HIGH-YIELD CORPORATE BONDS

Transcription

1 HIGH-YIELD (Agreement of Purchaser) Account Name Account Number Rep. No. HY I/We represent and agree as follows: Piper Jaffray Copy Terms. I or me means the client(s). You means Piper Jaffray. High-Yield Corporate Bonds refer to bonds or notes rated Ba-1 or lower by Moody s and BB+ or lower by Standard & Poor s, Fitch or Duff and Phelps. Disclosure Document. I have received, read and understand the attached document entitled Investing in High-Yield Corporate Bonds (the Disclosure Document). Risks of Purchasing High-Yield Corporate Bonds. I understand there are increased risks in purchasing High-Yield Corporate Bonds that differ from investment grade bonds. Some of these risks are described in the Disclosure Document. I have evaluated the risks and merits of an investment in High-Yield Corporate Bonds and I am fully prepared financially to undertake such risks and to withstand any losses as a result of these purchases. Suitable for my Account. I represent that purchases of High-Yield Corporate Bonds are compatible with my investment objectives and are therefore suitable for my account. Client Information. I agree to advise you of changes in my financial situation and needs, experience, or investment objectives that would impact the suitability of High-Yield Corporate Bonds for my account. Client Acknowledges Agreement. I agree that you are selling High-Yield Corporate Bonds to me in reliance on my confirmations, acknowledgments and agreements set forth herein, and I hereby irrevocably authorize you to produce this agreement or a copy hereof to an interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby until I inform you otherwise in writing. I CONFIRM THAT I HAVE RECEIVED AND READ AND THAT I UNDERSTAND THE INFORMATION CON- TAINED IN THE DISCLOSURE DOCUMENT. I AM AWARE OF THE RISKS OF PURCHASING HIGH-YIELD COR- PORATE BONDS. I HAVE READ AND UNDERSTOOD THIS AGREEMENT AND I AM BOUND BY IT. :,. BY SIGNING THIS AGREEMENT I ACKNOWLEDGE RECEIPT OF A COPY OF THIS AGREEMENT AND THE DIS- CLOSURE DOCUMENT. INTERNAL USE ONLY Financial Advisor Signature Branch Office Manager Signature Form E4234 (12/03) 1 Since Member SIPC and NYSE.

2 HIGH-YIELD (Agreement of Purchaser) Account Name Account Number Rep. No. HY I/We represent and agree as follows: Terms. I or me means the client(s). You means Piper Jaffray. High-Yield Corporate Bonds refer to bonds or notes rated Ba-1 or lower by Moody s and BB+ or lower by Standard & Poor s, Fitch or Duff and Phelps. Disclosure Document. I have received, read and understand the attached document entitled Investing in High-Yield Corporate Bonds (the Disclosure Document). Risks of Purchasing High-Yield Corporate Bonds. I understand there are increased risks in purchasing High-Yield Corporate Bonds that differ from investment grade bonds. Some of these risks are described in the Disclosure Document. I have evaluated the risks and merits of an investment in High-Yield Corporate Bonds and I am fully prepared financially to undertake such risks and to withstand any losses as a result of these purchases. Suitable for my Account. I represent that purchases of High-Yield Corporate Bonds are compatible with my investment objectives and are therefore suitable for my account. Client Information. I agree to advise you of changes in my financial situation and needs, experience, or investment objectives that would impact the suitability of High-Yield Corporate Bonds for my account. Client Acknowledges Agreement. I agree that you are selling High-Yield Corporate Bonds to me in reliance on my confirmations, acknowledgments and agreements set forth herein, and I hereby irrevocably authorize you to produce this agreement or a copy hereof to an interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby until I inform you otherwise in writing. I CONFIRM THAT I HAVE RECEIVED AND READ AND THAT I UNDERSTAND THE INFORMATION CON- TAINED IN THE DISCLOSURE DOCUMENT. I AM AWARE OF THE RISKS OF PURCHASING HIGH-YIELD COR- PORATE BONDS. I HAVE READ AND UNDERSTOOD THIS AGREEMENT AND I AM BOUND BY IT. :,. BY SIGNING THIS AGREEMENT I ACKNOWLEDGE RECEIPT OF A COPY OF THIS AGREEMENT AND THE DIS- CLOSURE DOCUMENT. INTERNAL USE ONLY Financial Advisor Signature Branch Office Manager Signature Form E4234 (12/03) 1 Since Member SIPC and NYSE.

