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Index-linked Bond USA

Basic and Extra

The global economy and the corporate earnings are settling to a more stable growth track after the swift initial rise after the recession. This trend supports growth in the equity markets globally. However, investors must be prepared for increased volatility as the stimulus policy is gradually being scaled down.

The US economy is generally considered the most dynamic in the world and its capacity to recover has again surprised many economists. Measured in terms of GDP, the US economy has already returned to pre-crisis level. In the beginning of the year the growth estimates were upgraded substantially and during the spring the mainly positive flow of news has continued. Growth is anticipated to accelerate this year and corporate earnings are reaching new records. Supported by growth, both corporate sales and earnings will also continue to grow in the future.

Many things speak in favour of the appreciation of the US dollar (USD). We expect the Federal Reserve (the Fed) to begin robust rate hikes at the end of the year. According to our forecast, Fed's key rate will rise to 3.5% in two years and during the same period of time the key rate in the euro area will rise to 2.25%. The interest rate spread between the currencies will increase the attractiveness of USD denominated bonds, which in turn will strengthen the USD. Furthermore, it will be easier for the US to attract foreign capital than for many of the euro countries. In other words, for debt investors the US debt is not as big a problem as the euro area debt.

Index-linked Bond USA

The index-linked Bond USA is a bond issued by Nordea Bank Finland Plc. The maturity is approximately five years and the yield is based on the performance of the S&P 500 equity index. In addition to the performance of the equity index, the yield payable on the bond is affected by the USD performance in relation to the EUR. The appreciation of the USD will improve the yield payable on the investment. In the best case scenario from the investor's point of view the prices of US shares go up and the weak USD appreciates. The exchange rate is of essential importance only if the share prices in June 2016 are on a higher level than their starting level. If the prices go down, the nominal capital of the bond is returned to the investors in euros.

The bond comes with two alternatives: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 80% of the increase in the value of the index in accordance with the terms of issue. The alternative Extra suits risk-tolerant investors who seek a higher return. Its yield at maturity is 150% of the increase in the value of the index in accordance with the terms of issue.

The increase in the value of the index is calculated as the difference of the S&P Index initial price and final price. The initial price is the S&P Index closing price on 6 July 2011. The final price is the average of the quarterly closing values of the reference asset from 18 June 2014 to 18 June 2016.

Risks of the investment

The investor is faced with foreign exchange –risk, i.e. the risk that the dollar would weaken against the euro during the investment period. The index-linked bond involves a risk of the issuer Nordea Bank Finland Plc’s repayment ability. The risk relating to the issuer's repayment ability means the risk that the issuer becomes insolvent and cannot fulfil its commitments, for example, in the event of the issuer's bankruptcy. The investor can lose the invested capital and the possible yield partially or in full in the event of the issuer's insolvency. Nordea has a credit rating Aa2 by Moody's and AA- by Standard & Poor's. The bond is unsecured.

The investor can lose the invested capital for the part exceeding the nominal value either partially or in full. In the Extra bond this premium risk is about 10%, as its subscription price is about 110%. The investor can also sell Index-linked Bond USA on the secondary market before maturity. The repurchase price may be above or below the bond’s nominal value. In normal market conditions Nordea quotes a secondary market price for the bond on all banking days when banks are generally open in Finland.

Reference asset

USA
Standard and Poor´s 500 (S&P 500)
The S&P 500 Equity Index reflects the performance of the share prices of the five hundred largest companies in the United States. The index is capitalisation weighted. Further information available on the Internet at www.sandp.com.

The performance of the S&P Index May 2001 - May 2011
Starting level indexed at 100%. The premium, if any, the averaging of the final price in accordance with the issue terms and the participation rates are not taken into account in calculating the index performance. The yields in accordance with the issue terms can deviate significantly from the index performance. Source: Bloomberg.

The presented figures describe previous yield or performance, and no reliable assumptions on future yield or value can be made based on them.

Yield table: Index-linked Bond USA Basic

Change in the reference index according to the terms of the issue	Return when exchange rate unchanged, USA Basic		US Dollar strenghtens to 1.1		US Dollar weakens to 1.7
	Issue price ca.	100%
	Participation rate	80%
	Value at maturity	Ret. pa.	Value at maturity	Ret. pa.	Value at maturity	Ret. pa.
100%	180%	12.5%	203%	15.2%	166%	10.7%
75%	160%	9.9%	177%	12.1%	150%	8.4%
50%	140%	7.0%	151%	8.6%	133%	5.9%
25%	120%	3.7%	126%	4.7%	117%	3.9%
0%	100%	0.0%	100%	0.0%	100%	0.0%
-25%	100%	0.0%	100%	0.0%	100%	0.0%
-50%	100%	0.0%	100%	0.0%	100%	0.0%

The initial value 1.41(17 May 2011) has been used as the start value for the EUR/USD exchange rate in the example.

Yield table: Index-linked Bond USA Basic

Change in the reference index according to the terms of the issue	Return when exchange rate unchanged, USA Extra		US Dollar strenghtens to 1.1		US Dollar weakens to 1.7
	Issue price ca.	100%
	Participation rate	80%
	Value at maturity	Ret. pa.	Value at maturity	Ret. pa.	Value at maturity	Ret. pa.
100%	250%	17.8%	292%	21.6%	224%	15.3%
75%	213%	14.1%	244%	17.3%	193%	11.9%
50%	175%	9.7%	196%	12.3%	162%	8.1%
25%	138%	4.6%	148%	6.1%	131%	3.6%
0%	100%	-1.9%	100%	-1.9%	100%	-1.9%
-25%	100%	-1.9%	100%	-1.9%	100%	-1.9%
-50%	100%	-1.9%	100%	-1.9%	100%	-1.9%

The initial value 1.41(17 May 2011) has been used as the start value for the EUR/USD exchange rate in the example.
*The yield calculation includes the 10% premium.

