Q&A with CMMB Securities

Q. What is the Depositors Insurance Company? And just how safe is my money when I put it into commercial banks?

Allison, Belmont

A: The Deposit Insurance Corporation (DIC) is a statutory authority, which provides insurance on bank deposits up to $50,000 of the value of each deposit. Banks must pay DIC a premium for obtaining this insurance in the same way an individual would pay a premium to an insurance company for health or life insurance. Based on deposit insurance alone, a depositor with more than $50,000 in the bank is only insured up to $50,000 by DIC. The rest of the funds are subject to the management of the bank. However, bank regulations governing how bank managers invest depositors funds are very strict. Every two years banks are also subject to an audit by the Central Bank as to their investment profile and risk management systems.  Banks which are on the stock exchange are also subject to even more scrutiny from analysts who seek to determine stock prices. In short, there are enough safeguards in place to ensure the integrity of the financial system so your money should be well protected.

Q. The invitations to borrow money for clothing, vacation and consumer items are very tempting, but I remember being advised many years ago that it’s generally a bad financial move to borrow money for things that depreciate in value. Can you explain why?

Satish, Point Fortin

A: The principle of only borrowing to buy things which do not quickly depreciate in value usually applies to a firm. For example, if a businessman decides to borrow to expand his firm he would want the assets, which he purchases to retain their value sufficiently in order to generate sales in order to repay the loan over time. If the assets quickly depreciate in value or usefulness before the loan is fully repaid then the firm makes a capital loss on investment since the remaining balance on the loan still has to be repaid out of the businessman’s pocket. This is when value is measured only in dollars and cents.

For an individual, buying clothes or other consumables will always result in having to pay the loan long after the item has been consumed. This should only be done if the individual feels a sense of lasting value after consumption. This of course will vary widely from person to person.
Therefore borrowing to buy clothes or to go on a vacation may or may not be advisable depending on the individual’s psychological profile. So, it is not possible to say a firm yes or no. However, generally speaking, it may not be advisable to borrow for luxuries you cannot afford out of your own pocket.

Q. What role does the bond market play in the local financial sector and how can I invest in bonds?

Lalman, Chaguanas

A: The role of the bond market in any country is to facilitate the raising of capital for the Government or Corporations. The bond market is a network of underwriters, brokers and investors. Underwriters structure the bond, i.e. determine the terms and conditions (interest rate and time frame) and then find investors who would like to buy these bonds. Whether all would be sold will depend on the attractiveness of the bond, i.e. the risk profile of the borrower, interest rate, etc. Alternatively, investors holding bonds who would like to buy more or even sell some of their holdings can contact a broker whose role would be to match buyers with sellers. In essence, the bond market puts borrowers and lenders together. The lowest required minimum investment for bonds in Trinidad and Tobago would be around TT$100,000. If you do not have that much, call a bond broker that may be willing to structure an investment where you can still derive the benefits of the bond without an outright purchase. There is an instrument called a repurchase agreement, which would allow this.

Questions can be sent to PO Box 1830, Wrightson Road, Port-of-Spain
e-mail: cmmb@mycmmb.com

Disclaimer for Articles:
“All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgement as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever. CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.”