1. PROtected Structured PERmal Notes
Capital Guaranteed Product linked to the Permal FX, Financials and Futures Fund
The Safe Way to Play Hedge Funds
PROSPER Notes
December 2005

2. Contents
The Premise
Permal… a “pioneer”
The Structure
Contact us

3. The premise

4. Facts and Problems
Institutional and Retail Clients are attracted to hedge funds by the promise of:
Diversification benefits
Better and different risk/return profiles from their existing investments
But they are put off, to some extent, by these problems:
The actual and perceived risks (blow-up, black box, no liquidity)
Regulations that discourage direct investments in hedge funds
Various tax and administrative issues

5. The Solution
Capital guaranteed products linked to an alternative investment funds have been seen as the answer to these problems
They eliminate the risk by offering Noteholders a 100% principal protected vehicle enabling them to benefit from most of the upside of a hedge fund portfolio
Capital guaranteed products overcome the regulatory hurdles by optimizing allocation to hedge funds through an unsubordinated EMTN (meeting regulators’ concerns for investor protection)

6. Characteristics Notes (EMTN) Issued by Royal Bank of Scotland
Structured by Merrill Lynch International (also Calculation Agent)
Maturity of 5 years, in USD
100% capital guaranteed at maturity
Linked to the performance of the Permal FX, Financials and Futures Fund, a fund of alternative investment funds, with emphasis on directional and macro strategy managers
CPPI mechanism:
100% initial exposure to the fund on day one (subject to interest rates)
Potential leverage up to 200% exposure
Multiplier of 5
Coupon payments: on each anniversary year, the Note pays a coupon equal to the positive performance of the CPPI, capped at 6% on that year.

7. Permal… a “pioneer”

8. Permal… a “pioneer”
A pioneer in the multi-manager hedge fund industry…..
One of the pioneers in multi-manager funds since 1973
“Multi-manager funds are all the rage these days. Permal pioneered the concept and is still one of the best at it.”
Solid long-term performance
$100,000 invested in original fund at its inception in 1973 is worth $16.1 million today (over 5 times the S&P 500)
Stable and experienced management team, providing….
Access to highly regarded industry managers
Ongoing selection and monitoring process
Risk management / dynamic asset allocation
Permal FX, Financials and Futures Fund provides access to some of the best CTA and macro trading managers of the industry
Hedge Funds Review
November 2002
Financial Times
June 2003
Forbes, February 2002

9. Fund’s Main Characteristics
Permal… a “pioneer”
Permal FX, Financials and Futures at a glance
Fund’s Main Characteristics
Performance
Manager Permal IM
Strategy Futures/CTA
Country focus None
Inception date February 1992
Currency USD
Current size >4 billion
Redemption frequency Monthly / 20 days*
* Notice period
YTD performance (09/05) % p.a.
Performance since 01/ % p.a.

10. Why Permal?
Qualitative rationale
The Fund manager benefits from the recognition of the largest institutional clients worldwide.
The Fund is investing in some of the best hedge funds, which are often closed.
Quantitative rationale
The Fund has been consistently performing over the past years, with an annualised return above of 8% almost every calendar year.
The volatility of the Fund has consistently been below 6% p.a., thanks to the diversification between managers.
The Fund is therefore an optimal candidate for a CPPI-type strategy

11. The Structure

12. Protected Permal FX Notes
The CPPI Strategy:
The PROtected Structured PERmal Notes use a dynamic CPPI (Constant Proportion Portfolio Insurance) strategy. The objectives are to:
Capture most of the upside in rising markets
Preserve the capital in declining markets
The Notes are linked to an Index which follows an algorithmic, pre-defined asset allocation mechanism. The Index allocates assets between the Market Asset Units (i.e. the Permal FX Fund) and Reserve Asset Units (Cash). The Cushion is defined as the difference between the Index and the present value of 100% at Maturity.
As the Cushion increases…
The Index is adjusted so that it consists of more units of the Fund, thus allowing the investor to profit increasingly from the Fund gains.
As the Cushion decreases…
The Index is adjusted so that it consists of more units of Reserve Assets. This reduces the exposure of the investment to further decreases in the Fund.

13. Protected Permal FX Notes
The CPPI Strategy:
The PROtected Structured PERmal Notes provide a 100% Protection with a dynamic allocation process.
Fund Rising
Higher investment
in Fund
Time
Fund
Fund Falling
in Cash

14. Protected Permal FX Notes
Back-testing:
Using the historical performance of Permal FX during the last 5 years and the current yield curve, the PROtected Structured Permal Notes would have performed by 25.3% at maturity, and would have delivered four coupons of 6% each year (2001, 2002, and 2004).

15. Protected Permal FX Notes
The PROtected Structured PERmal Notes provide the investor with a dynamic exposure to the Permal FX Fund, with a full capital protection at Maturity.
Characteristics:
Maturity 5 years
Currency USD
Protection 100% at Maturity
Initial Exposure 100% (indicative, to be determined on strike date)
Maximum Exposure 200%
Coupon Annual Coupon linked to the performance of the CPPI, cap at 6%
Strategy Constant Proportion Portfolio Insurance Strategy:
If Permal FX performs well, exposure to the Fund is dynamically increased
If Permal FX performs badly, exposure to the Fund is dynamically decreased
Targets Absolute Returns, that are uncorrelated to equity and bond markets
Expected low volatility of the PROtected Structured PERmal Notes, with annual performance- linked coupons (similar to bond investments).

16. Contact us

17. Merrill Lynch and Fund Derivatives
National Bank of Bahrain:
Riyad Yousif
Phone
Fax

18. Disclaimer
The information presented herein is intended only for discussion purposes. Material terms of the investment generally described herein are subject to change prior to the consummation of the transaction. Any potential investor will be provided with offering materials for the investment and an opportunity to review the documentations relating to the investment. Prospective investors should review the offering materials, including the risk factors, before making a decision to invest. In addition, prospective investors should rely only on the final offering documentation relating to this Note in making their investment decision.
These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security and may not be relied upon by any prospective investor in evaluating the merits of investing in the securities.
Distribution of this information to any person other than the person to whom this information was originally delivered and to such person’s advisors is unauthorized and any reproduction of these materials, in whole or in part, or the divulgence of any of their contents, without the prior consent of National Bank of Bahrain in each such instance.
Certain information simulations in this document result from estimations made by Merrill Lynch International on the basis of the terms of the structure, the market conditions at such time (and historical date can in no way be considered as a guarantee of future performance).
The performance shown is hypothetical and shows how the Notes would have performed based upon a retroactive application of its investment strategy. These performance results do not represent the performance of actual Notes, but were achieved by means of the retroactive application of a “back-tested” model. Therefore, the returns presented must be considered as no more than an approximate representation of the objectives of the Notes, not as indicative of how they would have performed in the past or will in fact perform in the future.