This pricing supplement, which is not complete and
may be changed, relates to an effective Registration Statement under the Securities Act of 1933. This pricing supplement and the
accompanying product supplement, prospectus supplement and prospectus are not an offer to sell these notes in any country or jurisdiction
where such an offer would not be permitted.
Pricing Supplement No. ___
Preliminary Pricing Supplement - Subject to Completion
(To Prospectus dated May 1, 2015, Series L
Prospectus
Supplement dated January 20, 2016 and
Product
Supplement EQUITY-1 dated February 9, 2016)
Dated
February 10, 2016
|
Filed Pursuant to Rule 424(b)(2)
Registration Statement No. 333-202354
|
$_____________ |
Digital Return Notes Linked to the Least Performing of the S&P 500® Index and the Dow Jones Industrial AverageSM, due March 6, 2017 |
| · | The
notes are unsecured senior notes issued by Bank of America Corporation (“BAC”). The notes do not guarantee a full
return of your principal at maturity, and you could lose up to 100% of the principal amount. |
| · | All
payments on the notes occur at maturity. Any payment due on the notes, including any repayment of principal, will be subject to
our credit risk. |
| · | The
notes are expected to price on February 19, 2016 (the “pricing date”). |
| · | The
notes are expected to mature on March 6, 2017. The notes will
not pay interest. |
| · | Payment
on the notes will depend on the individual performance of the S&P 500® Index (the “SPX”) and the
Dow Jones Industrial AverageSM (the “INDU”) (each, an “Underlying,” and collectively, the “Underlyings”). |
| · | If
the Ending Value of each Underlying is greater than or equal to its Threshold Value, at maturity you will receive the principal
amount plus a Digital Payment. However, if the Ending Value of either Underlying is less than its Threshold Value, you
will be subject to 1-1 downside exposure to any decrease in the level of the Least Performing Underlying from its Starting Value.
In that case, the Redemption Amount (each as defined below) will be less than or equal to 80% of the principal amount and could
be zero. |
| · | The
“Threshold Value” with respect to each Underlying will be 80% of its Starting Value. |
| · | The
“Digital Payment” per note will be at least $83.00 (at least 8.3% over the principal amount), and will be determined
on the pricing date. |
| · | The
“Least Performing Underlying” will be the Underlying with the lowest Underlying Return (as defined below). |
| · | The
notes will not be listed on any securities exchange. |
| · | The
notes will be issued in denominations of $1,000 and whole multiples of $1,000. |
| · | The
CUSIP number of the notes is 06048WSG6. |
| · | The
initial estimated value of the notes will be less than the public offering price. As of the date of this pricing supplement,
the initial estimated value of the notes at the time of pricing is expected to be at least $950 per $1,000 in principal amount.
See “Summary” beginning on page PS-3 of this pricing supplement, “Risk Factors” beginning on page PS-6
of this pricing supplement and “Structuring the Notes” on page PS-18 of this pricing supplement for additional information.
The actual value of your notes at any time will reflect many factors and cannot be predicted with accuracy. |
Are Not FDIC Insured |
Are Not Bank Guaranteed |
May Lose Value |
|
|
|
|
|
|
Per Note |
|
Total |
|
|
Public Offering Price |
$1,000.00 |
|
$ |
|
|
Underwriting Discount |
$9.00 |
|
$ |
|
|
Proceeds (before expenses) |
$991.00 |
|
$ |
|
|
* We or one of our affiliates will pay a fee of $9.00 per $1,000 in principal amount of the notes. For additional information relating to the plan of distribution, see “Supplemental Plan of Distribution—Conflicts of Interest” below. |
|
The notes are unsecured and are not savings accounts,
deposits, or other obligations of a bank. The notes are not guaranteed by Bank of America, N.A. or any other bank, are not insured
by the Federal Deposit Insurance Corporation or any other governmental agency and involve investment risks. Potential purchasers
of the notes should consider the information in “Risk Factors” beginning on page PS-6 of this pricing supplement, page
PS-5 of the accompanying product supplement, page S-5 of the accompanying prospectus supplement, and page 9 of the accompanying
prospectus. You may lose some or all of your principal amount in the notes.
None of the Securities and Exchange Commission (the
“SEC”), any state securities commission, or any other regulatory body has approved or disapproved of these notes or
passed upon the adequacy or accuracy of this pricing supplement, or the accompanying prospectus supplement or prospectus. Any representation
to the contrary is a criminal offense. |
We will deliver the notes in book-entry form only through The Depository Trust Company on or about February 26, 2016 against payment in immediately available funds. |
BofA Merrill Lynch
Selling Agent |
TABLE OF CONTENTS
Page
SUMMARY |
pS-3 |
RISK FACTORS |
pS-6 |
DESCRIPTION OF THE NOTES |
pS-9 |
THE UNDERLYINGS |
pS-10 |
SUPPLEMENTAL PLAN OF DISTRIBUTION—CONFLICTS OF INTEREST |
pS-17 |
STRUCTURING THE NOTES |
pS-18 |
U.S. FEDERAL INCOME TAX SUMMARY |
pS-19 |
SUMMARY
The Digital Return Notes Linked to the
Least Performing of the S&P 500® Index and the Dow Jones Industrial AverageSM, due March 6, 2017
(the “notes”) are our senior debt securities. The notes are not guaranteed or insured by the Federal Deposit Insurance
Corporation or secured by collateral. The notes will rank equally with all of our other unsecured senior debt, and any payment
due on the notes, including any repayment of the principal amount, will be subject to our credit risk. The notes will mature
on March 6, 2017.
If
the Ending Value of each Underlying is greater than or equal to its Threshold Value, at maturity you will receive the principal
amount plus a Digital Payment. However, if the Ending Value of either Underlying is less than its Threshold Value, you will
be subject to 1-1 downside exposure to any decrease in the level of the Least Performing Underlying from
its Starting Value. In that case, the Redemption Amount will be less than or equal to 80% of the principal amount and could be
zero.
Any
payment on the notes depends on our credit risk and on the performance of each of the Underlyings. The economic terms of the notes
(including the Digital Payment) are based on our internal funding rate, which is the rate we would pay to borrow funds through
the issuance of market-linked notes and the economic terms of certain related hedging arrangements we enter into. Our internal
funding rate is typically lower than the rate we would pay when we issue conventional fixed or floating rate debt securities. This
difference in funding rate, as well as the underwriting discount and the hedging related charges described below, will reduce the
economic terms of the notes to you and the initial estimated value of the notes. Due to these factors, the public offering price
you pay to purchase the notes will be greater than the initial estimated value of the notes as
of the pricing date.
The initial estimated value of the notes
as of the date of this pricing supplement is set forth on the cover page of this pricing supplement. The final pricing supplement
will set forth the initial estimated value of the notes as of the pricing date. For more information about the initial estimated
value and the structuring of the notes, see “Risk Factors” beginning on page PS-6 and “Structuring the Notes”
on page PS-18.
