424B2 1 dp31264_424b2-26ii.htm PRODUCT SUPPLEMENT NO. 26-II
Product supplement no. 26-II
To prospectus dated November 14, 2011 and
prospectus supplement dated November 14, 2011
Registration Statement No. 333-177923
Dated June 22, 2012
Rule 424(b)(2)
Return Notes Linked to the JPMorgan ETF Efficiente 5 PR Index, with Variable Coupons Based on the Relative Performance of the JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index
 
General
·
JPMorgan Chase & Co. may from time to time offer and sell return notes linked to the JPMorgan ETF Efficiente 5 PR Index, with variable coupons that will be based on the relative performance of the JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index.  This product supplement no. 26-II describes terms that will apply generally to the notes, and supplements the terms described in the accompanying prospectus supplement and prospectus.  A separate term sheet or pricing supplement, as the case may be, will describe terms that apply to specific issuances of the notes, including any changes to the terms specified below.  We refer to such term sheets and pricing supplements generally as terms supplements.  If the terms described in the relevant terms supplement are inconsistent with those described in this product supplement or in the accompanying prospectus supplement or prospectus, the terms described in the relevant terms supplement will control.
·
The notes are unsecured and unsubordinated obligations of JPMorgan Chase & Co. Any payment on the notes is subject to the credit risk of JPMorgan Chase & Co.
·
The payment at maturity is linked to the PR Index as described below.  In addition, we will pay variable monthly coupons, if any, that will be based on the relative performance of the JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index, as described below.  The notes do not guarantee any Coupon Payment over the term of the notes.
·
For important information about tax consequences, see “Material U.S. Federal Income Tax Consequences” beginning on page PS-130 of this product supplement.
·
The notes will be issued in minimum denominations as specified in the relevant terms supplement, and integral multiples thereof, unless otherwise specified in the relevant terms supplement.
·
Investing in the notes is not equivalent to investing directly in the Indices, any of the Basket Constituents or any of the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.
·
The notes will not be listed on any securities exchange unless otherwise specified in the relevant terms supplement.
 
Key Terms
 
Indices:
The JPMorgan ETF Efficiente 5 PR Index (the “PR Index”) and the JPMorgan ETF Efficiente 5 TR Index (the “TR Index”).  We refer to the PR Index and the TR Index each as an “Index” and collectively as the “Indices.”
The PR Index is a notional dynamic basket that tracks the return of a portfolio of twelve exchange-traded funds (the “ETF Constituents”), without dividends reinvested, and the JPMorgan Cash Index USD 3 Month (the “Cash Constituent”), less a fee of 0.50% per annum that accrues daily.  We refer to the ETF Constituents and the Cash Constituent together as the “Basket Constituents.”  The ETF Constituents represent a diverse range of asset classes and geographic regions.
The TR Index tracks the same Basket Constituents and employs the same methodology as the PR Index, except that the level of the TR Index reflects the reinvestment of any dividends payable on the ETF Constituents.
Principal Amount:
As specified in the relevant terms supplement
Payment at Maturity:
Unless otherwise specified in the relevant terms supplement and subject to the impact of a commodity hedging disruption event, at maturity, in addition to the final Coupon Payment, if any, you will receive a cash payment for each note calculated as follows:
Principal Amount × (1 + PR Index Return) – Deduction Amount – Stub Dividend Amount
where the PR Index Return is determined with respect to the Final Valuation Date.  If the amount calculated above is less than zero, the payment at maturity will be $0.
You will lose some or all of your initial investment at maturity if (a) the level of the PR Index decreases between the pricing date and the Final Valuation Date, and any Coupon Payments are not sufficient to offset the negative effects of (i) the decrease in the level of the PR Index, (ii) the Deduction Amount and (iii) the Stub Dividend Amount or (b) the level of the PR Index increases between the pricing date and the Final Valuation Date, and the increase in the level of the PR Index and any Coupon Payments are not sufficient to offset the negative effects of (i) the Deduction Amount and (ii) the Stub Dividend Amount.
In the event of a commodity hedging disruption event, we may, in our sole and absolute discretion, accelerate the payment on your notes and pay you an amount determined in good faith and in a commercially reasonable manner by the note calculation agent.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event.”
continued on next page
Investing in the notes involves a number of risks. See “Risk Factors” beginning on page PS-5.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this product supplement no. 26-II,  the accompanying prospectus supplement and prospectus or terms supplement. Any representation to the contrary is a criminal offense.
 
The notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, nor are they obligations of, or guaranteed by, a bank.
June 22, 2012
 
 
 

 
Key Terms (continued):
Coupon Payments:
Unless otherwise specified in the relevant terms supplement, with respect to each Coupon Determination Date, the “Coupon Payment” per note payable on the following Coupon Payment Date will be calculated as follows:
Principal Amount × (1 + PR Index Return) × Monthly Dividend Rate
where the PR Index Return is determined with respect to the immediately preceding Coupon Determination Date and the Monthly Dividend Rate is determined with respect to that Coupon Determination Date, provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
In the event of a commodity hedging disruption event, the amount due and payable per note upon early acceleration will be the final payment on the notes, and no further Coupon Payments will be made.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event.”
Deduction Amount:
If applicable, an amount determined in the manner specified in the relevant terms supplement
Stub Dividend Amount:
If applicable, an amount determined in the manner specified in the relevant terms supplement.  Unless otherwise specified in the relevant terms supplement, the Stub Dividend Amount will reflect the value, as of the pricing date, of the notional reinvestment in the TR Index of any dividends on the ETF Constituents with an ex-dividend date from but excluding the Stub Coupon Determination Date to and including the pricing date.  We can give no assurance that the first Coupon Payment or the aggregate Coupon Payments you may receive will be sufficient to offset the Stub Dividend Amount.  For the avoidance of doubt, if the pricing date is a Re-Weighting Date, the Stub Dividend Amount will be equal to $0 per note.
PR Index Return:
Unless otherwise specified in the relevant terms supplement, with respect to the PR Index with respect to any relevant day:
Index closing level on that day – Initial PR Index Level
Initial PR Index Level
For the avoidance of doubt, the PR Index Return with respect to the Stub Coupon Determination Date will be calculated as follows:
Index closing level on the Stub Coupon Determination Date – Initial PR Index Level
Initial PR Index Level
Initial PR Index Level:
Unless otherwise specified in the relevant terms supplement, with respect to the PR Index, the Index closing level on the pricing date
Monthly Dividend Rate:
Unless otherwise specified in the relevant terms supplement, with respect to each monthly Coupon Determination Date:
(a) the Monthly Index Return of the TR Index with respect to that Coupon Determination Date minus
(b) the Monthly Index Return of the PR Index with respect to that Coupon Determination Date.
Notwithstanding the forgoing, If there are no dividends on the ETF Constituents with an ex-dividend date from but excluding the immediately preceding Coupon Determination Date to and including the current Coupon Determination Date, the Monthly Dividend Rate with respect to the current Coupon Determination Date will be equal to 0%, provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
Monthly Index Return:
Unless otherwise specified in the relevant terms supplement, with respect to an Index with respect to any monthly Coupon Determination Date:
Index closing level on that Coupon Determination Date – Index closing level on the immediately preceding Coupon Determination Date
Index closing level on the immediately preceding Coupon Determination Date
provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
Stub Coupon Determination Date:
Unless otherwise specified in the relevant terms supplement, the Stub Coupon Determination Date will be the Re-Weighting Date immediately preceding the pricing date, provided that if the pricing date is a Re-Weighting Date, the Stub Coupon Determination Date will be the pricing date.
Coupon Determination Dates:
Unless otherwise specified in the relevant terms supplement, (a) each Re-Weighting Date occurring from but excluding the pricing date to but excluding the Final Valuation Date and (b) the Final Valuation Date.  See “Re-Weighting Dates” and “Final Valuation Date” below.
Re-Weighting Dates:
As defined in the rules governing the Indices (the “Index Rules”).  Re-Weighting Dates occur once each month, typically near the beginning of the month.  As described in the Index Rules, Re-Weighting Dates are subject to postponement in the event of certain index market disruption events.  See “The JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index — Determining the Weights for the Basket Constituents” and “The JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index — Index Market Disruption Events.”
Coupon Payment Dates:
Unless otherwise specified in the relevant terms supplement, the third business day after each Coupon Determination Date, provided that the final Coupon Payment Date will be the maturity date.
Final Valuation Date:
As specified in the relevant terms supplement. The Final Valuation Date is subject to postponement in the event of certain market disruption events and as described under “Description of Notes — Postponement of the Final Valuation Date.”
Maturity Date:
As specified in the relevant terms supplement.  The maturity date of the notes is subject to postponement in the event of certain market disruption events and as described under “Description of Notes — Payment at Maturity.”

 
 
 

 

TABLE OF CONTENTS
 

 
 Page
 
Description of Notes
PS-1
Risk Factors
PS-7
Use of Proceeds and Hedging
PS-33
The JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index
PS-34
Basket Constituents of the Indices
PS-50
Background on the SPDR® S&P 500® ETF Trust
PS-50
Background on the iShares® Russell 2000 Index Fund
PS-56
Background on the iShares® MSCI EAFE Index Fund
PS-65
Background on the MSCI Indices
PS-68
Background on the iShares® Barclays 20+ Year Treasury Bond Fund
PS-78
Background on the iShares® iBoxx $ Investment Grade Corporate Bond Fund
PS-81
Background on the iShares® iBoxx $ High Yield Corporate Bond Fund
PS-87
Background on the iShares® MSCI Emerging Markets Index Fund
PS-93
Background on the iShares® JPMorgan USD Emerging Markets Bond Fund
PS-96
Background on the iShares® Dow Jones Real Estate Index Fund
PS-102
Background on the iShares® S&P GSCI™ Commodity-Indexed Trust
PS-106
Background on the SPDR® Gold Trust
PS-116
Background on the iShares® Barclays TIPS Bond Fund
PS-119
Background on the JPMorgan Cash Index USD 3 Month
PS-123
General Terms of Notes
PS-124
Material U.S. Federal Income Tax Consequences
PS-130
Plan of Distribution (Conflicts of Interest)
PS-134
Notice to Investors
PS-136
Benefit Plan Investor Considerations
PS-143
Annex A: The JPMorgan ETF Efficiente Total Return Index Series and ETF Efficiente Price Return Index Series Index Rules.
A-1

We have not authorized anyone to provide any information other than that contained or incorporated by reference in the relevant terms supplement, this product supplement no. 26-II and the accompanying prospectus supplement and prospectus with respect to the notes offered by the relevant terms supplement and with respect to JPMorgan Chase & Co.  We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you.  This product supplement no. 26-II, together with the relevant terms supplement and the accompanying prospectus and prospectus supplement, contains the terms of the notes and supersedes all other prior or contemporaneous oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, fact sheets, brochures or other educational materials of ours.  The information in the relevant terms supplement, this product supplement no. 26-II and the accompanying prospectus supplement and prospectus may only be accurate as of the dates of each of these documents, respectively.
 
The notes described in the relevant terms supplement and this product supplement no. 26-II are not appropriate for all investors, and involve important legal and tax consequences and investment risks, which should be discussed with your professional advisers. You should be aware that the regulations of Financial Industry Regulatory Authority, Inc., or FINRA, and the laws of certain jurisdictions (including regulations and laws that require brokers to ensure that investments are suitable for their customers) may limit the availability of the notes. The relevant terms supplement, this product supplement no. 26-II and the accompanying prospectus supplement and prospectus do not constitute an offer to sell or a solicitation of an offer to buy the notes in any circumstances in which such offer or solicitation is unlawful.
 
In this product supplement no. 26-II, the relevant terms supplement and the accompanying prospectus supplement and prospectus, “we,” “us” and “our” refer to JPMorgan Chase & Co., unless the context requires otherwise.
 
 
 

 
 
DESCRIPTION OF NOTES
 
The following description of the terms of the notes supplements the description of the general terms of the debt securities set forth under the headings “Description of Notes” in the accompanying prospectus supplement and “Description of Debt Securities” in the accompanying prospectus.  A separate terms supplement will describe the terms that apply to specific issuances of the notes, including any changes to the terms specified below.  Capitalized terms used but not defined in this product supplement no. 26-II have the meanings assigned in the accompanying prospectus supplement and prospectus and the relevant terms supplement.  The term “note” refers to each Principal Amount of our Return Notes Linked to the JPMorgan ETF Efficiente 5 PR Index, with Variable Coupons Based on the Relative Performance of the JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index.
 
General
 
The notes are unsecured and unsubordinated obligations of JPMorgan Chase & Co. that are linked to the JPMorgan ETF Efficiente 5 PR Index (the “PR Index”), with variable coupons that will be based on the relative performance of the PR Index and the JPMorgan ETF Efficiente 5 TR Index (the “TR Index”).  We refer to the PR Index and the TR Index each as an “Index” and collectively as the “Indices.”
 
The “ETF Constituents” means the exchange-traded funds (each an “ETF,” and collectively the “ETFs”) (or any successor or substitute ETF or index included in the Indices) composing the Indices.  As of June 22, 2012, the ETF Constituents were the SPDR® S&P 500® ETF Trust, iShares® Russell 2000 Index Fund, iShares® MSCI EAFE Index Fund, iShares® Barclays 20+ Year Treasury Bond Fund, iShares® iBoxx $ Investment Grade Corporate Bond Fund, iShares® iBoxx $ High Yield Corporate Bond Fund, iShares® MSCI Emerging Markets Index Fund, iShares® JPMorgan USD Emerging Markets Bond Fund, iShares® Dow Jones Real Estate Index Fund, iShares® S&P GSCI™ Commodity-Indexed Trust, SPDR® Gold Trust and the iShares® Barclays TIPS Bond Fund. The “Cash Constituent” means the JPMorgan Cash Index USD 3 Month (or any successor or substitute cash index included in the Indices).  The “Basket Constituents” means the ETF Constituents together with the Cash Constituent.
 
We refer to any ETF Constituent that tracks an equity or bond index or invests primarily in equity or debt securities as an “Equity/Bond ETF Constituent.”  We refer to any ETF Constituent that tracks a commodity index or invests primarily in commodities or commodity futures contracts as a “Commodity ETF Constituent.”  “Reference Index” means, with respect to a Basket Constituent that is an ETF, the index, if applicable, underlying that Basket Constituent.  “Reference Commodity” means, with respect to an ETF Constituent, each commodity, if applicable, underlying that ETF Constituent.
 
The notes are a series of debt securities referred to in the accompanying prospectus supplement and prospectus. The notes will be issued by JPMorgan Chase & Co. under an indenture dated May 25, 2001, as may be amended or supplemented from time to time, between us and Deutsche Bank Trust Company Americas (formerly Bankers Trust Company), as trustee.
 
The “Principal Amount” of each note will be an amount as specified in the relevant terms supplement.
 
The notes do not guarantee any return of principal at, or prior to, maturity.  At maturity you will receive a payment in cash, the amount of which will vary depending on the Principal Amount, the performance of the PR Index, the Deduction Amount and the Stub Dividend Amount.  In addition, we will pay variable monthly coupons, if any, that will be based on the relative performance of the PR Index and the TR Index, applied to the Principal Amount.  The notes do not guarantee any Coupon Payment over the term of the notes.  Any payment on the notes is subject to the credit risk of JPMorgan Chase & Co.
 
 
PS-1

 
 
The notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or by any other governmental agency, nor are they obligations of, or guaranteed by, a bank.
 
The notes are our unsecured and unsubordinated obligations and will rank pari passu with all of our other unsecured and unsubordinated obligations.
 
The notes will be issued in denominations as specified in the relevant terms supplement.  The notes will be represented by one or more permanent global notes registered in the name of The Depository Trust Company, or DTC, or its nominee, as described under “Description of Notes — Forms of Notes” in the accompanying prospectus supplement and “Forms of Securities — Book-Entry System” in the accompanying prospectus.
 
The terms of specific issuances of the notes will be described in the relevant terms supplement accompanying this product supplement no. 26-II.  The terms described in that document supplement those described in this product supplement and in the accompanying prospectus and prospectus supplement.  If the terms described in the relevant terms supplement are inconsistent with those described in this product supplement or in the accompanying prospectus or prospectus supplement, the terms described in the relevant terms supplement will control.
 
Payment at Maturity
 
The maturity date for the notes will be set forth in the relevant terms supplement and is subject to postponement if that day is not a business day or if the Final Valuation Date is postponed as described under “— Postponement of the Final Valuation Date” below.
 
Unless otherwise specified in the relevant terms supplement and subject to the impact of a commodity hedging disruption event, at maturity, in addition to the final Coupon Payment, if any, you will receive a cash payment for each note calculated as follows:
 
Principal Amount × (1 + PR Index Return) – Deduction Amount – Stub Dividend Amount
 
where the PR Index Return is determined with respect to the Final Valuation Date.  If the amount calculated above is less than zero, the payment at maturity will be $0.
 
You will lose some or all of your initial investment at maturity if (a) the level of the PR Index decreases between the pricing date and the Final Valuation Date, and any Coupon Payments are not sufficient to offset the negative effects of (i) the decrease in the level of the PR Index, (ii) the Deduction Amount and (iii) the Stub Dividend Amount or (b) the level of the PR Index increases between the pricing date and the Final Valuation Date, and the increase in the level of the PR Index and any Coupon Payments are not sufficient to offset the negative effects of (i) the Deduction Amount and (ii) the Stub Dividend Amount.
 
In the event of a commodity hedging disruption event, we may, in our sole and absolute discretion, accelerate the payment on your notes and pay you an amount determined in good faith and in a commercially reasonable manner by the note calculation agent.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event.”
 
If applicable, the “Deduction Amount” is an amount determined in the manner specified in the relevant terms supplement.
 
If applicable, the “Stub Dividend Amount” is an amount determined in the manner specified in the relevant terms supplement.  Unless otherwise specified in the relevant terms supplement, the Stub Dividend Amount will reflect the value, as of the pricing date, of the notional reinvestment in the TR Index of any dividends on the ETF Constituents with an ex-dividend date from but excluding the Stub Coupon Determination Date to and including the pricing date.  We can give no assurance that the first Coupon Payment or the aggregate Coupon Payments you may receive will be sufficient to offset the Stub Dividend Amount.  For the avoidance of doubt, if the pricing date is a Re-Weighting Date, the Stub Dividend Amount will be equal to $0 per note.
 
