Securities Law & Instruments

Headnote

Mutual Reliance Review System for ExemptiveRelief Applications -- Revised form of strip bond informationstatement accepted by Director.

Staff Note

The B.C. Securities Commission did not participatein this MRRS Decision. However, the B.C. Securities Commissionis publishing a contemporaneous Notice confirming that theirExecutive Director has approved the information statement, whichis contained in Schedule A to the MRRS Decision, for the purposesof B.C. Instrument 91-504 Government Strip Bonds. The B.C. Noticewill also confirm that their Executive Director has revokedBC Form 91-504F, being the form of the Previous Strip Bond InformationStatement referred to in the MRRS Decision, with effect fromNovember 1, 2003.

Applicable Ontario Rule

Ontario Securities Commission Rule 91-501 StripBonds.

IN THE MATTER OF

THE SECURITIES LEGISLATIONOF

ALBERTA, MANITOBA, NEWFOUNDLANDAND LABRADOR,

NOVA SCOTIA, ONTARIO, QUEBECAND SASKATCHEWAN

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

THE INVESTMENT DEALERS ASSOCIATIONOF CANADA

AND

A STRIP BOND INFORMATION STATEMENT

 

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof the provinces of Alberta, Manitoba, Newfoundland and Labrador,Nova Scotia, Ontario, Quebec and Saskatchewan (collectively,the "Jurisdictions") has received an application (the"Application") from the Investment Dealers Associationof Canada (the "IDA") for a decision, pursuant tothe securities legislation (the "Legislation") ofeach of the Jurisdictions, that the form of information statementdated June, 2003 (the "Revised Strip Bond Information Statement")submitted with the Application, and attached hereto as Schedule"A", is, depending upon the Jurisdiction, approvedby, accepted by, or satisfactory to, the Decision Maker, forthe purposes of the Revised Strip Bond Information Statementbeing delivered to purchasers of strip bonds in accordance withprovisions (the "Information Statement Delivery Requirements")in the Legislation that require delivery of an information statementor document that has been approved or accepted by, or is satisfactoryto, the Decision Maker;

AND WHEREAS pursuant to the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission is the principal regulatorfor the Application;

AND WHEREAS the IDA has represented tothe Decision Makers that:

1. The head office of the IDA is in Toronto,Ontario.

2. The IDA has prepared the Revised StripBond Information Statement and submitted it to the DecisionMakers for this Decision in order that the Revised Strip BondInformation Statement may be used by members of the IDA tosatisfy certain Information Statement Delivery Requirements.

3. The IDA does not object to other marketparticipants using the Revised Strip Bond Information Statementto satisfy Information Statement Delivery Requirements.

4. The Information Statement Delivery Requirementsare contained in:

(i) requirements in the Legislation thatmust be satisfied in order for a person or company to beable to rely upon an exemption from the "dealer registrationrequirement", as defined in National Instrument 14-101-- Definitions (the "National Definition Instrument"),or the "prospectus requirement", as defined inthe National Definition Instrument, for trading in stripbonds; or

(ii) requirements in the Legislation applicableto trading by registrants in strip bonds.

5. The Revised Strip Bond Information Statementclearly describes:

(a) the nature of strip bonds, the rightsof holders of strip bonds and how strip bonds differ fromconventional interest-bearing debt securities;

(b) the fluctuations, and volatility offluctuations, in the market price and value of strip bondsresulting from fluctuations in interest rates;

(c) the effect on the volatility of fluctuationsreferred to in paragraph (b) associated with the time tomaturity of strip bonds;

(d) the secondary market for strip bondsand underlying bonds;

(e) custodial arrangements for strip bondsand underlying bonds;

(f) the Canadian federal income tax consequencesof buying, selling and holding strip bonds; and

(g) the existence of dealer mark-ups orcommissions on the purchase and sale of strip bonds andthe impact, illustrated in tabular form, of different mark-upsor commissions on the yield to maturity of a strip bond,and includes a statement inviting the prospective purchaseror seller of a strip bond to compare the yield to maturityof the strip bond, calculated after giving effect to anyapplicable dealer mark-up or commission, against the similarlycalculated yield to maturity of a conventional interest-bearingdebt security, and to inquire about the dealer's bid andask prices for the subject strip bond.

