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Index-linked bond EuroDollar

Yield ir Extra

Euro’s exchange rate against the dollar is at its highest since the adoption of the euro. The historically cheap dollar is expected to strengthen in the coming years along with the recovering US economy. With index-linked bond EuroDollar you can benefit from the possible appreciation of the dollar in a capital protected way.

At present one euro will give you a record-number of dollars. The present rate of the euro against the dollar is about 1.6 whereas the exchange rate at the time the euro was adopted in January 1999 was about 1.2. Dollar was at its highest in the autumn of 2000 (one euro was 0.83 dollars). From that time the euro has strengthened by almost as much as 100% up to date. The main reason for the recent weakness of the dollar has been the economic development in the US, and the concerns over a possible recession. We believe that the US dollar will continue to be a subject for pressure in its relation to the euro in the near future. We expect the dollar to appreciate in the longer term when the US economy starts to gradually recover. In our view, the balance between the euro and the dollar is in the range 1.15 - 1.20.

With index-linked bond EuroDollar you can benefit from the possible appreciation of the dollar against the euro safely and cost-effectively. Index-linked bond EuroDollar has two alternatives: Yield and Return. The Yield bond offers secure annual cash flow to cautious investors. It also offers a possibility for a higher annual coupon in the years 2 -5 if the limit condition is fulfilled. The limit condition is that on the annual observation date the EUR/USD rate is below the limit value determined on the starting day. The Extra option suits investors who tolerate limited risk and seek a higher return. This option offers a 22% annual coupon for the years the limit condition is fulfilled. If the limit condition is not fulfilled, the investor loses the amount paid above par value (about 10%).

Yield calculation

EuroDollar Yield: In the first year a fixed interest of 4% is paid on EuroDollar Yield In the years 2 - 5 the yield is at least 1.75%. If the limit condition is fulfilled, the yield is 7%.

EuroDollar Extra: The annual interest paid on EuroDollar Extra is 22% for the years in which the limit condition is fulfilled.

Limit condition: the EUR/USD rate is below the limit value on the annual observation date.

Limit value: about 0.90*starting date’s exchange rate. For example: if the exchange rate is 1.55, the limit value will be about 1.395. The limit value is confirmed on 26 June 2008.

In both alternatives the maturity is approximately five years, and the nominal capital is repaid at maturity irrespective of the performance of the reference index. The index-linked bonds involve a risk of the issuer’s repayment ability. The investment can also be sold before maturity, in which case the repurchase price may be above or below the nominal value depending on market performance. Sales and purchases on the secondary market can be made once a month.

In the example below, forecasts of the EUR/USD rate for the years 2009 - 2012 have been used, and the yield on the investment is realised if the forecasts are realised. (If the exchange rate was 1.55, the limit value would be 1.395). These consensus forecasts are an average of 41 international banks’ and financial institutions’ evaluations of the EUR/USD exchange rate for the years in question (source Bloomberg)

EUR/USD market-estimates 2009–2012 (Source: Bloomberg)		EuroDollar Yield Issue price about 100% Min. annual yield 1.75% Yield p.a if limit condition is met 7.0%	EuroDollar Extra Issue price about 110% Min. annual yield - Yield p.a if limit condition is met 22.0%
Year	EUR/USD	Annual yield	Annual yield
2009	1.40	4%**	0%
2010	1.36	7%	22%
2011	1.37	7%	22%
2012	1.34	7%	22%
2013*	1.34*	7%	22%
		Effective annual yield 6.3%	Effective annual yield 13.5%

* At the time of issuance, no consensus forecast for 2013 is available.
** Fixed yield of 4% in year 1.

Historical performance of the currency pair EUR/USD in 1/1999 - 4/2008 (Source: Bloomberg)

The presented figures apply for previous yield or value performance and no reliable assumptions on future yield or value development can be formed based on them.