 
PS-2

 
Unless otherwise specified in the relevant terms supplement, with respect to the PR Index with respect to any relevant day, the “PR Index Return” will be calculated as follows:
 
PR Index Return
  =  
Index closing level on that day – Initial PR Index Level
Initial PR Index Level
 
For the avoidance of doubt, the PR Index Return with respect to the Stub Coupon Determination Date will be calculated as follows:
 
PR Index Return
  =  
Index closing level on the Stub Coupon Determination Date
 – Initial PR Index Level
Initial PR Index Level
 
Unless otherwise specified in the relevant terms supplement, the “Initial PR Index Level” is, with respect to the PR Index, the Index closing level on the pricing date.
 
With respect to an Index or any Successor Index (as described under “General Terms of Notes — Discontinuation of an Index; Alteration of Method of Calculation”), the “Index closing level” on any relevant day will equal the official closing level of that Index or Successor Index, as applicable, published following the regular official weekday close of trading on that day.  In certain circumstances, the Index closing level of an Index or any Successor Index will be based on the alternative calculation of that Index described under  “— Postponement of the Final Valuation Date” below or “General Terms of Notes — Discontinuation of an Index; Alteration of Method of Calculation.”
 
Unless otherwise specified in the relevant terms supplement, the “Stub Coupon Determination Date” will be the Re-Weighting Date (as defined under “— Potential Coupon Payments” below) immediately preceding the pricing date, provided that if the pricing date is a Re-Weighting Date, the Stub Coupon Determination Date will be the pricing date.
 
The “Final Valuation Date” will be specified in the relevant terms supplement and is subject to postponement in the event of certain market disruption events and as described under “— Postponement of the Final Valuation Date” below.
 
The “maturity date” will be specified in the relevant terms supplement and is subject to adjustment as described below.  If the scheduled maturity date (as specified in the relevant terms supplement) is not a business day, then the maturity date will be the next succeeding business day following the scheduled maturity date.  If, due to a market disruption event or otherwise, the Final Valuation Date is postponed so that it falls less than three business days prior to the scheduled maturity date, the maturity date will be the third business day following the Final Valuation Date, as postponed, unless otherwise specified in the relevant terms supplement.  We describe market disruption events under “General Terms of Notes — Market Disruption Events.” In addition, the maturity date may be accelerated if there is a commodity hedging disruption event or an event of default.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event” and “General Terms of Notes — Payment upon an Event of Default.”
 
We will irrevocably deposit with DTC no later than the opening of business on the applicable date or dates funds sufficient to make payments of the amount payable at maturity and on the Coupon Payment Dates, if any, with respect to the notes on the applicable date or dates.  We will give DTC irrevocable instructions and authority to pay the applicable amount to the holders of the notes entitled thereto.
 
A “business day” is, unless otherwise specified in the relevant terms supplement, any day other than a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to close or a day on which transactions in U.S. dollars are not conducted.
 
 
PS-3

 
The “note calculation agent” is the agent appointed by us to make certain calculations for the notes, which initially will be J.P. Morgan Securities LLC (“JPMS”).  See “General Terms of Notes — Note Calculation Agent” below.  JPMS is our affiliate and may have interests adverse to you.  Please see “Risk Factors — Risks Relating to the Notes Generally — We or our affiliates may have economic interests that are adverse to those of the holders of the notes due to JPMS’s role as note calculation agent.”
 
The “index calculation agent” means J.P. Morgan Securities Ltd. (“JPMSL”) or any affiliate or subsidiary designed by JPMSL to calculate and publish the official closing level of the Indices.  The index calculation agent is currently JPMSL.  See “The JPMorgan ETF Efficiente 5 Index” below.  JPMSL is our affiliate and may have interests adverse to you.  Please see “Risk Factors — Risks Relating to the Notes Generally — JPMSL, the index calculation agent, may adjust an Index in a way that affects its level, and JPMSL has no obligation to consider your interests.”
 
Subject to the foregoing and to applicable law (including, without limitation, U.S. federal laws), we or our affiliates may, at any time and from time to time, purchase outstanding notes by tender, in the open market or by private agreement.
 
Potential Coupon Payments
 
The notes will pay variable monthly coupons, which may be zero, that will depend on the relative performance of the PR Index and the TR Index, as specified below.
 
Unless otherwise specified in the relevant terms supplement, with respect to each Coupon Determination Date, the “Coupon Payment” per note payable on the following Coupon Payment Date will be calculated as follows:
 
Principal Amount × (1 + PR Index Return) × Monthly Dividend Rate
 
where the PR Index Return is determined with respect to the immediately preceding Coupon Determination Date and the Monthly Dividend Rate is determined with respect to that Coupon Determination Date, provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
 
In the event of a commodity hedging disruption event, the amount due and payable per note upon early acceleration will be the final payment on the notes, and no further Coupon Payments will be made.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event.”
 
Unless otherwise specified in the relevant terms supplement, the “Monthly Dividend Rate” is, with respect to each monthly Coupon Determination Date, (a) the Monthly Index Return of the TR Index with respect to that Coupon Determination Date minus (b) the Monthly Index Return of the PR Index with respect to that Coupon Determination Date.  Notwithstanding the forgoing, If there are no dividends on the ETF Constituents with an ex-dividend date from but excluding the immediately preceding Coupon Determination Date to and including the current Coupon Determination Date, the Monthly Dividend Rate with respect to the current Coupon Determination Date will be equal to 0%, provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
 
Unless otherwise specified in the relevant terms supplement, the “Monthly Index Return” is, with respect to an Index with respect to any monthly Coupon Determination Date, (a) (i) the Index closing level on that Coupon Determination Date minus (ii) the Index closing level on the immediately preceding Coupon Determination Date divided by (b) the Index closing level on the immediately preceding Coupon Determination Date; provided that, for purposes of the first Coupon Determination Date, the immediately preceding Coupon Determination Date will be deemed to be the Stub Coupon Determination Date.
 
 
PS-4

 
Unless otherwise specified in the relevant terms supplement, the “Coupon Determination Dates” will be (a) each Re-Weighting Date occurring from but excluding the pricing date to but excluding the Final Valuation Date and (b) the Final Valuation Date.
 
Re-Weighting Dates” are as defined in the rules governing the Indices (the “Index Rules”).  Re-Weighting Dates occur once each month, typically near the beginning of the month.  As described in the Index Rules, Re-Weighting Dates are subject to postponement in the event of certain index market disruption events.  See “The JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index — Determining the Weights for the Basket Constituents” and “The JPMorgan ETF Efficiente 5 PR Index and the JPMorgan ETF Efficiente 5 TR Index — Index Market Disruption Events.”
 
Unless otherwise specified in the relevant terms supplement, the “Coupon Payment Dates” will be the third business day after each Coupon Determination Date, provided that the final Coupon Payment Date will be the maturity date.
 
Postponement of the Final Valuation Date
 
If the Final Valuation Date is not a trading day with respect to an Index or if there is a market disruption event with respect to an Index on the Final Valuation Date (any such day, a “Disrupted Day”), the Final Valuation Date will be postponed to the immediately succeeding business day that is not a Disrupted Day for either Index.  Accordingly, if the Final Valuation Date is postponed as described above, the note calculation agent will reference the Index closing levels of the Indices on the Final Valuation Date, as postponed, when making any determination with respect to the Final Valuation Date.
 
For example, assume that:
 
 
(a)
Business Day 1, the scheduled Final Valuation Date, is a Disrupted Day for the PR Index and the TR Index;
 
 
(b)
Business Day 2 is not a Disrupted Day for the PR Index but is a Disrupted Day for the TR Index; and
 
 
(c)
Business Day 3 is not a Disrupted Day for either Index.
 
Under these circumstances, the Final Valuation Date originally scheduled to occur on Business Day 1 would be postponed to Business Day 3 and the note calculation agent would reference the Index closing levels of the Indices on Business Day 3 when making any determination with respect to the Final Valuation Date.
 
In no event, however, will the Final Valuation Date be postponed to a date that is after the tenth business day after the Final Valuation Date, as originally scheduled (the “Final Disrupted Valuation Date”).  If the Final Valuation Date has been postponed to the Final Disrupted Valuation Date and that day is a Disrupted Day for either Index, the Index closing level for each Index on the Final Disrupted Valuation Date will be:
 
 
(a)
for any Index that is not affected by a Disrupted Day on the Final Disrupted Valuation Date, the Index closing level on the Final Disrupted Valuation Date; or
 
 
(b)
for any Index that is affected by a Disrupted Day on the Final Disrupted Valuation Date, the Index closing level determined by the note calculation agent in accordance with the formula for and method of calculating the Index closing level of that Index last in effect prior to the commencement of the market disruption event (or prior to the non-trading day), using:
 
 
(i)
the closing price (or, if trading in the relevant Basket Constituent has been materially suspended or materially limited, the note calculation agent’s good faith estimate of the
 
 
 
PS-5

 
 
closing price that would have prevailed but for that suspension or limitation or non-trading day) on the business day immediately preceding the Final Disrupted Valuation Date of the shares of each Basket Constituent that is an ETF (including any relevant successor or substitute Basket Constituent that is an ETF);
 
 
(ii)
the official closing price, fixing level, settlement price or any other relevant published trading price or level (or, if trading in the relevant securities, commodities or futures contracts has been materially suspended or materially limited, the note calculation agent’s good faith estimate of the closing price, fixing level, settlement price or other trading price or level that would have prevailed but for that suspension or limitation or non-trading day) on the business day immediately preceding the Final Disrupted Valuation Date of each security, commodity or futures contract most recently composing each Basket Constituent that is an index (including any relevant successor or substitute Basket Constituent that is an index) (other than the Cash Constituent) and, with respect to any Basket Constituent that holds futures contracts, any futures contract required to roll any expiring futures contract in accordance with the method of calculating that Basket Constituent; and
 
 
(iii)
the deposit rates underlying the Cash Constituent (or, if such deposit rates are not published on that day, the note calculation agent’s good faith estimate of such deposit rates) on the business day immediately preceding that Final Disrupted Valuation Date.
 
A “trading day” is, unless otherwise specified in the relevant terms supplement, a day, as determined by the note calculation agent, on which (a) trading is generally conducted on the Relevant Exchange (as defined under “General Terms of Notes — Market Disruption Events” below) for each Basket Constituent composing the Indices (other than the Cash Constituent) and the principal options and futures exchanges relating to that Basket Constituent and (b) banking institutions in The City of New York are not otherwise authorized or required by law, regulation or executive order to close.
 
 
PS-6

 
 
RISK FACTORS
 
Your investment in the notes will involve certain risks. Investing in the notes is not equivalent to investing directly in the Indices, any of the Basket Constituents or any of the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents, as applicable, or any futures contracts or exchange-traded or over-the-counter instruments based on, or other instruments linked to, any of the foregoing.  In addition, your investment in the notes entails other risks not associated with an investment in conventional debt securities. You should consider carefully the following discussion of risks before you decide that an investment in the notes is suitable for you.
 
Risks Relating to the Notes Generally
 
The notes do not guarantee the return of your investment.
 
The notes may not return any of your investment.  The amount payable at maturity, if any, will reflect the performance of the PR Index, minus the Deduction Amount and minus the Stub Dividend Amount, and will be determined pursuant to the terms described in this product supplement no. 26-II and the relevant terms supplement.  You will lose some or all of your initial investment at maturity if (a) the level of the PR Index decreases between the pricing date and the Final Valuation Date, and any Coupon Payments are not sufficient to offset the negative effects of (i) the decrease in the level of the PR Index, (ii) the Deduction Amount and (iii) the Stub Dividend Amount or (b) the level of the PR Index increases between the pricing date and the Final Valuation Date, and the increase in the level of the PR Index and any Coupon Payments are not sufficient to offset the negative effects of (i) the Deduction Amount and (ii) the Stub Dividend Amount.
 
The amount of any Coupon Payment is uncertain and could be zero.
 
You will receive a Coupon Payment on a Coupon Payment Date only if the Monthly Dividend Rate is greater than 0%.  If the Monthly Dividend Rate is equal to 0% on each Coupon Determination Date, no Coupon Payment will be paid over the term of the notes.
 
The notes are subject to the credit risk of JPMorgan Chase & Co.
 
The notes are subject to the credit risk of JPMorgan Chase & Co. and our credit ratings and credit spreads may adversely affect the market value of the notes.  Investors are dependent on JPMorgan Chase & Co.’s ability to pay all amounts due on the notes, and therefore investors are subject to our credit risk and to changes in the market’s view of our creditworthiness.  Any decline in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to adversely affect the value of the notes.  If we were to default on our payment obligations, you may not receive any amounts owed to you under the notes and you could lose your entire investment.
 
You should not expect to benefit on a net basis from the inclusion in the first Coupon Payment of any reinvested dividends with an ex-dividend date between the Stub Coupon Determination Date and the pricing date.
 
If the Stub Coupon Determination Date is before the pricing date, the first Coupon Payment will reflect the notional reinvestment in the TR Index of any dividends on the ETF Constituents with an ex-dividend date from but excluding the Stub Coupon Determination Date to and including the first Coupon Determination Date, even though the Stub Coupon Determination Date is before the pricing date.  If any of the reinvested dividends that affect the first Coupon Payment have an ex-dividend date on or before the pricing date, the Stub Dividend Amount will reflect the value of those reinvested dividends as of the pricing date.  However, because of the deduction of the Stub Dividend Amount from your payment at maturity, you should not expect to benefit on a net basis from the inclusion in the first Coupon Payment of any reinvested dividends with an ex-dividend date between the Stub Coupon Determination Date and the pricing date.
 
 
PS-7

 
Our offering of the notes does not constitute an expression of our view about, or a recommendation of, the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying any Basket Constituent.
 
You should not take our offering of the notes as an expression of our views about how the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying any Basket Constituent will perform in the future or as a recommendation to invest (directly or indirectly, by taking a long or short position) in the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying any Basket Constituent, including through an investment in the notes.  As a global financial institution, we and our affiliates may, and often do, have positions (long, short or both) in the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying one or more Basket Constituents that conflict with an investment in the notes.  See “— We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our hedging and other trading activities” below and “Use of Proceeds and Hedging” in this product supplement for some examples of potential conflicting positions we may have.  You should undertake an independent determination of whether an investment in the notes is suitable for you in light of your specific investment objectives, risk tolerance and financial resources.
 
We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our hedging and other trading activities.
 
In anticipation of the sale of the notes, we expect to hedge our obligations under the notes through certain affiliates or unaffiliated counterparties by taking positions in instruments the value of which is derived from the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying one or more Basket Constituents.  We may also adjust our hedge by, among other things, purchasing or selling instruments the value of which is derived from the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying one or more Basket Constituents at any time and from time to time, and close out or unwind our hedge by selling any of the foregoing on or before any Coupon Determination Date (including the Final Valuation Date).  We cannot give you any assurances that our hedging will not negatively affect the levels of the Indices or the performance of the notes.  See “Use of Proceeds and Hedging” below for additional information about our hedging activities.
 
These hedging activities may present a conflict of interest between your interest as a holder of the notes and the interests our affiliates have in executing, maintaining and adjusting hedge transactions.  These hedging activities could also affect the price at which JPMS is willing to purchase your notes in the secondary market.
 
Our hedging counterparties expect to make a profit.  Because hedging our obligations entails risk and may be influenced by market forces beyond our control, this hedging may result in a profit that is more or less than expected, or it may result in a loss.
 
JPMS and other affiliates of ours also trade the ETF Constituents and the securities, commodities, commodity futures contracts or other assets underlying one or more Basket Constituents and other financial instruments related to the Indices, the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying one or more Basket Constituents on a regular basis (taking long or short positions or both), for their accounts, for other accounts under their management and to facilitate transactions, including block transactions, on behalf of customers.  While we cannot predict an outcome, any of these hedging activities or other trading activities of ours could potentially increase the Index closing level of the PR Index on the pricing date or such other date or dates as specified in the relevant terms supplement, and/or decrease the Index closing level of the PR Index on the Final Valuation Date, which could adversely affect your payment at maturity.
 
It is possible that these hedging or trading activities could result in substantial returns for us or our affiliates while the value of the notes declines.
 
 
PS-8

 
We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our business activities.
 
We or our affiliates may currently or from time to time engage in business with companies the securities of which are held by a Basket Constituent (the “underlying companies”), including extending loans to, making equity investments in or providing advisory services to the underlying companies, including merger and acquisition advisory services. In the course of this business, we or our affiliates may acquire nonpublic information about the underlying companies, and we will not disclose any such information to you.  In addition, we or one or more of our affiliates may publish research reports or otherwise express views about the underlying companies.  Any prospective purchaser of notes should undertake an independent investigation of each of the underlying companies as in its judgment is appropriate to make an informed decision with respect to an investment in the notes.  We do not make any representation or warranty to any purchaser of notes with respect to any matters whatsoever relating to our business with the underlying companies.
 
In the course of our business, we or our affiliates may acquire non-public information about movements in the price levels of the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents, and we will not disclose any such information to you.  In addition, one or more of our affiliates may publish research reports or otherwise express views about the ETF Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.  Any prospective purchaser of the notes should undertake an independent investigation of the ETF Constituents and the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents as in its judgment is appropriate to make an informed decision with respect to an investment in the notes.
 
Additionally, we or one of our affiliates may serve as issuer, agent or underwriter for issuances of other securities or financial instruments with returns linked or related to changes in the levels of the Indices, the Basket Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.  To the extent that we or one of our affiliates serves as issuer, agent or underwriter for such securities or financial instruments, our or their interests with respect to such products may be adverse to those of the holders of the notes.  By introducing competing products into the marketplace in this manner, we or one or more of our affiliates could adversely affect the value of the notes.
 