Issuer: |
Bank of America Corporation (“BAC”) |
Term: |
Approximately one year |
Pricing Date: |
February 19, 2016 |
Issue Date: |
February 26, 2016 |
Calculation Day: |
February 27, 2017, subject to postponement as set forth in the section “Description of the Notes—Certain Terms of the Notes—Events Relating to Calculation Days” of the accompanying product supplement. |
Maturity Date: |
March 6, 2017 |
Underlyings: |
Each of the S&P 500® Index (Bloomberg ticker: “SPX”) and the Dow Jones Industrial AverageSM (Bloomberg ticker: “INDU”), each, a price return index. |
Starting Value: |
With respect to each Underlying, its closing level on the pricing date. |
Threshold Value: |
With respect to each Underlying, 80% of its Starting Value. |
Ending Value: |
With respect to each Underlying, its closing level on the calculation day. |
Digital Payment: |
At least $83 per $1,000 in principal amount of the notes (at least 8.3% over the principal amount). The actual Digital Payment will be determined on the pricing date. |
Redemption Amount: |
At maturity, you will receive the Redemption Amount, denominated
in U.S. dollars, calculated as follows:
You will receive: |
Least Performing Underlying: |
The Underlying with the lowest Underlying Return. |
Underlying Return: |
With respect to each Underlying, (Ending Value – Starting
Value)
Starting Value |
Calculation Agent: |
Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a subsidiary of BAC. |
Selling Agent: |
MLPF&S |
The pricing date, issue date and other
dates set forth above are subject to change, and will be set forth in the final pricing supplement relating to the notes.
You should read carefully this entire
pricing supplement, product supplement, prospectus supplement, and prospectus to understand fully the terms of the notes, as well
as the tax and other considerations important to you in making a decision about whether to invest in the notes. In particular,
you should review carefully the section in this pricing supplement entitled “Risk Factors,” which highlights a number
of risks of an investment in the notes, to determine whether an investment in the notes is appropriate for you. If information
in this pricing supplement is inconsistent with the product supplement, prospectus supplement or prospectus, this pricing supplement
will supersede those documents. You are urged to consult with your own attorneys and business and tax advisors before making a
decision to purchase any of the notes.
The information in this “Summary”
section is qualified in its entirety by the more detailed explanation set forth elsewhere in this pricing supplement and the accompanying
product supplement, prospectus supplement and prospectus. You should rely only on the information contained in this pricing supplement
and the accompanying product supplement, prospectus supplement and prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither
we nor the selling agent is making an offer to sell these notes in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this pricing supplement, the accompanying product supplement, prospectus supplement, and
prospectus is accurate only as of the date on their respective front covers.
The above documents may be accessed at
the following links:
| · | Product supplement EQUITY-1 dated February 9, 2016: |
https://www.sec.gov/Archives/edgar/data/70858/000119312516455439/d124909d424b5.htm
| · | Series L MTN prospectus supplement dated January 20, 2016 and prospectus
dated May 1, 2015: |
https://www.sec.gov/Archives/edgar/data/70858/000119312516433708/d122981d424b3.htm
Capitalized terms used but not defined
in this pricing supplement have the meanings set forth in the accompanying product supplement, prospectus supplement and prospectus.
Unless otherwise indicated or unless the context requires otherwise, all references in this pricing supplement to “BAC,”
“we,” “us,” “our,” or similar references are to BAC.
Hypothetical Payments on the Notes
The following table is for purposes of
illustration only. It is based on hypothetical values and show hypothetical returns on the notes. It illustrates
the calculation of the Redemption Amount and total rate of return based on a hypothetical Starting Value of 100 and a hypothetical
Threshold Value of 80 for the Least Performing Underlying, a hypothetical Digital Payment of $83 per note, and a range of hypothetical
Ending Values of the Least Performing Underlying. The actual amount you receive and the resulting total rate of return will
depend on the actual Starting Values, Threshold Values and Ending Values of the Underlyings, the actual Digital Payment, and whether
you hold the notes to maturity. The numbers appearing in the table below have been rounded for ease of analysis, and do not
take into account any tax consequences from investing in the notes.
For recent actual levels of the Underlyings,
see “The Underlyings” section below. Each Underlying is a price return index and as such its Ending Value will not
include any income generated by dividends paid on the securities included in that Underlying, which you would otherwise be entitled
to receive if you invested in those stocks directly. In addition, all payments on the notes are subject to issuer credit risk.
Ending
Value of the Least Performing Underlying |
Percentage
Change from the Starting Value to the Ending Value of
the Least Performing Underlying |
Redemption
Amount per Note |
Total
Rate of Return on the Notes |
0.00 |
-100.00% |
$0.00 |
-100.00% |
50.00 |
-50.00% |
$500.00 |
-50.00% |
60.00 |
-40.00% |
$600.00 |
-40.00% |
70.00 |
-30.00% |
$700.00 |
-30.00% |
79.99 |
-20.01% |
$799.90 |
-20.01% |
80.00(1) |
-20.00% |
$1,083.00 |
8.30% |
85.00 |
-15.00% |
$1,083.00 |
8.30% |
90.00 |
-10.00% |
$1,083.00 |
8.30% |
95.00 |
-5.00% |
$1,083.00 |
8.30% |
100.00(2) |
0.00% |
$1,083.00 |
8.30% |
105.00 |
5.00% |
$1,083.00 |
8.30% |
110.00 |
10.00% |
$1,083.00 |
8.30% |
120.00 |
20.00% |
$1,083.00 |
8.30% |
130.00 |
30.00% |
$1,083.00 (3) |
8.30% |
140.00 |
40.00% |
$1,083.00 |
8.30% |
150.00 |
50.00% |
$1,083.00 |
8.30% |
160.00 |
60.00% |
$1,083.00 |
8.30% |
(1)
This is the hypothetical Threshold Value of the Least Performing
Underlying.
(2) The hypothetical Starting Value of 100 used in
the table above has been chosen for illustrative purposes only, and does not represent a likely actual Starting Value for either
Underlying.
(3) The Redemption Amount per note cannot exceed the principal
amount plus the Digital Payment.
RISK
FACTORS
Your investment in the notes entails
significant risks, many of which differ from those of a conventional debt security. Your decision to purchase the notes should
be made only after carefully considering the risks of an investment in the notes, including those discussed below, with your advisors
in light of your particular circumstances. The notes are not an appropriate investment for you if you are not knowledgeable about
significant elements of the notes or financial matters in general.
General Risks Relating to the Notes
Your investment may result in a loss;
there is no guaranteed return of principal. There is no fixed principal repayment amount on the notes at maturity. If the Ending
Value of either Underlying is less than its Threshold Value, you will lose 1% of the principal amount for each 1% that the
Ending Value of the Least Performing Underlying is less than its Starting Value. In that case, you will lose 20% to 100% of your
principal.
The notes do not bear interest.
Unlike a conventional debt security, no interest payments will be paid over the term of the notes, regardless of the extent
to which the Ending Value of either Underlying exceeds its Threshold Value or Starting Value. Payments on the notes will be limited
only to the payment at maturity.
Your investment return will be limited
to the return represented by the Digital Payment, and may be less than a comparable investment directly in an Underlying. The
appreciation potential of the notes is limited to the Digital Payment. You will not receive a payment at maturity per note greater
than the principal amount plus the Digital Payment, regardless of the appreciation of either Underlying. In contrast, a direct
investment in an Underlying or the securities included in an Underlying would allow you to receive the full benefit of any appreciation
in the level of an Underlying (or prices of those underlying securities).
