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Learning Department

December 1998

Ever wish stocks were more like home appliances, ie, they'd come with some guarantee? Well, they do, via Merrill Lynch's Market Index Target-Term Securities, or MITTS® for short. In plain English, they're index-linked corporate bonds. What are they linked to? Various stock/equity indexes (see table). Eg, the Major 8 European Index consists of the stock indexes of France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland & the UK.

NAME
MITTS Sym
Index Sym
Exch
Mat Date
Dow, Jones Industrials
DJM
INDU
NYSE
01/14/2003
European MITTS
MEE
MEP
NYSE
06/30/1999
Healthcare/Biotech Pf
MLH
MXH
AMEX
10/31/2001
Major 8 European Index
MEM
EMX
AMEX
08/30/2002
Major 11 Intl Index
EEM
EuX
AMEX
02/28/2006
Merrill Lynch EuroFund
EFM
DFI
AMEX
02/28/2006
Nikkei 225 Index
JEM
NKE
NYSE
06/14/2002
Russell 2000 Index
RUM
RUT
AMEX
09/30/2004
S&P 500 Index
MIX
SPX
NYSE
05/10/2001
S&P 500 Index
MIM
SPX
NYSE
09/16/2002
S&P 500 Index
MLF
SPX
AMEX
07/01/2005
S&P 500 Index
MIJ
SPX
NYSE
08/15/2001
Technology Index
TKM
TXX
NYSE
08/15/2001
Top Ten Yield Index
MTT
XMT
AMEX
08/15/2006


With MITTS, you're guaranteed (assuming Merrill Lynch is still in biz) a minimum return at maturity of $10/unit (original issue price) regardless of what happens to the stocks in the underlying index. So if you buy when first issued, your nominal risk is zero. You'll also get a Supplemental Redemption Amount. The actual SRA depends on how much the index goes up.

Let's run some numbers for the Technology MITTS (NYSE: TKM). The underlying CBOE Tech index includes stocks like Cisco, Intel, & Microsoft. For the sharp-pencil set, here's the actual equation: SRA = $10 x (Ending index value - 189.48/189.48). TKM was issued in August, 1996. At the beginning of '98, it was at $10.625 (see pt A on chart), a gain of just 6.25% in 16 mos. But on November 20, TKM closed at $14.25 (+34%). The underlying CBOE Tech Index rallied from 206.82 to 352.04 in '98, for a gain of +70%—twice as much as the MITTS. So the sleep-at-night guarantee comes with a price (big surprise!).

But had the CBOE Tech Index declined, your original purchase price of $10/unit would be guaranteed. MITTS are safest if bought when first issued or if they decline to or below the issue price. Six weeks after TKM was issued (pt B) it traded as low as $9.125. If you bought then, the worst you could do is gain $0.875/unit over the life of the bond while enjoying an unlimited upside. Is the no- to limited-downside with a more modest upside worth it? That's a decision only you can make. With MITTS, it's a lot safer ballgame than most, but there are no free tickets. (This is #19 in the series, Building Wealth the Harry Schultz Way).

Less than a year later…

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