We or one of our affiliates may currently or from time to time engage in trading activities related to the currencies in which the securities underlying a Basket Constituent that is a foreign index are denominated or traded.  These trading activities could potentially affect the exchange rates with respect to such currencies and, if currency exchange rate calculations are involved in the calculation of the closing prices of shares of that Basket Constituent, could affect the closing levels of such Basket Constituent and, accordingly, the value of the notes.  A “foreign index” is one that is composed primarily of equity securities issued by non-U.S. companies.
 
In the course of our or our affiliates’ currency trading activities, we or our affiliates may acquire material nonpublic information with respect to currency exchange rates, and we will not disclose any such information to you.  In addition, one or more of our affiliates may produce and/or publish research reports, or otherwise express views, with respect to expected movements in currency exchange rates.  We do not make any representation or warranty to any purchaser of notes with respect to any matters whatsoever relating to future currency exchange rate movements and, as applicable, any prospective purchaser of the notes should undertake an independent investigation of the foreign currencies in which the securities underlying the Indices are denominated or traded and their related exchange rates as, in its judgment, is appropriate to make an informed decision with respect to an investment in the notes.
 
 
PS-9

 
We or our affiliates may have economic interests that are adverse to those of the holders of the notes due to JPMS’s role as note calculation agent.
 
JPMS, one of our affiliates, will act as the note calculation agent.  The note calculation agent will determine, among other things, the Initial PR Index Level, the Deduction Amount, the Stub Dividend Amount, any PR Index Return, any Monthly Dividend Rate, any Monthly Index Return, any Index closing level and the amount of any payment on the notes. In addition, the note calculation agent will determine, among other things:
 
 
·
whether a market disruption event has occurred; and
 
 
·
whether an Index has been discontinued, whether the method of calculating an Index has changed in a material respect or whether an Index has been otherwise modified so that it does not, in the opinion of the note calculation agent, fairly represent the level of that Index had those changes or modifications not been made and, if applicable, which index to select as a successor index.
 
In performing these duties, JPMS may have interests adverse to the interests of the holders of the notes, which may affect your return on the notes, particularly where JPMS, as the note calculation agent, is entitled to exercise discretion.
 
JPMSL, the index calculation agent, may adjust an Index in a way that affects its level, and JPMSL has no obligation to consider your interests.
 
JPMSL, one of our affiliates, currently acts as the index calculation agent and is responsible for calculating and maintaining the Indices and developing the guidelines and policies governing their composition and calculation. It is entitled to exercise discretion in relation to the Indices, including but not limited to the calculation of the level of an Index in the event of an Index Market Disruption Event (as defined in “The JPMorgan ETF Efficiente 5 Index”).  Although JPMSL acting as the index calculation agent will make all determinations and take all action in relation to the Indices acting in good faith, it should be noted that the policies and judgments for which JPMSL is responsible could have an impact, positive or negative, on the level of an Index and the value of your notes.  JPMSL may also amend the rules governing the Indices in certain circumstances.
 
Although judgments, policies and determinations concerning the Indices are made by JPMSL, JPMorgan Chase & Co., as the parent company of JPMSL, ultimately controls JPMSL. JPMSL has no obligation to consider your interests in taking any actions that might affect the value of your notes. Furthermore, the inclusion of the Basket Constituents in the Indices is not an investment recommendation by us or JPMSL of the Basket Constituents, or any of the securities, commodities or futures contracts underlying the Basket Constituents.  See “The JPMorgan ETF Efficiente 5 Index.”
 
JPMS and its affiliates may have published research, expressed opinions or provided recommendations that are inconsistent with investing in or holding the notes, and may do so in the future. Any such research, opinions or recommendations could affect the market value of the notes.
 
JPMS and its affiliates publish research from time to time on financial markets and other matters that may influence the value of the notes, or express opinions or provide recommendations that are inconsistent with purchasing or holding the notes.  JPMS and its affiliates may have published research or other opinions that call into question the investment view implicit in an investment in the notes.  Any research, opinions or recommendations expressed by JPMS or its affiliates may not be consistent with each other and may be modified from time to time without notice.  Investors should make their own independent investigation of the merits of investing in the notes and the Indices, the Basket Constituents and the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents described herein to which the notes are linked.
 
 
PS-10

 
 
The Index closing level of the PR Index on the Final Valuation Date may be less than the Index closing level of the PR Index at other times during the term of the notes.
 
The Index closing level of the PR Index at various other times during the term of the notes could be higher than the Index closing level of the PR Index on the Final Valuation Date.  This difference could be particularly large if there is a significant increase in the Index closing level of the PR Index before and/or after the Final Valuation Date, if there is a significant decrease in closing level of the PR Index around the time of the Final Valuation Date or if there is significant volatility in the Index closing level of the PR Index during the term of the notes (especially on dates near the Final Valuation Date).  For example, if the Index closing level increases or remains relatively constant during the initial term of the notes and then decreases below the Initial PR Index Level, the Index closing level of the PR Index may be significantly less than if it were calculated on a date earlier than the Final Valuation Date.  Under these circumstances, if the notes have not be previously called, you may receive a lower payment at maturity than you would have received if you had invested directly in the Indices, any of the Basket Constituents or any of the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents, as applicable, or any futures contracts or exchange-traded or over-the-counter instruments based on, or other instruments linked to, any of the foregoing.
 
The notes are designed to be held to maturity.
 
The notes are not designed to be short-term trading instruments. The price at which you will be able to sell your notes to us or our affiliates prior to maturity, if at all, may be at a substantial discount from the principal amount of the notes, even in cases where the Indices have appreciated since the pricing date. The potential returns described in any terms supplement assume that your notes are held to maturity.
 
Secondary trading may be limited.
 
Unless otherwise specified in the relevant terms supplement, the notes will not be listed on any securities exchange. There may be little or no secondary market for the notes. Even if there is a secondary market for the notes, it may not provide enough liquidity to allow you to trade or sell the notes easily.
 
JPMS may act as a market maker for the notes, but is not required to do so. Because we do not expect that other market makers will participate significantly in the secondary market for the notes, the price at which you may be able to trade your notes is likely to depend on the price, if any, at which JPMS is willing to buy the notes. If at any time JPMS or another agent does not act as a market maker, it is likely that there would be little or no secondary market for the notes.
 
Prior to maturity, the value of the notes will be influenced by many unpredictable factors.
 
Many economic and market factors will influence the value of the notes. We expect that, generally, the levels of the Indices on any day will affect the value of the notes more than any other single factor. However, you should not expect the value of the notes in the secondary market to vary in proportion to changes in the levels of the Indices.  The value of the notes will be affected by a number of other factors that may either offset or magnify each other, including:
 
 
·
the actual and expected volatility in the Indices and Basket Constituents:
 
 
·
the time to maturity of the notes;
 
 
·
the market price of gold and the market price of the physical commodities upon which the commodity futures contracts that compose some of the Basket Constituents are based;
 
 
·
if applicable, the dividend rate on the equity securities held by a Basket Constituent (while not paid to holders of the notes, dividend payments on the equity securities held by ETFs may influence the prices of the ETFs or the market value of related options, and therefore affect the market value of the notes);
 
 
PS-11

 
 
 
·
interest and yield rates in the market generally as well as in each of the markets of the securities, commodities, commodity futures contracts or other assets underlying a Basket Constituent;
 
 
·
economic, financial, political, regulatory, geographical, meteorological and judicial events that affect the securities, commodities, commodity futures contracts or other assets underlying a Basket Constituent, stock markets or markets generally and which may affect the closing levels of the Basket Constituents and the Index closing levels of the Indices on any Coupon Determination Date (including the Final Valuation Date);
 
 
·
the exchange rate and the volatility of the exchange rate between the U.S. dollar and the various currencies in which the securities underlying the Basket Constituents are traded, and, for ETF Constituents, if the net asset value of the ETF is calculated in one currency and the equity securities underlying the ETF are traded in another currency, the correlation between those rates and the price of shares of such ETF Constituent; and
 
 
·
our creditworthiness, including actual or anticipated downgrades in our credit ratings.
 
Some or all of these factors will influence the price you will receive if you choose to sell your notes prior to maturity. The impact of any of the factors set forth above may enhance or offset some or all of any change resulting from another factor or factors.  You may have to sell your notes at a substantial discount from the principal amount if the Index closing level of the PR Index is at, below or not sufficiently above the Initial Index Level.
 
You cannot predict the future performance of the Indices or any of the Basket Constituents based on their historical performance.  You will lose some or all of your initial investment at maturity if (a) the level of the PR Index decreases between the pricing date and the Final Valuation Date, and any Coupon Payments are not sufficient to offset the negative effects of (i) the decrease in the level of the PR Index, (ii) the Deduction Amount and (iii) the Stub Dividend Amount or (b) the level of the PR Index increases between the pricing date and the Final Valuation Date, and the increase in the level of the PR Index and any Coupon Payments are not sufficient to offset the negative effects of (i) the Deduction Amount and (ii) the Stub Dividend Amount.
 
The inclusion in the original issue price of each agent’s commission and the estimated cost of hedging our obligations under the notes is likely to affect adversely the value of the notes prior to maturity.
 
While the payment at maturity will be based on the full principal amount of your notes as described in the relevant terms supplement, the original issue price of the notes includes each agent’s commission and the estimated cost of hedging our obligations under the notes. An agent’s commission or the estimated cost (see “Use of Proceeds and Hedging”) includes the profit our affiliates expect to realize in consideration for assuming the risks inherent in providing such hedge. As a result, assuming no change in market conditions or any other relevant factors, the price, if any, at which JPMS will be willing to purchase notes from you in secondary market transactions, if at all, will likely be lower than the original issue price. In addition, any of those prices may differ from values determined by pricing models used by JPMS, as a result of this compensation or other transaction costs.
 
You will have no rights with respect to the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents composing the Indices.
 
As a holder of the notes, you will not have voting rights or other rights that holders of the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents composing the Indices would have.
 
Market disruptions may adversely affect your return.
 
The note calculation agent may, in its sole discretion, determine that the markets have been affected in a manner that prevents it from determining any Index closing level on any relevant date,
 
 
PS-12

 
 
and consequently, calculating any amount payable on the notes. These events may include disruptions or suspensions of trading in the markets as a whole.  If the note calculation agent, in its sole discretion, determines that any of these events prevents us or any of our affiliates from properly hedging our obligations under the notes, it is possible that one or more of the Coupon Determination Dates, the Final Valuation Date and/or the maturity date will be postponed and your return will be adversely affected. See “General Terms of Notes — Market Disruption Events.”
 
If a commodity hedging disruption event occurs, we may accelerate your notes.
 
Upon the occurrence of legal or regulatory changes that the note calculation agent determines have interfered with our or our affiliates’ ability to hedge our obligations under the notes, or if for any other reason we or our affiliates are unable to enter into or maintain hedge positions the note calculation agent deems necessary to hedge our obligations under the notes, we may, in our sole and absolute discretion, accelerate the payment on your notes and pay you an amount determined in good faith and in a commercially reasonable manner by the note calculation agent.  If a commodity hedging disruption event occurs and we decide to exercise our right to accelerate the payment on your notes, your investment may result in a loss and you may not be able to reinvest the proceeds in a comparable investment. In addition, the amount due and payable per note upon that early acceleration will be the final payment on the notes, and no further Coupon Payments will be made.  See “General Terms of Notes — Consequences of a Commodity Hedging Disruption Event” and “— The commodity futures contracts underlying the iShares® S&P GSCI™ Commodity-Indexed Trust or related to gold underlying the SPDR® Gold Trust are subject to legal and regulatory regimes that may change in ways that could affect our ability to hedge our obligations under the notes, may have an adverse effect on the levels of the Indices and/or could lead to the early acceleration of your notes” below.
 
Standard & Poor’s downgrade of the U.S. government’s credit rating, and any future downgrades by credit rating agencies, may adversely affect the performance of the Indices and the notes.
 
On August 6, 2011, Standard & Poor’s Ratings Services (“Standard & Poor’s”), downgraded the U.S. government’s credit rating from AAA to AA+.  Additionally, Standard & Poor’s and Moody’s Investor Services, Inc. have assigned a negative outlook on the U.S. government’s credit rating, meaning that the agencies may downgrade the U.S. government’s credit rating in the next year or two.  The downgrade has increased and may continue to increase volatility in the global equity and credit markets, which may adversely affect the levels of the Basket Constituents.  Future downgrades by credit ratings agencies may also increase this volatility.  These events may also increase short-term borrowing costs, including the 3-month LIBOR rate underlying the Cash Constituent, which will adversely affect the levels of the Indices.  All of the above may adversely affect the performance of the Indices and the notes.
 
The tax consequences of an investment in the notes are unclear.
 
There is no direct legal authority as to the proper U.S. federal income tax treatment of the notes, and we do not intend to request a ruling from the Internal Revenue Service (the “IRS”) regarding the notes.  Unless otherwise indicated in the relevant terms supplement, insofar as we have tax reporting responsibilities with respect to your notes, we intend to treat them as “open transactions” that are not debt instruments for U.S. federal income tax purposes.  We may seek an opinion of counsel regarding the tax consequences of owning and disposing of the notes.  In this event, and subject to the discussion of the “constructive ownership” rules in the following sentence, we expect counsel to be able to opine that if the notes are properly treated as open transactions that are not debt instruments, they should generate long-term capital gain or loss on a sale or exchange (including redemption at maturity) if held for more than one year.   Unless otherwise indicated in the relevant terms supplement, due to the lack of governing authority and the fact-sensitive nature of the analysis regarding the application of the constructive ownership rules of Section 1260 of the Internal Revenue Code of 1986, as amended (the “Code”), we do not expect that counsel would be able to opine as to whether or how these rules would apply to your notes.  If
 
 
PS-13

 
 
the constructive ownership rules were determined to apply to the notes, any long-term capital gain that is in excess of the “net underlying long-term capital gain” (as defined in Code Section 1260) would be treated as ordinary income, and an interest charge would apply as if that income had accrued for tax purposes at a constant yield over the notes’ term.
 
Although the U.S. federal income tax treatment of Coupon Payments is uncertain, we expect (in the absence of an administrative determination or judicial ruling to the contrary) to treat Coupon Payments as ordinary income at the time accrued or received, in accordance with your method of accounting for U.S. federal income tax purposes.
 
In 2007 Treasury and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments, which may include the notes.  The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of their investment.  It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; the relevance of factors such as the nature of the underlying property to which the instruments are linked and whether these instruments are or should be subject to the “constructive ownership” regime described above.  While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the notes, possibly with retroactive effect.  Both U.S. and Non-U.S. Holders should review carefully the section entitled “Material U.S. Federal Income Tax Consequences” in this product supplement no. 26-II and consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the notes, including the potential application of the constructive ownership rules, possible alternative treatments and the issues presented by this notice.
 
Non-U.S. Holders should evaluate an investment in the notes in light of their particular circumstances.
 
If you are a Non-U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences — Tax Consequences to Non-U.S. Holders”), we expect that Coupon Payments to you will be withheld upon at a rate of 30%, subject to the possible reduction or elimination of that rate under an applicable income tax treaty, unless that income is effectively connected with your conduct of a trade or business in the United States.
 
 If you are not a United States person, you are urged to consult your tax adviser regarding the U.S. federal income tax consequences of an investment in the notes in light of your particular circumstances.
 
JPMorgan Chase & Co. employees holding the notes must comply with policies that limit their ability to trade the notes and may affect the value of their notes.
 
If you are an employee of JPMorgan Chase & Co. or one of its affiliates, you may only acquire the notes for investment purposes and you must comply with all of our internal policies and procedures. Because these policies and procedures limit the dates and times that you may transact in the notes, you may not be able to purchase any notes described in the relevant terms supplement from us and your ability to trade or sell any such notes in the secondary market may be limited.
 
Historical performance of the Indices and the Basket Constituents should not be taken as an indication of the future performance of the Indices or the Basket Constituents during the terms of the notes.
 
The actual performance of the Indices and the Basket Constituents over the term of the notes, as well as payments on the notes, may bear little relation to the historical performance of the Indices or the Basket Constituents.  The trading prices of the securities, commodities, commodity futures contracts or other assets underlying a Basket Constituent will determine the price of that Basket Constituent.  As a result, it is impossible to predict whether the price of any Basket Constituent or any Index will rise or fall.
 
 
PS-14

 
Risks Relating to the Indices
 
We are affiliated with the sponsor of one of the Basket Constituents and with the sponsor of the index underlying one of the ETF Constituents.
 
JPMS, one of our affiliates, is the sponsor of one of the Basket Constituents (the JPMorgan Cash Index USD 3 Month).  JPMS will have no obligation to consider your interests as a holder of the notes in taking any actions that might affect the value of your notes.
 
JPMS is also the sponsor of the JPMorgan EMBI Global Core Index, which is the index underlying the iShares® JPMorgan USD Emerging Markets Bond Fund, one of the Basket Constituents.  JPMS may, as a last resort, if there are no valid prices available for composite instruments included in the JPMorgan EMBI Global Core Index, price such composite instruments by asking JPMS traders to provide a market bid and ask.  Neither JPMS nor we will have any obligation to consider your interests as a holder of the notes in taking any actions that might affect the value of your notes.
 
We are currently one of the companies that make up the SPDR® S&P 500® ETF Trust, but, to our knowledge, we are not affiliated with any other company the securities of which are held by the Basket Constituents.
 
We are currently one of the companies that make up the SPDR® S&P 500® ETF Trust, but, to our knowledge, we are not currently affiliated with any other issuers the securities of which are held by the Basket Constituents. As a result, we will have no ability to control the actions of the other issuers of such securities, including actions that could affect the value of the securities held by the Basket Constituents or your notes. None of the money you pay us will go to the sponsors of the Basket Constituents or any of the other issuers the securities of which are held by the Basket Constituents and none of those other issuers will be involved in the offering of the notes in any way. Neither those other issuers nor we will have any obligation to consider your interests as a holder of the notes in taking any actions that might affect the value of your notes.
 
In the event we become affiliated with any other issuers the equity securities of which are held by any Basket Constituent, we will have no obligation to consider your interests as a holder of the notes in taking any action with respect to such issuer that might affect the value of your notes.
 
Either Index may not be successful, outperform any alternative strategy that might be employed in respect of the Basket Constituents or achieve its target volatility.
 
