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Contingent Income Auto-Callable Securities due September 5, 2013, Based on the Performance of the Common Stock of Apple Inc.

Samuels Yoelin Kantor LLP

These notes are one example of a product with complex yield calculations based on the performance of a single traded equity, Apple stock in this case, which is piling risk on risk for a start. They offer a relatively lucrative coupon rate along the way, which is attractive in the short term, but the ultimate return of principal at maturity is dependent on the performance of Apple stock. If the stock rises, the investor gets his or her principal back. If the stock falls, the investor either gets a reduced principal — or Apple stock (hence the description “convertible”). If it sounds difficult for the investor to win this game, that’s accurate. Also important to note that Apple has nothing to do with this product, apart from its stock price providing a number. These pseudo- bonds, unlike ordinary corporate bonds, are not based on Apple’s credit risk, they are based on the issuing bank’s credit risk.

As a class JP Morgan has called them “Reverse Exchangeable Notes”, Barclays “Reverse Convertible Notes”, UBS “Reverse Convertible Notes”, and Morgan Stanley “ELKS”.

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