The budget for the education sector in the 2004/05 financial year is $59.5 billion. This is a 3 per cent drop from 2003/2004. Secretary for Education and Manpower Arthur Li Kwok-cheung has announced that the government wants his ministry to save $200 million in order to fund upcoming projects, which will cost up to $2 billion. These include whole-day schooling, native English-speaking teachers' scheme, school improvements and a pilot project for smaller classes. Now, many secondary schools have to look for new ways to generate additional income. Schools can't solely depend on generous donors to raise extra revenue. It is prohibited by law to use public funds for investment. The exception is donations. Therefore, the management committee of Pui Ching Middle School decided to use donation money to invest in overseas bonds. Of the 300 government-subsidised secondary schools, Pui Ching was the first to dabble in the bond market. The school was considering how to use a donation of US$1 million. The interest rates on the bonds range from 6 to 9 per cent. This investment generates a cash flow of $600,000 each year. The management now plans to set up scholarships to sponsor students on overseas study trips. Actually, investing school donations as a way of preserving capital is nothing new. Harvard University invests in hedge funds. Why did Pui Ching select bonds as its investment tool? They provide a fixed income - periodic coupon payments at a fixed rate and a lump sum on the maturity date. When thinking about investing in bonds, we should consider the default risk of the issuers. Bonds are classified into two grades - investment or speculative. Investment-grade bonds are ranked AAA through BBB by top rating agency Standard and Poor's (S&P). Their speculative counterparts are ranked BB or below by S&P. These 'junk bonds' offer higher coupon rates. However, schools cannot afford to take risks so they must focus on the top ratings bonds. Dr Sze is the president of the Society of Registered Financial Planners If you have a money-related question, send it to yp@scmp.com with Money Matters as the subject