6. The Revised Strip Bond Information Statementis substantially the same as an earlier information statementdated April, 1998 (the "Previous Strip Bond InformationStatement"), which was submitted by the IDA to the DecisionMakers and, depending upon the Jurisdiction, approved or acceptedby, or determined to be satisfactory to, the Decision Makers.

7. The Revised Strip Bond Information Statementdiffers from the Previous Strip Bond Information Statementin the following respects:

(i) the section in the Revised Strip BondInformation Statement which identifies those strip bondswhich are exempt from the registration and prospectus requirementsof applicable securities legislation has been made moreuser friendly by specifically listing particular securities(whereas in the Previous Strip Bond Information Statementthe corresponding section only described the general requirementsfor exemption);

(ii) the discussion illustrating potentialtax consequences has been updated to reflect current incometax rates; and

(iii) the Revised Strip Bond InformationStatement incorporates certain other minor drafting changesof a non-substantive nature.

8. Following the issuance of this Decision,the IDA will announce a date after which it will encourageits members to use the Revised Strip Bond Information Statementinstead of the Previous Strip Bond Information Statement inorder to comply with then applicable Information StatementDelivery Requirements.

AND WHEREAS pursuant to the System, thisMRRS Decision Document evidences the decision of each DecisionMaker (collectively, the "Decision");

AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;

THE DECISION of the Decision Makers pursuantto the Legislation is that the Revised Strip Bond InformationStatement is approved or accepted by, or is satisfactory to,the Decision Maker, for the purposes of the Information StatementDelivery Requirements.

July 28, 2003.

"Margo Paul"

 

Schedule A

STRIP BONDS AND STRIP BONDPACKAGES

INFORMATION STATEMENT

INVESTMENT

DEALERS

ASSOCIATION

OF CANADA

This Information Statement is being providedas required by securities regulatory authorities in Canada todescribe certain attributes of "strip bonds" and "stripbond packages".

Strip Bonds and Strip Bond Packages

In this Information Statement, the term "stripbond" refers to an interest in (i) the amount payable onaccount of principal, and/or (ii) an amount payable on accountof interest, in respect of "Underlying Bonds". UnderlyingBonds are certain government bonds which can be traded pursuantto an exemption from the registration and prospectus requirementsof applicable securities legislation. For a trade in bonds notexpressly exempted by the applicable securities legislation,an order or other form of acknowledgment may be sought fromthe applicable securities commission to proceed without complyingwith registration and prospectus requirements.

The following is a summary of certain governmentbonds which can be traded pursuant to an exemption from theregistration and prospectus requirements of applicable securitieslegislation in particular provinces or territories (or in thecase of the Yukon Territory, from the prospectus requirementsonly).

Canada, Provincial and Territorial Bonds

    • In all provincesand territories, bonds issued or guaranteed by the Governmentof Canada or a province of Canada.

    • In Alberta,British Columbia, New Brunswick, Nova Scotia, Newfoundland,Ontario, Prince Edward Island, Saskatchewan, the NorthwestTerritories, Nunavut and the Yukon Territory, bonds issuedor guaranteed by a government of a territory in Canada.

Foreign Country Bonds

    • In Alberta,Newfoundland, Nova Scotia, Ontario, Prince Edward Island,the Northwest Territories, Nunavut and the Yukon Territory,bonds issued or guaranteed by the government of any foreigncountry or a political division thereof.

    • In BritishColumbia and Saskatchewan, bonds issued or guaranteed by theGovernment of the United Kingdom, the Government of the UnitedStates of America, a state or territory of the United Statesof America, or the District of Columbia in the United Statesof America.

    • In Manitoba,bonds issued or guaranteed by the Government of the UnitedStates of America or the Government of the United Kingdom.

A strip bond entitles the holder to a singlepayment of a fixed amount in the future without the paymentof any interest in the interim. The purchase price or presentvalue of a strip bond is determined by discounting the amountof the payment to be received on the payment or maturity dateof the strip bond by the appropriate interest rate or yieldfactor. Strip bonds are therefore different from conventionalinterest-bearing debt securities and purchasers of strip bondsshould be aware of the special attributes of strip bonds asdescribed in this Information Statement. Strip bonds may bepurchased in various different forms as described below under"Custodial Arrangements".

