debt securities issued by the Philippine government to finance its budget deficit and fund public projects. Government bonds are considered the safest fixed-income securities since the government's credit backs them.

Examples of these include RCBC's Treasury Bonds (T-Bonds) or Fixed-Rate Treasury Notes. With these products, you can invest a minimum amount of ₱100,000. The only difference is that the T-Bonds' terms can be a minimum of 3 months to 1 year, while the Treasury Notes' tenure is at least 2 to 25 years.

Other government bonds RCBC offers are Foreign Currency Sovereigns with debt securities backed by the U.S. government or other nations. These bonds are generally best if you're looking to invest in other currencies and are willing to put down a larger amount of investment from at least $100,000 with terms lasting 1 to 30 years.

Corporate Bonds

Corporations in the Philippines issue bonds to raise capital for business expansion, debt refinancing, or other corporate purposes. Corporate bonds typically offer higher yields than government bonds but carry different levels of credit risk depending on the issuer's creditworthiness. As investors, you must carefully assess the credit ratings and financial health of the issuing corporation before investing in corporate bonds.

Here at RCBC, we have a curated list of businesses to invest in for local corporate bonds. With a minimum investment of ₱100,000 lasting 3 to 5 years, we offer medium to long-term investments. Some of our corporate partners are Energy Development Corporation and San Miguel Brewery Inc. Speak with our financial advisors to learn more about our corporate partners for investment opportunities.

Retail Treasury Bonds (RTBs)

These are government bonds specifically issued to retail investors in the Philippines. RTBs offer smaller denominations and are designed to make government bonds more accessible to individual investors. They provide a convenient option for you to invest in government debt securities.

For instance, RCBC's RTBs only require at least ₱5,000 worth of investment without a minimum tenure but can last up to 25 years.

Retail Treasury Bonds 2 (RTB-2)

Similar to RTBs, RTB-2s are government bonds targeted at retail investors. These bonds are issued with longer tenors and may offer higher interest rates compared to traditional RTBs. RTB-2s aim to attract individual investors looking for long-term investment opportunities.

Short-Term Commercial Papers

These are unsecured promissory notes issued by corporations to raise short-term funds. Short-term commercial papers typically have maturities ranging from 30 days to one year and are often used to finance working capital needs or bridge temporary cash flow gaps.

Certificates of Deposit (CDs)

CDs are time deposits offered by banks and financial institutions in the Philippines. Investors deposit funds for a fixed period, and in return, they receive interest payments at regular intervals. CDs are considered low-risk investments, making them an attractive option for investors seeking stable returns.

Savings Bonds

These are government-issued bonds designed to encourage saving among individual investors. Savings bonds offer attractive interest rates and flexible terms, making them a popular choice for Filipinos looking to save for the future.

Each type of security has its own features, risks, and potential returns, so you have to carefully assess your investment objectives and risk tolerance before investing in fixed-income bonds. Consulting with an investment professional can help you make informed decisions and ensure there's diversification in your investing that meets your financial needs and goals.

What are the Differences Between Equity and Fixed-Income Securities?

Since fixed-income securities are a less common type of investment than stocks (equities), you may be wondering how they're different from each other.

Equity securities represent ownership in a company. They generally carry a higher risk for losses yet higher return potential through capital appreciation. Equity markets are typically more volatile and focus on your investment's growth.

On the other hand, fixed-income securities represent debt obligations, providing regular interest payments and a return of principal at maturity with lower risk. This type of investment is generally focused on income generation with more stable markets.

While both types of investments are worth considering, your choice ultimately depends on your goal. Each investment type has its own advantages so it's best to carefully gauge which one works for you.

So, Why Invest in Fixed-Income Securities?

Fixed-income bonds offer several benefits to you as an investor:

• Stability: Fixed-income securities, particularly government-issued bonds like Treasury Bills and Bonds, are generally considered low-risk investments. They provide a steady and predictable stream of income through regular interest payments and return of principal upon maturity.

• Income Generation: Fixed-income securities provide you with a reliable source of income in the form of periodic interest payments. This can be especially appealing if you seek regular cash flow or if you're looking to add to your existing income.

• Diversification: Including fixed-income securities in your investment portfolio can help diversify risk. Since they typically have lower risks compared to other assets like stocks, fixed-income bonds can perform differently under various market conditions. They are good prospects when investing in volatile markets.