The Indices follow a notional rules-based proprietary strategy that operates on the basis of pre-determined rules.  No assurance can be given that the investment strategy on which the Indices is based will be successful or that either Index will outperform any alternative strategy that might be employed in respect of the Basket Constituents.  Furthermore, no assurance can be given that either Index will achieve its target volatility of 5%.  The actual realized volatility of one or both Indices may be greater or less than 5%.
 
If the market values of the Basket Constituents changes, the level of the Indices and the market value of your notes may not change in the same manner.
 
Owning the notes is not the same as owning each of the Basket Constituents.  Accordingly, changes in the market values of the Basket Constituents may not result in a comparable change in the level of the Indices or the market value of your notes.
 
The Indices comprise notional assets and liabilities.
 
The exposures to the Basket Constituents are purely notional and will exist solely in the records maintained by or on behalf of the index calculation agent.  There is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest.  Consequently, you will not have any claim against any of the reference assets that compose the Indices.
 
 
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The levels of the Indices will include the deduction of a fee.
 
One way in which the Indices may differ from a typical index is that each of their levels will include a deduction from the performance of the Basket Constituents of a fee of 0.50% per annum.  This fee will be deducted daily.  As a result of the deduction of this fee, the levels of the Indices will trail the value of hypothetical identically constituted synthetic portfolios from which no such fee is deducted.
 
The Indices have limited operating histories and may perform in unanticipated ways.
 
The Indices were established on May 30, 2012 and therefore have limited operating histories.  Any back-testing or similar analysis performed by any person in respect of the Indices must be considered illustrative only and may be based on estimates or assumptions not used by the index calculation agent when determining the levels of the Indices.  Past performance should not be considered indicative of future performance.
 
The Indices are subject to market risks.
 
The performance of the Indices is dependent on the performance of the thirteen Basket Constituents.  As a consequence, your investment in the notes is exposed to the price performance and credit performance of the Basket Constituents.
 
An investment in the notes carries the risks associated with the Indices’ momentum investment strategy.
 
The Indices are constructed using what is generally known as a momentum investment strategy. Momentum investing generally seeks to capitalize on positive trends in the price of assets.  As such, the weights of the Basket Constituents in the Indices are based on the performance of the Basket Constituents from the immediately preceding six months.  However, there is no guarantee that trends existing in the preceding six months will continue in the future.  A momentum strategy is different from a strategy that seeks long-term exposure to a portfolio consisting of constant components with fixed weights.  The Indices may fail to realize gains that could occur as a result of holding assets that have experienced price declines, but after which experience a sudden price spike.  As a result, if market conditions do not represent a continuation of prior observed trends, the levels of the Indices, which are rebalanced based on prior trends, may decline.  Additionally, even when the closing prices or levels of the Basket Constituents are trending downwards, the Indices will continue to be composed of the thirteen Basket Constituents.  Due to the “long-only” construction of the Indices, the weight of each Basket Constituent will not fall below zero in respect of each Re-weighting Date even if the relevant Basket Constituent displayed a negative performance over the relevant six month period.  No assurance can be given that the investment strategy used to construct the Indices will outperform any alternative index that might be constructed from the Basket Constituents.
 
The Indices may perform poorly during periods characterized by short-term volatility.
 
The Indices’ strategy is based on momentum investing.  Momentum investing strategies are effective at identifying the current market direction in trending markets.  However, in non-trending, sideways markets, momentum investment strategies are subject to “whipsaws.”  A whipsaw occurs when the market reverses and does the opposite of what is indicated by the trend indicator, resulting in a trading loss during the particular period.  Consequently, the Indices may perform poorly in non-trending, “choppy” markets characterized by short-term volatility.
 
The investment strategy used to construct the Indices involves monthly rebalancing and weighting caps that are applied to the Basket Constituents.
 
The Basket Constituents are subject to monthly rebalancing and maximum weighting caps by asset type and on subsets of assets.  By contrast, a synthetic portfolio that does not rebalance monthly and is not subject to any weighting caps in this manner could see greater compounded
 
 
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gains over time through exposure to a consistently and rapidly appreciating portfolio consisting of the Basket Constituents. Therefore, your return on the notes may be less than the return you could realize on an alternative investment in the Basket Constituents that is not subject to rebalancing and weighting caps.  No assurance can be given that the investment strategy used to construct the Indices will outperform any alternative investment in the Basket Constituents.
 
The Indices may be partially invested in the Cash Constituent.
 
The weight of the Cash Constituent at any given time represents the portion of the synthetic portfolio that is not notionally invested in any ETF Constituent at that time.  While the weight of the Cash Constituent is normally limited by a weighting constraint of 50%, if any Basket Constituent is replaced with the Cash Constituent, the aggregate weight of the Cash Constituent would be allowed to exceed 50% because a portion of such aggregate weight would be subject to the weighting constraints specific to the replaced Basket Constituent and not the weighting constraints specific to the Cash Constituent. See “The Basket Constituents composing the ETF Efficiente Index may be replaced by a substitute ETF or index in certain extraordinary events” below.
 
The Basket Constituents composing the Indices may be replaced by a substitute ETF or index in certain extraordinary events.
 
Following the occurrence of certain extraordinary events with respect to a Basket Constituent as described under “The JPMorgan ETF Efficiente 5 Index — Extraordinary Events,” the affected Basket Constituent may be replaced by a substitute ETF or index.  If the index calculation agent determines in its discretion that no suitable substitute ETF or index is available for an affected Basket Constituent (other than the Cash Constituent), then the index calculation agent will replace such Basket Constituent with the Cash Constituent as its substitute.  Under such circumstances, the aggregate weight of the Cash Constituent in the Indices may be greater than the maximum 50% weight limit allocated for the Cash Constituent because a portion of such aggregate weight would be subject to the separate maximum weight limit specific to the affected Basket Constituent.  You should realize that the changing of a Basket Constituent may affect the performance of the Indices, and therefore, the return on the notes, as the replacement Basket Constituent may perform significantly better or worse than the affected Basket Constituent.
 
Any of the ETF Constituents may be replaced by an index under extraordinary circumstances, in which case the risks relating to indices will affect the levels of the Indices and therefore the value of the notes.
 
Under certain extraordinary circumstances, any ETF Constituent may be replaced by a substitute index that possesses substantially similar characteristics or provides a substantially similar exposure as the ETF Constituent being replaced, as determined by the index calculation agent in its discretion.  As a holder of the notes, you will not have rights that holders of the assets underlying a substitute index would have such as, if applicable, voting rights or rights to dividends or other distributions.  If the substitute index is an equity index that is not a total return index, the value of the substitute index will not reflect dividends on the equity securities included in such equity index.
 
Moreover, the policies of the sponsor of the substitute index concerning the methodology and calculation of the substitute index, including decisions regarding additions, deletions or substitutions of the assets underlying the substitute index could affect the level of the successor index and therefore the value of the notes.  The amount payable on the notes and their market value could also be affected if the sponsor of the substitute index discontinues or suspends calculation or dissemination of the substitute index, in which case it may become difficult to determine the market value of the notes.  The index sponsor of the substitute index will have no obligation to consider your interests in calculating or revising such substitute index.
 
If the assets included in the substitute index are denominated in currencies other than U.S. dollars, then the notes will be subject to currency exchange risk. If the assets underlying a substitute index have been issued by non-U.S. companies or non-U.S. governments, the level of the substitute
 
 
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index and therefore the value of the notes will be affected by political, economic, financial and social factors in the relevant countries, including changes in a relevant country’s government, economic and fiscal policies, currency exchange laws and other foreign laws or restrictions. See the relevant terms supplement for additional information regarding the risks associated with any substitute index.
 
Correlation of performances among the Basket Constituents may reduce the performance of the notes.
 
Performances of the Basket Constituents may become highly correlated from time to time during the term of the notes, including, but not limited to, a period in which there is a substantial decline in a particular sector or asset type represented by the Basket Constituents and which has a higher weighting in the Indices relative to any of the other sectors or asset types, as determined by the Indices’ strategy.  High correlation during periods of negative returns among Basket Constituents representing any one sector or asset type and which Basket Constituents have a substantial percentage weighting in the Indices could have an adverse effect on any payments on, and the value of, your notes.
 
Changes in the value of the Basket Constituents may offset each other.
 
Because the notes are linked to Indices that are linked to the performance of the Basket Constituents, which collectively represent a diverse range of asset classes and geographic regions, price movements between the Basket Constituents representing different asset classes or geographic regions may not correlate with each other.  At a time when the value of a Basket Constituent representing a particular asset class or geographic region increases, the value of other Basket Constituents representing a different asset class or geographic region may not increase as much or may decline.  Therefore, in calculating the levels of the Indices, increases in the value of some of the Basket Constituents may be moderated, or more than offset, by lesser increases or declines in the level of other Basket Constituents.
 
The value of the notes could be affected by an anticipated change in ownership of a Reference Index.
 
On November 4, 2011, The McGraw-Hill Companies, Inc. (“McGraw-Hill”), the owner of the S&P Indices business, and CME Group Inc. (“CME Group”), the 90% owner of the CME Group and Dow Jones & Company, Inc. joint venture that owns the Dow Jones Indexes business, announced a new joint venture, S&P/Dow Jones Indices, which will own the S&P Indices business and the Dow Jones Indexes business.  McGraw-Hill and CME Group expect the S&P/Dow Jones Indices to be operational in the first half of 2012, subject to regulatory approval and other conditions.  While it’s unclear what effect, if any, this change in ownership will have on the S&P 500® Index, the Dow Jones U.S. Real Estate Index or the S&P GSCI™ Total Return Index or on the notes, any changes to the methodology of a relevant Reference Index could affect adversely the level of the applicable Basket Component and, accordingly, the value of your notes.
 
Risks Relating to the Equity/Bond ETF Constituents
 
The notes will be subject to currency exchange risk.
 
Because the prices of some or all of the securities composing two of the thirteen Basket Constituents (the iShares® MSCI EAFE Index Fund and the iShares® MSCI Emerging Markets Index Fund) (the “Component Securities”) are converted into U.S. dollars for the purposes of calculating the value of the relevant Basket Constituents, holders of the notes will be exposed to currency exchange rate risk with respect to each of the relevant currencies. An investor’s net exposure will depend on the extent to which such currencies strengthen or weaken against the U.S. dollar and the weight of the Component Securities in the relevant Basket Constituents denominated in each such currency. If, taking into account such weighting, the U.S. dollar strengthens against those currencies, the value of the relevant Basket Constituents will be adversely affected and any return on the notes may be reduced.
 
 
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Of particular importance to potential currency exchange risk are:
 
 
·
existing and expected rates of inflation;
 
 
·
existing and expected interest rate levels;
 
 
·
the balance of payments;
 
 
·
political, civil or military unrest; and
 
 
·
the extent of governmental surpluses or deficits in the relevant countries and the United States.
 
All of these factors are, in turn, sensitive to the monetary, fiscal and trade policies pursued by the governments of various countries, the United States and other countries important to international trade and finance.
 
If the prices of the equity securities held by an ETF Constituent holding primarily foreign equity securities (a “foreign ETF Constituent”) are not converted into U.S. dollars for purposes of calculating the net asset value of that foreign ETF Constituent, the amount payable on the notes at maturity will not be adjusted for changes in exchange rates that might affect that foreign ETF Constituent.
 
Because the prices of the equity securities held by a foreign ETF Constituent are not converted into U.S. dollars for purposes of calculating the net asset value of that foreign ETF Constituent and although the equity securities held by that foreign ETF Constituent are traded in currencies other than U.S. dollars, and the Indices, which are linked in part to that foreign ETF Constituent, are denominated in U.S. dollars, the amount payable on the notes at maturity, if any, will not be adjusted for changes in the exchange rate between the U.S. dollar and each of the currencies in which the equity securities held by that foreign ETF Constituent are denominated.  Changes in exchange rates, however, may reflect changes in various non-U.S. economies that in turn may affect the value of the notes.  Any payments in respect of the notes will be determined solely in accordance with the procedures described in “Description of Notes — Potential Coupon Payments.”
 
Changes in the volatility of exchange rates, and the correlation between those rates and the prices of the iShares® MSCI EAFE Index Fund and the iShares® MSCI Emerging Markets Index Fund are likely to affect the market value of the notes.
 
The exchange rate between the U.S. dollar and each of the currencies in which the Component Securities are denominated refers to a foreign exchange spot rate that measures the relative values of two currencies – the particular currency in which a Component Security is denominated and the U.S. dollar. This exchange rate reflects the amount of the particular currency in which a Component Security is denominated that can be purchased for one U.S. dollar and thus increases when the U.S. dollar appreciates relative to the particular currency in which a Component Security is denominated. The volatility of the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities are denominated refers to the size and frequency of changes in that exchange rate.
 
Because the iShares® MSCI EAFE Index Fund and the iShares® MSCI Emerging Markets Index Fund are calculated, in part, by converting the closing prices of the Component Securities into U.S. dollars, the volatility of the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities are denominated could affect the market value of the notes.
 
The correlation of the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities are denominated and the value of the relevant Basket Constituent refer to the relationship between the percentage changes in that exchange rate and the percentage changes in the net asset value of that Basket Constituent. The direction of the correlation (whether positive or negative) and the extent of the correlation between the percentage changes in the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities are denominated and the percentage changes in the net asset value of that Basket Constituent could affect the value of the notes.
 
 
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An investment in the notes is subject to risks associated with non-U.S. securities markets, including emerging markets.
 
Some or all of the equity securities that are held by the iShares® MSCI EAFE Index Fund and the iShares® MSCI Emerging Markets Index Fund, two of the Basket Constituents, have been issued by non-U.S. issuers. In addition, the iShares® iBoxx $ Investment Grade Corporate Bond Fund and the iShares® iBoxx $ High Yield Corporate Bond Fund, which are also Basket Constituents, may include U.S. dollar-denominated bonds of foreign corporations.  Investments in securities linked to the value of non-U.S. securities involve risks associated with the securities markets in those countries, including risks of volatility in those markets, governmental intervention in those markets and cross shareholdings in companies in certain countries. Also, there is generally less publicly available information about companies in some of these jurisdictions than about U.S. companies that are subject to the reporting requirements of the Securities and Exchange Commission (the “SEC”), and generally non-U.S. companies are subject to accounting, auditing and financial reporting standards and requirements and securities trading rules different from those applicable to U.S. reporting companies.
 
Moreover, the bonds held by the iShares® JPMorgan USD Emerging Markets Bond Fund have been issued by 33 countries. Investments in the notes, which are linked in part to the economic stability and development of such countries, involve risks associated with investments in, or the securities markets in, those countries.
 
The prices of equity securities and government bonds in non-U.S. markets may be affected by political, economic, financial and social factors in such markets, including changes in a country’s government, economic and fiscal policies, currency exchange laws or other laws or restrictions.  Moreover, the economies of these countries may differ favorably or unfavorably from the economy of the United States in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources and self -sufficiency.  These countries may be subjected to different and, in some cases, more adverse economic environments.
 
The economies of emerging market countries in particular face several concerns, including relatively unstable governments that may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and which may have less protection of property rights than more developed countries. These economies may also be based on only a few industries, be highly vulnerable to changes in local and global trade conditions and may suffer from extreme and volatile debt burdens or inflation rates. In addition, local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times.
 
Some or all of these factors may influence the value of the relevant Basket Constituents, and therefore, the Indices. The impact of any of the factors set forth above may enhance or offset some or all of any change resulting from another factor or factors. You cannot predict the future performance of such Basket Constituents based on their historical performance.  The value of any such Basket Constituents may decrease, resulting in a decrease in the levels of the Indices, which may adversely affect the value of the notes.
 
The notes are subject to significant risks associated with fixed-income securities, including interest rate-related risks.
 
Five of the Basket Constituents (the iShares® Barclays 20+ Year Treasury Bond Fund, the iShares® iBoxx $ Investment Grade Corporate Bond Fund, the iShares® iBoxx $ High Yield Corporate Bond Fund, the iShares® Emerging Markets Bond Fund and the iShares® Barclays TIPS Bond Fund, which we collectively refer to as the “Bond ETFs”) are bond ETFs that attempt to track the performance of indices composed of fixed income securities.  Investing in the notes linked indirectly to these Basket Constituents differs significantly from investing directly in bonds to be held to maturity as the
 
 
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values of the Bond ETFs change, at times significantly, during each trading day based upon the current market prices of their underlying bonds.  The market prices of these bonds are volatile and significantly influenced by a number of factors, particularly the yields on these bonds as compared to current market interest rates and the actual or perceived credit quality of the issuer of these bonds.  The market prices of the bonds underlying each of the iShares® iBoxx $ Investment Grade Corporate Bond Fund and the iShares® iBoxx $ High Yield Corporate Bond Fund are determined by reference to the bid and ask quotations provided by 9 contributing banks, one of which is our parent company, J.P. Morgan Chase & Co.  JPMS is also the sponsor of the JPMorgan EMBI Global Core Index, which is the index underlying the iShares® JPMorgan USD Emerging Markets Bond Fund.  JPMS may, as a last resort, if there are no valid prices available for instruments included in the JPMorgan EMBI Global Core Index, price such instruments by asking JPMS traders to provide a market bid and ask.
 
In general, fixed-income securities are significantly affected by changes in current market interest rates.  As interest rates rise, the price of fixed-income securities, including those underlying the Bond ETFs, is likely to decrease. Securities with longer durations tend to be more sensitive to interest rate changes, usually making them more volatile than securities with shorter durations.  The eligibility criteria for the securities included in the indices that underlie the Bond ETFs, which each mandate that each security must have a minimum term remaining to maturity (ranging from one year to 20 years) for continued eligibility, means that, at any time, only longer-term securities underlie the Bond ETFs, which thereby increases the risk of price volatility in the underlying securities and, consequently, the volatility in the levels of the Indices.  As a result, rising interest rates may cause the value of the bonds underlying the Bond ETFs, the Bond ETFs and the Indices to decline, possibly significantly.
 
Interest rates are subject to volatility due to a variety of factors, including:
 
 
·
sentiment regarding underlying strength in the U.S. economy and global economies;
 
 
·
expectations regarding the level of price inflation;
 
 
·
sentiment regarding credit quality in the U.S. and global credit markets;
 
 
·
central bank policies regarding interest rates; and
 
 
·
the performance of U.S. and foreign capital markets.
 