In this Information Statement the term "stripbond package" refers to a security comprised of two ormore strip bonds which are combined to make up a "bond-like"strip bond package or an "annuity-like" strip bondpackage. A bond-like strip bond package consists of a lump-sumpayable at maturity, which is backed by an interest in a stripbond payable in respect of one or more Underlying Bonds, togetherwith one or more interests in other strip bonds (usually interestpayments) related to one or more Underlying Bonds, thereby creatingan instrument that resembles, in its payment characteristics,a conventional bond. An annuity-like strip bond package differsfrom a bond-like strip bond package only to the extent thatit does not include a lump-sum payment at maturity. Strip bondpackages may be purchased in the form of several separate stripbonds or as one security in one of the forms described belowunder "Custodial Arrangements".

Price Volatility

As with conventional interest-bearing debt securities,the market price of strip bonds and strip bond packages willfluctuate with prevailing interest rates. Generally, the marketprice of conventional interest-bearing debt securities and ofstrip bonds and strip bond packages will fluctuate in the samedirection: when prevailing interest rates rise above the yieldof these instruments, their market price will tend to fall;conversely, when prevailing interest rates fall below the yieldof these instruments, their market price will tend to rise.

However, the market price of a strip bondwill be significantly more volatile than the price of a conventionalinterest-bearing debt security with the same credit risk andterm to maturity. When prevailing interest rates rise, themarket price of a strip bond will tend to fall to a greaterdegree than the market price of a conventional interest-bearingdebt security with the same credit risk and term to maturity.Conversely, when prevailing interest rates fall, the marketprice of a strip bond will tend to rise to a greater degreethan the market price of a conventional interest-bearing debtsecurity with the same credit risk and term to maturity. Theprimary reason for such volatility is the fact that no interestis paid in respect of a strip bond prior to its maturity. Thereis, therefore, no opportunity to reinvest interest paymentsat prevailing rates of interest prior to maturity.

The table below compares changes in the pricesof conventional interest-bearing debt securities and strip bonds.The table shows, on a hypothetical basis, the difference inprice fluctuation as a result of fluctuations in prevailinginterest rates between, on the one hand, 5-year and 20-year$100 face amount conventional bonds bearing interest at 6% payablesemi-annually, and, on the other hand, 5-year and 20-year $100face amount strip bonds priced to yield 6%. It will be notedthat the longer the term to maturity of the bond or the stripbond, the more volatile its market price will be.

Market Price Volatility
 
Market price
Market yield
Price with rate dropto5%
% price change
Price with rate increaseto 7%
% price change
6% 5 Year Bond
$100.00
6.00%
$104.38
+ 4.38%
$95.84
- 4.16%
5 Year Strip Bond
74.41
6.00
78.12
+ 4.99
70.89
- 4.73
6% 20 Year Bond
100.00
6.00
112.55
+ 12.55
89.32
- 10.68
20 Year Strip Bond
30.66
6.00
37.24
+ 21.49
25.26
- 17.61

In contrast to strip bonds, the income streamreceived on a strip bond package prior to maturity or the finalpayment date may be reinvested at the then prevailing interestrates. Therefore, the market price of a strip bond package willnot be as volatile as the market price of a strip bond withthe same credit risk and term to maturity or final payment date.However, it may be more volatile than the market price of aconventional interest-bearing debt security with the same creditrisk and term to maturity.

Secondary Market and Liquidity

Strip bonds, strip bond packages and UnderlyingBonds do not trade in Canada in an auction market similar tothat for shares listed on a stock exchange. Instead, strip bonds,strip bond packages and Underlying Bonds trade in dealer orover-the-counter markets similar to those for most conventionaldebt securities.

Certain strip bonds and strip bond packagesthat are available in Canada are offered by groups of investmentdealers or financial institutions which may make markets forthe strip bonds and strip bond packages they offer, althoughthey are not obligated to do so. There can be no assurancethat a market for particular strip bonds or strip bond packageswill be available at any given time. In such circumstances,purchasers may have to hold their strip bonds and strip bondpackages to maturity or final payment date in order to realizetheir investment.

The market for Underlying Bonds is more liquidthan the market for strip bonds and strip bond packages. Totalturnover in Canadian federal and provincial bonds totalled $3.6trillion in 2000, with trading in Canadian federal bonds accountingfor 92 percent of this amount. The average daily turnover ofGovernment of Canada bonds amounted to $13 billion in 2000,in proportionate terms roughly equivalent to the average dailyturnover of U.S. treasury bonds which is generally consideredto be the most liquid market in the world.