Your return on the notes may be less
than the yield on a conventional debt security of comparable maturity. Any return that you receive on the notes, which could
be negative, may be less than the return you would earn if you purchased a conventional debt security with the same maturity date.
As a result, your investment in the notes may not reflect the full opportunity cost to you when you consider factors, such as inflation,
that affect the time value of money.
Any payment on the notes is subject
to our credit risk, and actual or perceived changes in our creditworthiness are expected to affect the value of the notes.
The notes are our senior unsecured debt securities. As a result, your receipt of the Redemption Amount at maturity is dependent
upon our ability to repay our obligations on the maturity date, regardless of the Ending Value of either Underlying as compared
to its Threshold Value or Starting Value. No assurance can be given as to what our financial condition will be on the maturity
date. If we become unable to meet our financial obligations as they become due, you may not receive the amounts payable under the
terms of the notes.
In addition, our credit ratings are an
assessment by ratings agencies of our ability to pay our obligations. Consequently, our perceived creditworthiness and actual or
anticipated decreases in our credit ratings or increases in the spread between the yield on our securities and the yield on U.S.
Treasury securities (the “credit spread”) prior to the maturity date may adversely affect the market value of the notes.
However, because your return on the notes depends upon factors in addition to our ability to pay our obligations, such as the levels
of the Underlyings, an improvement in our credit ratings will not reduce the other investment risks related to the notes.
The public offering price you pay
for the notes will exceed their initial estimated value. The initial estimated value of the notes that is provided in this
preliminary pricing supplement, and that will be provided in the final pricing supplement, are each an estimate only, determined
as of a particular point in time by reference to our and our affiliates’ pricing models. These pricing models consider certain
assumptions and variables, including our credit spreads, our internal funding rate, mid-market terms on hedging transactions, expectations
on interest rates, dividends and volatility, price-sensitivity analysis, and the expected term of the notes. These pricing models
rely in part on certain forecasts about future events, which may prove to be incorrect.
The initial estimated value does not
represent a minimum or maximum price at which we, MLPF&S or any of our affiliates would be willing to purchase your notes in
any secondary market (if any exists) at any time. The value of your notes at any time after the date of this pricing supplement
will vary based on many factors that cannot be predicted with accuracy, including our creditworthiness and changes in market conditions.
If you attempt to sell the notes prior
to maturity, their market value may be lower than the price you paid for them and lower than their initial estimated value. This
is due to, among other things, changes in the levels of the Underlyings, our internal funding rate, and the inclusion in the public
offering price of the underwriting discount and the hedging related charges, all as further described in "Structuring the
Notes" below. These factors, together with various credit, market and economic factors over the term of the notes, are expected
to reduce the price at which you may be able to sell the notes in any secondary market and will affect the value of the notes in
complex and unpredictable ways.
We cannot assure you that a trading
market for your notes will ever develop or be maintained. We will not list the notes on any securities exchange. We cannot
predict how the notes will trade in any secondary market or whether that market will be liquid or illiquid.
The development of a trading market for
the notes will depend on our financial performance and other factors, including changes in the levels of the Underlyings. The number
of potential buyers of your notes in any secondary market may be limited. We anticipate that MLPF&S will act as a market-maker
for the notes, but neither we nor MLPF&S is required to do so. There is no assurance that any party will be willing to purchase
your notes at any price in any secondary market. MLPF&S may discontinue its market-making activities as to the notes at any
time. To the extent that MLPF&S engages in any market-making activities, it may bid for or offer the notes. Any price at which
MLPF&S may bid for, offer, purchase, or sell any notes may differ from the values determined by pricing models that it may
use, whether as a result of dealer discounts, mark-ups, or other transaction costs. These bids, offers, or completed transactions
may affect the prices, if any, at which the notes might otherwise trade in the market.
In addition, if at any time MLPF&S
were to cease acting as a market-maker as to the notes, it is likely that there would be significantly less liquidity in the secondary
market. In such a case, the price at which the notes could be sold likely would be lower than if an active market existed.
The Redemption Amount will not reflect
changes in the levels of the Underlyings other than on the calculation day. Changes in the levels of the Underlyings during
the term of the notes other than on the calculation day will not be reflected in the calculation of the Redemption Amount. To calculate
the Redemption Amount, the calculation agent will compare only the Ending Value of each Underlying to its Starting Value or Threshold
Value, as applicable. No other levels of the Underlyings will be taken into account. As a result, even if the level of each Underlying
has increased at certain times during the term of the notes, you will receive a Redemption Amount that is less than the principal
amount if the Ending Value of either Underlying is less than its Threshold Value.
Because the notes are linked to the
lesser performing (and not the average performance) of the two Underlyings, you may lose some or all of your principal amount even
if the Ending Value of one Underlying is always greater than its Threshold Value. Your notes are linked to the lesser performing
of two Underlyings, and a change in the level of one Underlying may not correlate with changes in the level of the other Underlying.
The notes are not linked to a basket composed of the Underlyings, where the depreciation in the level of one Underlying could be
offset to some extent by the appreciation in the level of the other Underlying. In the case of the notes that we are offering,
the individual performance of each Underlying would not be combined, and the depreciation in the level of one Underlying would
not be offset by any appreciation in the level of the other Underlying. Even if the Ending Value of one Underlying is equal to
or above its Threshold Value, you will lose at least 20% of your principal if the Ending Value of the other Underlying is below
its Threshold Value. Both of the Underlyings track U.S. traded securities with large capitalizations; accordingly, if one of them
declines in value, it is possible that the other will as well.
The publisher of an Underlying may
adjust that Underlying in a way that affects its levels, and the publisher has no obligation to consider your interests. The
publisher of an Underlying can add, delete, or substitute the components included in that Underlying or make other methodological
changes that could change its level. A new security included in an Underlying may perform significantly better or worse than the
replaced security, and the performance will impact the level of that Underlying. Additionally, the publisher of an Underlying may
alter, discontinue, or suspend calculation or dissemination of that Underlying. Any of these actions could adversely affect the
value of your notes. The publisher of either Underlying will have no obligation to consider your interests in calculating or revising
the applicable Underlying.
The U.S. federal income tax consequences
of an investment in the notes are uncertain, and may be adverse to a holder of the notes. No statutory, judicial, or administrative
authority directly addresses the characterization of the notes or securities similar to the notes for U.S. federal income tax purposes.
As a result, significant aspects of the U.S. federal income tax consequences of an investment in the notes are not certain. Under
the terms of the notes, you will have agreed with us to treat the notes as single financial contracts, as described under “U.S.
Federal Income Tax Summary—General.” If the
Internal Revenue Service (the “IRS”) were successful
in asserting an alternative characterization for the notes, the timing and character of gain or loss with respect to the notes
may differ. No ruling will be requested from the IRS with respect to the notes and no assurance can be given that the IRS will
agree with the statements made in the section entitled “U.S. Federal Income Tax Summary.” You are urged to consult
with your own tax advisor regarding all aspects of the U.S. federal income tax consequences of investing in the notes.