Recently, U.S. treasury notes have been trading near their historic high trading price.  If the price of the U.S. treasury notes reverts to its historic mean or otherwise falls, as a result of a general increase in interest rates or perceptions of reduced credit quality of the U.S. government or otherwise, the value of the bonds underlying the iShares® Barclays 20+ Year Treasury Bond Fund will decline, which could have a negative impact on the performance of the Indices and the return on your notes.
 
In addition, the iShares® Barclays TIPS Bond Fund includes inflation-protected bonds, which typically have lower yields than conventional fixed-rate bonds because of their inflation adjustment feature. For the iShares® Barclays TIPS Bond Fund, if inflation is low, the benefit received from the inflation-protected feature of the underlying bonds may not sufficiently compensate you for this reduced yield.
 
The notes are subject to significant risks associated with fixed-income securities, including credit risk.
 
The prices of the underlying bonds are significantly influenced by the creditworthiness of the issuers of the bonds.  The bonds underlying the Bond ETFs may have their credit ratings downgraded, including in the case of the bonds included in the iShares® iBoxx $ Investment Grade Corporate Bond Fund, a downgrade from investment grade to non-investment grade status, or have their credit spreads widen significantly.  Following a ratings downgrade or the widening of credit spreads, some or all of the underlying bonds may suffer significant and rapid price declines.  These events may affect only a few or a large number of the underlying bonds.  For example, during the
 
 
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recent credit crisis in the United States, credit spreads widened significantly as the market demanded very high yields on corporate bonds and, as a result, the prices of the bonds underlying the Bond ETFs dropped significantly.  There can be no assurance that some or all of the factors that contributed to this credit crisis will not continue or return during the term of the notes, and, consequently, depress the price, perhaps significantly, of the underlying bonds and therefore the value of the Bond ETFs, the Indices and the notes.
 
Further, the iShares® iBoxx $ High Yield Corporate Bond Fund is designed to provide a representation of the U.S. dollar high yield corporate market and is therefore subject to high yield securities risk, being the risk that securities that are rated below investment grade (commonly known as “junk bonds,” including those bonds rated at BB+ or lower by S&P or Fitch or Ba1 by Moody’s) may be more volatile than higher-rated securities of similar maturity. High yield securities may also be subject to greater levels of credit or default risk than higher-rated securities. The value of high yield securities can be adversely affected by overall economic conditions, such as an economic downturn or a period of rising interest rates, and high yield securities may be less liquid and more difficult to sell at an advantageous time or price or to value than higher-rated securities. In particular, high yield securities are often issued by smaller, less creditworthy companies or by highly leveraged (indebted) firms, which are generally less able than more financially stable firms to make scheduled payments of interest and principal.
 
An investment in the notes is subject to risks associated with small capitalization stocks.
 
The stocks that constitute the Russell 2000® Index and that are held by the iShares® Russell 2000 Index Fund are issued by companies with relatively small market capitalization.  The stock prices of smaller companies may be more volatile than stock prices of large capitalization companies.  Small capitalization companies may be less able to withstand adverse economic, market, trade and competitive conditions relative to larger companies.  These companies tend to be less well-established than large market capitalization companies.  Small capitalization companies are less likely to pay dividends on their stocks, and the presence of a dividend payment could be a factor that limits downward stock price pressure under adverse market conditions.
 
Risks associated with the real estate industry will affect the price of shares of the iShares® Dow Jones Real Estate Index Fund Constituent and the value of the notes.
 
The real estate industry is cyclical and has from time to time experienced significant difficulties.  The prices of the securities included in the Dow Jones U.S. Real Estate Index and held by the iShares® Dow Jones Real Estate Index Fund and, in turn, the level of the Dow Jones U.S. Real Estate Index and the price of shares of the iShares® Dow Jones Real Estate Index Fund, as applicable, will be affected by a number of factors that may either offset or magnify each other, including:
 
 
·
employment levels and job growth;
 
 
·
the availability of financing for real estate;
 
 
·
interest rates;
 
 
·
consumer confidence;
 
 
·
the availability of suitable undeveloped land;
 
 
·
federal, state and local laws and regulations concerning the development of land, construction, home and commercial real estate sales, financing and environmental protection; and
 
 
·
competition among companies that engage in the real estate business.
 
The difficulties described above could cause a downturn in the real estate industry generally or regionally and could cause the value of the securities included in the Dow Jones U.S. Real Estate Index and held by the iShares® Dow Jones Real Estate Index Fund and the level of the Dow Jones U.S. Real Estate Index and the price of shares of the iShares® Dow Jones Real Estate Index Fund, as applicable, to decline or remain flat during the term of the notes.
 
 
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Risks associated with Real Estate Investment Trusts will affect the value of the notes.
 
The Dow Jones U.S. Real Estate Index and the iShares® Dow Jones Real Estate Index Fund are composed of a variety of real-estate-related stocks including real estate investment trusts (“REITs”).  REITs invest primarily in income-producing real estate or real-estate-related loans or interests.  Investments in REITs, though not direct investments in real estate, are still subject to the risks associated with investing in real estate.  The following are some of the conditions that might impact the structure of and cash flow generated by REITs and, consequently, the value of REITs and, in turn, the Dow Jones U.S. Real Estate Index and the iShares® Dow Jones Real Estate Index Fund:
 
 
·
a decline in the value of real estate properties;
 
 
·
extended vacancies of properties;
 
 
·
increases in property and operating taxes;
 
 
·
increased competition or overbuilding;
 
 
·
a lack of available mortgage funds or other limits on accessing capital;
 
 
·
tenant bankruptcies and other credit problems;
 
 
·
limitation on rents, including decreases in market rates for rents;
 
 
·
changes in zoning laws and governmental regulations;
 
 
·
costs resulting from the clean-up of, and legal liability to third parties for, damages resulting from environmental problems;
 
 
·
investments in developments that are not completed or that are subject to delays in completion;
 
 
·
risks associated with borrowing;
 
 
·
changes in interest rates;
 
 
·
casualty and condemnation losses; and
 
 
·
uninsured damages from floods, earthquakes or other natural disasters.
 
The factors above may either offset or magnify each other.  To the extent that any of these conditions occur, they may negatively impact a REIT’s cash flow and cause a decline in the share price of a REIT, and, consequently, the level of the Dow Jones U.S. Real Estate Index and the price of shares of the iShares® Dow Jones Real Estate Index Fund.  In addition, some REITs have relatively small market capitalizations, which can increase the volatility of the market price of securities issued by those REITs.  Furthermore, REITs are dependent upon specialized management skills, have limited diversification and are, as a result, subject to risks inherent in operating and financing a limited number of projects.  To the extent that such risks increase the volatility of the market price of securities issued by REITs, they may also, consequently, increase the volatility of the Dow Jones U.S. Real Estate Index and the iShares® Dow Jones Real Estate Index Fund.
 
There will be no direct correlation between the value of the notes or the price of the iShares® Dow Jones Real Estate Index Fund and residential housing prices.
 
There is no direct linkage between the price of shares of the iShares® Dow Jones Real Estate Index Fund and residential housing prices in specific regions or residential housing prices in general.  While residential housing prices may be one factor that could affect the prices of the securities held by the Real Estate Constituent and consequently the price of shares of the iShares® Dow Jones Real Estate Index Fund, the price of shares of the iShares® Dow Jones Real Estate Index Fund and therefore the value of the notes are not directly linked to movements of residential housing prices and may be affected by factors unrelated to such movements.
 
 
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There are risks associated with the Equity/Bond ETF Constituents.
 
The Equity/Bond ETF Constituents may have a limited operating history.  Although the Equity/Bond ETF Constituents are listed for trading and a number of similar products have been traded on the same and other securities exchanges for varying periods of time, there is no assurance that an active trading market will continue for the ETF Constituents or that there will be liquidity in the trading market.
 
In addition, the Equity/Bond ETF Constituents are subject to management risk, which is the risk that the applicable investment adviser’s investment strategy, the implementation of which is subject to a number of constraints, may not produce the intended results.  These constraints could adversely affect the market prices of the shares of the Equity/Bond ETF Constituents, and consequently, the value of the notes.  See the relevant Basket Constituent description below or the relevant terms supplement for additional information.
 
The policies of the investment adviser for an ETF Constituent, and the sponsor of a Reference Index, could affect the value and the amount payable on the securities.
 
The policies of the investment adviser for an ETF Constituent concerning the calculation of the ETF Constituent’s net asset value, additions, deletions or substitutions of securities, commodities, commodity futures contracts or other assets underlying the ETF Constituent and manner in which changes affecting the Reference Index of the ETF Constituent are reflected in the ETF Constituent could affect the market price of shares of the ETF Constituent and, therefore, affect the value of the notes before maturity.  Any payments on the notes could also be affected if the investment adviser changes these policies, for example, by changing the manner in which it calculates the ETF Constituent’s net asset value, or if the investment adviser discontinues or suspends calculation or publication of the ETF Constituent’s net asset value, in which case it may become difficult to determine the value of the notes.
 
In addition, the sponsor of the index underlying an ETF Constituent, which we refer to as the Reference Index, is responsible for the design and maintenance of such Reference Index. The policies of the sponsor concerning the calculation of the Reference Index, including decisions regarding the addition, deletion or substitution of the equity securities included in the Reference Index, could affect the value of the Reference Index and, consequently, could affect the market prices of the ETF Constituent and, therefore, the value of the notes before maturity.
 
The performance of each Equity/Bond ETF Constituent may not correlate with the performance of its Reference Index.
 
Each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust) uses a representative sampling indexing strategy to attempt to track the performance of its Reference Index.  Pursuant to such representative sampling indexing strategy, each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust) invests in a representative sample of securities that collectively has an investment profile similar to its Reference Index; however, each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust) may not hold all or substantially all of the securities included in its Reference Index. Therefore, while the performance of each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust) is linked principally to the performance of its Reference Index, the performance of each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust) is also generally linked in part to assets other than the securities included in the Reference Index because the investment adviser to each Equity/Bond ETF Constituent (other than the SPDR® S&P 500® ETF Trust),  BlackRock Fund Advisors (“BFA”), generally may invest up to a certain percentage of the Equity/Bond ETF Constituent’s assets in securities not included in the Reference Index, but which BFA believes will help the Equity/Bond ETF Constituent track the Reference Index, and in other assets, including shares of money market funds affiliated with or advised by BFA.
 
 
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In addition, the performance of each Equity/Bond ETF Constituent (including the SPDR® S&P 500® ETF Trust) will reflect additional transaction costs and fees that are not included in the calculation of the relevant Reference Index. Also, the component stocks of each Equity/Bond ETF Constituent (including the SPDR® S&P 500® ETF Trust), if applicable, may be unavailable in the secondary market or due to other extraordinary circumstances.  Corporate actions with respect to the sample of securities (such as mergers and spin-offs) also may impact the variance between each Equity/Bond ETF Constituent (including the SPDR® S&P 500® ETF Trust) and its Reference Index. Finally, because the shares of each Equity/Bond ETF Constituent (including the SPDR® S&P 500® ETF Trust) are traded on the NYSE Arca, Inc. and are subject to market supply and investor demand, the market value of one share of each Equity/Bond ETF Constituent may differ from the net asset value per share of the each such Equity/Bond ETF Constituent.
 
For all of the foregoing reasons, the performance of each Equity/Bond ETF Constituent (including the SPDR® S&P 500® ETF Trust) may not correlate with the performance of the relevant Reference Index. Consequently, the return on the notes will not be the same as investing directly in any Equity/Bond ETF Constituent or any relevant Reference Index or in the securities held by any Equity/Bond ETF Constituent or included in any relevant Reference Index, and will not be the same as investing in a security or another financial product with a payment linked to the performance of the relevant Reference Index.
 
Risks Relating to the Commodity ETF Constituents
 
Suspension or disruptions of market trading in the relevant commodity and related futures markets may adversely affect the value of the notes.
 
The commodity markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single day. These limits are generally referred to as “daily price fluctuation limits” and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a “limit price.” Once the limit price has been reached for a particular contract, no trades may be made at a different price. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices. These circumstances could adversely affect the price of shares of the iShares® S&P GSCI™ Commodity-Indexed Trust and the SPDR® Gold Trust and therefore, the levels of the Indices and the value of your notes.
 
The notes will not be regulated by the Commodity Futures Trading Commission.
 
The notes are our debt securities. The net proceeds to be received by us from the sale of the notes will not be used to purchase or sell any commodity futures contracts or options on futures contracts for your benefit. An investment in the notes thus neither constitutes an investment in futures contracts, options on futures contracts nor a collective investment vehicle that trades in these futures contracts (i.e., the notes will not constitute a direct or indirect investment by you in the futures contracts), and you will not benefit from the regulatory protections of the Commodity Futures Trading Commission, commonly referred to as the “CFTC.”  Among other things, this means that we are not registered with the CFTC as a futures commission merchant and you will not benefit from the CFTC’s or any other non -U.S. regulatory authority’s regulatory protections afforded to persons who trade in futures contracts on a regulated futures exchange through a registered futures commission merchant.   For example, the price you pay to purchase notes will be used by us for our own purposes and will not be subject to customer funds segregation requirements provided to customers that trade futures on an exchange regulated by the CFTC.
 

 
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Unlike an investment in the notes, an investment in a collective investment vehicle that invests in futures contracts on behalf of its participants may be subject to regulation as a commodity pool and its operator may be required to be registered with and regulated by the CFTC as a commodity pool operator, or qualify for an exemption from the registration requirement. Because the notes will not be interests in a commodity pool, the notes will not be regulated by the CFTC as a commodity pool, we will not be registered with the CFTC as a commodity pool operator, and you will not benefit from the CFTC’s or any non U.S. regulatory authority’s regulatory protections afforded to persons who invest in regulated commodity pools.
 
The commodity futures contracts underlying the iShares® S&P GSCI™ Commodity-Indexed Trust or related to gold underlying the SPDR® Gold Trust are subject to legal and regulatory regimes that may change in ways that could affect our ability to hedge our obligations under the notes, may have an adverse effect on the levels of the Indices and/or could lead to the early acceleration of your notes.
 
Futures contracts and options on futures contracts markets, including the futures contracts underlying the iShares® S&P GSCI™ Commodity-Indexed Trust or related to gold underlying the SPDR® Gold Trust, are subject to extensive regulation and margin requirements.  The CFTC and the exchanges on which such futures contracts trade, are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily limits and the suspension of trading.  Furthermore, certain exchanges have regulations that limit the amount of fluctuations in futures contract prices that may occur during a single five-minute trading period.  These limits could adversely affect the market prices of relevant futures contracts and forward contracts.  The regulation of commodity transactions in the U.S. is subject to ongoing modification by government and judicial action.  In addition, various non-U.S. governments have expressed concern regarding the disruptive effects of speculative trading in the commodity markets and the need to regulate the derivative markets in general.  The effect on the value of the notes of any future regulatory change  is impossible to predict, but could be substantial and adverse to the interests of noteholders.
 
Notably, with respect to agricultural and exempt commodities as defined in the Commodity Exchange Act (generally, physical commodities such as agricultural commodities, energy commodities and metals), the Dodd-Frank Act, which was enacted on July 21, 2010, requires the CFTC to establish limits on the amount of positions, other than bona fide hedge positions, that may be held by any person in futures contracts, options on futures contracts and other related derivatives such as swaps that are economically equivalent to those contracts.  The Dodd-Frank Act also requires the CFTC to establish limits for each month, including related hedge exemption positions, on the aggregate number or amount of positions in contracts based upon the same underlying commodity, as defined by the CFTC, that may be held by any person, including any group or class of traders.  In addition, designated contract markets and swap execution facilities, as defined in the Dodd-Frank Act, are required to establish and enforce position limits or position accountability requirements on their own markets or facilities, which must be at least as stringent as the CFTC’s where CFTC limits also apply.
 
Pursuant to the Dodd-Frank Act requirements, on October 18, 2011 the CFTC adopted final rules to establish position limits that will apply to any one of 28 futures and options contracts and that are traded on U.S. futures exchanges and to futures, options and swaps that are economically equivalent to those contracts, as described in the rules.  The limits will apply to a person’s combined position across those related products.  The limits cover a number of commodity futures contracts that may be included in the iShares® S&P GSCI™ Commodity-Indexed Trust, such as CBOT Soybeans, Soybean Meal and Wheat futures; ICE Futures US Cotton No. 2, Sugar No. 11 and Sugar No. 16 futures; NYMEX Light Sweet Crude Oil, NY Harbor No. 2 Heating Oil, NY Harbor Gasoline Blendstock and Henry Hub Natural Gas futures; and COMEX Gold, Silver and Copper futures and NYMEX Palladium and Platinum futures.  The rules also narrow the existing exemption for hedge positions.  The rules may interfere with our ability to enter into or maintain hedge positions to hedge our obligations under the notes.
 
 
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Upon the occurrence of legal or regulatory changes that the note calculation agent determines have interfered with our or our affiliates’ ability to hedge our obligations under the notes, including the CFTC’s adoption of the position limit rules mentioned above, or if for any other reason we or our affiliates are unable to enter into or maintain hedge positions the note calculation agent deems necessary to hedge our obligations under the notes, we may, in our sole and absolute discretion, accelerate the payment on your notes and pay you an amount determined in good faith and in a commercially reasonable manner by the note calculation agent.  In the event of a commodity hedging disruption event, the amount due and payable per note upon early acceleration will be the final payment on the notes, and no further Coupon Payments will be made.  See “Risks Relating to the Notes Generally — If a commodity hedging disruption event occurs, we may accelerate your notes” above.
 
Commodity futures prices may change unpredictably, affecting the price of shares of the iShares® S&P GSCI™ Commodity-Indexed Trust and the value of your notes in unforeseeable ways.
 
