Fixed Rate Treasury Notes (FXTNs) are direct and unconditional obligations of the national government.

They are issued by the Bureau of Treasury (BTr). They are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity. Fixed Rate Treasury Notes are considered one of the primest investment instruments in the market. They are safe, liquid and offer attractive returns to investors.
Features:

Issuer Term Tax feature Type of income Rate Coupon payment period Interest computation Manner of purchase

: National government : 2, 5, 7, 10, 15, 25 years : Interest income subject to 20% final withholding tax : Tax paid income : Fixed for the life of the FXTN; based on lowest accepted yield to maturity on auction date : Payable semi-annually in arrears : Simple interest/add-on : Auction or through secondary market

Fixed Rate Treasury notes are issued and sold at a price equal to be face value and are redeemed at maturity for the full face value of the instrument plus interest/coupon of the last period.

Fixed Rate Treasury Notes FXTNs are long-term financial obligations issued by the National Government which promise to pay a specific sum of money with frequent fixed-rate coupon payments at a specified future date. FXTNs have a known maturity and yield. Minimum Deposit PhP 10,000.00 Term/Tenor Tax Feature Coupon Interest Computation Manner of Purchase Documentation Liquidity Marketing Network 2, 5, 7, 10, 20 & 25 years (subject to availability) Interest income subject to 20% final withholding tax Semi-Annual Simple Interest / Add-on Through the Secondary Market Confirmation of Sale (COS) without recourse 3rd Party Custodianship documents Bank will provide liquidity for clients willing to sell securities subject to prevailing market rates for the remaining tenor of the securities. Available at all Bank of Commerce branches nationwide (cut-off is at 4:00 PM)

Advantage FXTNs are guaranteed by the Philippine Government and are, therefore, virtually risk-free.

Best for Individual and corporate clients who are looking for long-term and risk-free investment alternatives.

The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. A bond is a certificate of debt issued by a party in order to raise money. This money is repaid in annuity form until a specified date, at which point the principal amount is repaid. A government bond is a bond issued by the treasury of a government itself or by an agency delegated that power. Government Securities Market Primary market The market for public money-market instruments, or Treasury bills, is the single largest market for debt instruments in the Philippines (see Tables 2 and 3). The need to finance the Philippines chronic budget deficits has created a highly liquid market for T-bills. This market comprises the primary and secondary markets for 91-, 180-, and 364-day T-bills, as well as shorter-maturity cash management bills issued by the Treasury in unusually tight monetary conditions. Source: BSP To rely less on short-term debt and to develop the capital market by providing a benchmark for pricing private debt securities, the government started issuing floating-rate Treasury notes (FRTNs) in 1991. FRTN yields were set quarterly at a fixed spread over 91-day Treasury bills. The issuance of FRTNs paved the way for longerterm issues of fixed-rate Treasury notes (FXTNs), with 2-, 5-, 7-, 10-, and 20-year maturities, and provided the basis for pricing longer-term private-sector debt. The government hopes to increase the liquidity of the market for longterm government securities by further standardizing the tenor and regularity of issues. Meanwhile, tight monetary conditions and reduced demand for long-term instruments during the regional financial crisis have temporarily slowed down FXTN issues. Apart from the Bangko Sentral, banks and nonbank private investors, such as insurance companies and wealthy individuals, are the largest holders of T-bills and other short-term government securities (see Table 4). Semigovernment contractual savings institutions, such as the Social Security System (SSS) and the Government Service Insurance System (GSIS), are also large investors in government securities. 1 The private life insurance sector, fully liberalized only recently to allow unrestricted foreign entry, is another potential source of investment funds for capital market securities but has not yet had a substantial impact on this market, as the Insurance Commission has acknowledged. 1 SSS and GSIS corporate charters have only recently been amended and liberalized to relieve these institutions of the burden of using their reserves for compulsory purchases of government securities. The SSS has the largest stock of government securities in its portfolio. Source: BSP (latest available figures) Table 4 Holders of Outstanding Government Securities, 19851994 (percentage of total outstanding government securities held) The financial crisis has complicated fiscal management by the Philippine government. The initial defense of the exchange rate in July 1997, and the tightening of liquidity in financial markets in succeeding months, pushed up short-term interest rates, and therefore borrowing costs for the public sector, besides drastically shortening the term structure of public debt. Interest rates have risen across all maturities. Yield curves for government securities have always sloped upward, indicating that the yield curve does not always reflect market expectations of lower short-term rates in the future. This may be because investors still attach a risk premium to Philippine government securities. The shock to the government securities market due to the regional financial crisis, along with the contraction of the macroeconomy, reversed the fiscal surpluses generated by the government in 1997. For fiscal year 1998, the government now estimates that it will suffer a P40-billion deficit. With domestic interest rates still relatively high in mid-1998, the government has looked for other ways of financing noninflationary deficit

spending. In March, the outgoing government floated US$400 million worth of eurobonds. The present administration has recently obtained a foreigncurrency loan from a consortium of public and private banks, but has abandoned the idea of issuing euro-denominated bonds. Aside from exploring cheaper ways of financing the deficit, the administration is also attempting to broaden the ownership base of public debt to include smaller (especially low- to middle-income) investors. The proposal to sell government securities in smaller denominations in the primary and secondary markets fits in with this goal, even if primary and secondary dealers generally prefer high minimum investments to make up for the high transaction costs. A program launched recently by the GSIS offers mutual fund shares in T-bills and T-bonds in relatively small denominations; it is open to all citizens of legal age. The Treasury is also studying options which might involve opening a separate window in government financial institutions (GFIs) for the sole purpose of selling smalldenomination (less than P10,000) T-bills. The extent of liquidity in the money market can be gleaned from Table 5 which shows the volume of transactions in this market from 1990 to 1997. Government securities take up a substantial share of transactions, while commercial-paper issues in the private sector have a small, albeit growing, share. The volume of publicly issued securities as a percentage of all money-market transactions declined steadily from 1994 to 1996 Treasury bonds, on the other hand, are auctioned off every other week using the Dutch auction system. Under the Dutch system, all accepted470 CHAPTER 7 bids with yields higher than the winning (lowest) bid are awarded the same yield as the winning bid. Like T-bill issues, T-bond issues have also been oversubscribed in the recent past. Treasury bills and bonds have been issued in book-entry or scripless form by the BSP since 1989. Secondary trading of Treasury bills is generally liquid because of the large volume of securities that have been issued under each maturity to finance chronic budget deficits, and because of the generally high demand from the private sector for risk-free shortterm government securities. At present, secondary trades in T-bills are cleared and settled through the Registry of Scripless Securities (ROSS) system developed and operated by the BTr.