* * *
Investors in the notes should review
the additional risk factors set forth beginning on page PS-5 of the product supplement prior to making an investment decision.
DESCRIPTION
OF THE NOTES
General
The notes will be part of a series of
medium-term notes entitled “Medium-Term Notes, Series L” issued under the Senior Indenture, as amended and supplemented
from time to time. The Senior Indenture is more fully described in the prospectus supplement and prospectus. The following description
of the notes supplements the description of the general terms and provisions of the notes and debt securities set forth under the
headings “Description of the Notes” in the prospectus supplement and “Description of Debt Securities” in
the prospectus. These documents should be read in connection with this pricing supplement.
The notes will be issued in denominations
of $1,000 and whole multiples of $1,000. You may transfer the notes only in whole multiples of $1,000.
Prior to maturity, the notes are not
repayable at our option or at your option.
If the scheduled maturity date is not
a business day, the payment will be postponed to the next business day, and no interest will be payable as a result of that postponement.
Redemption Amount
At maturity, subject to our credit risk
as issuer of the notes, you will receive the Redemption Amount per note that you hold, denominated in U.S. dollars. The Redemption
Amount will be calculated as follows:
| · | If the Ending Value of each Underlying is greater than or equal
to its Threshold Value, the Redemption Amount will equal: |
Principal Amount + Digital Payment
| · | If the Ending Value of either Underlying is less than its Threshold
Value, the Redemption Amount will equal: |
In this case, the Redemption Amount will be less than
or equal to 80% of the principal amount of the notes, and you may lose up to 100% of your principal.
Determining the Starting Value and the Ending Value of
Each Underlying
With respect to each Underlying, the
“Starting Value” will be its closing level on the pricing date.
With respect to each Underlying, the
“Ending Value” will be its closing level on the calculation day.
The calculation day is subject to postponement
as set forth in the product supplement, in the section “Description of the Notes—Certain Terms of the Notes—Events
Relating to Calculation Days.”
Events of Default and Acceleration
If an event of default, as defined in
the Senior Indenture, with respect to the notes occurs and is continuing, the amount payable to a holder of the notes upon any
acceleration permitted under the Senior Indenture will be equal to the amount described under the caption “—Redemption
Amount,” calculated as though the date of acceleration were the maturity date of the notes and as though the calculation
day were the fifth trading day prior to the date of acceleration. In case of a default in the payment of the notes, the notes will
not bear a default interest rate.
THE UNDERLYINGS
All
disclosures contained in this pricing supplement regarding the Underlyings, including, without limitation, their make-up, method
of calculation, and changes in their components, have been derived from publicly available sources. The information reflects the
policies of, and is subject to change by each of S&P Dow Jones Indices LLC (“SPDJI”), the sponsor of the SPX, and
CME Group Index Services LLC (“CME Indexes”), the
sponsor of the INDU. We refer to SPDJI and CME Indexes as the “Underlying Sponsors.” The Underlying Sponsors, which
license the copyright and all other rights to the Underlyings, have no obligation to continue to publish, and may discontinue publication
of, the Underlyings. The consequences of either Underlying Sponsor discontinuing publication of the applicable Underlying are discussed
in “Description of the Notes—Discontinuance of an Index” in
the accompanying product supplement. None of us, the calculation agent, or MLPF&S accepts any responsibility for the calculation,
maintenance or publication of either Underlying or any successor index.
Neither we nor any of our affiliates make
any representation to you as to the future performance of the Underlyings.
You should make your own investigation
into the Underlyings.
The S&P 500® Index
The SPX is intended to provide an indication
of the pattern of common stock price movement. The calculation of the level of the SPX is based on the relative value of the aggregate
market value of the common stocks of 500 companies as of a particular time compared to the aggregate average market value of the
common stocks of 500 similar companies during the base period of the years 1941 through 1943.
The Underlying Sponsor chooses companies
for inclusion in the SPX with the aim of achieving a distribution by broad industry groupings that approximates the distribution
of these groupings in the common stock population of its Stock Guide Database of over 10,000 companies, which the Underlying Sponsor
uses as an assumed model for the composition of the total market. Relevant criteria employed by the Underlying Sponsor include
the viability of the particular company, the extent to which that company represents the industry group to which it is assigned,
the extent to which the market price of that company’s common stock generally is responsive to changes in the affairs of
the respective industry and the market value and trading activity of the common stock of that company. Ten main groups of companies
constitute the SPX, with the approximate percentage of the market capitalization of the SPX included in each group as of January
29, 2016 indicated in parentheses: Information Technology (20.7%); Financials (15.9%); Health Care (14.7%); Consumer Discretionary
(12.9%); Consumer Staples (10.6%); Industrials (10.0%); Energy (6.6%); Utilities (3.3%); Telecommunication Services (2.7%); and
Materials (2.6%). The Underlying Sponsor may from time to time, in its sole discretion, add companies to, or delete companies from,
the SPX to achieve the objectives stated above.
The Underlying Sponsor calculates the
SPX by reference to the prices of the constituent stocks of the SPX without taking account of the value of dividends paid on those
stocks. As a result, the return on the notes will not reflect the return you would realize if you actually owned the SPX constituent
stocks and received the dividends paid on those stocks.
Computation of the SPX
While the Underlying Sponsor currently
employs the following methodology to calculate the SPX, no assurance can be given that the Underlying Sponsor will not modify or
change this methodology in a manner that may affect the Redemption Amount.
Historically, the market value of any
component stock of the SPX was calculated as the product of the market price per share and the number of then outstanding shares
of such component stock. In March 2005, the Underlying Sponsor began shifting the SPX halfway from a market capitalization weighted
formula to a float-adjusted formula, before moving the SPX to full float adjustment on September 16, 2005. The Underlying Sponsor’s
criteria for selecting stocks for the SPX did not change with the shift to float adjustment. However, the adjustment affects each
company’s weight in the SPX.
Under float adjustment, the share counts
used in calculating the SPX reflect only those shares that are available to investors, not all of a company’s outstanding
shares. Float adjustment excludes shares that are closely held by control groups, other publicly traded companies or government
agencies.
In September 2012, all shareholdings
representing more than 5% of a stock’s outstanding shares, other than holdings by “block owners,” were removed
from the float for purposes of calculating the SPX. Generally, these “control holders” will include officers and directors,
private equity, venture capital and special equity firms, other publicly traded companies that hold shares for control, strategic
partners, holders of restricted shares, ESOPs, employee and family trusts, foundations associated with the company, holders of
unlisted share classes of stock, government entities at all levels (other than government retirement/pension funds) and any individual
person who controls a 5% or greater stake in a company as reported in regulatory filings. However, holdings by block owners, such
as depositary banks,
pension funds, mutual funds and ETF providers, 401(k) plans
of the company, government retirement/pension funds, investment funds of insurance companies, asset managers and investment funds,
independent foundations and savings and investment plans, will ordinarily be considered part of the float.
Treasury stock, stock options, restricted
shares, equity participation units, warrants, preferred stock, convertible stock, and rights are not part of the float. Shares
held in a trust to allow investors in countries outside the country of domicile, such as depositary shares and Canadian exchangeable
shares are normally part of the float unless those shares form a control block. If a company has multiple classes of stock outstanding,
shares in an unlisted or non-traded class are treated as a control block.