Trading in commodity futures contracts underlying the iShares® S&P GSCI™ Commodity-Indexed Trust is speculative and can be extremely volatile. A decrease in the price of any of the commodities upon which the futures contracts that compose the iShares® S&P GSCI™ Commodity-Indexed Trust are based may have a material adverse effect on the value of the notes and your return on an investment in the notes.  Market prices of the commodities on which the futures contracts that compose the iShares® S&P GSCI™ Commodity-Indexed Trust are based may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships; governmental programs and policies, national and international monetary, trade, political and economic events, wars and acts of terror, changes in interest and in exchange rates, speculation and trading activities in commodities and related contracts, weather, and agricultural, trade, fiscal and exchange control policies.  The price volatility of each commodity also affects the value of the futures and forward contracts related to that commodity and therefore its price at any such time. The price of any one commodity may be correlated to a greater or lesser degree with any other commodity and factors affecting the general supply and demand as well as the prices of other commodities may affect the particular commodity in question. In respect of commodities in the energy sector, due to the significant level of its continuous consumption, limited reserves, and oil cartel controls, energy prices are subject to rapid price increases in the event of perceived or actual shortages.  The commodities markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. Many commodities are also highly cyclical.  These factors, some of which are specific to the nature of each such commodity, may cause the value of the different commodities upon which the futures contracts that compose the iShares® S&P GSCI™ Commodity-Indexed Trust are based, as well as the futures contracts themselves, to move in inconsistent directions at inconsistent rates.  This, in turn, will affect the value of shares of the iShares® S&P GSCI™ Commodity-Indexed Trust and the value of the notes.  It is not possible to predict the aggregate effect of all or any combination of these factors.
 
Some of the commodities underlying the iShares® S&P GSCI™ Commodity-Indexed Trust will be subject to pronounced risks of pricing volatility.
 
As a general matter, the risk of low liquidity or volatile pricing around the maturity date of a commodity futures contract is greater than in the case of other futures contracts because (among other factors) a number of market participants take physical delivery of the underlying commodities.  Many commodities, like those in the energy and industrial metals sectors, have liquid futures contracts that expire every month.  Therefore, in the calculation of the iShares® S&P GSCI™ Commodity-Indexed Trust these contracts are rolled forward every month.  Contracts based on certain other commodities, most notably agricultural and livestock products, tend to have only a few contract months each year that trade with substantial liquidity.  Thus, these commodities, with related futures contracts that expire infrequently, roll forward less frequently than every month in the calculation of the iShares® S&P GSCI™ Commodity-Indexed Trust, and can have further pronounced pricing volatility during extended periods of low liquidity.  The risk of aberrational
 
 
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liquidity or pricing around the maturity date of a commodity futures contract is greater than in the case of other futures contracts because (among other factors) a number of market participants take delivery of the underlying commodities.  Due to the significant level of continuous consumption, limited reserves, and oil cartel controls, energy commodities are subject to rapid price increases in the event of perceived or actual shortages.  These factors (when combined or in isolation) may affect the price of futures contracts and, as a consequence, the levels of the Indices and you return on the notes.
 
The iShares® S&P GSCI™ Commodity-Indexed Trust does not offer direct exposure to commodity spot prices.
 
The value of the iShares® S&P GSCI™ Commodity-Indexed Trust is intended to track generally the performance of commodity-futures contracts on physical commodities included in the S&P GSCI™ Index, not physical commodities (or their spot prices).  The price of a futures contract reflects the expected value of the commodity upon delivery in the future, whereas the spot price of a commodity reflects the immediate delivery value of the commodity.  A variety of factors can lead to a disparity between the expected future price of a commodity and the spot price at a given point in time, such as the cost of storing the commodity for the term of the futures contract, interest charges incurred to finance the purchase of the commodity and expectations concerning supply and demand for the commodity.  The price movements of a futures contract are typically correlated with the movements of the spot price of the reference commodity, but the correlation is generally imperfect and price movements in the spot market may not be reflected in the futures market (and vice versa).  Accordingly, the notes may underperform a similar investment that reflects the return on physical commodities.
 
Higher future prices of the commodity futures contracts constituting the iShares® S&P GSCI™ Commodity-Indexed Trust relative to their current prices may decrease the amount payable at maturity.
 
The iShares® S&P GSCI™ Commodity-Indexed Trust is composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for delivery of the underlying physical commodity. As the exchange-traded futures contracts that compose the iShares® S&P GSCI™ Commodity-Indexed Trust approach expiration, they are replaced by contracts that have a later expiration.  For example, a contract purchased and held in August may specify an October expiration.  As time passes, the contract expiring in October is replaced by a contract for delivery in November.   This is accomplished by selling the October contract and purchasing the November contract.  This process is referred to as “rolling.”  Excluding other considerations, if the market for these contracts is in “contango,” where the prices are higher in the distant delivery months than in the nearer delivery months, the purchase of the November contract would take place at a price that is higher than the price of the October contract, thereby creating a negative “roll yield.”  Moreover, many commodities have historically exhibited contango markets.  The presence of contango in the commodity markets could adversely affect the price of shares of the iShares® S&P GSCI™ Commodity-Indexed Trust and, therefore, the levels of the Indices and the value of your notes.
 
An increase in the margin requirements for commodity futures contracts included in the iShares® S&P GSCI™ Commodity-Indexed Trust may adversely affect the levels of the Indices.
 
Futures exchanges require market participants to post collateral in order to open and to keep open positions in futures contracts.  If an exchange increases the amount of collateral required to be posted to hold positions in commodity futures contracts underlying the iShares® S&P GSCI™ Commodity-Indexed Trust, market participants who are unwilling or unable to post additional collateral may liquidate their positions, which may cause the price of the relevant commodity futures contracts to decline significantly.  As a result, the levels of the Indices and the value of the notes may be adversely affected.
 
 
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The price of gold is volatile and is affected by numerous factors.
 
The value of the SPDR® Gold Trust is closely related to the price of gold.  A decrease in the price of gold may have a material adverse effect on the value of the notes and your return on your investment in the notes.  Gold is subject to the effect of numerous factors.  The following describes some of the factors affecting gold.
 
The price of gold is primarily affected by the global demand for and supply of gold.  The market for gold bullion is global, and gold prices are subject to volatile price movements over short periods of time and are affected by numerous factors, including macroeconomic factors such as the structure of and confidence in the global monetary system, expectations regarding the future rate of inflation, the relative strength of, and confidence in, the U.S. dollar (the currency in which the price of gold is usually quoted), interest rates, gold borrowing and lending rates, and global or regional economic, financial, political, regulatory, judicial or other events.  Gold prices may be affected by industry factors such as industrial and jewelry demand as well as lending, sales and purchases of gold by the official sector, including central banks and other governmental agencies and multilateral institutions that hold gold.  Additionally, gold prices may be affected by levels of gold production, production costs and short-term changes in supply and demand due to trading activities in the gold market.  It is not possible to predict the aggregate effect of all or any combination of these factors.
 
Economic or political events or crises could result in large-scale purchases or sales of gold, which could affect the price of gold and may adversely affect the value of your notes.
 
Many investors, institutions, governments and others purchase and sell gold as a hedge against inflation, market turmoil or uncertainty or political events. Under such circumstances, significant large-scale purchases or sales of gold by market participants may affect the price of gold, which could adversely affect the value of your notes.  Crises in the future may impair gold’s price performance which would, in turn, adversely affect the shares of the SPDR® Gold Trust and your investment in the notes.
 
Substantial sales of gold by governments or public sector entities could result in price decreases, which would adversely affect the value of your notes.
 
Governments and other public sector entities, such as agencies of governments and multi-national institutions, regularly buy, sell and hold gold as part of the management of their reserves. In the event that economic, political or social conditions or pressures require or motivate public sector entities to sell gold, in a coordinated or uncoordinated manner, the resulting purchases could cause the price of gold to decrease substantially, which could adversely affect the value of your notes.
 
Gold is traded on the London Bullion Market Association, so an investment in the notes may be subject to risks associated with the London Bullion Market Association.
 
The Indices are linked to the SPDR® Gold Trust, which is closely related to its underlying commodity (e.g., gold) that is traded on the London Bullion Market Association (the “LBMA”).  Investments in securities indexed to the value of commodities that are traded on non-U.S. exchanges involve risks associated with the markets in those countries, including risks of volatility in those markets and governmental intervention in those markets.
 
The final price of gold will be determined by reference to fixing prices reported by the LBMA.  The LBMA is a self-regulatory association of bullion market participants.  Although all market-making members of the LBMA are supervised by the Bank of England and are required to satisfy a capital adequacy test, the LBMA itself is not a regulated entity.  If the LBMA should cease operations, or if bullion trading should become subject to a value added tax or other tax or any other form of regulation currently not in place, the role of LBMA price fixings as a global
 
 
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benchmark for the value of gold may be adversely affected.  The LBMA is a principals’ market which operates in a manner more closely analogous to an over-the-counter physical commodity market than regulated futures markets, and certain features of U.S. futures contracts are not present in the context of LBMA trading.  For example, there are no daily price limits on the LBMA which would otherwise restrict fluctuations in the prices of LBMA contracts.  In a declining market, it is possible that prices would continue to decline without limitation within a trading day or over a period of trading days.
 
The relevant exchange for gold has no obligation to consider your interests.
 
The price of the SPDR® Gold Trust is closely related to the price of gold.  The relevant exchange for gold is responsible for calculating the official settlement price or fixing level, as applicable, for gold.  The relevant exchange may alter, discontinue or suspend calculation or dissemination of the official settlement price or fixing level, as applicable, for gold.  Any of these actions could adversely affect the value of the notes.  The relevant exchange has no obligation to consider your interests in calculating or revising the official settlement price or fixing level, as applicable, for gold.
 
Termination of the SPDR® Gold Trust could affect adversely the value of the notes.
 
The SPDR® Gold Trust may be required to terminate and liquidate at a time that is disadvantageous to you.  If the SPDR® Gold Trust is required to terminate and liquidate, such termination and liquidation could occur at a time that is disadvantageous to you, such as when the price of gold is higher than the price of gold at the time when you purchased your notes.
 
There are risks associated with the Commodity ETF Constituents.
 
The Commodity ETF Constituents may have a limited operating history.  Although the Commodity ETF Constituents are listed for trading and a number of similar products have been traded on the same and other securities exchanges for varying periods of time, there is no assurance that an active trading market will continue for the Commodity ETF Constituents or that there will be liquidity in the trading market.
 
The policies of the sponsors of the Commodity ETF Constituents and changes that affect the Commodity ETF Constituents could affect the net asset value of the Commodity ETF Constituents and the value of your notes.
 
The policies of the sponsors of the Commodity ETF Constituents concerning the net asset value of the Commodity ETF Constituents, additions, deletions or substitutions of assets in the Commodity ETF Constituents and the manner in which changes affecting the Commodity ETF Constituents are reflected in the price of the Commodity ETF Constituents could affect the price of the Commodity ETF Constituents and, therefore, the levels of the Indices and the value of your notes before maturity.  Any payments on the notes could also be affected if the sponsor of a Commodity ETF Constituent changes these policies, for example, by changing the manner in which it calculates the price of the relevant Commodity ETF Constituent or if the sponsor discontinues or suspends calculation or publication of the relevant closing price, in which case it may become difficult to determine the value of your notes.
 
The performance of the iShares® S&P GSCI Commodity-Indexed Trust may not correlate with the performance of its Reference Index, the S&P GSCI™ Total Return Index.
 
Substantially all of the assets of the iShares® S&P GSCI Commodity-Indexed Trust (the “Commodity-Indexed Trust”) consist of its holdings of the limited liability company interests in the iShares® S&P GSCI™ Commodity-Indexed Investing Pool LLC (the “Investing Pool”), which holds long positions in futures contracts on the S&P GSCI™ Excess Return Index called “CERFs” and posts as margin cash or short-term securities to collateralize its CERF positions. The investment objective of the Commodity-Indexed Trust is to seek investment results that correspond generally, but are not necessarily identical, to the performance of the S&P GSCI™ Total Return Index, which we refer to as
 
 
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the Reference Index for the Commodity-Indexed Trust, before the payment of expenses and liabilities of the Commodity-Indexed Trust and the Investing Pool. Differences between the returns of the Commodity-Indexed Trust and the S&P GSCI™ Total Return Index may be based on, among other factors, any differences between the return on the assets used by the Investing Pool to collateralize its CERF positions and the U.S. Treasury rate used to calculated the return component of the S&P GSCI™ Total Return Index, timing differences, differences between the portion of the Investing Pool’s assets invested in CERFs and the portion of the return of the S&P GSCI™ Total Return Index contributed by the S&P GSCI™ Excess Return Index, and the payment of expenses and liabilities by the Commodity-Indexed Trust and the Investing Pool.
 
The net asset value of the Commodity-Indexed Trust will reflect the performance of the Investing Pool, its sole investment. However, because the shares of the Commodity-Indexed Trust are traded on NYSE Arca, Inc. and are subject to market supply and investor demand, the market value of one Share of the Commodity-Indexed Trust may differ from the net asset value per share of the Commodity-Indexed Trust.
 
For all of the foregoing reasons, the performance of the Commodity-Indexed Trust may not correlate with the performance of the S&P® GSCI™ Total Return Index. Consequently, the return on the notes will not be the same as investing directly in the Commodity-Indexed Trust or the S&P® GSCI™ Total Return Index or in the commodity futures contracts or other assets held by the Commodity-Indexed Trust or included in the S&P® GSCI™ Total Return Index, and will not be the same as investing in a note or another financial product with payments linked in part to the performance of the S&P® GSCI™ Total Return Index.
 
The performance of the SPDR® Gold Trust may not correlate with the price of gold.
 
The performance of SPDR® Gold Trust may not fully replicate the performance of the price of gold due to the fees and expenses charged by the SPDR® Gold Trust or by restrictions on access to gold due to other circumstances.  The SPDR® Gold Trust does not generate any income and as the SPDR® Gold Trust regularly sells gold to pay for its ongoing expenses, the amount of gold represented by each share gradually declines over time.  The SPDR® Gold Trust sells gold to pay expenses on an ongoing basis irrespective of whether the trading price of the shares rises or falls in response to changes in the price of gold.  The sale of SPDR® Gold Trust’s gold to pay expenses at a time of low gold prices could adversely affect the levels of the Indices and the value of the notes.  Additionally, there is a risk that part or all of the SPDR® Gold Trust’s gold could be lost, damaged or stolen due to war, terrorism, theft, natural disaster or otherwise.
 
The net asset value of the SPDR® Gold Trust will reflect the performance of gold. However, because the shares of the SPDR® Gold Trust are traded on NYSE Arca, Inc. and are subject to market supply and investor demand, the market value of one Share of the SPDR® Gold Trust may differ from the net asset value per share of the SPDR® Gold Trust.
 
For all of the foregoing reasons, the performance of the SPDR® Gold Trust over the term of the notes may not correlate with the performance of the return on gold over the same period. Consequently, the return on the notes will not be the same as investing directly in the SPDR® Gold Trust, gold or other exchange-traded or over-the-counter instruments based on gold, and will not be the same as investing in a note or another financial product with payments linked in part to the performance of the SPDR® Gold Trust.
 
Risks Relating to the Cash Constituent
 
The JPMorgan Cash Index USD 3 Month will be affected by a number of factors.
 
The performance of the JPMorgan Cash Index USD 3 Month will depend on a number of factors that can affect the levels of 3-month LIBOR, including, but not limited to:
 
 
 
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·
changes in, or perceptions about, future rates: increased interest rate volatility is historically associated with an increased spread between long- and short-term interest rates and, conversely, decreased volatility is historically associated with tighter spreads;
 
 
·
general economic conditions: the economic, financial, political, regulatory and judicial events that affect financial markets generally will affect 3-month LIBOR;
 
 
·
prevailing interest rates: 3-month LIBOR is subject to daily fluctuations depending on the levels of prevailing interest rates in the market generally; in addition, lower overall interest rates are historically associated with an increased spread between long and short-term interest rates and, conversely, higher overall interest rates are historically associated with tighter spreads; and
 
 
·
policy of the Federal Reserve Board regarding interest rates: an easing of monetary policy is historically associated with an increased spread between long and short-term interest rates and, conversely, a tightening of monetary policy is historically associated with tighter spreads.
 
These and other factors may have a negative effect on the performance of the JPMorgan Cash Index USD 3 Month.
 
Three-month LIBOR and the manner in which it is calculated may change in the future.
 
There can be no assurance that the method by which 3-month LIBOR is calculated will not change.  Such changes in the method of calculation could reduce the level of 3-month LIBOR.  Accordingly, the return of the JPMorgan Cash Index USD 3 Month may be may be significantly reduced.
 
Three-month LIBOR may be volatile.
 
Three-month LIBOR is subject to volatility due to a variety of factors affecting interest rates generally, including:
 
 
·
sentiment regarding underlying strength in the U.S., European and global economies;
 
 
·
expectation regarding the level of price inflation;
 
 
·
sentiment regarding credit quality in U.S., European and global credit markets;
 
 
·
central bank policy regarding interest rates; and
 
 
·
performance of capital markets.
 
Decreases in 3-month LIBOR will have a negative effect on the performance of the JPMorgan Cash Index USD 3 Month.
 
 
 

 
 
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USE OF PROCEEDS AND HEDGING
 
Unless otherwise specified in the relevant terms supplement, the net proceeds we receive from the sale of the notes will be used for general corporate purposes and, in part, by us or by one or more of our affiliates in connection with hedging our obligations under the notes.  The original issue price of the notes includes each agent’s commissions (as shown on the cover page of the relevant terms supplement) paid with respect to the notes and the estimated cost of hedging our obligations under the notes.  We may have hedged our obligations under the notes through certain affiliates or unaffiliated counterparties.
 
If so specified in the relevant terms supplement, each agent’s commission will include the projected profit that our affiliates expect to realize in consideration for assuming the risks inherent in hedging our obligations under the notes.   If the relevant terms supplement does not specify that such projected profit is included in each agent’s commission, the original issue price of the notes will include the reimbursement of certain issuance costs and the estimated cost of hedging our obligations under the notes.  Under these circumstances, the estimated cost of hedging will include the projected profit, which will not exceed $60.00 per note.  Because hedging our obligations entails risk and may be influenced by market forces beyond our control, this hedging may result in a profit that is more or less than expected, or could result in a loss.  See also “Use of Proceeds” in the accompanying prospectus.
 
