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BOND STRATEGIES ------------------------Ladders A bond ladder staggers the maturity of your fixed-income investments, while creating a schedule for

reinvesting the proceeds as each bond matures. Because your holdings are not bunched up in one time period, you reduce the risk of being caught holding a significant cash position when reinvesting is less optimalfor instance, if rates on current bonds are too low to generate sufficient income. Example: Say you buy three bonds scheduled to mature in two, four, and six years. As each bond matures and repays your principal, you reinvest the proceeds in a 10-year bond. Longerterm bonds like these typically offer higher interest rates. More importantly, because no two bonds mature at the same time, youve created a diversified maturity distribution. Ladders are popular among those investing in bonds with long-term objectives, such as saving for college tuition. Theyre also particularly useful for retirees or others trying to create a predictable income stream. Laddering, however, can require a substantial commitment of assets over time, and the return of principal at maturity of any bond is not guaranteed. Advantages:

The periodic return of principal provides additional investing flexibility. The proceeds received from principal and interest payments can be invested in additional bonds if interest rates are relatively high or in other securities if they are relatively low. Your exposure to interest rate volatility is reduced because your bond portfolio is now spread across different coupons and maturities.

Barbells When pursuing a barbell strategy, you purchase short- and long-term bonds only. Theoretically, this provides you with the best of both worlds. By owning longer-term bonds you lock in higher interest rates, while owning shorter-term securities gives you greater flexibility to invest in other assets should rates fall too low to provide sufficient income. If rates should rise, the short-term bonds can be held to maturity and then reinvested at the higher prevailing interest rates. Example: In order to take advantage of high long-term interest rates, you buy two long-term bonds. At the same time, you also buy two short-term bonds. Once the short-term bonds mature and you receive the principal, you can decide how to invest itin more bonds if rates are high enough to generate a sufficient amount of income, or in a more liquid shorter-term investment if you think rates may soon rise. At the same time you continue to receive interest payments from the two higher-yielding long-term bonds. Advantages:

Strategy allows you to take advantage of rates when theyre high, without limiting your financial flexibility. Because a portion of your assets are invested in securities that mature every few years, you have the necessary liquidity to make large purchases or respond to emergencies. Allocating only part of your fixed-income portfolio in longer-term bonds can help reduce the risk associated with rising rates, which tend to have a greater impact on the value of longer maturities.

Bullets When pursuing a bullet strategy you purchase several bonds that mature at the same time, minimizing your interest rate risk by staggering your purchase date. This is an effective approach when you know that you will need the proceeds from the bonds at a specific time, like when a college tuition bill comes due. Example: You want all the bonds in your portfolio to mature in 10 years so that you have the proceeds available all at once. However, you also want to reduce your exposure to fluctuating interest rates, particularly when it comes to bonds with longer maturities, which are more likely to lose value when rates rise. The way to do this is to stagger your bond purchases over a fouryear period. Advantages:

All bonds mature at roughly the same time, ensuring you have sufficient funds to finance your purchase. By buying bonds at different times and during different interest rate environments, you are hedging interest rate risk.

CREDIT LINKED NOTES ----------------------------

A security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. CLNs are created through a Special Purpose Company (SPC), or trust, which is collateralized with AAA-rated securities. Investors buy securities from a trust that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. The trust enters into a default swap with a deal arranger. In case of default, the trust pays the dealer par minus the recovery rate in exchange for an annual fee which is passed on to the investors in the form of a higher yield on the notes.

Under this structure, the coupon or price of the note is linked to the performance of a reference asset. It offers borrowers a hedge against credit risk, and gives investors a higher yield on the note for accepting exposure to a specified credit event.

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