For each stock, an investable weight
factor (“IWF”) is calculated by dividing the available float shares by the total shares outstanding. As of September
21, 2012, available float shares are defined as the total shares outstanding less shares held by control holders. This calculation
is subject to a 5% minimum threshold for control blocks. For example, if a company’s officers and directors hold 3% of the
company’s shares, and no other control group holds 5% of the company’s shares, the Underlying Sponsor would assign
that company an IWF of 1.00, as no control group meets the 5% threshold. However, if a company’s officers and directors hold
3% of the company’s shares and another control group holds 20% of the company’s shares, the Underlying Sponsor would
assign an IWF of 0.77, reflecting the fact that 23% of the company’s outstanding shares are considered to be held for control.
For companies with multiple classes of stock, the Underlying Sponsor calculates the weighted average IWF for each stock using the
proportion of the total company market capitalization of each share class as weights.
The SPX is calculated using a base-weighted
aggregate methodology. The level of the SPX reflects the total market value of all component stocks relative to the base period
of the years 1941 through 1943. An indexed number is used to represent the results of this calculation in order to make the level
easier to work with and track over time. The actual total market value of the component stocks during the base period of the years
1941 through 1943 has been set to an indexed level of 10. This is often indicated by the notation 1941- 43 = 10. In practice, the
daily calculation of the SPX is computed by dividing the total market value of the component stocks by the “index divisor.”
By itself, the index divisor is an arbitrary number. However, in the context of the calculation of the SPX, it serves as a link
to the original base period level of the SPX. The index divisor keeps the SPX comparable over time and is the manipulation point
for all adjustments to the SPX, which is index maintenance.
Index Maintenance
Index maintenance includes monitoring
and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price
adjustments due to company restructuring or spinoffs. Some corporate actions, such as stock splits and stock dividends, require
changes in the common shares outstanding and the stock prices of the companies in the SPX, and do not require index divisor adjustments.
To prevent the level of the SPX from
changing due to corporate actions, corporate actions which affect the total market value of the SPX require an index divisor adjustment.
By adjusting the index divisor for the change in market value, the level of the SPX remains constant and does not reflect the corporate
actions of individual companies in the SPX. Index divisor adjustments are made after the close of trading and after the calculation
of the SPX closing level.
Changes in a company’s shares outstanding
of 5.00% or more due to mergers, acquisitions, public offerings, tender offers, Dutch auctions, or exchange offers are made as
soon as reasonably possible. All other changes of 5.00% or more (due to, for example, company stock repurchases, private placements,
redemptions, exercise of options, warrants, conversion of preferred stock, notes, debt, equity participation units, at-the-market
offerings, or other recapitalizations) are made weekly and are announced on Fridays for implementation after the close of trading
on the following Friday. Changes of less than 5.00% due to a company's acquisition of another company in the SPX are made as soon
as reasonably possible. All other changes of less than 5.00% are accumulated and made quarterly on the third Friday of March, June,
September, and December, and are usually announced two to five days prior.
Changes in IWFs of more than five percentage
points caused by corporate actions (such as merger and acquisition activity, restructurings, or spinoffs) will be made as soon
as reasonably possible. Other changes in IWFs will be made annually when IWFs are reviewed.
The following graph sets forth
the daily historical performance of the SPX in the period from January 1, 2008 through February 8, 2016. This historical data on
the SPX is not necessarily indicative of its future performance or what the value of the notes may be. Any historical upward or
downward trend in the level of the SPX during any period set forth below is not an indication that the level of the SPX is more
or less likely to increase or decrease at any time over the term of the notes. The horizontal line in the graph represents the
hypothetical Threshold Value of 1,482.75, assuming a Starting Value of 1,853.44, which was the closing level of the SPX on February
8, 2016 (the actual Starting Value and Threshold Value of the SPX, which will be 80% of its Starting Value, will be determined
on the pricing date).
Historical Performance of the SPX
Before investing in the notes, you should
consult publicly available sources for the levels of the SPX.
License Agreement
S&P® is a registered
trademark of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered
trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks have been licensed for use by S&P
Dow Jones Indices LLC. “Standard & Poor’s®,” “S&P 500®” and
“S&P®” are trademarks of S&P. These trademarks have been sublicensed for certain purposes by
our subsidiary, MLPF&S. The SPX is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed
for use by MLPF&S.
The notes are not sponsored, endorsed,
sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or any of their respective affiliates (collectively, “S&P
Dow Jones Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the holders
of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly
or the ability of the SPX to track general market performance. S&P Dow Jones Indices’ only relationship to MLPF&S
with respect to the SPX is the licensing of the SPX and certain trademarks, service marks and/or trade names of S&P Dow Jones
Indices and/or its third party licensors. The SPX is determined, composed and calculated by S&P Dow Jones Indices without
regard to us, MLPF&S, or the notes. S&P Dow Jones Indices have no obligation to take our needs or the needs of MLPF&S
or holders of the notes into consideration in determining, composing or calculating the SPX. S&P Dow Jones Indices are
not responsible for and have not participated in the determination of the prices, and amount of the notes or the timing of the
issuance or sale of the notes or in the determination or calculation of the equation by which the notes are to be converted
into cash. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or
trading of the notes. There is no assurance that investment products based on the SPX will accurately track index performance
or provide positive investment returns. S&P Dow Jones Indices LLC and its subsidiaries are not investment advisors.
Inclusion of a security or futures contract within an index is not a recommendation by S&P Dow Jones Indices to buy, sell,
or hold such security or futures contract, nor is it considered to be investment advice. Notwithstanding the foregoing,
CME Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated to the notes currently being
issued by us, but which may be similar to and competitive with the notes. In addition, CME Group Inc. and its affiliates
may trade financial products which are linked to the performance of the SPX. It is possible that this trading activity will
affect the value of the notes.
S&P DOW JONES INDICES DO NOT GUARANTEE
THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE SPX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING
BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW
JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW
JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY US, MLPF&S, HOLDERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE SPX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER
SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT
NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS
OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND MLPF&S, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
The Dow Jones Industrial AverageSM
All disclosures contained in this term sheet regarding the
INDU, including, without limitation, its make up, method of calculation, and changes in its components, have been derived from
publicly available sources. The information reflects the policies of Dow Jones Indexes, the marketing name of CME Indexes, and
is subject to change by Dow Jones Indexes. Dow Jones Indexes has no obligation to continue to publish, and may discontinue publication
of, the INDU. Neither we nor MLPF&S accept any responsibility for the calculation, maintenance, or publication of the INDU
or any successor index.
Publication of the INDU
Unless otherwise stated, all information on the INDU provided
in this term sheet is derived from Dow Jones Indexes, the marketing name and a licensed trademark of CME Indexes. The INDU is a
price-weighted index, which means an underlying stock’s weight in the INDU is based on its price per share rather than the
total market capitalization of the issuer. The INDU is designed to provide an indication of the composite performance of 30 common
stocks of corporations representing a broad cross-section of U.S. industry. The corporations represented in the INDU tend to be
market leaders in their respective industries and their stocks are typically widely held by individuals and institutional investors.
