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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.
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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