Filed Pursuant to Rule 433
Registration Statement No. 333-134553
Structured Investments
Structures at a Glance
at lehman Brothers Structured Investments,
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every investment we construct incorporates
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management insights of lehman Brothers, a
leader in the global capital markets.
Common Terms And Definitions
The variety and flexibility of structured investments may make them very useful in a portfolio. However, variety is often accompanied by complexity. This page is a quick guide to reading typical payoff diagrams and understanding some key terms.
Linked Asset — Structured investments provide returns based on the performance of a reference underlying (e.g., a stock, commodity, currency exchange rate, or interest rate), referred to as the linked asset. The linked asset may be an individual underlying, a basket of underlyings, or an index.
Coupons — Some structured investments offer discrete payments, called coupons, that may or may not be contingent upon the linked asset’s value. These coupons may be paid prior to maturity (e.g., quarterly, semi-annually) or only at maturity.
Downside: Linked asset depreciates over the life of the investment Upside: Linked asset appreciates over the life of the investment Direct Investment in Linked Asset Investment has a positive return at maturity RETURN
INVESTMENT0%
Investment has a negative return at maturity
0%
CHANGE IN LINKED ASSET VALUE
LEVERAGED RETURN
If the investment return (payable at maturity) increases or decreases at the same rate as the change in value of the linked asset, the payout is said to have a 1-for-1 return. If the investment return increases or decreases at a faster rate than that of the linked asset, the return is said to be leveraged. Leveraged upside return may also be referred to as “enhanced” upside.
Leveraged Downside and Leveraged Upside and 1-for-1 Upside 1-for-1 Downside
1-for-1 Leveraged upside upside return return
Leveraged 1-for-1 downside downside return return
Note: Both illustrations above include some type of principal protection (see “Principal Protection” for further explanation). Structures with leverage may or may not include Principal Protection.
CAPPED RETURN
Some structured investments limit, or cap, the investment’s upside to a pre-defined maximum return. A capped structure typically provides for greater upside leverage below the cap than an otherwise identical but uncapped structure (as shown below).
Capped Upside Un-capped Upside
Cap
PRINCIPAL PROTECTION
Some structured investments are designed to return some or all of the invested capital (or principal) at maturity. Greater levels of principal protection typically provide for lower or no upside leverage, all else being equal.
Principal Protected
100% principal protected
Principal protected investments offer 100% protection of invested principal (if held to maturity).
Partially Protected
1-for-1 downside return
Protection to pre-determined Percentage level of principal protection
Partially protected investments offer protection of invested principal up to a pre-determined downside percentage, and after that point, the investment participates 1-for-1 in the downside risk on the linked asset. The maximum principal at risk is a pre-determined percentage of the invested principal.
Buffered Protected
Protection to pre-determined Leveraged level downside return
Buffered protected investments offer protection of invested principal up to a predetermined downside percentage, and after that point, the investment participates on a leveraged basis in the downside risk on the linked asset. The full invested principal is at risk.
Overview of Structures
Structured investments can be debt securities, bank certificates of deposit (CDs), or warrants. They are
versatile tools that may serve a range of functions within a portfolio.
Tailor Risk and Reward Characteristics. Structured investments
may help investors manage the risk and return characteristics of their
portfolio. For example, structured investments can provide investors
with upside exposure to the linked asset while limiting downside risk.
Implement Market Views. Investors may be able to implement
specific market views more directly through the tailored payoffs of
a structured investment than with traditional trading strategies.
Provide Access and Efficiency. Structured investments provide a
means to access asset classes, market sectors, or investment themes
that may otherwise be difficult to access, thereby facilitating portfolio
diversification. A single transaction in a structured investment may
provide access to a complex payoff that may otherwise require
several individual transactions to replicate.
The following structures are meant to be a select representation of common cross-asset-class investments. Variations to
any of these structures may also be available.