Government of Canada bonds with 2, 5, 10 and30-year maturities (i.e., the so-called benchmark issues) accountfor most of the trading activity in this market and are themost liquid Government of Canada securities. The benchmark issuestrade with the tightest bid-offered spread, with spreads wideningfor securities with different maturities than the benchmarkissues. The market for provincial and territorial governmentsecurities is less liquid than the market for Government ofCanada securities. Securities issued by the larger provinceswith significant borrowing requirements are more liquid thansecurities issued by the smaller provinces, or the territories.

Custodial Arrangements

Purchasers may purchase strip bonds and stripbond packages in four forms:

    • A book-entryposition created by The Canadian Depository for SecuritiesLimited (CDS) which represents an undivided interest in therelevant interest and/or principal payment(s) to be made inrespect of one or more Underlying Bonds held by CDS. Thisis the most common form of ownership today.

    • A deposit receiptor certificate issued by a custodian where the receipt orcertificate represents an undivided interest in a pool ofinterest coupons or principal residues held by the custodianor in interest or principal payments to be made in respectof one or more Underlying Bonds held by the custodian (nonalter-ego receipts).

    • A deposit receiptor certificate issued by a custodian where the receipt orcertificate represents the relevant segregated underlyinginterest coupon(s) or principal residue(s) held by the custodian(alter-ego receipt).

    • In limitedcircumstances, physical delivery of the actual coupon(s) orresidue(s) (in specie).

Each of these forms has different characteristics:

    • Holders ofbook-entry positions and non alter-ego receipts are not entitledto take physical delivery of the underlying coupon(s) or residue(s),except in cases where specifically allowed by the rules ofCDS or the custodial arrangements, as the case may be.

    • Holders ofbook-entry positions, alter-ego receipts and non alter-egoreceipts and holders of physical coupon(s) and residue(s),may be limited in their right to enforce the terms of theUnderlying Bond(s) directly against the issuer. Further, suchholders may have their rights under applicable custodial arrangementsand in respect of the Underlying Bond(s) affected by a specifiedmajority of such holders. Voting rights may be allocated toholders of strip bonds and strip bond packages based on aformula specified as part of the relevant custodial arrangementor as specified in the terms of the Underlying Bond(s). Eachpurchaser should review the relevant custodial arrangementsand the purchaser's rights thereunder.

    • For non alter-egoreceipts and alter-ego receipts, registered certificates maybe available to the holder on request. Where registered certificatesare not available, the holder should receive periodic statementsshowing the security position from his or her investment dealeror other financial institution.

    • Alter-ego receiptsmay entitle the holder to take physical delivery of the underlyingcoupon(s) or residue(s). If the holder decides to take physicaldelivery, the holder should be aware of the risks (includingthe risk of lost ownership) associated with holding a bearersecurity which cannot be replaced. The holder also shouldbe aware that the secondary market for physical strip bondsmay be more limited than for other forms of strip bonds andstrip bond packages, due to the risks involved.

The facilities of CDS are available for custodyand settlement of strip bonds and strip bond packages for anyCDS participant.

In some cases the Underlying Bonds are redeemableor callable prior to maturity. Purchasers of strip bonds orstrip bond packages relating to interest payments to be madein respect of Underlying Bonds that are redeemable or callableshould satisfy themselves that such interest payments do notrelate to interest payment dates that may occur after the UnderlyingBond's earliest call or redemption date.

Canadian Income Tax Summary

The Canadian income tax consequences of purchasingstrip bonds and strip bond packages are complex. Purchasersof strip bonds and strip bond packages should consult theirown tax advisors for advice relating to their particular circumstances.The following summary is intended to be a general commentaryon the attributes of strip bonds and strip bond packages underthe Income Tax Act (Canada) ("Tax Act") andthe regulations thereunder ("Regulations") for purchaserswho hold their strip bonds and strip bond packages as capitalproperty for purposes of the Tax Act. The summary also commentson the attributes under applicable similar provincial or territorialtaxation laws.

Qualified Investments

Strip bonds and strip bond packages relatingto Underlying Bonds that are issued or guaranteed by the Governmentof Canada or issued by a province or territory of Canada are"qualified investments" under the Tax Act and aretherefore eligible for purchase by trusts governed by registeredretirement savings plans ("RRSPs"), registered retirementincome funds ("RRIFs"), registered education savingsplans ("RESPs") and deferred profit sharing plans("DPSPs").