The INDU is maintained by an Averages Committee comprised
of the Managing Editor of The Wall Street Journal (“WSJ”), the head of Dow Jones Indexes research and the head of CME
Group Inc. research. The Averages Committee was created in March 2010, when Dow Jones Indexes became part of CME Group Index Services,
LLC, a joint venture company owned 90% by CME Group Inc. and 10% by Dow Jones & Company. Generally, composition changes occur
only after mergers, corporate acquisitions or other dramatic shifts in a component's core business. When such an event necessitates
that one component be replaced, the entire INDU is reviewed. As a result, when changes are made they typically involve more than
one component. While there are no rules for component selection, a stock typically is added only if it has an excellent reputation,
demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by
the average.
Changes in the composition of the INDU are made entirely
by the Averages Committee without consultation with the corporations represented in the INDU, any stock exchange, any official
agency or us. Unlike most other indices, which are reconstituted according to a fixed review schedule, constituents of the INDU
are reviewed on an as-needed basis. Changes to the common stocks included in the INDU tend to be made infrequently, and the underlying
stocks of the INDU may be changed at any time for any reason. The companies currently represented in the INDU are incorporated
in the United States and its territories and their stocks are listed on the New York Stock Exchange and NASDAQ.
The INDU initially consisted of 12 common stocks and was
first published in the WSJ in 1896. The INDU was increased to include 20 common stocks in 1916 and to 30 common stocks in 1928.
The number of common stocks in the INDU has remained at 30 since 1928, and, in an effort to maintain continuity, the constituent
corporations represented in the INDU have been changed on a relatively infrequent basis. Nine main groups of companies constitute
the INDU, with the approximate sector weights of the INDU as of January 29, 2016 indicated in parentheses: Financials (18.97%);
Industrials (18.72%); Consumer Services (17.12%); Technology (13.81%); Health Care (12.51%); Consumer Goods (7.76%); Oil &
Gas (6.83%); Basic Materials (2.19%); and Telecommunication (2.08%).
Computation of the INDU
The level of the INDU is the sum of the primary exchange
prices of each of the 30 component stocks included in the INDU, divided by a divisor that is designed to provide a meaningful continuity
in the level of the INDU. Because the INDU is price-weighted, stock splits or changes in the component stocks could result in distortions
in the index level. In order to prevent these distortions related to extrinsic factors, the divisor is periodically changed in
accordance with a mathematical formula that reflects adjusted proportions within the INDU. The current divisor of the INDU is published
daily in the WSJ and other publications. In addition, other statistics based on the INDU may be found in a variety of publicly
available sources.
The following table presents the listing symbol, industry group,
price per share, and component stock weight for each of the top 10 component stocks in the INDU based on publicly available information
on January 29, 2016.
Issuer
of Component Stock |
Symbol |
Industry |
Component
Stock Weight |
The Goldman Sachs Group, Inc. |
GS |
Investment Services |
6.72% |
3M Company |
MMM |
Diversified Industrials |
6.28% |
The Home Depot, Inc. |
HD |
Home Improvement Retailers |
5.23% |
International Business Machines Corporation |
IBM |
Computer Services |
5.19% |
McDonald’s Corporation |
MCD |
Consumer Services |
5.15% |
The Boeing Company |
BA |
Aerospace |
5.00% |
|
|
|
|
UnitedHealth Group Incorporated |
UNH |
Health Care Providers |
4.79% |
The Travelers Companies, Inc. |
TRV |
Property & Casualty Insurance |
4.45% |
Johnson & Johnson |
JNJ |
Health Care |
4.34% |
Apple Inc. |
AAPL |
Computer Hardware |
4.05% |
The following graph sets forth
the daily historical performance of the INDU in the period from January 1, 2008 through February 8, 2016. This historical data
on the INDU is not necessarily indicative of its future performance or what the value of the notes may be. Any historical upward
or downward trend in the level of the INDU during any period set forth below is not an indication that the level of the INDU is
more or less likely to increase or decrease at any time over the term of the notes. The horizontal line in the graph represents
the hypothetical Threshold Value of 11,218.94, assuming a Starting Value of 12.821.64, which was the closing level of the INDU
on February 8, 2016 (the actual Starting Value and Threshold Value of the INDU, which will be 80% of its Starting Value, will be
determined on the pricing date).
Historical Performance of the INDU
Before investing in the notes, you should
consult publicly available sources for the levels of the INDU.
License Agreement
S&P® is a registered trademark of Standard
& Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow
Jones Trademark Holdings LLC (“Dow Jones”). These trademarks have been licensed for use by S&P Dow Jones
Indices LLC. “Standard & Poor’s®”, “S&P 500®” and “S&P®”
are trademarks of S&P. These trademarks have been sublicensed for certain purposes by our subsidiary, MLPF&S. The
INDU is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by MLPF&S.
The notes are not sponsored, endorsed, sold or promoted by
S&P Dow Jones Indices LLC, Dow Jones, S&P or any of their respective affiliates (collectively, “S&P Dow Jones
Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the holders of the
notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly
or the ability of the INDU to track general market performance. S&P Dow Jones Indices’ only relationship to MLPF&S
with respect to the INDU is the licensing of the INDU and certain trademarks, service marks and/or trade names of S&P Dow Jones
Indices and/or its third party licensors. The INDU is determined, composed and calculated by S&P Dow Jones Indices without
regard to us, MLPF&S, or the notes. S&P Dow Jones Indices have no obligation to take our needs or the needs of MLPF&S
or holders of the notes into consideration in determining, composing or calculating the INDU. S&P Dow Jones Indices are
not responsible for and have not participated in the determination of the prices, and amount of the notes or the timing of the
issuance or sale of the notes or in the determination or calculation of the equation by which the notes are to be converted
into cash. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or
trading of the notes. There is no assurance that investment products based on the INDU will accurately track index performance
or provide positive investment returns. S&P Dow Jones Indices LLC and its subsidiaries are not investment advisors.
Inclusion of a security or futures contract within an index is not a recommendation by S&P Dow Jones Indices to buy, sell,
or hold such security or futures contract, nor is it considered to be investment advice. Notwithstanding the foregoing, CME
Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated to the notes currently being
issued by us, but which may be similar to and competitive with the notes. In addition, CME Group Inc. and its affiliates
may trade financial products which are linked to the performance of the INDU. It is possible that this trading activity will
affect the value of the notes.
S&P DOW JONES INDICES DO NOT GUARANTEE THE ADEQUACY,
ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED
TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL
NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO
EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
USE OR AS TO RESULTS TO BE OBTAINED BY US, MLPF&S, HOLDERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P
DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED
TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,
WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS
BETWEEN S&P DOW JONES INDICES AND MLPF&S, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
SUPPLEMENTAL PLAN OF DISTRIBUTION—CONFLICTS
OF INTEREST
MLPF&S, a broker-dealer subsidiary
of BAC, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and will participate as selling
agent in the distribution of the notes. Accordingly, the offering of the notes will conform to the requirements of FINRA Rule 5121.
MLPF&S may not make sales in this offering to any of its discretionary accounts without the prior written approval of the account
holder.
