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Instalments

Instalments allow you to gain exposure to shares (and other securities) by making a part payment upfront and delaying an optional final payment until a later date. This allows you to buy shares for a fraction of the current share price while receiving the benefits of capital growth, dividends and franking credits.

Features of instalments

Underlying assets Issued over Shares, Exchange Traded Funds, Listed Investment Companies, A-REITs and Managed Funds
Term to expiry Three months to 5 years
Exercise style American or European
Gearing ratio (LVR) On issue it can range from 40% to 110%
Code abbreviation 6 letter code with the fourth letter being an I or J
Initial payment Instalment price, varies depending on the level of gearing (includes a funding cost component)
Final instalment Final instalment (loan amount) is optional. Fixed at time of issue, represents loan by the issuer
Settlement Generally Deliverable ( full ownership of underlying asset is transferred)
Entitlements Entitled to all dividends and distributions including franking credits

Benefits of instalments

  • Gain a leveraged exposure to the movement of the underlying asset which may enhance your capital returns
  • No obligation to repay the loan unlike other forms of borrowing, such as margin lending
  • Build a broader asset base by diversifying through instalments
  • Derive a regular income stream through the entitlement to dividends and franking credits
  • Convert your shares into instalments without triggering a Capital Gains Tax (CGT) event.  This strategy is known as cash extraction.

Risks of instalments

  • The underlying asset fails to perform as you expected
  • Instalments offer a leveraged exposure to sharemarket, therefore percentage profits and losses are magnified
  • General Market risks

Example of an ordinary (or vanilla) instalment

Warrant code WBCIML
Underlying instrument Ordinary shares of Westpac Banking Corporation Ltd.
Warrant type Instalment
Expiry date 21 December 2010
Exercise price $8.50
Exercise style American
Conversion ratio 1

If you bought WBCIML instalments you would have the right to buy one ordinary share in WBC for $8.50 on or before 21 December 2010. You will receive the full dividends and franking credits that are paid on Westpac Banking Corporation Ltd ordinary shares during the life of the instalment.

Alternative types of instalments are rolling and self-funding instalments.

To learn more about instalments, visit our online warrants courses.

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