Bank of America's Stars tied to S&P 500 offer attractive return in flat or slightly up market

By Emma Trincal

New York, July 12 - Bank of America Corp.'s upcoming 0% Strategic Accelerated Redemption Securities due January 2012 linked to the S&P 500 index offer a digital type of payout if the market does not decline after six months. The return would outperform the S&P 500 in a sluggish but positive equity market, sources said.

If the index closes at or above its initial level on the observation date in January 2012, the notes will be called at par of $10 plus an annualized call premium of 10% to 18%, according to an FWP filing with the Securities and Exchange Commission.

The actual call premium paid at maturity will be 5% to 9%, and its exact amount will be determined at pricing.

If the notes are not called, the payout at maturity will be par plus the index return on the observation date, which will be negative.

Digital payout

"This is pretty attractive. If the market goes up only by a small amount, even if it's just up fractionally, you get a nice coupon," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

"This is the advantage of a digital payout: You get an attractive fixed return even if the underlying grows only moderately."

Minor negatives

Wright said that he saw two negatives in the notes: one pertaining to taxation and the other to the vague definition of the call premium.

"The six-month [tenor] takes away the long-term capital gains treatment from a tax standpoint," he said.

"In addition, the call premium amount is defined as a big range from 5% to 9%. It's somewhat of a negative."

No protection

But Wright's main objection was the lack of downside protection.

"I'm not really crazy buying notes that are fully exposed to losses. I would like it much better with a buffer," he said.

Market expectations

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that he liked the notes because they fit his general outlook on the market.

"We think the market will end at around 10%, so we have another 5% to move. Based on that, your digital note gives you the 5% right away even if we don't move up that much. So I think it's valuable," he said.

For Pool, the absence of a buffer was not such a concern.

"We always like some protection. However, it's only going six months. So we're willing to give up some protection for a short period, especially when we believe that the economy will stay relatively strong for the rest of the year," he said.

The notes will price in July and settle in August.

Bank of America Merrill Lynch is the agent.

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