MLPF&S will sell the notes to other
broker-dealers that will participate in the offering and that are not affiliated with us, at a purchase price equal to 99.10% of
the principal amount. Each of those broker-dealers may sell the notes to one or more additional broker-dealers. MLPF&S has
informed us that these discounts may vary from dealer to dealer and that not all dealers will purchase or repurchase the notes
at the same discount.
We may deliver the notes against payment
therefor in New York, New York on a date that is greater than three business days following the pricing date. Under Rule 15c6-1
of the Securities Exchange Act of 1934, trades in the secondary market generally are required to settle in three business days,
unless the parties to any such trade expressly agree otherwise. Accordingly, if the initial settlement of the notes occurs more
than three business days from the pricing date, purchasers who wish to trade the notes more than three business days prior to the
original issue date will be required to specify alternative settlement arrangements to prevent a failed settlement.
MLPF&S and any of our other broker-dealer
affiliates, may use this pricing supplement, and the accompanying product supplement, prospectus supplement and prospectus for
offers and sales in secondary market transactions and market-making transactions in the notes. However, they are not obligated
to engage in such secondary market transactions and/or market-making transactions. The selling agent may act as principal or agent
in these transactions, and any such sales will be made at prices related to prevailing market conditions at the time of the sale.
At MLPF&S’s discretion, for
a short, undetermined initial period after the issuance of the notes, MLPF&S may offer to buy the notes in the secondary market
at a price that may exceed the initial estimated value of the notes. Any price offered by MLPF&S for the notes will be based
on then-prevailing market conditions and other considerations, including the performance of the Underlyings and the remaining term
of the notes. However, neither we nor any of our affiliates is obligated to purchase your notes at any price or at any time, and
we cannot assure you that we or any of our affiliates will purchase your notes at a price that equals or exceeds the initial estimated
value of the notes.
Any price that MLPF&S may pay to
repurchase the notes will depend upon then prevailing market conditions, our creditworthiness and transaction costs. At certain
times, this price may be higher than or lower than the initial estimated value of the notes.
STRUCTURING THE NOTES
The notes are our debt securities, the
return on which is linked to the performance of the Underlyings. As is the case for all of our debt securities, including our market-linked
notes, the economic terms of the notes reflect our actual or perceived creditworthiness at the time of pricing. In addition, because
market-linked notes result in increased operational, funding and liability management costs to us, we typically borrow the funds
under these notes at a rate that is more favorable to us than the rate that we might pay for a conventional fixed or floating rate
debt security. This generally relatively lower internal funding rate, which is reflected in the economic terms of the notes, along
with the fees and charges associated with market-linked notes, typically results in the initial estimated value of the notes at
the time the terms of the notes are set and on the pricing date being less than their public offering price.
In order to meet our payment obligations
on the notes, at the time we issue the notes, we may choose to enter into certain hedging arrangements (which may include call
options, put options or other derivatives) with MLPF&S or one of its affiliates. The terms of these hedging arrangements are
determined based upon terms provided by MLP&S and its affiliates, and take into account a number of factors, including our
creditworthiness, interest rate movements, the volatilities of the Underlyings, the tenor of the notes and the hedging arrangements.
The economic terms of the notes and their initial estimated value depend in part on the terms of these hedging arrangements.
MLPF&S has advised us that the hedging
arrangements will include hedging related charges, reflecting the costs associated with, and our affiliates’ profit earned
from, these hedging arrangements. Since hedging entails risk and may be influenced by unpredictable market forces, actual profits
or losses from these hedging transactions may be more or less than any expected amounts.
For further information, see “Risk
Factors—General Risks Relating to the Notes” beginning on page PS-6 above and “Use of Proceeds” on page
PS-14 of product supplement EQUITY-1.
U.S. FEDERAL
INCOME TAX SUMMARY
The following summary of the material U.S.
federal income tax considerations of the acquisition, ownership, and disposition of the notes is based upon the advice of Morrison
& Foerster LLP, our tax counsel. The following discussion supplements, and to the extent inconsistent supersedes, the discussions
under “U.S. Federal Income Tax Considerations” in the accompanying prospectus and under “U.S. Federal Income
Tax Considerations” in the accompanying prospectus supplement and is not exhaustive of all possible tax considerations. This
summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the
Code by the U.S. Treasury Department (“Treasury”) (including proposed and temporary regulations), rulings, current
administrative interpretations and official pronouncements of the IRS, and judicial decisions, all as currently in effect and all
of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that
the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This summary does not include any description of the tax laws of any state or local governments, or of any foreign government,
that may be applicable to a particular holder.
This summary is directed solely to U.S. Holders
and Non-U.S. Holders that, except as otherwise specifically noted, will purchase the notes upon original issuance and will hold
the notes as capital assets within the meaning of Section 1221 of the Code, which generally means property held for investment,
and that are not excluded from the discussion under “U.S. Federal Income Tax Considerations” in the accompanying prospectus.
You should consult your own tax advisor
concerning the U.S. federal income tax consequences to you of acquiring, owning, and disposing of the notes, as well as any tax
consequences arising under the laws of any state, local, foreign, or other tax jurisdiction and the possible effects of changes
in U.S. federal or other tax laws.
General
Although there is no statutory, judicial, or
administrative authority directly addressing the characterization of the notes, we intend to treat the notes for all tax purposes
as single financial contracts with respect to the Underlyings and under the terms of the notes, we and every investor in the notes
agree, in the absence of an administrative determination or judicial ruling to the contrary, to treat the notes in accordance with
such characterization. This discussion assumes that the notes constitute single financial contracts with respect to the Underlyings
for U.S. federal income tax purposes. If the notes did not constitute single financial contracts, the tax consequences described
below would be materially different.
This characterization of the notes is not
binding on the IRS or the courts. No statutory, judicial, or administrative authority directly addresses the characterization of
the notes or any similar instruments for U.S. federal income tax purposes, and no ruling is being requested from the IRS with respect
to their proper characterization and treatment. Due to the absence of authorities on point, significant aspects of the U.S. federal
income tax consequences of an investment in the notes are not certain, and no assurance can be given that the IRS or any court
will agree with the characterization and tax treatment described in this supplement. Accordingly, you are urged to consult your
tax advisor regarding all aspects of the U.S. federal income tax consequences of an investment in the notes, including possible
alternative characterizations.
Unless otherwise stated, the following discussion
is based on the characterization described above. The discussion in this section assumes that there is a significant possibility
of a significant loss of principal on an investment in the notes.
We will not attempt to ascertain whether the
issuer of any component stocks included in an Underlying would be treated as a “passive foreign investment company”
(“PFIC”), within the meaning of Section 1297 of the Code, or a United States real property holding corporation, within
the meaning of Section 897(c) of the Code. If the issuer of one or more stocks included in an Underlying were so treated, certain
adverse U.S. federal income tax consequences could possibly apply to a holder of the notes. You should refer to information filed
with the SEC by the issuers of the component stocks included in each Underlying and consult your tax advisor regarding the possible
consequences to you, if any, if any issuer of the component stocks included in an Underlying is or becomes a PFIC or is or becomes
a United States real property holding corporation.