3 INVESTING IN HIGH-YIELD (Disclosure Document) What are High Yield Corporate Bonds? All corporate bonds, including high-yield bonds, are debt securities issued by corporations to raise capital for various business purposes*. When you buy a bond, you lend money to the corporation that issued it. In return for the loan of these funds, the issuer agrees to pay interest and return the original investment (principal) when the bond matures at a specified date in the future. High-yield bonds, also called junk bonds, speculative-grade bonds or non-investment grade bonds, are bonds rated Ba-1 or lower by Moody's and BB+ or lower by Standard & Poor's, Fitch or Duff and Phelps. Some non-rated bonds are also high-yield bonds. Generally speaking, these bonds are rated below investment grade because of the credit of the corporation issuing the bonds. Please refer to page 3 for a chart describing debt credit ratings. High-yield bonds have characteristics of both common stock and investment grade bonds. Like investment grade bonds, high-yield bonds typically pay interest at a fixed rate and have a set maturity date. Like common stock, the prices of high-yield bonds tend to move largely based on changes on the outlook for the company. High-yield bonds frequently provide investors above-average returns relative to investment grade bonds. This yield premium may attract some investors, especially during periods of declining interest rates. The potential increased return of high-yield bonds is intended to compensate investors for the extra risk they assume. Because high-yield bonds pose extra risks, investors must approach the market with a full understanding of these risks. * The term bond hereinafter is used in a general sense and refers to bonds, indentures, notes and all other forms of indebtedness. In this form, High-Yield Bonds does not include municipal bonds of any type. Who Issues High-Yield Bonds? High-yield bonds are frequently characterized as belonging to one of the following three major types. These types describe certain characteristics of the corporate issuer of the bonds: Fallen Angels. Fallen angels are bonds previously rated investment grade that fell below investment grade because of operating difficulties, changes in the business environment or other reasons. Future prospects for these bonds depend on the issuer's ability to resolve negative trends internally or adapt to a changing economic environment or competitive forces. Emerging Issuers. Companies with little or no financial history or expertise frequently fall into this category because rating agencies are unwilling to assign investment grade ratings to companies with no proven track record. Other issuers often included in this category are companies spun off from larger companies. Prospects for these bonds can be similar to those of any emerging company. Companies with Less Financial Stability. This category of high-yield issuer describes companies that may be established but may have less operating cash flow and may carry relatively high levels of debt. These factors make financial stability of high-yield issuers less certain compared to companies with stronger capitalizations. Assessing and Managing Risk. Many factors, including yield, security features, legal covenants, characteristics of the issuing corporation, the business climate of the company or the economy, should be considered in evaluating the degree of risk associated with investing in high-yield bonds. For example, high-yield bonds frequently are not secured by specific assets, such as property and equipment, thus leaving creditors with no direct recourse to company assets in the event of default. Some high-yield bonds are subordinate to the issuer's other debt and will pay only after the senior bonds have been paid. Although risk of investing in high-yield bonds is reflected in the increase in yield over investment grade securities, demand factors may drive yields down, creating a false impression of the relative risk of the investment in relation to investment grade bonds. Benefits of Investing in High-Yield Bonds* Appreciation Potential. If company fundamentals improve, there is a potential for a ratings upgrade to a higher non-investment grade of even investment grade rating. If this were to occur, the price of the bonds could increase significantly. More Senior Security Compared to Common Stock. Bondholders stand in a senior position when compared to common stock shareholders and are more likely to receive payment, in whole or in part, in the event of a liquidation of the company. Higher Yields. Due to the nature of high-yield bonds, investors demand higher yields for non-investment grade bonds. Thus, these 1 *Past performance does not guarantee future results.