Issue terms in brief

Issuer	Nordea Bank Finland Plc
Issue date	12 May 2008
Maturity date	20 June 2013
Subscription period	12 May - 19 June 2008
Places of subscription	Nordea Bank Finland Plc and its branches in the Baltics.
Subscription price	Yield 4131A: Variable, about 100% Extra 4131B: Variable, about 110 %
Minimum subscription	EUR 1,000
Annual yield	Yield 4131A: 1st year: Fixed at 4% Years 2 - 5: 7% p.a., if the limit condition is fulfilled, at least 1.75% p.a. Extra 4132B: Years 1 - 5: 22% p.a., if the limit condition is fulfilled, otherwise 0% p.a.
Limit condition	The quotation of the EUR/USD exchange rate on the annual observation date is below the limit barrier.
Limit barrier	about 0,9 * official EUR/USD fixing 24th June 2008.
Reference index	The currency pair EUR/USD (BB: EUCFUSD Index)
Starting value	The official quotation of EUR/USD on 24th June 2008
Annual observation date	Annually on 4 June. The first observation date is 4 June 2009 and the last 4 June 2013.
Annual payment days	Annually on 20 June. The first payment date is 20 June 2009 and the last 20 June 2013.
Repayment of the principal	As the issuer Nordea Bank Finland Plc will repay the nominal capital of the index-linked bonds in full at maturity irrespective of the performance of the reference index. The index-linked bonds involve a risk of the issuer’s repayment ability.
Early redemption	Early redemption is possible only if a hedging instrument has to be dissolved due to amendments to law or legal praxis.
Security	The index-linked bonds are unsecured.
Structuring cost	The subscription price includes a structuring cost, which is about 0.8% p.a. (see the terms of issue). No separate subscription or management fee is charged on the index-linked bonds.
Secondary market	The issuer Nordea Bank Finland Plc quotes a repurchase price for the index-linked bonds, which may be lower or higher than the nominal value.
Taxation	No tax is deducted at source for non-residents in Finland.
Cancellation of the issue	The issuer is entitled to cancel the issue based on changes in economic conditions, if the total amount of subscriptions is low or something occurs which the issuer considers might endanger the issue.

An application will be made for the index-linked bonds to be listed on OMX Nordic Exchange Helsinki.

Index-linked bonds 4131A and 4131B under the Medium-Term Note programme (a index-linked bond programme reported to the Finnish Financial Supervision Authority from Sweden in accordance with the Prospectus Directive) of Nordea Bank AB (publ) and Nordea Bank Finland Plc dated 7 June 2007. The index-linked bond-specific terms are available at the places of subscription.

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 notice 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 reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

Market review

According to our view, the US economy will slow down for a longer period than previously anticipated, which will probably affect also the growth rate in the euro area. Export companies operating in the euro area have been caught in a tight spot as a consequence of the appreciating euro. So far the drive elsewhere has continued strong, although exports to the US have decreased. The headache of the export companies is made worse by the top appreciation of the euro, which in our view will continue to be strong for the most part of this year. The slowdown of the export markets which started in the US will probably not curb the euro area’s economy in earnest until the autumn. Although the attraction of the emerging economies supports the euro area considerably, we do not believe in the euro area’s own growth potential. The slowdown of exports plays a significant part in the slowing of the euro area. As a whole, the economy of the euro area is plunging into a decline although a proper recession will probably be avoided. It seems probable that recovery in the euro area is not likely until the end of 2009.

The ECB regards the present monetary policy setup as neutral. The key rate has been kept at over 4% for over 10 months, but the euro has appreciated considerably during that time, which has helped to ease inflationary pressures. In spite of this, prices have risen high above the ECB's target partly because of rises in the price of food and energy. We expect the ECB to keep the key rate unchanged at least until the end of Q1 2009. We believe that the central bank will cut the key rate by a total of about one percentage point in 2009, but not before the economy shows clear signs of slowing down, which will temporarily keep inflation at a more tolerable level. The euro is expected to start weakening against the dollar, when the ECB starts signalling rate hikes.

Taking the extension of the economic decline into account, we expect more rate hikes from the Fed. However, the Fed has indicated that it will cut rates at a slightly slower pace than before. We expect that the interest rates will decrease by a total of 0.75 percentage points to 1.5% by the end of this quarter. It seems likely that the Fed will not start to gradually normalise the rates until the economy shows clear signs of recovery. We believe this will happen earliest at the end of 2009. In the light of our expectations concerning the measures of the Fed and the ECB we believe that the dollar will continue to weaken in the near future. However, in the longer term we expect the dollar to appreciate when the US economy starts to show signs that the bottom has been reached.

Source: Nordea Economic Research