Most charities live with two basic types of fundraising: a current ongoing campaign to satisfy this year’s operating requirements, and (hopefully) an endowment and gift planning program for future needs. Speaking to a recent meeting of the Greater Toronto Chapter of the National Society of Fund Raising Executives, Gary Ursell, of Richardson Greenshields outlined the advantages of the strip bond concept for the endowment portion of your program.

Ursell points out that endowment programs, the fastest-growing field in fundraising, are prime candidates for the use of strip bonds, nothing more than regular bonds with the interest coupons removed. The holder of the `strip’ is thus entitled to a single payment of a fixed amount (the face value) at some time in the future (the maturity date of the bond), without the payment of any interest in the interim. Created from the strongest credit-worthy organizations available, they are usually issued or guaranteed by the government of Canada, a province of Canada, or a foreign country. The purchase price (present value) is determined by discounting the amount of the payment to be received on the maturity date by the appropriate current interest rate or yield factor.

Always get bids from at least two brokers

Combined with the fact that the maturity date can be geared to suit almost any donor’s requirements, these characteristics, Ursell stresses, make them particularly appropriate for the generation of substantial secure medium- and long-term charitable gifts from individuals (see Table – Approximate Value At Maturity). The only cost involved is the commission payable to the seller (investment broker or advisor) at the time.

Three factors affect the value of the bond: the time until maturity; the current interest rate; and the seller’s commission, typically $100 for a $25,000 bond. There are no trailer fees. Since strip bonds are traded on the commodities market, Ursell says, the field is very competitive, and you should always get bids from at least two competing brokers.

But why strip bonds rather than life insurance?

The so far not well-known facts are that while gifts of life insurance can generate a substantial return for a charity as well, the strip bond approach is almost always preferable . The cost is known, and is less than with insurance. The charity knows precisely when it will receive the money, and how much. The donor doesn’t have to die for the gift to occur, and can often reasonably expect to survive to see it take place.

You can use strip bonds to develop donors at an early stage and any age, with large or small donation amounts, whether smokers or not. They allow you to call on your donors year after year to add to their support, to set up gifts that can be counted on in spite of tough times, to pool small donations to buy larger bonds, and to give your donors a chance to celebrate the gift while they are still alive. Finally, you can thank your donor now for a gift that you know you will receive (not always the case with gifts of life insurance).

“Unless you have an insurance policy the value of which the insurer is enhancing each year,” Ursell told the NSFRE, “don’t just take a whole life policy with $6,000 cash value and turn it over as a gift. Roll it into a strip bond, and turn it into a much larger gift that will give the donor at least a good chance of seeing the donation occur in their lifetime.”

Think of them solely in terms of their value at maturity

If you’re a gambler of course, there is always the possibility that a life insurance policy could in fact pay off in the short-term, upon an untimely early death of the donor – the only, albeit extreme, situation in which the insurance policy comes out ahead of the strip bond approach. While this would be a hard-to-defend position for any charity to adopt in support of a preference for gifts of insurance, the scenario does illustrate the important underlying fact that case for the strip bond assumes it will be held until maturity.

This approach is in fact crucial to the success of the strip bond gift concept, since shorn of its interest element, the day-to-day price of a strip bond will be significantly more volatile than the price of a conventional interest-bearing debt security with the same credit risk and term to maturity. And again, since the investment dealers and financial institutions which offer strip bonds are not obligated to “make” a market for any particular bond at any given time, strips, as far as charities are concerned, should be seen solely in terms of their value at maturity.

Turning to the question of recognition, Ursell argues that many charities don’t know how to properly thank their donors, and suggests that a good approach is that of the United Way of Metro Toronto, which has mounted a major strip bond-based endowment program, and which gives the donor recognition for the ultimate value of the gift, rather than the amount of today’s donation which was used to buy the bond. Charities using strip bonds, Ursell said, should agree on how they are going to recognize these gifts. “To fail to do this,” he reminded the NSFRE members, “would be to miss an important opportunity to promote this very important fundraising tool.”