4 securities typically have higher coupons than investment grade bonds. Higher Risk-Adjusted Returns. Because of these higher coupons and the appreciation potential, high-yield bonds have provided a greater return over an economic cycle than investment grade bonds, despite posing a greater amount of risk. The Sharpe Ratio. Bond Annualized Annualized Annualized Type Return 1 Risk % 2 Risk-Adjusted Performance 3 U.S. Agency Mortgage Backed High-Yield Corporate Bonds Investment Grade Corporate Bonds U.S. Treasury Notes and Bonds The chart above shows the average annual return, risk and risk-adjusted measure (Sharpe ratio) of several fixed-income categories over a 10-year period ending December 31, The Sharpe Ratio is a measure of additional return earned per unit of risk assumed. A higher number indicates better risk-adjusted performance. This ratio is calculated by subtracting the risk-free rate of return from the annualized return from each bond category and dividing by the risk. As the chart shows, high-yield bonds have provided higher total returns over the last 10 years with comparable riskadjusted returns. Source: Frontier Analytics. Each bond type is represented by a Merrill Lynch bond index: Mortgage Master, High-yield Master, Corporate Master and Treasury Master, which are unmanaged idexes that include no expenses or transaction charges. 1 Annualized Return represented by the annualized geometric mean. This measure is defined as the product of all 10 years' returns to the 10th root. 2 Annualized Risk is measured by the standard deviation of the period returns, which measures variability of a probability distribution; the square root of the variance. 3 Annualized Risk Adjusted Performance is represented by the Sharpe ratio. The Sharpe Ratio is the average return minus the risk-free return divided by the risk (standard deviation). The one-year U.S. Government Treasury Note is used as a proxy for the risk-free rate. Past performance does not guarantee future results. Keep in mind the payment of principal and interest on Treasury Notes and Bonds is guaranteed by the U.S. Government. Balancing Risk with Potential Reward. The potential for increased income must be balanced against the increased risks of investing in high-yield bonds. These increased risks include: Default Risk. The risk of default on principal or interest or both is higher for high-yield bonds than for investment grade bonds. In addition to permanent defaults, high-yield bonds are more likely than investment grade bonds to delay or miss payments of principal and interest when due. Companies that are less capitalized, not as seasoned or that carry excessive amounts of debt may be at higher risk of default. Recession Risk. High-yield issuers may be more vulnerable to an economic downturn than an investment grade issuer. There is added risk in investing in high-yield bonds during a recession. Price Volatility. High-yield bonds tend to exhibit greater price volatility than investment grade bonds because their prices are influenced not only by changes in interest rates but by factors reflecting company performance and changes in the outlook for the company and its industry. Decreased Market-Liquidity. High-yield bonds may be less liquid than investment grade bonds depending on the issuer and the market conditions. This means that investors wishing to sell high-yield bonds may be unable to find a ready buyer. Although Piper Jaffray makes a market in high-yield bonds when possible, the firm does not guarantee it will repurchase high-yield bonds. If you sell your bonds prior to maturity, you may receive more or less than your initial investment. High-Yield Bonds Are Not for All Investors. Investors should choose to avoid high-yield bonds if they: are unable to weather economic declines or individual business cycle downturns. are seeking price stability need the ability to sell their securities at any time cannot withstand delays in the payment of principal or interest cannot withstand any loss of principal Investors may also be restricted from non-rated commercial paper purchases based on the financial parameters outlined in Non-Rated Commercial Paper Investor Agreement. 2

5 Bond Risk Spectrum. U.S. Treasury Bill U.S. T-Notes & Bonds U.S. Agency Mortgage Backed Investment Grade Corporate Bonds Higher Risk Risk is defined as uncertainty about future rates of return. This is an interpretation of the risk spectrum from the Piper Jaffray Fixed Income Research department. The payment of principal and interest on Treasury Bills, Notes and Bonds is guaranteed by the U.S. Government. Managing Risk Through Diversification. High-Yield Corporate Bonds The risk of high-yield bonds may be acceptable for certain investors, if the bonds are chosen as a portion of a diversified portfolio constructed within the clients needs and investment objectives. You may choose to further diversify your holdings among the high-yield issues you own. You may do this by selecting various high-yield issuers within several industry sectors. The benefits of diversification occur because different types of assets perform differently during various economic conditions. Because of this, the use of several types of assets reduces the volatility of your portfolio. Stated in another way, diversification decreases the risk portion of the risk/return trade off. While potential returns may be slightly lower in a diversified portfolio, the reduction of risk provides a valuable benefit to an investor. All investors, in partnership with their financial advisors, need to determine the appropriate amount of risk for their portfolios. Credit Ratings and High-Yield Bonds. The following table describes the rating assignments for investment and below investment grade debt. Credit Risk Moody s* Standard Duff & Poor s** Fitch & Phelps Investment Grade Highest Quality Aaa AAA AAA AAA High Quality (very strong) Aa AA AA AA Upper Medium Grade (strong) A A A A Medium Grade Baa BBB BBB BBB Below Investment Grade Lower Medium Grade (somewhat speculative) Ba BB BB BB Low Grade (speculative) B B B B Poor Quality (may default) Caa CCC CCC CCC Most Speculative Ca CC CC CC No Interest Being Paid or Bankruptcy Petition Filed C C C C In Default C D D D Source: The Bond Market Association * The ratings from Aa to Ca by Moody's may be modified by the addition of a 1, 2 or 3 to show relative standing within the category. ** The ratings from AA to CC by Standard & Poor's may be modified by the addition of plus or minus sign to show relative standing within the category. Look to Your Financial Advisor for Guidance. Your Piper Jaffray financial advisor can help you balance the risks of high-yield bonds against the benefits to determine if high-yield bonds may be suitable for your portfolio. Call your financial advisor for additional information. High-yield bonds offer several benefits when purchased as part of a diversified investment portfolio constructed with the client's investment needs and risk parameters in mind. However, even small purchases of high-yield bonds are not suitable for every investor. High-yield bonds are markedly different from investment grade bonds. They are less liquid, more subject to price volatility and more likely to default on principal and interest. Investors seeking higher income must be prepared to forgo the relative safety of principal and interest inherent in an investment grade bond. 3 Since Member SIPC and NYSE.