REVERSE exchangeaBLE
How the Structure Works
Provides fixed coupon payment(s) regardless of any changes
in linked asset value
• Returns full invested principal at maturity if linked asset value
does not dip below pre-defined threshold at any time during the
life of the investment
• If linked asset value dips below pre-defined threshold at any
time during the life of the investment, investor has full downside
exposure on the principal. In this case, at maturity, the investor
will receive either a cash payment or an equal amount of the
linked asset (e.g., shares of stock)
• Typically linked to an individual stock or a basket of stocks
Potential Portfolio Applications
• The coupon rate of reverse exchangeables typically exceeds the
dividend yield of the linked equity asset as well as the yield on
a conventional debt security issued by the same issuer and with
the same maturity
Select Considerations*
• Investor could lose entire invested principal if the linked asset
declines in value to zero
• Investor forgoes participation in the upside of the linked asset
above coupon payment
Payoff Diagram at Maturity
Payout if linked
asset value falls
below threshold
Fixed coupon
Pre-defined
threshhold
Fixed coupon
INVESTMENT RETURN
CHANGE IN LINKED ASSET VALUE
Auto-Callable
How the Structure Works
• Pays pre-defined coupon if note is called
• Coupon increases as each potential call date passes without
note being called
• Whether or not the note is called is contingent on the value of
the linked asset
• May have partial downside protection if held until maturity
• Typically linked to equities or commodities
Potential Portfolio Applications
• May provide greater yield than a direct investment in the
linked asset in neutral to slightly bullish market conditions
• May provide limited downside protection against a decline
in the linked asset
Select Considerations*
• If linked asset value is below the partial protection level at
maturity, the investor will lose a percentage of principal
• Investor forgoes participation in the upside of the linked asset
above coupon payment
• Reinvestment risk, as these notes are callable
ISSUE
DATE
FIRST
POTENTIAL
CALL DATE
FINAL
POTENTIAL
CALL DATE
Strike
Price
Note is called:
Payoff = coupon + 100% of principal
Note is called:
Payoff = coupon + 100% of principal
–
–
+
+
Note matures:
Note may offer partial principal
protection at maturity
Linked asset
appreciates (+) or
depreciates (–)
Linked asset
appreciates (+) or
depreciates (–)
Time
* Investing in structured investments involves risks. Following is a summary of select considerations. Investors should read any relevant offering documents for a complete discussion of risks.
Principal Protected Note
How the Structure Works
• Protects 100% of invested principal if held to maturity, even if the
linked asset declines in value
• Provides additional return above the invested principal if the linked
asset increases in value
• Upside participation rates will likely be different across different
notes (e.g., may have leveraged upside return)
• Typically linked to equities, commodities or foreign exchange
Potential Portfolio Applications
• Principal protection may be a surrogate for the protection that some
investors associate with bonds. While conventional bonds pay
pre-determined coupons, principal protected notes provide returns
that vary with the performance of the linked asset
Select Considerations*
• If the linked asset does not increase in value, the investment will
not pay any return above the invested principal
Payoff Diagram at Maturity
CHANGE IN LINKED ASSET VALUE
INVESTMENT RETURN
Partially Protected Participation Note
How the Structure Works
• Partial principal protection if held to maturity
• If linked asset declines more than a pre-determined amount,
investment has 1-for-1 downside return
• May have leveraged upside return
• Typically linked to equities, commodities or foreign exchange.
Potential Portfolio Applications
• Provides exposure to the linked asset with some degree of
principal protection
• May provide unlimited (un-capped) leveraged upside return
Select Considerations*
• If the linked asset declines in value to below the pre-determined
level, the investor will lose a portion of invested principal
Payoff Diagram at Maturity
CHANGE IN LINKED ASSET VALUE
INVESTMENT RETURN
Buffered Return Enhanced Note Payoff Diagram at Maturity
How the Structure Works
• Buffered principal protection if held to maturity
• If linked asset declines more than a pre-determined amount,
investment has leveraged downside return
• Provides leveraged upside return below the cap
• Typically linked to equities, commodities or foreign exchange.
Potential Portfolio Applications
• Provides exposure to the linked asset with buffered protection
• May provide leveraged upside return in a market that is
moderately rising or range-bound (below the cap)
Select Considerations*
• Investor could lose entire invested principal if the linked asset
declines in value to zero
• If the linked asset increases in value beyond a pre-determined
level, investor will forgo any gains beyond the capped return
INVESTMENT RETURN
CHANGE IN LINKED ASSET VALUE
*Investing in structured investments involves risks. Following is a summary of select considerations. Investors should read any relevant offering documents for a complete discussion of risks.
