Endowment

created by Webster 1913

(thing) by Mandi (3.7 y) (print) ? (I like it!) Mon Apr 15 2002 at 6:41:30

Endowments are funds designed to permanently provide an income for somebody/thing/organization, usually with a growth rate built into the amount donated. When endowing a position/organization/etc., a common tactic is for the donor to place a large sum of money in an investment fund, and the position/organization/etc. is paid for in perpetuity by the interest income. In a basic finance class, students typically learn how to calculate simple endowments (simple meaning sweeping generalizations are made about future plans and interest rates so that the concept is quickly understood).

Example:

The University wishes to endow a position in the Business College. The starting salary is $120,000, and the University had decided on a 4% annual pay increase. How much should the donors provide in order to endow this position?

Solution:

120000 = $4,000,000
0.7-0.4

This $4,000,000 will be enough, then, to pay this professor's salary forever. The calculation is the same one used for calculation of other types of perpetuities.

Pmt₁ = payment (time 1)
I = interest rate (assumed to be static)
G = growth rate

Pmt₁
I - G

Clearly, if we don't require a growth rate, the principal needn't be as large. Consider the original problem. If the salary were to remain at $120,000 forever (a raw deal, that), we would only require $120,000/0.7 = $1,714,285 for the salary to be paid forever. However, thinking long term and considering inflation, $120,000 won't be worth much 100 years from now!

On the other hand, an Endowment Policy is a type of insurance policy which is getting quite popular because of its primary benefit over whole life and term life policies: the sum assured (the amount of insurance you asked for when you signed up) is paid out after a set amount of years, usually 25. Whether you died or not.

(definition) by Webster 1913 (print) Tue Dec 21 1999 at 23:23:40

En*dow"ment (?), n.

The act of bestowing a dower, fund, or permanent provision for support.

That which is bestowed or settled on a person or an institution; property, fund, or revenue permanently appropriated to any object; as, the endowment of a church, a hospital, or a college.

That which is given or bestowed upon the person or mind; gift of nature; accomplishment; natural capacity; talents; -- usually in the plural.

His early endowments had fitted him for the work he was to do. I. Taylor.

printable version
chaos

bigger breasts	Indowment	Juggs	eating club
Life insurance	Endow	insurance	Florida Institute of Technology
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Farang Ding Dong	National Endowment for Democracy	Disendowment	Sarajevo
Public school	How to send a child to college	lunchbox	humble pie
Lee and Herring	Naming rights	Caltech	Carnegie Corporation

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