• Preservation of Capital: Government-issued bonds are generally considered to have a low risk of default, especially those issued by stable governments. Investing in these securities can help you preserve capital, making them attractive if you're the type of investor looking to protect your wealth.

• Access to Emerging Markets: Investing in fixed-income securities in emerging markets can provide exposure to economies with strong growth potential. As these economies develop, their bond markets may offer attractive investment opportunities for yield-seeking investors.

• Regulatory Support: The Philippine government and regulatory bodies like the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) actively promote the development of the fixed-income market. This regulatory support enhances market transparency, liquidity, and investor confidence.

Overall, investing in fixed-income securities in the Philippines can be a prudent strategy if you're seeking investments for stable incomes and preservation of your financial assets.

Practical Tips for Investing in Fixed-Income Securities

Fixed-income bonds are a great way to achieve financial stability and grow your wealth over time. Whether you're a seasoned investor or just learning how to start investing, here are some tips to help you invest in fixed-income securities:

• Understand Your Goals

Before diving into fixed-income securities, take the time to clearly define your investment objectives. Are you looking for regular income, to preserve your capital, or long-term growth? Understanding your goals will guide your investment decisions and help you choose the right fixed-income securities for your portfolio.

• Know the Different Types of Fixed-Income Securities

Familiarize yourself with the various types of fixed-income securities available in the Philippines. These can include government bonds, corporate bonds, treasury bills, and retail treasury bonds. Each type of security has its own risk profile, return potential, and maturity period, so it's essential to understand their characteristics before investing.

• Assess Your Risk Tolerance

Fixed-income securities vary in terms of risk, with government bonds typically considered the safest option and corporate bonds carrying higher levels of risk. Assess your risk tolerance carefully and choose fixed-income securities that align with your comfort level. Remember that higher returns often come with higher risk, so balance your portfolio accordingly.

• Diversify Your Portfolio

As the famous saying goes, do not put all your eggs in one basket. Diversification is the key to managing risk and maximizing returns in your investment portfolio.

Spread your investments across different types of fixed-income securities, sectors, and maturities to reduce concentration risk. Doing so can help mitigate the impact of unstable market conditions on your portfolio and improve overall stability.

• Consider the Interest Rate Environment

Interest rates play a significant role in the performance of fixed-income securities. When interest rates rise, bond prices typically fall, and vice versa. Keep an eye on interest rate movements and adjust your investment strategy accordingly. For example, in a low-interest-rate environment, longer-term bonds can offer higher yields, while in a rising-rate environment, shorter-term bonds are typically more attractive.

• Conduct Due Diligence

Before investing in any fixed-income security, conduct thorough research to evaluate the credit quality of the issuer, the terms of the security, and the prevailing market conditions. Review credit ratings from reputable agencies, assess the issuer's financial health, and consider factors such as inflation, economic growth, and political risks that can impact your investment.

• Monitor Your Investments

Once you've built your fixed-income portfolio, monitor it regularly to ensure it remains aligned with your investment goals and risk tolerance. Stay informed about changes in interest rates, credit ratings, and market conditions that can affect the performance of your securities. Review your portfolio periodically and rebalance it as needed to optimize your potential returns.

• Seek Professional Advice

If you're unsure about how to grow your money in the bank, which fixed-income securities to invest in, or how to construct a balanced portfolio, seek advice from investment professionals like RCBC. We can provide personalized recommendations based on your financial situation, risk tolerance, and investment objectives, helping you make informed decisions and achieve your financial goals.

By following these tips, you can navigate your fixed-income security bonds with confidence and build an investment portfolio that delivers consistent returns and long-term wealth. Just remember to stay disciplined, informed, and focused on your goals as you invest.

Partnering with RCBC for your Fixed-Income Securities Investments

Fixed-income securities offer a reliable investment option if you're seeking consistent income and capital preservation. By understanding the basics of fixed-income investing and following our practical tips, you can build a solid foundation for long-term financial success.

With that said, trust RCBC Philippines for fixed-income securities investments for our stability and reliability as a financial institution. Our decades of experience in finance offer a diverse range of fixed-income products including government and corporate bonds.

Benefit from our competitive rates and attractive returns backed by RCBC's expertise. Access your investments conveniently through online banking and mobile apps. Enjoy personalized services and innovative solutions and make RCBC your partner for building a strong fixed-income portfolio.

Start your journey to financial stability today with RCBC fixed-income securities.Get in touch with us to know more about our investment services.