Range accrual Note
How the Structure Works
• May have multiple coupon periods, each of which typically
has a contingent coupon payment
• The coupon for a given coupon period will accrue for each
separate observation (e.g., daily, weekly) during the period
that the linked asset value lies within a pre-determined range
• Maximum coupon for a period is 100% of the specified
contingent coupon (if linked asset is within range at every
observation); minimum coupon for a coupon period is 0%
(if linked asset is not within the range at any observation)
• 100% principal protected, if held until maturity
• Typically linked to an interest rate reference, such as LIBOR
or the Treasury yield curve
Potential Portfolio Applications
• Potential for attractive yield while protecting the full initial
investment if held to maturity
• Exposure to linked asset value may help diversify a portfolio
Select Considerations*
• Loss of coupon if linked asset trades outside of range
• Reinvestment risk, as these investments are frequently callable
Coupon Accrual For a
Single Observation
Coupon accrues
if linked asset
is in the range
Pre-determined
range
LINKED ASSET VALUE
COUPON ACCRUED FOR OBSERVATION
Coupon Payment at
End of Coupon Period
No coupon paid if the
linked asset is outside
the range on every
observation during
the period
Coupon will accrue
for each observation
during the coupon
period that the linked
asset is in the range,
up to 100% of the
specified contingent
coupon for that period
NUMBER OF OBSERVATIONS IN RANGE
Less
observations
More
observations
in range
COUPON PAYMENT
Steepener Note
How the Structure Works
• Generally provides a fixed coupon for an initial period of time,
after which the coupon rate floats based on the slope of an
interest rate curve and a pre-determined, fixed multiplier
• Floating coupon is not paid if short-term interest rate is higher
than long-term interest rate (if curve is inverted)
• 100% principal protected, if held to maturity
• Typically linked to LIBOR/swap curve or the Treasury
yield curve
Potential Portfolio Applications
• Potential for attractive yield while protecting the full initial
investment if held to maturity
• Exposure to steepening of the interest rate curve may help
diversify a portfolio
Select Considerations*
• Possible loss of coupon if yield curve inverts
• Reinvestment risk, as these investments are frequently callable
First Period
Initial fixed
coupon
regardless
of interest rate
curve slope
SLOPE OF REFERENCE INTEREST RATE CURVE
COUPON
First Period
Remaining Periods
If interest rate
curve is
inverted, no
coupon is paid
Higher
coupon as
interest rate
curve gets
steeper
Curve
is more inverted
Curve
is steeper
SLOPE OF REFERENCE INTEREST RATE CURVE
COUPON
Warrants Structured Investments can also be implemented through
warrants instead of notes
How a Warrant Works
• Provides highly leveraged exposure to the linked asset in
return for an upfront premium payment
• Linked asset must appreciate past a certain level to realize
a profit
• Maximum loss limited to initial premium paid
Potential Portfolio Applications
• Can provide access to a wide variety of asset classes
• Allow investors to participate in the upside potential of the
linked asset while investing only a fraction of the amount
that would otherwise be required for the same exposure
(if investing directly in the linked asset)
Select Considerations*
• Potential loss of initial investment if the linked asset declines
or does not appreciate enough
Payoff Diagram at Maturity
INVESTMENT RETURN
INVESTMENT RETURN
* Investing in structured investments involves risks. Following is a summary of select considerations. Investors should read any relevant offering documents for a complete discussion of risks.
Select Risk Considerations*
Principal Risk
If the structured investment does not include principal protection, the
investor may be exposed to all or a portion of the potential downside
risk of the linked asset.
• A principal protected investment does not provide protection on the
invested principal prior to maturity.
Liquidity Risk
• A liquid market for a particular structured investment may not exist
or develop.
• The issuer and underwriter of structured investments are not obligated
to commence or continue any secondary market-making activity and,
if started, may discontinue such activity at any time.
• A lack of liquidity may cause the investor to experience a loss if the
investment is not held to maturity.
Credit Risk
• All payments associated with the structured investment are obligations
of the issuer.
• An investor should be aware of the issuer’s credit rating before
purchasing a structured investment. To the extent that structured
investments are debt of the issuer, investors will be exposed to the
credit of the issuer.
Structure Complexity
• Structured investments may include multiple derivative instruments.
Investors should be aware of all the instruments involved in the structure.
• If you are an advisor, you should be aware of the behavior of each
instrument inherent in a structure and be able to determine if the
structure as a whole is suitable for any particular client.
Price Volatility
• The value of a structured investment at maturity depends on the value
of the linked asset, which may be highly volatile.
• Leverage may magnify the volatility of structured investments and
cause the performance of certain structured investments to experience
more volatility than the linked asset.
Opportunity Cost
• Investors will lose access to invested principal for the term of the
investment.
• Investors may also forgo the return that could have been achieved had
the principal been invested in other fixed income securities.
Tax Considerations
• Tax considerations will vary depending on the type of structured investment.
• Investors should consult their own tax advisor regarding the tax treatment
of structured investments.
For any questions or comments please contact us.
Lehman Brothers Structured Investments
1.212.526.0905
Structured_Investments@lehman.com
* Investing in structured investments involves risks. Above is a summary of select considerations. Investors should read any relevant offering documents for a complete discussion of risks.
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