Endowments

Endowments are long-term call warrants, typically with a 10 year life at the time of issue. They are issued over an ASX quoted security or a basket of securities. They are generally purchased and held till expiry, with dividends paid on the underlying used to reduce the loan amount.

Features of endowments

Underlying assets Issued over ASX listed shares or a basket of shares
Term to expiry 10 years
Exercise style European
Gearing ratio (LVR) On issue it can range from 30 to 65%
Code abbreviation 6 letter code with the fourth letter being an E
Initial payment Pay between 30 and 65 percent of the market value of the underlying securities
Exercise price Remaining value + other costs varies over life of warrant
Settlement Generally Deliverable ( full ownership of underlying asset is transferred)
Entitlements Dividends used to reduce the loan

At expiry, if you exercise the warrant and pay the balance of the outstanding amount (if any) the issuer will transfer the underlying securities to you.

If the outstanding amount falls to zero before the warrant's expiry date, you may only have to pay a nominal exercise price such as one cent in order to receive the underlying securities.

Benefits of endowments

  • Leverage - Gain a leveraged exposure to the movement of the underlying asset.
  • Diversification - Endowments can help you diversify your portfolio.

Example - Endowment Warrant

Warrant code CBAECE
Underlying instrument Ordinary shares in Commonwealth Bank of Australia
Expiry date 18 August 2010
Outstanding amount when issued -14 February 2000 $13.30
Outstanding amount as at 16 August 2008 $1.6498
Market price of CBA shares (as at 26 November 2008) $32.66
Exercise style European
Conversion ratio 1

CBAECE endowments give you the right to buy one ordinary share in CBA on 18 August 2010

In order to exercise the endowment you will have to pay any outstanding amount. The amount payable will depend on the dividends paid on CBA shares during the life of the endowment, and the amount of interest charged on the outstanding amount during its life. 

If the dividends pay off the outstanding amount and accrued interest before the expiry date the fully paid share will be passed to you.