Simulated performance history

The historical value at maturity, had the investment been made in accordance with the issue terms in January 2001–May 2006, and the yield on a direct investment in the index. The investment would have matured January 2006– May 2011 (weekly observations). The yield on a direct investment has been calculated using one initial and closing value without averaging the final value.

	Average value at maturity	Average annual return
„Basic“	110,2 %	2,0 %
„Extra“	119,2 %	1,6 %*
Direct investment	112,8 %	2,4 %

*The yield calculation includes the 10% premium.

Issue terms in brief

Issuer	Nordea Bank Finland Plc; credit ratings Aa2 (Moody’s) and AA- (Standard & Poor’s).
Loan number and ISIN	USA Basic 4518 A FI4000024831 USA Extra 4518 B FI4000024849
Issue date	27 May 2011
Maturity date	1 July 2016
Subscription period	27 May - 1 July 2011
Places of subscription	Nordea Bank Finland Plc and its branches in the Baltics
Subscription price	Basic 4518A: variable, about 100% Extra 4518B: variable, about 110%
Minimum subscription	1,000 euros
Yield at maturity	Basic 4518A: 80% of the rise of the index value in accordance with the issue terms Extra 4518B: 150% of the rise of the index value in accordance with the issue terms In addition to the reference asset performance, the development of EUR/USD exchange rate influence the possible return (see loan terms).
Reference asset	S&P 500 Equity Index (Bloomberg: SPX Index)
Initial price	The closing price of the reference asset on 6 July 2011
Final price	Average of the reference asset's quarterly closing values from 18 June 2014 to 18 June 2016.
Repayment of capital	The issuer Nordea Bank Finland Plc repays the nominal capital of the bonds in full at maturity irrespective of the performance of the index. The bonds involve a risk of the issuer’s repayment ability and of losing the premium (in the Extra bond about 10%).
Security	The bonds are unsecured.
Structuring cost	The subscription price includes a structuring cost of about 0.9% p.a. (see the terms of issue for more details). No separate subscription or management fee is charged on the bonds.
Secondary market	In normal market conditions the issuer Nordea Bank Finland Plc quotes a repurchase price for the bonds, which may be lower or higher than the nominal value.
Taxation	No tax is deducted at source for non-residents in Finland.
Safe custody	Free of charge with Nordea Bank Finland Plc.
Cancellation of the issue	The issuer has the right to cancel the issue based on changes in the economic circumstances or if the total amount of subscriptions is low, or if something should occur that the issuer considers might endanger the issue.
Listing	An application will be made for the bonds to be listed on NASDAQ OMX Helsinki.

Loans 4518A (Index-linked Bond USA Basic) and 4518B (Index-linked Bond USA Extra) under the MTN programme (a medium term note programme reported to the Finnish Financial Supervisory Authority from Sweden in accordance with the Prospectus Directive) of Nordea Bank AB (publ) and Nordea Bank Finland Plc, dated 25 May 2011. The bond-specific terms and the base prospectus are available at the places of subscription. Read the issue terms and the base prospectus before subscription. The Swedish version of the terms is binding and thus applied in possible dispute situations.

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S.

The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets on the date of this document and are subject to change without notice. This document is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

This document may not be copied, distributed or published for any purpose without the prior consent in writing of Nordea Markets.

Market review - Growth in the US accelerates

In the United States GDP has returned to its pre-crisis level. In Q1 2011, growth was a couple of per cent compared to Q4 in terms of annual growth. After this, the growth will accelerate in Q2 and continue strongly for the rest of the year.

Private consumption continues to grow as a result of a decrease in the savings ratio and tax reductions. The danger hidden here is that the positive impact of the tax reductions is eaten by the increase in the price of raw materials this year. However, this would mean that the price of energy and food would go up almost ten per cent. The employment data also supports growth in private consumption.

In April about 270,000 jobs were created in the private sector in addition to the 230,000 created in March and we believe that the positive employment trend will continue this year. This enables the unemployment rate to continue decreasing during the rest of the year. The not so strict credit conditions of the banks have also supported the creation of new jobs in the private sector. Growth of productivity in US companies has been fast as unused industrial capacity has been mobilised. Now the situation has changed and the slower growth in productivity supports the labour market.

The indebtedness of the federal state has caused a lot of discussion and Standard & Poor's has warned that the rating of US government bonds will decrease from AAA to AA. For the markets this does not mean much, as they are still the most secure investment alternative in dollars. In addition, the continuous incurring of debt has not raised the US net debt as the US has a lot of equity investments abroad.

We do not consider it very likely that a political consensus about a significant tightening of financial policy would be reached in 2011 - 2012 with the exception of scaling down the present resuscitation measures next year (tax cuts and longer than average unemployment benefits.)

Monetary policy is probably the most important tool in tightening the economic policy this and next year. Tightening will decrease the danger of accelerating inflation and of new bubbles. However, we do not expect the first rate hike before December this year. The Fed will probably signal the coming rate hike in the autumn, maybe in August or September. The banks have huge cash surpluses and the prevailing interest rate level is low. That is why we expect the Fed to act fairly aggressively when it finally decides to normalise the interest rate level. We anticipate that the key rate will rise to 3.5% within the next two years. The rate hikes will probably strengthen the USD against the EUR.

Sources: Nordea Economic Research