Annual Taxation of Strip Bonds

The Canada Customs and Revenue Agency has indicatedthat purchasers of strip bonds will be treated as having purchaseda "prescribed debt obligation" within the meaningof the Regulations. Accordingly, a purchaser will be requiredto include in income in each year a notional amount of interest,notwithstanding that no interest will be paid or received inthe year (see example below). Therefore, these instruments maybe more attractive to non-taxable accounts, such as self-directedRRSPs, RRIFs, DPSPs, RESPs, pension funds and charities, thanto taxable accounts.

In general terms, the amount of notional interestdeemed to accrue each year will be determined by using thatinterest rate which, when applied to the total purchase price(including any dealer mark-up or commission) and compoundedat least annually, will result in a cumulative accrual of notionalinterest from the date of purchase to the date of maturity equalto the amount of the discount from face value at which the stripbond was purchased.

For individuals and certain trusts, the requiredaccrual of notional interest in each year is generally onlyup to the anniversary date of the issuance of the UnderlyingBond. For example, if a strip bond is purchased on February1 of a year and the anniversary date of the issuance of theUnderlying Bond is June 30, only five months of notional interestaccrual will be required in the year of purchase. However, ineach subsequent year, notional interest will be required tobe accrued from July 1 of the previous year to June 30 of thesubsequent year.

The table below sets out the income tax treatmentof a taxable individual investor resident in Canada who purchasesa $5,000 strip bond on February 1, 2002 at a total purchaseprice of $3,742.96. The anniversary date of the issuance ofthe Underlying Bond is June 30. The strip bond is due on June30, 2007 (i.e. 5 years and 149 days later) and the investorholds it to maturity. Thus, the effective annual interest rateon the strip bond for purposes of the interest accrual ruleswill be 5.5%. The investor's marginal tax rate (determined aftertaking into account applicable provincial or territorial taxationlaws) is assumed for illustrative purposes only to be 45%. Investorsshould determine their actual marginal tax rate after discussionwith a professional tax advisor.

Year

Base for interest compounding(i.e. purchase price plus previously accrued notionalinterest)

Accrued notional interestfor year (i.e. 5.5% of the base for interest compoundingexcept in the first year)

Tax liability at 45%

____

______________

_______________

_________

 

2002

$3,742.96

$ 82.71{•}

$ 37.22

2003

3,825.67

210.41

94.68

2004

4,036.08

221.98

99.89

2005

4,258.06

234.20

105.39

2006

4,492.26

247.07

111.18

2007

4,739.33

260.67

117.30

 

 

______

 

 

 

1,257.04

 

{•}[(1.055)149/365 x $3,742.96] - $3,742.96. February1, 2002 to June 30, 2002 = 149 days because the investor isnot credited with interest for the day of purchase.

In some circumstances the anniversary date ofthe issuance of the Underlying Bond may not be readily determinable.In these circumstances individual investors may wish to consideraccruing notional interest each year to the end of the yearinstead of to the anniversary date.

A corporation, partnership, unit trust or anytrust of which a corporation or partnership is a beneficiaryis required for each taxation year to accrue notional interestto the end of the taxation year and not just to an earlier anniversarydate in the taxation year.

Disposition of Strip Bonds Prior To Maturity

Upon the disposition of a strip bond prior tomaturity, purchasers will be required to include in their incomefor the year of disposition notional interest to the date ofdisposition. If the amount received on such a disposition exceedsthe total of the purchase price and the amount of all notionalinterest accrued and included in income, the excess will betreated as a capital gain. If the amount received on dispositionis less than the total of the purchase price and the amountof all notional interest accrued and included in income, thedifference will be treated as a capital loss. As of the dateof this Information Statement, a taxpayer was required to takeinto account one half of the capital gain or loss in determiningtaxable income.

The table below sets out the income tax treatmentfor the individual investor in the previous example where theinvestor sells the strip bond on September 30, 2004 for an assumedsale price of $4,361.31.

Proceeds of disposition

 

$4,361.31

Base for calculation of capital gain

 

 

initial purchase price

$3,742.96

 

accrued income for 2002 (see previoustable)

82.71

 

accrued income for 2003 (see previoustable)

210.41

 

accrued income for 2004

 

 

to anniversary date (see previous table)

221.98

 

to September 30

57.85{•}

4,315.91

 

 

______

________

Capital gain

 

45.40

Taxable capital gain (1/2 of capital gain)

 

22.70

{•}[(1.055)92/365 x $4,258.06] - $4,258.06

Strip Bond Packages

Because a strip bond package consists for taxpurposes of a series of separate strip bonds, the interest inclusionrules will be satisfied if an annual notional interest inclusionis determined in respect of each separate strip bond as outlinedabove. However, the calculation of such annual notional interestinclusion may be very complex. In addition, the calculationmay be impossible to perform for individual purchasers to theextent that the anniversary dates of the Underlying Bonds areunknown.