On or prior to the date of the relevant terms supplement, we, through our affiliates or others, expect to hedge some or all of our anticipated exposure in connection with the notes.  In addition, from time to time after we issue the notes, we, through our affiliates or others, may enter into additional hedging transactions and close out or unwind those we have entered into, in connection with the notes and possibly in connection with our or our affiliates’ exposure to the Indices, any of the Basket Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.  To accomplish this, we, through our affiliates or others, may take positions in the Indices, any of the Basket Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents, or instruments the value of which is derived from the Indices, any of the Basket Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.  From time to time, prior to maturity of the notes, we may pursue a dynamic hedging strategy that may involve taking long or short positions in the instruments described above.
 
While we cannot predict an outcome, any of these hedging activities or other trading activities of ours could potentially increase the Index closing level of the PR Index on the pricing date or such other date or dates as specified in the relevant terms supplement, and/or decrease the Index closing level of the PR Index on the Final Valuation Date, which could adversely affect your payment at maturity.  It is possible that these hedging or trading activities could result in substantial returns for us or our affiliates while the value of the notes declines.  See “Risk Factors — Risks Relating to the Notes Generally — We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our hedging and other trading activities” above.
 
We have no obligation to engage in any manner of hedging activity and will do so solely at our discretion and for our own account.  We may hedge our exposure on the notes directly or we may aggregate this exposure with other positions taken by us and our affiliates with respect to our exposure to the Indices, any of the Basket Constituents or the securities, commodities, commodity futures contracts or other assets underlying the Basket Constituents.  No note holder will have any rights or interest in our hedging activity or any positions that we or any unaffiliated counterparties may take in connection with our hedging activity.
 
 
 
PS-33

 
 
THE JPMORGAN ETF EFFICIENTE 5 PR INDEX AND THE JPMORGAN ETF EFFICIENTE 5 TR INDEX
 
General
 
The JPMorgan ETF Efficiente 5 TR Index (the “TR Index”) and the JPMorgan ETF Efficiente 5 PR Index (the “PR Index”) were developed and are maintained and calculated by J.P. Morgan Securities Ltd.  We refer to the TR Index and the PR Index each as an “Index” and collectively as the “Indices.”  The description of the Indices and methodology included in this product supplement is based on rules formulated by J.P. Morgan Securities Ltd. (the “Rules”).  The Rules, and not this description, will govern the calculation and constitution of the Indices and other decisions and actions related to their maintenance.  The Rules in effect as of the date of this product supplement are attached as Annex A to this product supplement.  The Indices are the intellectual property of J.P. Morgan Securities Ltd., and J.P. Morgan Securities Ltd. reserves all rights with respect to its ownership of the Indices.  The Indices are reported by Bloomberg L.P. under the ticker symbols “EEJPUS5T” for the TR Index and “EEJPUS5P” for the PR Index.
 
The PR Index is a notional dynamic basket that tracks the return of a portfolio of twelve exchange-traded funds (each an “ETF Constituent,” and collectively the “ETF Constituents”), without dividends reinvested, and the JPMorgan Cash Index USD 3 Month (the “Cash Constituent”), less a fee of 0.50% per annum that accrues daily.  We refer to the ETF Constituents and the Cash Constituent together as the “Basket Constituents.”  The ETF Constituents represent a diverse range of asset classes and geographic regions.  The TR Index tracks the same Basket Constituents and employs the same methodology as the PR Index, except that the level of the TR Index reflects the reinvestment of any dividends payable on the ETF Constituents.
 
The Indices rebalance monthly a synthetic portfolio composed of the Basket Constituents.  The Indices are based on the “modern portfolio theory” approach to asset allocation, which suggests how a rational investor should allocate his capital across the available universe of assets to maximize return for a given risk appetite.  The Indices use the concept of an “efficient frontier” to define the asset allocation of the Indices.  An efficient frontier for a portfolio of assets defines the optimum return of the portfolio for a given amount of risk.  The Indices use the volatility of returns of hypothetical portfolios as the measure of risk.  This strategy is based on the assumption that the most efficient allocation of assets is one that maximizes returns per unit of risk.  The index level of the TR Index (the “TR Index Level”) is determined by tracking the returns of the synthetic portfolio, assuming reinvestment of all dividends.  The index level of the PR Index (the “PR Index Level”) is determined by tracking the returns of the synthetic portfolio, but without reinvestment of dividends.  We refer to the TR Index Level and the PR Index Level each as an “Index Level.”
 
The strategy assigns the weights to the Basket Constituents based upon the returns and volatilities of multiple hypothetical portfolios comprising the Basket Constituents measured over the previous six months.  The re-weighting methodology seeks to identify the weights for each Basket Constituent that would have resulted in the hypothetical portfolio with the highest return over the relevant measurement period subject to an annualized volatility over the same period of 5% or less.  Thus, the portfolio exhibiting the highest return with an annualized volatility of 5% or less is then selected, with the weighting for such portfolio applied to the Basket Constituents.  In the event that none of the portfolios has an annualized volatility equal to or less than 5%, this volatility threshold is increased by 1% until a portfolio is selected.
 
No assurance can be given that the investment strategy used to construct the Indices will be successful or that the Indices will outperform any alternative basket or strategy that might be constructed from the Basket Constituents. Furthermore, no assurance can be given that either Index will achieve its target volatility of 5%. The actual realized volatility of either Index may be greater or less than 5%.
 
 
PS-34

 
 
The Weight of the Cash Constituent at any given time represents the portion of the synthetic portfolio that is not notionally invested in any ETF Constituent at that time.  While the weight of the Cash Constituent is normally limited by a Weighting Constraint of 50%, if any Basket Constituent is replaced with the Cash Constituent, as described below, the aggregate Weight of the Cash Constituent would be allowed to exceed the 50% because a portion of such aggregate Weight would be subject to the Weighting Constraints specific to the replaced Basket Constituent and not the Weighting Constraints applicable to the Cash Constituent itself.
 
Each Index is described as a “notional” or synthetic portfolio or basket of assets because there is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest.  Each Index merely references certain assets, the performance of which will be used as a reference point for calculating the TR Index Level and the PR Index Level.
 
The Index Calculation Agent; Amendment of Rules; Limitation of Liability
 
J.P. Morgan Securities Ltd. (“JPMSL”) or any affiliate or subsidiary designated by it will act as calculation agent for the Indices (the “index calculation agent”).  The index calculation agent’s determinations in respect of the Indices and interpretation of the Rules will be final.  The Rules may be supplemented, amended or restated from time to time at the discretion of JPMSL in its capacity as index calculation agent.
 
The index calculation agent will act in good faith and in a commercially reasonable manner with respect to the performance of its obligations and the exercise of its discretions pursuant to the Rules.
 
While the Rules are intended to be comprehensive, ambiguities may arise. In those circumstances, the index calculation agent will resolve those ambiguities in a reasonable manner and, if necessary, amend the Rules to reflect that resolution.
 
Neither the index calculation agent nor any of its affiliates or subsidiaries or any of their respective directors, officers, employees, representatives, delegates or agents (each a “Relevant Person”) will have any responsibility to any person (whether as a result of negligence or otherwise) for any determinations made or anything done (or omitted to be determined or done) in respect of either Index and any use to which any person may put either Index or its Index Levels.  No Relevant Person will take your interests into account in making any determination in respect of any Index.  All determinations of the index calculation agent in respect of each Index will be final, conclusive and binding and no person will be entitled to make any claim against any of the Relevant Persons in respect thereof.  Once a determination or calculation is made or action taken by the index calculation agent in respect of an Index, neither the index calculation agent nor any other Relevant Person will be under any obligation to revise any determination or calculation made or action taken for any reason.
 
The Basket Constituents of the Indices
 
Subject to the occurrence of an Extraordinary Event (as defined below), the Basket Constituents are set out in Table 1 below. Table 1 also contains the Bloomberg ticker for each Basket Constituent for ease of identification, as well as the primary exchange and Related Exchange for each ETF Constituent.
 
 
PS-35

 
Table 1
 
 
Basket Constituent Name
Bloomberg Ticker
Primary Exchange
Related Exchange
1
SPDR® S&P 500® ETF Trust
SPY
NYSE Arca, Inc. (“NYSE Arca”)
All Exchanges
2
iShares® Russell 2000 Index Fund
IWM
NYSE Arca
All Exchanges
3
iShares® MSCI EAFE Index Fund
EFA
NYSE Arca
All Exchanges
4
iShares® Barclays 20+ Year Treasury Bond Fund
TLT
NYSE Arca
All Exchanges
5
iShares® iBoxx $ Investment Grade Corporate Bond Fund
LQD
NYSE Arca
All Exchanges
6
iShares® iBoxx $ High Yield Corporate Bond Fund
HYG
NYSE Arca
All Exchanges
7
iShares® MSCI Emerging Markets Index Fund
EEM
NYSE Arca
All Exchanges
8
iShares® JPMorgan USD Emerging Markets Bond Fund
EMB
NYSE Arca
All Exchanges
9
iShares® Dow Jones Real Estate Index Fund
IYR
NYSE Arca
All Exchanges
10
iShares® S&P GSCI™ Commodity-Indexed Trust
GSG
NYSE Arca
All Exchanges
11
SPDR® Gold Trust
GLD
NYSE Arca
All Exchanges
12
iShares® Barclays TIPS Bond Fund
TIP
NYSE Arca
All Exchanges
13
JPMorgan Cash Index USD 3 Month
JPCAUS3M
N/A
N/A

 
Determining the Weights for the Basket Constituents
 
The Indices will be rebalanced on the first Index Business Day of each calendar month (each such day a “Re-weighting Date”), subject to adjustment if an Index Market Disruption Event has occurred and is continuing.
 
An “Index Business Day” means a day (i) on which the New York Stock Exchange is scheduled to open for trading for its regular trading session and (ii) that is a Dealing Day for all Basket Constituents.
 
Dealing Day” means (a) in respect of any Basket Constituent that is an index, including the Cash Constituent, a day upon which the Closing Level for the Basket Constituent is (or, but for the occurrence of an Index Market Disruption Event, would have been) scheduled to be calculated and published by the relevant Basket Constituent Sponsor and (b) in respect of an ETF Constituent, each day on which the primary exchange in the United States for that ETF Constituent is scheduled to be open for trading for its regular trading session.
 
 
 
PS-36

 
 
(a)
Identifying the Performance Observation Periods
 
The weights assigned to the Basket Constituents are determined two Index Business Days before the Re-weighting Date (the “Re-weighting Selection Date”), subject to adjustment. These weights are based on the returns and volatilities of multiple hypothetical portfolios comprising the Basket Constituents over the period of 126 Weekdays prior to and including each Re-weighting Selection Date, as identified by the index calculation agent (each, a “Performance Observation Period”).
 
A “Weekday” is any day other than a Saturday or a Sunday.
 
(b)
Identifying the Unique Portfolio for each Performance Observation Period
 
With respect to the applicable Performance Observation Period identified by the index calculation agent, on each Re-weighting Selection Date k, the index calculation agent selects the weights in order to identify the hypothetical portfolio with the strongest performance that has an annualized volatility of 5% or less (subject to adjustment) by the following methodology:
 
1.      The index calculation agent calculates the Closing TR Level of each ETF Constituent and obtains the Closing Level of each Basket Constituent that is an index, including the Cash Constituent, for each Weekday during the relevant Performance Observation Period. If any Weekday is not a Dealing Day with respect to a Basket Constituent or if the index calculation agent cannot obtain relevant reliable information from third party sources, the Closing TR Level or Closing Level, as the case may be, for that Basket Constituent in respect of that Weekday will be deemed to be the Closing TR Level or the Closing Level, as the case may be, for that Basket Constituent as of the immediately preceding Dealing Day for that Basket Constituent for which the index calculation agent can obtain relevant reliable information from third party sources.
 
For the avoidance of doubt, even though the PR Index Levels do not reflect the reinvestment of dividends, the weights of the Basket Constituents selected on each Re-weighting Selection Date, which are the same for both the PR Index and the TR Index, are determined based in part on the Closing TR Levels of the ETF Constituents (which Closing TR Levels themselves reflect the reinvestment of dividends).
 
Closing TR Level” means, subject to the provisions of “— Index Market Disruption Events” below, with respect to a Basket Constituent if that Basket Constituent is an ETF Constituent and a Dealing Day, the Closing Level of the ETF Constituent with the dividends re-invested, determined for each ETF Constituent on each Dealing Day to be the product of (x) the Closing TR Level of that ETF Constituent on the immediately preceding Dealing Day and (y) the quotient of (a) the Closing Level of that ETF Constituent on that Dealing Day plus the Gross Dividend Amount of that ETF Constituent (if that Dealing Day is an Ex-Dividend Date for that ETF Constituent) divided by (b) the Closing Level of that ETF Constituent on the immediately preceding Dealing Day.
 
Closing Level,” means, subject to the provisions of “— Index Market Disruption Events” and “— Extraordinary Events” below, (a) in respect of a Basket Constituent that is an index, including the Cash Constituent, and a Dealing Day, (i) the official closing level of the applicable Basket Constituent published by the relevant Basket Constituent Sponsor for such Dealing Day; provided, however, that if the index calculation agent determines that the official closing level reflects manifest error on the part of the relevant Basket Constituent Sponsor, the index calculation agent will determine the closing level of the index in good faith and in a commercially reasonable manner or (ii) in such circumstances as set out in the definition of Non-Publication Event relating to the calculation of a Proxy Calculated Level, the Proxy Calculated Level, and (b) in respect of an ETF Constituent and a Dealing Day, the last reported sale price, regular way (or, in the case of the NASDAQ Stock Market, the official closing price) of the principal trading session on that Dealing Day on the principal U.S. securities exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on which that ETF Constituent is listed or admitted to trading.
 
 
PS-37

 
 
Gross Dividend Amount” means, in respect of an ETF Constituent and an Ex-Dividend Date for that ETF Constituent, 100% of the amount of any dividend or other distribution per share of the ETF Constituent that a shareholder in that ETF Constituent on that Ex-Dividend Date would no longer have the right to receive due to the occurrence of that Ex-Dividend Date, as determined by the index calculation agent in its discretion as (x) the amount of any cash dividend paid or other cash distribution made and (y) the fair market value of any distribution of shares of capital stock, evidences of indebtedness or other assets or property of that ETF Constituent (other than share dividends or distributions).  If a portion of that distribution consists of property traded on the Ex-Dividend Date on a U.S. national securities exchange, the fair market value of that portion will equal the closing price of that distributed property on that Ex-Dividend Date.
 
Ex-Dividend Date” means, (a) in respect of any Basket Constituent that is an index, including the Cash Constituent, a day upon which the Closing Level for the Cash Constituent is (or, but for the occurrence of a Market Disruption Event, would have been) scheduled to be calculated and published by the relevant Basket Constituent Sponsor; and (b) in respect of an ETF Constituent, each day on which the primary exchange in the United States for that ETF Constituent is scheduled to be open for trading for its regular trading session.
 
Basket Constituent Sponsor” means, in respect of a Basket Constituent, the sponsor or successor sponsor of that Basket Constituent.
 
2.      The index calculation agent identifies all possible Eligible Portfolios as described below under “Eligible Portfolios and Weighting Constraints.”
 
3.      The index calculation agent calculates the Performance of each Eligible Portfolio over the relevant Performance Observation Period, which is equal to the sum of the weighted returns of each Basket Constituent (based on the weights assigned to the Basket Constituents in the relevant Eligible Portfolio) over the relevant Performance Observation Period, minus one.
 
Performance” means, in respect of an Eligible Portfolio and a Performance Observation Period, the performance of that Eligible Portfolio over that Performance Observation Period, as determined by the index calculation agent using the algorithm(s) set out in the Rules.
 
4.      The index calculation agent calculates the annualized realized volatility of each Eligible Portfolio over the Performance Observation Period (the “Realized Volatility”) based on a pre-determined formula.
 
5.      The index calculation agent selects the Eligible Portfolio with the strongest performance over the relevant Performance Observation Period (with a precision of as many decimal places as necessary) that has an annualized Realized Volatility equal to or less than the Target Volatility, which is subject to adjustment as described below. The Eligible Portfolio that satisfies these criteria is known as the “Unique Portfolio” for that Performance Observation Period.
 
The “Target Volatility” means 5% and is subject to adjustment as described in (6) below.
 
6.      If none of the Eligible Portfolios has an annualized Realized Volatility equal to or less than the Target Volatility, the index calculation agent will increase the Target Volatility by one percent (1%) and repeat step (5) above until a Unique Portfolio is selected. These steps, including an increase to the Target Volatility, may be repeated further until a Unique Portfolio is selected.
 
(c)
Determining the Weight to be assigned to each Basket Constituent on the relevant Re-weighting Date
 
The weight assigned to each Basket Constituent as of any Re-weighting Date will be determined by the index calculation agent as the weight assigned to that Basket Constituent within the Unique Portfolio identified with respect to the immediately preceding Re-weighting Selection Date (the “Weight”).
 
 
PS-38

 
 
The effective Weight of each of the Basket Constituents within each Index may fluctuate during the period from one Re-weighting Date to the next Re-weighting Date due to movements in the level of the Basket Constituents.
 
(d)
Eligible Portfolios and Weighting Constraints
 
For each Index, an “Eligible Portfolio” is any hypothetical portfolio of Basket Constituents that comprises all thirteen (13) of the Basket Constituents and that satisfies the following (the “Weighting Constraints”):
 
 
(i)
The minimum possible Weight assigned to any Basket Constituent is 0%;
 
(ii)
The Weight assigned to each Basket Constituent is an integral multiple of 5%;
 
(iii)
The maximum possible Weight assigned to (x) either of the JPMorgan Cash Index USD 3 Month* or the iShares® Barclays TIPS Bond Fund is 50%, (y) the iShares® Russell 2000 Index Fund or the iShares® S&P GSCI™ Commodity-Indexed Trust or the SPDR® Gold Trust is 10%, and (z) any other Basket Constituent is 20%;
 
(iv)
The sum of the Weights assigned to the Basket Constituents numbered 1 through 3 in Table 1 above will not be greater than 50%.  For the avoidance of doubt, the sum of the weights assigned to the SPDR® S&P 500® ETF Trust, iShares® Russell 2000 Index Fund and the iShares® MSCI EAFE Index Fund will not be greater than 50%;
 
(v)
The sum of the Weights assigned to the Basket Constituents numbered 4 through 6 in Table 1 above will not be greater than 50%.  For the avoidance of doubt, the sum of the Weights assigned to the iShares® Barclays 20+ Year Treasury Bond Fund, iShares® iBoxx $ Investment Grade Corporate Bond Fund and iShares® iBoxx $ High Yield Corporate Bond Fund will not be greater than 50%;
 
(vi)
The sum of the Weights assigned to the Basket Constituents numbered 7 and 8 in Table 1 above will not be greater than 25%.  For the avoidance of doubt, the sum of the Weights assigned to the iShares® MSCI Emerging Markets Index Fund and iShares® JPMorgan USD Emerging Markets Bond Fund will not be greater than 25%.
 
