LOUISE FAIRSAVE: Govt savings bonds
WHEN YOU WISH to invest your cash, yet you need to have relatively quick access to it in an emergency, the investment vehicle to choose is the Government of Barbados savings bond, or simply called Government savings bonds.
In aiding your decision-making, here are responses to some of your ready questions: What are Government savings bonds? How and where can you obtain them? How can you use them as an investment vehicle, and how, why, where and when can you realise your investment?
Government savings bonds are Government securities. They are issued by the Central Bank as authorised by the Minister of Finance depending on the liquidity in the economy. The bonds can be purchased through the Central Bank or any commercial bank. The commercial banks serve as agents for the Central Bank. The bonds may also be redeemed at any commercial bank.
That means that Government savings bonds will be repayable out of the Consolidated Fund. This can be a very secure investment unless the Government runs into a debt crisis and is forced to give bondholders a reduced or negative return on the investment. Although this is unlikely, it has happened with governments in the Caribbean before.
The bonds are certificate-like documents, usually in face value denominations of $50, $100, $500, $1 000 and $5 000. The face of the bond certificate carries information on the terms of the bond issue. The reverse side of the bond displays certain conditions and the value of the bond at maturity or on encashment at discreet six-monthly stages of its life.
You buy bonds at a discount on the face value. For example, a bond of face value of $50 can be bought for $35 and a $100 bond for $70 and so on. Different bond issues may have different discount levels. For instance, a $50 bond in 1995 was issued at a cost of $33. That is, the larger the discount on the bond, the higher the yield, or rate of return, on the bond and vice versa. For a bond issue with a discount rate, or yield, of around seven per cent, here are the corresponding face values and purchase prices in the table below:
Nominal/Face Values: $50 $100 $500 $1 000 $5 000
Purchase Prices: $35 $70 $350 $700 $3 500
Having bought the particular bond or bonds, the investor can hold them for a five-year period and receive the maturity value of the full face value. The bond grows in value over the five-year period by six-month incremental steps. However, note that no more interest accrues after the five-year life of the bond. For example, two years after purchasing, a $500 bond (purchased for $350) can be cashed for $400. The maximum value of that bond, $500, will be after five years have elapsed.
The annual yield shown in the table represents the average annual interest rate of return for the particular six-month period.
The longer the bond is held, the greater the annual yield on the bond for successive six-month periods. This yield or rate of return (over the full five years) represents the interest rate at which you would have had to invest your money in the bank for the same period to get the same earning result.
Your aim is to maximise your return relatively safely, so consider the level of the discount carefully. If the discount is really attractive, it may be in your interest to move other under-performing cash investments into savings bonds.
The savings bond provides a good saving vehicle for spenders who have difficulty holding cash on a savings account. The money is not readily available right there on your bank account, so you are not as tempted to withdraw part or all of it.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.