As an alternative, purchasers of strip bondpackages may wish to consider accruing notional interest tothe end of each year at the internal rate of return or yieldof the strip bond package determined by reference to the totalpurchase price (including any dealer mark-up or commission)and on the assumption that each component of the strip bondpackage is held to maturity or final payment date. The use ofthis method may in some circumstances result in a marginallyless favourable income tax result to an individual purchaserthan the calculation of an annual notional interest inclusionin respect of each separate strip bond comprising the stripbond package.

Upon the disposition of a strip bond packageprior to maturity, purchasers will be required to include intheir income for the year of disposition notional interest tothe date of disposition. If the amount received on such a dispositionexceeds the sum of the total purchase price and the amount ofall notional interest accrued and included in income, the excesswill be treated as a capital gain. If the amount received ondisposition is less than the sum of the total purchase priceand the amount of all notional interest accrued and includedin income, the difference will be treated as a capital loss.As of the date of this Information Statement, a taxpayer wasrequired to take into account one half of the capital gain orloss in determining taxable income.

Non-Residents of Canada

Non-residents of Canada for the purposes ofthe Tax Act who purchase strip bonds or strip bond packagesrelating to Underlying Bonds issued or guaranteed by the Governmentof Canada or issued by a province or territory of Canada andwhich were issued after April 15, 1966 will not be liable forincome tax in Canada (including withholding tax) on any amountspaid or credited with respect to the strip bonds or strip bondpackages if such purchasers do not use or hold the strip bondsor strip bond packages in carrying on business in Canada andtheir sole connection with Canada is the acquisition and ownershipof the strip bonds or strip bond packages.

Impact on Yield-to-Maturity of Dealer Mark-upsor Commissions Paid on Strip Bonds

Dealer mark-ups or commissions on strip bondsare quoted as a fixed amount per $100 of maturity amount ofthe strip bond purchased. The commission charged is generallynot affected by the purchase price of the strip bond. Thus,the commission remains the same for strip bonds with a longerterm to maturity and lower purchase price. The commissions quotedby investment dealers for strip bonds generally range between25 cents per $100 of maturity amount to $1.50 per $100 of maturityamount. Commissions are typically at the higher end of thisrange for small transaction amounts, reflecting the higher costsof processing a small trade. The commissions generally declinefor larger transaction sizes.

The table below illustrates the after-commissionyield to an investor in strip bonds with different before-commissionyields and with different terms to maturity. All of the yieldnumbers are semi-annual. For example, a strip bond with a termto maturity of one year, a before-commission yield of 4.5% anda commission of 25 cents per $100 of maturity amount has anafter-commission yield of 4.234%. The before-commission costof this particular strip bond will be $94.72 per $100 of maturityamount while the after-commission cost will be $94.97 per $100of maturity amount. Similarly, a strip bond with a term to maturityof 25 years, a before-commission yield of 6.5% and a commissionof $1.50 per $100 of maturity amount has an after-commissionyield of 6.204%. The before-commission cost of this particularstrip bond will be $20.21 per $100 of maturity amount whilethe after-commission cost will be $21.71 per $100 of maturityamount.

The approximate reduction in annual percentageyield associated with the payment of a specific amount of commissionor dealer mark-up may generally be calculated as follows:

where

MA is the maturity value of the strip bond

PP is the purchase price of the strip bondincluding the amount of any commission or dealer mark-up requiredto be paid in order to acquire the strip bond

CA is the amount of the commission or dealermark-up required to be paid to the selling dealer at the timeof purchase of the strip bond

n is the number of days from the time of purchaseof the strip bond to the time of maturity of the strip bond(determined excluding the day of purchase but including thematurity day and ignoring leap years)

A prospective purchaser or seller of a stripbond is invited to compare the yield to maturity of the stripbond, calculated after giving effect to any applicable dealermark-up or commission, against the similarly calculated yieldto maturity of a conventional interest bearing debt security.Prospective purchasers or sellers are invited to inquire aboutthe dealer's bid and ask prices for the subject strip bond.

June, 2003.