U.S. Holders
Upon receipt of a cash payment at maturity
or upon a sale, exchange, or redemption of the notes prior to maturity, a U.S. Holder generally will recognize capital gain or
loss equal to the difference between
the amount realized and the U.S. Holder’s tax basis in the
notes. A U.S. Holder’s tax basis in the notes will equal the amount paid by that holder to acquire them. This capital gain
or loss generally will be long-term capital gain or loss if the U.S. Holder held the notes for more than one year. The deductibility
of capital losses is subject to limitations.
Alternative Tax Treatments. Due to the
absence of authorities that directly address the proper tax treatment of the notes, prospective investors are urged to consult
their tax advisors regarding all possible alternative tax treatments of an investment in the notes. In particular, the IRS could
seek to subject the notes to the Treasury regulations governing contingent payment debt instruments. If the IRS were successful
in that regard, the timing and character of income on the notes would be affected significantly. Among other things, a U.S. Holder
would be required to accrue original issue discount every year at a “comparable yield” determined at the time of issuance.
In addition, any gain realized by a U.S. Holder at maturity or upon a sale, exchange, or redemption of the notes generally would
be treated as ordinary income, and any loss realized at maturity would be treated as ordinary loss to the extent of the U.S. Holder’s
prior accruals of original issue discount, and as capital loss thereafter.
The IRS released Notice 2008-2 (the “Notice”),
which sought comments from the public on the taxation of financial instruments currently taxed as “prepaid forward contracts.”
This Notice addresses instruments such as the notes. According to the Notice, the IRS and Treasury are considering whether a holder
of an instrument such as the notes should be required to accrue ordinary income on a current basis, regardless of whether any payments
are made prior to maturity. It is not possible to determine what guidance the IRS and Treasury will ultimately issue, if any. Any
such future guidance may affect the amount, timing and character of income, gain, or loss in respect of the notes, possibly with
retroactive effect.
The IRS and Treasury are also considering additional
issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether foreign
holders of such instruments should be subject to withholding tax on any deemed income accruals, whether Section 1260 of the Code,
concerning certain “constructive ownership transactions,” generally applies or should generally apply to such instruments,
and whether any of these determinations depend on the nature of the underlying asset.
In addition, proposed Treasury regulations
require the accrual of income on a current basis for contingent payments made under certain notional principal contracts. The preamble
to the regulations states that the “wait and see” method of accounting does not properly reflect the economic accrual
of income on those contracts, and requires current accrual of income for some contracts already in existence. While the proposed
regulations do not apply to prepaid forward contracts, the preamble to the proposed regulations expresses the view that similar
timing issues exist in the case of prepaid forward contracts. If the IRS or Treasury publishes future guidance requiring current
economic accrual for contingent payments on prepaid forward contracts, it is possible that you could be required to accrue income
over the term of the notes.
Because of the absence of authority regarding
the appropriate tax characterization of the notes, it is also possible that the IRS could seek to characterize the notes in a manner
that results in tax consequences that are different from those described above. For example, the IRS could possibly assert that
any gain or loss that a holder may recognize at maturity or upon the sale, exchange or redemption of the notes should be treated
as ordinary gain or loss.
Because each Underlying is an index that periodically
rebalances, it is possible that the notes could be treated as a series of single financial contracts, each of which matures on
the next rebalancing date. If the notes were properly characterized in such a manner, a U.S. Holder would be treated as disposing
of the notes on each rebalancing date in return for new notes that mature on the next rebalancing date, and a U.S. Holder would
accordingly likely recognize capital gain or loss on each rebalancing date equal to the difference between the holder’s tax
basis in the notes (which would be adjusted to take into account any prior recognition of gain or loss) and the fair market value
of the notes on such date.
Non-U.S. Holders
Except as discussed below, a Non-U.S. Holder
generally will not be subject to U.S. federal income or withholding tax for amounts paid in respect of the notes provided that
the Non-U.S. Holder complies with applicable certification requirements and that the payment is not effectively connected with
the conduct by the Non-U.S. Holder of a U.S. trade or business. Notwithstanding the foregoing, gain from the sale, exchange, or
redemption of the notes or their settlement at maturity may be subject to U.S. federal income tax if that Non-U.S. Holder is a
non-resident alien individual and is present in the U.S. for 183
days or more during the taxable year of the settlement at maturity,
sale, exchange, or redemption and certain other conditions are satisfied.
If a Non-U.S. Holder of the notes is engaged
in the conduct of a trade or business within the U.S. and if gain realized on the settlement at maturity, or upon sale, exchange,
or redemption of the notes, is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply,
is attributable to a permanent establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S. Holder generally will
be subject to U.S. federal income tax on such gain on a net income basis in the same manner as if it were a U.S. Holder. Such Non-U.S.
Holders should read the material under the heading “—U.S. Holders,” for a description of the U.S. federal income
tax consequences of acquiring, owning, and disposing of the notes. In addition, if such Non-U.S. Holder is a foreign corporation,
it may also be subject to a branch profits tax equal to 30% (or such lower rate provided by any applicable tax treaty) of a portion
of its earnings and profits for the taxable year that are effectively connected with its conduct of a trade or business in the
U.S., subject to certain adjustments.
A “dividend equivalent” payment
is treated as a dividend from sources within the U.S. and such payments generally would be subject to a 30% (or a lower rate under
an applicable treaty) U.S. withholding tax if paid to a Non-U.S. Holder. Under Treasury regulations, certain payments (including
deemed payments) that are contingent upon or determined by reference to actual or estimated U.S. source dividends with respect
to certain equity-linked instruments, whether explicitly stated or implicitly taken into account in computing one or more of the
terms of such instruments, may be treated as dividend equivalents. However, this withholding on “dividend equivalent”
payments, if any, will not apply to equity-linked instruments issued before January 1, 2017. If any payments are treated as dividend
equivalents subject to withholding, we (or the applicable paying agent) would be entitled to withhold taxes without being required
to pay any additional amounts with respect to amounts so withheld.
As discussed above, alternative characterizations
of the notes for U.S. federal income tax purposes are possible. Should an alternative characterization, by reason of change or
clarification of the law, by regulation or otherwise, cause payments as to the notes to become subject to withholding tax, we will
withhold tax at the applicable statutory rate. As discussed above, the IRS has indicated in the Notice that it is considering whether
income in respect of instruments such as the notes should be subject to withholding tax. Prospective Non-U.S. Holders of the notes
should consult their own tax advisors in this regard.
U.S. Federal Estate Tax. Under current
law, while the matter is not entirely clear, individual Non-U.S. Holders, and entities whose property is potentially includible
in those individuals’ gross estates for U.S. federal estate tax purposes (for example, a trust funded by such an individual
and with respect to which the individual has retained certain interests or powers), should note that, absent an applicable treaty
benefit, a note is likely to be treated as U.S. situs property, subject to U.S. federal estate tax. These individuals and entities
should consult their own tax advisors regarding the U.S. federal estate tax consequences of investing in a note.
Backup Withholding and Information Reporting
Please see the discussion under “U.S.
Federal Income Tax Considerations — Taxation of Debt Securities — Backup Withholding and Information Reporting”
in the accompanying prospectus for a description of the applicability of the backup withholding and information reporting rules
to payments made on the notes.
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