Stripped bonds? Perhaps you’ve never even heard of them. Perhaps you’re already using them as a vehicle for your own investments. In either case, they may be “just the right way” for you to make a gift to the Foundation.
What is a stripped bond?
For many years, governments and corporations have borrowed money from individuals by issuing bonds. As the lender, you purchase the bond at its “face value” and then receive interest at a fixed percentage until the bond “matures” and the face amount is refunded to you. (Bonds may also be bought and sold on the “secondary market” at current market prices; in that case you receive the stated interest for whatever time you own the bond.)
A stripped (or zero coupon) bond is a financial product sold by bond and securities dealers. Basically, it is a corporate or government bond from which the interest coupons have been stripped away. Instead of paying income to the holder, it is sold at a discount for much less than its future redemption value.
An individual who buys and holds a stripped bond must pay income tax each year on the growth in the bond’s value. However, when the bond is purchased and gifted to a Foundation, neither the buyer nor the Foundation is taxed, so its value increases tax-free ñ often doubling or tripling before it matures.
Andrew Smith wishes to establish a named endowment within the For the Soldier Legacy Fund of the PPCLI Foundation in memory of his wife. For $15,000, he purchases, in the Foundation’s name, a stripped bond which will mature in 10 years at a face value of $30,000. He receives a donation receipt for the full cost of the bond and, assuming a combined tax credit of 48 percent, realizes tax savings of $6,450 (43% of $15,000).
He has made a future gift of $30,000 to the PPCLI Foundation at a net cost of only $8,550 ($15,000 – $6,450)!
Selecting a bond to fit your goal
The cost of the stripped bond you purchase for the Foundation will depend on the years to maturity and the amount you want the Foundation to receive. Bond prices and yields fluctuate virtually every day. Contact an investment broker to obtain the most current stripped bond rates.
If you intend to use your stripped bond to establish a named endowment, as Andrew did in the example above, its present value must equal or exceed the established minimum for a new named fund. For a gift to the general endowment or a previously-established named fund, a bond of any size may be used.
Purchasing a stripped bond
Virtually any investment broker can provide a stripped bond, though you may wish to secure quotations from more than one to ensure that the pricing is efficient. You may consult your own dealer or ask us for suggestions.
If you have an account with the broker, you may use it to make your purchase and instruct the broker to register the bond in the name of the PPCLI Foundation and deliver it to us. Alternatively, you may give us a cheque for the required amount and we will purchase the bond. The settlement contract with the broker or your cheque to the Foundation will be the basis of your tax receipt.