Fixed Rate Treasury Notes (FXTNs)

While fixed income securities are considered alternative investment products that can provide relatively higher yield than other traditional bank products, they are risky and may not be appropriate or suitable for all types of investors.

You should not deal in fixed income securities unless you understand their nature and the extent of your exposure to the attendant risks. And even assuming that you understand the nature of these investments, you should not deal with the same unless the product is suitable for you in the light of your circumstances, experience, financial position and operational resources.

The following is a brief summary of certain risk considerations which you should take into account in deciding whether to purchase fixed income securities. This list is not exhaustive; rather it is intended to highlight certain risks that could be related to your investment.

1. Credit Risk / Issuer Risk refers to the possibility that a bond issuer will default on its debt obligation.
2. Liquidity Risk refers to the difficulty of selling the issue in the market due to limited marketability. There is a possibility that the investor of the said issue may not be able to sell or unload the issue quickly enough.
3. Price / Interest Rate Risk refers to the possibility of a reduction the value of a security due to a change in the level of price / interest rates. This is present only if the bond holder or investor decides not to hold on to the security up to final maturity.
4. Reinvestment Risk refers to the possibility that the interest received from the investment may not be able to be reinvested at the same rate or return as the invested funds that generated them.
5. Sovereign Risk refers to the possibility that the payments made related to the Securities or the value of the security may be negatively of by the economy and political events in the country of the Issuer.
6. Call Risk refers to the possibility that the issuer may exercise its option to redeem the bond before maturity. This may shorten the tenor of the Investors intended investment and force the client to settle reinvesting at a lower rate of return.
7. Company Risk refers to the risk that certain factors specific to the issuer and its business may negatively affect or cause the price of the security go down.

What are Fixed Income Securities?

Fixed income securities are a form of investment that pays out a fixed rate of income over time with the full investment amount returned upon maturity. You can enjoy the benefits of having a stable source of passive income with minimal risk. It’s the perfect investment option that allows you to grow your income regardless of changes in current market performance.

What is the minimum investible amount for fixed income securities?

Government Securities and PHP-denominated Corporate Bonds: PHP 50,000.00, in increments of PHP 1.00.

ROPs/USD-denominated Corporate Bonds/other Sovereign Bonds: USD 100,000.00, in increments of USD 1,000.00; or minimum trade lot size and increment of the issue, whichever is higher.

What is the difference between coupon rate and yield-to-maturity?

a. Coupon rate is expressed as the percentage (per annum basis) of the face value of the bond. It is the amount that the bondholders will receive for holding the bond. Coupon payments are usually made semi-annually or quarterly.
b. Yield-to-maturity (YTM), as the name states, is the rate of return that the investor/bondholder will receive, assuming the bond is held until maturity. YTM accounts for various factors like coupon rate, bond prices, and time remaining until maturity, as well as, difference between the face value and price.
Coupon rate is fixed at the issue date, whereas the YTM fluctuates due to market movement and the aforementioned factors.

Will there be liquidity, should I want to unload my securities?

Yes, provided that there is a buyer in the market. Since government and top-tier corporate issued securities can be traded in the secondary market, those who want to unload his/her holdings can do so before its maturity date at the market bid rate. Generally, Security Bank may provide liquidity for investors willing to sell their securities.

What do I do if I wish to terminate or sell my fixed income investments prior to its maturity?

Termination is subject to prevailing market rates, so your investments might be sold at a discount, par, or premium. Termination will have to be coursed through a Broker Bank’s salesman. The client will have to comply and submit all documentary requirements before the sale of securities can be executed.

Why is the settlement amount different from the face value?

Face amount, also known as par value, is the amount that the bondholder will receive at maturity date assuming the issuer of the bond does not default. On the other hand, the settlement amount is the amount that the bondholder pays or receives for the face value; it accounts for the accrued interest, taxes and applicable fees.

When a security is traded at a discount (YTM > Coupon rate), the settlement amount may be less than the face amount. On the other hand, when a security is traded at a premium, (YTM < Coupon rate), the settlement amount is greater than the face amount.

Can Fixed Income Securities be used as collateral for loans?

Fixed income securities, both USD- and PHP-denominated, may be used as loan collateral at a certain percentage (%) of the face value depending on the type of security and the bank’s credit guidelines.

What documents do I need to submit if I want to purchase and/or sell fixed income securities?

Before any transaction of government securities, Security Bank requires the submission of the following:

Purchasing: Special Power of Attorney (SPA), Investor’s Undertaking, Letter of Instruction (LOI) for Peso Fixed Income Securities and Client Suitability Questionnaire (CSQ)

Selling: Original Confirmation of Sale and Letter of Instruction (LOI) for Peso Fixed Income Securities

Note: Additional documents may be required by the Bank or Custodian to facilitate the execution of the transaction.

Before any transaction of USD bonds, Security Bank requires the submission of the following:

Purchasing: Special Power of Attorney (SPA), Client Mailing Instruction, Letter of Instruction (LOI) for USD Fixed Income Securities, Individual Self Certification Form, FATCA Form and LOI for USD Fixed Income Securities

Selling: Original Confirmation of Sale and Letter of Instruction (LOI) for USD Fixed Income Securities

Note: Additional documents may be required by the Bank or Custodian to facilitate the execution of the transaction.

Before any transaction of Philippine Corporate Bonds, Security Bank requires the submission of the following:

Purchasing: Investor Registration Form, Letter of Instruction (LOI) for Peso Fixed Income Securities and PDTC Specimen Signature Sheet

Selling: Trade Related Transfer Form, Letter of Instruction (LOI) for Peso Fixed Income Securities and Confirmation of Sale

Note: Additional documents may be required by the Bank or Custodian to facilitate the execution of the transaction.

What is the cut-off time to execute trade transactions?

All Security Bank branches can assist with buy or sell transactions, but execution of transactions are done at the Head Office. Transactions done on or before 11:30 AM for transactions are value-dated same day. Transactions done after cut-off time are for settlement the next banking day.

What do you mean by “on-the-run” and “off-the-run” issues?

“On-the-run” securities are the most recent issues of a particular maturity. Conversely, “off-the-run” securities are the opposite. “On-the-run” securities are generally more liquid than “off-the-run” securities.

Why are Government Securities considered “credit risk-free”?

Government Securities are backed by the full taxing power of the national government and its ability to print money, hence they are practically “default-free”.

Given the same tenor, is it better for me to invest in corporate bonds than Government Securities?

It depends on the client’s risk appetite. Corporate-issued bonds are riskier because corporations have greater chances of default (credit risk) than the government; hence, corporate bonds offer higher rates than GS as compensation for bondholders.

What is the difference between a Custodian and a Registry?

A custodian and a registry are either BSP-accredited banks or non-bank financial institutions. A custodian holds the securities on behalf of the client, while the registry records the initial and succeeding transfer of ownership of securities.

How will the securities be transferred upon purchase?

During settlement date, the securities will be delivered by the seller to the buyer or to its BSP-accredited custodian once all documentary requirements have been submitted.