Reverse convertibles securities

What are Reverse Convertible Securities?

* Short-term coupon bearing notes, structured to provide enhanced yield while participating in

certain equity-like risks.
* Investment value is derived from underlying equity exposure, which is paid in the form of fixed

coupons.
* Investors receive full principal back at maturity if the Knock-in Level is not breached (which is

typically 70-80% of the initial reference price).
* The underlying stock, index or basket of equities is defined as Reference Shares. However, in most

cases, Reverse convertibles are linked to a single stock.

Reference Shares

* Underlying stocks or basket of equities can include names such as:
o Dell Computers
o Wal Mart
o Exxon Mobil
o Cisco
o Best Buy
o Corning
* Broad market indices may include names such as:
o Nasdaq-100 Index

How do Reverse Convertibles work?

* Short-term investments, typically with one year maturity.
* At maturity, investors receive either 100% of their original investment or a predetermined number

of shares of the underlying stock, in addition to the stated coupon payment.
* The investors’ earning potential is limited to the security’s stated coupon, because investors

receive coupon payments regardless of the performance of the underlying reference shares.
* Coupon payments are the obligation of the Issuer and are paid quarterly.
* Sold by prospectus or offering circular and pricing term sheet.
* General rule of thumb:

The higher your coupon payment, the greater likelihood of receiving stock at maturity.

* NOTE: Whether or not the Knock-in Level is breached, the investor will receive fixed periodic

coupons through the term of the notes.

Delivery at Maturity

At maturity, there are 2 possible outcomes:

* Cash Delivery
o Stock closes at or above the Initial Share Price upon valuation date, regardless of whether

the stock closed below the Knock-in Level during the holding period. OR stock closes below the Initial

Share Price, but has never closed below the Knock-in Level.
* Physical Delivery
o Underlying shares closed below the Knock-in Level at any time during the holding period and

does not trade back up above the Initial Share Price on valuation date (4 days prior to maturity).

Physical Delivery

* Initial Share Price is determined on Trade Date.
* The final valuation of the shares is based on the closing price of the Reference Shares determined

4 days prior to maturity.
* If the investor is delivered physical shares, their value will be less than the Initial Share

Price, however, investors are not required to sell their shares at prevailing market prices.

Secenario 1 - Cash Delivery

Cash Delivery


Reference share closing price is above the Initial Share Price of the note on Valuation Date (4

days prior to maturity), regardless of whether the stock closed below the Knock-in Level. Investor

receives Cash Delivery Amount (Par), at maturity.

Secenario 2 - Cash Delivery

Cash Delivery


Reference share closing price is below the Initial Share Price of the note on Valuation Date (4

days prior to maturity), but never closed below the Knock-in Level. Investor receives Cash Delivery

Amount (Par) at maturity.

Secenario 3 - Physical Delivery

Physical Delivery


Reference share closing price is below the initial price of the note at valuation date (4 days

prior to maturity), and has closed below the downside Knock-in Level during the holding period.

Investors receive Physical Delivery Amount, or shares of stock, at maturity. Predetermined number of

shares delivered to the investor if closing price of reference shares below initial price.

Physical Delivery Amount = (Original Investment Amount / Initial Price of Underlying Asset),

Liquidity

* Generally created as a buy and hold investment.
* Issuers typically provide liquidity in the secondary market.
* The secondary market price may not immediately reflect changes in the underlying security.
* Liquidations prior to maturity may be less than the initial principal amount invested.

Trading

* Trade flat and accrue on a 30/360 basis.
* End of day pricing posted on Bloomberg and/or the internet.
* Pricing will fluctuate intraday.
* Reverse Convertibles are notes that are registered with the SEC

Ratings

* These are an unsecured debt obligation of the issuer, not the reference company thus it carries

the rating of the issuer.
* The creditworthiness of the issuer does not affect or enhance the likely performance of the

investment other than the ability of the issuer to meet its obligations.

Taxes

* For tax purposes Reverse Convertibles Notes are considered to have two components:
o A debt portion.
o A put option.
* At maturity, the option component is taxed as a short-term capital gain if the investor receives

the cash settlement. In the case of physical delivery, the option component will reduce the tax basis of

the Reference Shares delivered to their accounts.
* Investors should consult their own tax advisor prior to investing. Refer to the Note’s prospectus

for more detailed information.

Investor Benefits

* Enhanced yield.
* Current income
* Downside protection, typically up to 10-30% on most Reverse Convertible offerings.
* The bid-ask spread is typically 1%.
* $1,000 minimum investment.

Risk to Consider

* Owners of the Reverse Convertible Notes may be exposed to the risk of the decline in the price of

the reference shares during the term of the note.
* Investments in equity-linked notes may not be suitable for all investors.
* Investors selling notes prior to maturity may receive a market price which is at a premium or a

discount to par and may not necessarily reflect any increase or decrease in the market price of the

underlying equity to the date of such sale.
* Reverse Convertibles do NOT guarantee return of principal at maturity.
* In addition, Reverse Convertibles do not have the same price appreciation potential as the

reference shares because at maturity the value of the note may not appreciate above the initial

principal amount.
* The market price of the Reverse Convertibles may be influenced by unpredictable market factors.

Investor Suitability Profile

* High net worth clients seeking current income.
* Traditional Equity Customers.
o Trust accounts
o Money managers
o Qualified accounts
o Non-profit organizations
* Investors that believe the markets will be relatively flat.
* Current equity linked notes investors.
* Investors who own the underlying stock.
* Notes purchased at original issue will not subject to wash sale rules on the underlying stock