CLeaR Bonds
Another Alternative For Long Term Investing
Ideal for Foundations, Endowments, Non-Profits, Public and Private Pension Plans
And Insurance Company Investment Portfolios

Zero Coupon Bonds typically offer predictable yields and investment grade safety. Zero-coupon bonds allow you to lock in a fixed rate of return and provide a true compounding rate of return over a predetermined period. Compound interest can have a profound effect on the growth of your assets over time if held to maturity. In addition, zero-coupon bonds can add a degree of certainty to your overall portfolio.

How They Work

A zero-coupon bond provides compounded investment growth instead of paying regular interest. Because of this, you essentially earn interest on interest and eliminate the need of reinvesting regular coupon payments. Also, with zeros there is a predetermined yield to maturity. Depending on the maturity, the value of a zero-coupon bond may double, triple or even increase five times over its lifetime if held to maturity. For example, the table provided on the next page illustrates the growth of $1,000,000 when invested in zero-coupon bonds based on various maturities and yields.

Types of Zero-Coupon Bond

Due to their popularity, there is a wide variety of zero-coupon bonds available in the marketplace offering a wide variety of returns. They include zero coupon bonds secured by the US government, municipalities and corporations and real estate.

Benefits

Zero-coupon bonds offer a number of attractive benefits, including:

• Capital appreciation: Compound interest is a simple formula for long-term growth success.
• Predictable rates of return: While there are no guarantees with any investment, you generally know how much money you will receive at maturity due to the backing of the investment by the state or local government.
• Elimination of re-investment risk: Zero-coupon bonds provide a true compounding rate of return without having to re-invest at various intervals. The compounding rate is set at the time of purchase.

Tax Considerations

Even though you do not receive regular interest, the accrued annual growth is still taxable each year as ordinary income (except for tax- deferred and municipal zeros). For this reason, zero-coupon bonds are often used in tax-deferred accounts such as defined benefit plans and tax-exempt entities such as foundations and endowments.
Chart 1 is a standard compound interest chart showing returns for $1 million initial investment to identify the maturity value of $1 million invested in zero-coupon bonds representing different compounded rates for different maturities. This is for illustrative purposes only and is not deemed a solicitation to invest.

Laddering Zero-Coupon Bonds To Create Predictable Long Term Cash Flow

By purchasing zero-coupon bonds of different maturities, it is possible to construct a "laddered" portfolio of maturities so that it creates a predictable future cash flow.

Who Uses Laddered Zero-Coupon Bond Portfolios?

This is particularly attractive for tax-exempt organizations like foundations and endowments that need to be able to match future liabilities and expenses with reliable income. Similarly, insurance companies and public and private pension plans use laddered zero-coupon bonds to match income to future liabilities.

Chart 2 below illustrates an example of laddering "zero's" with different maturities to create a predictable cash flow. This is purely for illustrative purposes and is not deemed a solicitation to invest nor a reference to any particular product, but rather to illustrate how a "laddered" portfolio works.

How a "Laddered Zero-Coupon Bond "Portfolio"
Provides Predictable Income Over Many Years
@ a 10% Annual Interest Rate

CLeaR Bond: An Alternative for a Laddered Zero-Coupon Bond Portfolio

What is a CLeaR Bond?

Pacific Specialty Financial, Inc. has created the term CLeaR Bond to define a zero-coupon bond that is a loan to the owner of commercial real estate that is net leased to a single credit tenant. These tenant obligations are similar to bond obligations in that the corporate tenant's obligation to make rental payments is absolute. These rental payments fully repay the senior loan. By creating a laddered series of CLeaR Bonds, Pacific Specialty can provide the benefits of the "laddered" structure shown in Chart 2. This is purely for illustrative purposes and is not deemed a solicitation to invest nor a reference to any rate of return, but rather to illustrate how a "laddered" portfolio works.

How Does a CLeaR Bond Work?

CLeaR Bonds have two parts. Part of the repayment is guaranteed by an AA rated insurance company. An additional repayment is based on the value of the underlying real estate. The guaranteed part is designed to yield more than the bonds issued by the very same company or government agency tenant. Comparatively, the overall yield is designed to provide a substantial premium. CLeaR Bond investors may choose to participate in either or both parts, based on their preference.

Why Were CLeaR Bonds Designed?

The objective of a CLeaR Bond is to provide solid returns and safety to the investor due to the unique nature of financing for commercial properties that are net leased to a single investment grade rated company or government agency (Credit Tenant Lease or CTL financing). Owners of these properties can obtain highly favorable senior financing based on the strength of the tenant and the lease structure. In order to obtain this financing, these owners accept a fully amortizing loan, which creates taxable income for them. Loans to these owners as part of the CLeaR Bond program provide them immediate funding and offset part of their tax liability. Today, there are tens of billions of dollars of such properties creating a significant market opportunity.

What Risks Are Associated With CLeaR Bonds?

CLeaR Bonds have been designed to be lower risk. To protect the CLeaR Bond lender, the ownership of each property must be a single purpose bankruptcy remote trust with an institutional trustee. A significant portion of the real estate value is guaranteed by a AA rated insurance company. Valuation typically is based on very conservative underwriting, which recognizes only 50% of the current value without any recognition being given to long term inflation possibilities. Consequently, the property could lose half its current value and still fully cover the scheduled repayment. By contrast, the property owner does not enjoy this margin of safety. Only general purpose, well located commercial real estate that is net leased to a single investment grate rated company or government agency can qualify. Over time, the value of the real estate provides safety in the knowledge that the future payoff will be fully collateralized even if the property values fell by 50% from current valuation.

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This information is intended for accredited investors only and is not to be distributed to the public

The opinions referenced are as of the date of publication. Alternative investments are not for everyone and entail increased risk of loss that is different from more traditional investments. This information is for educational or informational purposes only and should not be construed in any way as an offer, an endorsement, investment advice or a solicitation to buy or sell a security.

Past performance is not a guarantee of future returns. There is risk of loss as well as the opportunity for gain when making any investment. In addition to liquidity, one risk associated with structured products is the credit quality of the issuer. Although the cash flows are derived from other sources, the products themselves are legally considered the issuing financial institution's liabilities. They are typically not issued through bankruptcy-remote third party vehicles in the way that asset-backed securities are. The vast majority of structured products are from high investment grade issuers only. Another consideration is pricing transparency. There is no uniform standard for pricing, making it harder to compare the net-of-pricing attractiveness of alternative structured products offerings than it is, for instance, to compare the net expense ratios of different mutual funds or commissions among broker-dealers. Many structured products issuers work the pricing into their option models so that t no explicit fee or other expense to the investor. On the other side, this means that the investor cannot know for sure what the implicit costs are.