(vii)
 The sum of the Weights assigned to Basket Constituents numbered 9 through 11 in Table 1 above will not be greater than 25%.  For the avoidance of doubt, the sum of the Weights assigned to the iShares® Dow Jones Real Estate Index Fund, iShares® S&P GSCI™ Commodity-Indexed Trust and SPDR® Gold Trust will not be greater than 25%.
 
(viii)
The sum of the Weights assigned to the Basket Constituents numbered 12 and 13 in Table 1 above will not be greater than 50%.*  For the avoidance of doubt, the sum of the Weights assigned to the iShares® Barclays US TIPS Bond Fund and the JPMorgan Cash Index USD 3 Month will not be greater than 50%.*
 
(ix)
The sum of (a) the Weights assigned to all the Basket Constituents will be equal to 100%.
 
The following table summarizes the Weighting Constraints described above.
 
Table 2
 
 
Sector Cap
Basket Constituent
Asset Cap
1
Developed Equities
50%
SPDR® S&P 500® ETF Trust
20%
2
iShares® Russell 2000 Index Fund
10%
3
iShares® MSCI EAFE Index Fund
20%
 
 
 
PS-39

 
 
 
Sector Cap
Basket Constituent
Asset Cap
4
Bonds
50%
iShares® Barclays 20+ Year Treasury Bond Fund
20%
5
iShares® iBoxx $ Investment Grade Corporate Bond Fund
20%
6
iShares® iBoxx $ High Yield Corporate Bond Fund
20%
7
Emerging Markets
25%
iShares® MSCI Emerging Markets Index Fund
20%
8
iShares® Emerging Markets Bond Fund
20%
9
Alternative
Investments
25%
iShares® Dow Jones Real Estate Index Fund
20%
10
iShares® S&P GSCI™ Commodity-Indexed Trust
10%
11
SPDR® Gold Trust
10%
12
Inflation Protected Bonds
and Cash
50%
iShares® Barclays TIPS Bond Fund
50%
13
JPMorgan Cash Index USD 3 Month*
50%
 
* For the avoidance of doubt, as a result of the replacement of any Basket Constituent with the Cash Constituent, the aggregate Weight of the Cash Constituent would be allowed to exceed the Weighting Constraints specific to the Cash Constituent because a portion of that aggregate Weight would be subject to the Weighting Constraints specific to the replaced Basket Constituent and not the Weighting Constraints specific to the Cash Constituent.
 
 
Consequently, (a) the Weight assigned to each Basket Constituent numbered 1, 3, 4, 5, 6, 7, 8 or 9 in Table 1 above in an eligible portfolio may be any of 0%, 5%, 10%, 15% and 20%; (b) the Weight assigned to each Basket Constituent numbered 2, 10 or 11 in Table 1 above may be any of 0%, 5% and 10%; and (c) the Weight assigned to the Basket Constituent numbered 12 or 13 in Table 1 above may be any of  0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45% or 50%, provided that Weighting Constraints (iv) through (ix) are satisfied.
 
Calculation of the TR Index Level and the PR Index Level
 
Unless an Index Market Disruption Event has occurred and is continuing, the TR Index Level and the PR Index Level will be calculated by the index calculation agent for each Index Business Day.
 
On May 30, 2012 (the “Start Date”), each Index comprised notional holdings in the Basket Constituents with Weights determined as of the Re-weighting Selection Date immediately preceding the Start Date (the “Initial Re-weighting Selection Date”) and effected as of the relevant Re-weighting Date (the “Initial re-weighting Date”), in accordance with “Determining the Weights for the Basket Constituents” above.  References to “Re-weighting Date” or “Re-weighting Selection Date,” respectively, include references to the Initial Re-weighting Date or Initial Re-Weighting Selection Date, respectively.  The TR Index Level and the PR Index Level were each set at 100 on October 1, 2010 (the “Base Date”).  On the Start Date, the TR Index Level was 112.39, and the PR Index Level was 107.46.
 
 
PS-40

 
 
On each Index Business Day t from but excluding the immediately preceding Re-weighting Date k to and including the next following Re-weighting Date k+1, the TR Index Level and the PR Index Level for each ETF Efficiente Index will be calculated according to the following formula:
 

where:
 
PR_Indexk,t means the Index Level of the PR Index on Index Business Day t;
PR_Indexk means the Index Level of the PR Index on Re-weighting Date k;
PR_Indexk,t means the Index Level of the TR Index on Index Business Day t;
PR_Indexk means the Index Level of the TR Index on Re-weighting Date k;
Fee means 0.50% per annum,
Daysk,t means the number of calendar days from but excluding the Re-weighting Date k to and including Index Business Day t,

 
where:

means, for i = 1 to 13, the Closing Level of Basket Constituent i on Index Business Day t;
means, for i = 1 to 13, the Closing Level of Basket Constituent i on Re-weighting Date k;
means, for i = 1 to 12, the Closing TR Level of Basket Constituent i, if such Basket Constituent is an ETF Constituent, or the Closing Level for Basket Constituent i, if such Basket Constituent is an index that is not the Cash Constituent, on Index Business Day t;
means, for i = 1 to 12, (x) the Closing TR Level on Re-weighting Date k of Basket Constituent i, if such Basket Constituent is an ETF Constituent or (y) the Closing Level on Re-weighting Date k for Basket Constituent i, if such Basket Constituent is an index that is not the Cash Constituent;
means the Closing Level of Basket Constituent i = 13 (the Cash Constituent) on Index Business Day t;
means the Closing Level of Basket Constituent i = 13 (the Cash Constituent) on Re-weighting Date k;
 
means the Weight assigned to Basket Constituent i on Re-weighting Date k (for all Basket Constituents);
where i for each Basket Constituent is the number (1 through 13) assigned to that Basket Constituent in Table 1 above.
 
 
PS-41

 
 
The Index Level on any Index Business Day reflects the sum of the weighted returns of the Basket Constituents over the period between the immediately preceding Re-weighting Date and that Index Business Day, minus the portion of the Fee that has accrued over the same period.
 
The Index Level will be reported to two decimal places.
 
Index Market Disruption Events
 
General
 
An “Index Market Disruption Event” occurs if the index calculation agent in its sole discretion determines that on any Dealing Day there has been:
 
 
(i)
in respect of any Basket Constituent that is an index or any Reference Index of any ETF Constituent, a failure by the relevant sponsor to calculate and publish the Closing Level for that index on that Dealing Day, or any event that, in the determination of the index calculation agent, disrupts or impairs the ability of market participants generally to effect transactions in or obtain market values for any securities or components that compose the relevant index, any options on instruments related to those securities or components, or relevant futures related to those securities or components, if that disruption relates to securities or components and related options or futures on the same or additional securities or components which securities and components in the aggregate compose 20% or more of the level of the relevant index;
     
 
(ii)
in respect of a Basket Constituent that is an equity index or any Reference Index of any ETF Constituent that is an equity index, an Equity Index Disruption Event;
     
 
(iii)
in respect of a Basket Constituent that is a commodity index, any Reference Index of any ETF Constituent that is a commodity index or any Reference Commodities of any ETF Constituent, a Commodity Disruption Event; or
     
 
(iv)
in respect of an ETF Constituent, an ETF Disruption Event; and
     
the index calculation agent determines in its sole discretion that the applicable event described above could materially interfere with the ability of market participants to transact in positions with respect to the Index, any Basket Constituent or the Reference Index of any ETF Constituent.
 
For the purpose of determining whether an Index Market Disruption Event with respect to an index and a Dealing Day exists at any time, if trading in a security or component included in the applicable index is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the applicable index will be based on a comparison of (x) the portion of the level of the applicable index attributable to that security relative to (y) the overall level of the applicable index, in each case immediately before that suspension or limitation.
 
An “Equity Index Disruption Event” means, in each case as determined by the index calculation agent in its sole discretion:
 
 
(i)
the occurrence or existence of a suspension, absence or material limitation of trading of securities then constituting 20% or more of the level of the equity index on the relevant exchanges for those securities for more than two hours of trading during, or during the last one-half hour period preceding the close of, the principal trading session on those relevant primary exchanges; or
     
 
(ii)
if applicable, the occurrence or existence of a suspension, absence or material limitation of trading on the primary exchange or market for trading in futures or options contracts related to the equity index for more than two hours of trading during, or during the last one-half hour period preceding the close of, the principal trading session on that applicable exchange or market.
 
 
 
PS-42

 
 
A “Commodity Disruption Event” means, in each case as determined by the index calculation agent in its sole discretion:
 
 
(i)
a material limitation, suspension, discontinuation or disruption of trading in one or more of the relevant Reference Commodities;
     
 
(ii)
a material limitation, suspension, discontinuation or disruption of trading in one or more options or futures contracts on (x) a relevant commodity or commodities related to the relevant commodity index or (y) the relevant Reference Commodities, which results in failure by the relevant exchange on which any such option(s) and/or futures contract(s) is/are traded to report an official settlement price for such option(s) and/or futures contract(s) on the day on which that event occurs or any succeeding day on which it continues;
     
 
(iii)
a limitation, suspension or disruption of trading in one or more options or futures contracts on (x) a relevant commodity or commodities related to the relevant commodity index or (y) the relevant Reference Commodities, by reason of movements exceeding “limit up” or “limit down” levels permitted by the relevant exchange and which the index calculation agent determines is material to trading volume and market conditions in such option(s) or futures contract(s) on a Dealing Day;
     
 
(iv)
publication by the relevant exchange of a “limit price” as the official settlement price for any futures contract on (x) the relevant commodity or commodities related to the relevant commodity index or (y) the relevant Reference Commodities (by reason of movements exceeding “limit up” or “limit down” levels permitted by the relevant exchange);
     
 
(v)
the occurrence of a Non-Publication Event;
     
 
(vi)
the relevant exchange for any futures contracts on (x) the relevant commodity or commodities related to the relevant commodity index or (y) the relevant Reference Commodities is not open for trading during its regular trading session as scheduled for the relevant day; or
     
 
(vii)
the relevant market for any Reference Commodity is not open for trading during its regular trading session as scheduled for the relevant day.
     
Non-Publication Event” means the failure by the relevant exchange, index sponsor of the relevant commodity index or other price source to announce publicly or publish the following (or the information necessary for determining the following): (a) the official settlement price for any relevant futures contract on (x) the relevant commodity or commodities related to the relevant commodity index or (y) the relevant Reference Commodities; or (b) the closing level of the relevant commodity index, in either case by noon (London time) on the immediately following Dealing Day, provided, however, that the occurrence of such an event will not constitute a “Non-Publication Event” in the case of clause (b) hereof if the index calculation agent determines in its sole discretion by noon (London time) on such immediately following Dealing Day that the information necessary for determining the closing level of the relevant commodity index has been announced publicly or published by the relevant exchange, index sponsor of the relevant commodity index or other price source in which case the index calculation agent will determine the closing level of that commodity index (the closing level so determined being a “Proxy Calculated Level”) in good faith and in a commercially reasonable manner.
 
An “ETF Disruption Event” means, in each case as determined by the index calculation agent in its sole discretion:
 
 
(i)
the occurrence or existence of a suspension, absence or material limitation of trading of the shares of an ETF Constituent on the relevant primary exchange for such shares for more than two hours of trading during, or during the last one-half hour period preceding the close of, the principal trading session on that relevant primary exchange;
 
 
 
PS-43

 
 
     
 
(ii)
a breakdown or failure in the price and trade reporting systems of the relevant primary exchange for the shares of an ETF Constituent as a result of which the reported trading prices for those shares are materially inaccurate for more than two hours of trading during, or during the last one-half hour preceding the close of, the principal trading session on that relevant primary exchange;
     
 
(iii)
if applicable, the occurrence or existence of a suspension, absence or material limitation of trading on the primary exchange or market for trading in futures or options contracts related to the shares of an ETF Constituent or on any Related Exchange for that ETF Constituent for more than two hours of trading during, or during the last one-half hour period preceding the close of, the principal trading session in the applicable exchange or market;
     
 
(iv)
the net asset value of an ETF Constituent is not calculated or is not announced by the Basket Constituent Sponsor; or
     
 
(v)
the relevant sponsor of an ETF Constituent suspends creations or redemptions of shares of that ETF Constituent.
     
For the purpose of determining whether an Equity Index Disruption Event or an ETF Disruption Event has occurred:
 
 
(i)
a limitation on the hours or number of days of trading will not constitute an Equity Index Disruption Event or an ETF Disruption Event if it results from an announced change in the regular business hours of the relevant primary exchange or the primary exchange or market for trading in futures or options contracts related to the relevant shares;
     
 
(ii)
limitations pursuant to the rules of any relevant primary exchange similar to New York Stock Exchange Rule 80B (or any applicable rule or regulation enacted or promulgated by any other self-regulatory organization or any government agency of scope similar to New York Stock Exchange Rule 80B as determined by the index calculation agent) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading;
     
 
(iii)
a suspension of trading in futures or options contracts on the applicable equity index or shares of an ETF Constituent by the primary exchange or market for trading in those contracts or shares by reason of (a) a price change exceeding limits set by that exchange or market, (b) an imbalance of orders relating to those contracts or shares or (c) a disparity in bid and ask quotes relating to those contracts or shares, will constitute a suspension, absence or material limitation of trading in futures or options contracts related to the applicable equity index or the shares of that ETF Constituent; and
     
 
(iv)
a suspension, absence or material limitation of trading on any relevant primary exchange or, if applicable, on the primary exchange or market on which futures or options contracts related to the applicable equity index or the shares of an ETF Constituent are traded will not include any time when that exchange or market is itself closed for trading under ordinary circumstances.
     
A “Related Exchange” means, in respect of any ETF Constituent, each exchange or quotation system, if any, specified as such in Table 1 above, any successor to that exchange or quotation system or any substitute exchange or quotation system to which trading in futures or options contracts relating to that ETF Constituent has temporarily relocated (provided that the index calculation agent has determined that there is a comparable liquidity relative to the futures or options contracts relating to that ETF Constituent on that temporary substitute exchange or quotation system as on the original Related Exchange), provided, however, that where “All Exchanges” is specified as the Related Exchange, “Related Exchange” means each exchange or quotation system (as determined by the index calculation agent) where trading has a material effect (as determined by the index calculation agent) on the overall market for futures or options contracts relating to that ETF Constituent.
 
 
PS-44

 
 
Reference Index” means, with respect to an ETF Constituent, the index underlying that ETF Constituent.
 
Reference Commodity” means, with respect to an ETF Constituent, each commodity underlying that ETF Constituent.
 
Disruption Affecting a Re-weighting Selection Date
 
If a Re-weighting Selection Date is a Dealing Day on which an Index Market Disruption Event occurs or is continuing (a “Disrupted Day”) in respect of any Basket Constituent (each such Basket Constituent for these purposes, an “Affected Basket Constituent”), then the relevant Re-weighting Selection Date will remain the originally scheduled Re-weighting Selection Date and the Closing TR Level or Closing Level, as the case may be, for each Affected Basket Constituent in respect of that Disrupted Day will be deemed to be the Closing TR Level or Closing Level, as the case may be, for the Affected Basket Constituent as of the immediately preceding Dealing Day for the Affected Basket Constituent that was not a Disrupted Day.
 
Disruption Affecting a Re-weighting Date
 
If a Re-weighting Date is a Disrupted Day in respect of any Basket Constituent (each such Basket Constituent for these purposes, an “Affected Basket Constituent”), then the relevant Re-weighting Date will be deemed to be the first following day that is a Dealing Day for all of the Basket Constituents and that is not a Disrupted Day for any Basket Constituent, unless each of the five Index Business Days immediately following the day originally scheduled to be the Re-weighting Date is a Disrupted Day for any Basket Constituent, in which case the fifth Index Business Day following the day originally scheduled to be the relevant Re-weighting Date will be deemed to be the relevant Re-weighting Date (notwithstanding that it is a Disrupted Day in respect of at least one Basket Constituent), and the index calculation agent will re-weight the relevant Index acting in good faith using such information and/or methods as it determines, in its reasonable discretion, are appropriate.
 
Disruption Affecting an Index Business Day
 
If any Index Business Day is a Disrupted Day for one or more Basket Constituents (each such Basket Constituent for these purposes, an “Affected Basket Constituent”), the index calculation agent may either:
 
(i)    calculate its good faith estimate of the relevant Index Level for that Index Business Day, using its good faith estimate of the Closing Level and/or the Closing TR Level of the Affected Basket Constituent(s). Any estimated level may be subject to correction on the first succeeding Index Business Day that is not a Disrupted Day in respect of the Affected Basket Constituent and on the first succeeding Index Business Day that is not a Disrupted Day in respect of any Basket Constituent; or
 
(ii)   suspend the calculation and publication of the relevant Index Level until the first succeeding Index Business Day that is not a Disrupted Day in respect of any Basket Constituent.
 
For purposes of determining the Closing TR Level for any ETF Constituent on any Dealing Day, if the immediately preceding Dealing Day (“Prior Dealing Day”) for that ETF Constituent is a Disrupted Day then, in the formula for determining the Closing TR Level for that Dealing Day, (i) the Closing TR Level for that Prior Dealing Day will be replaced with the Closing TR Level on the immediately preceding Dealing Day that was not a Disrupted Day (the “Prior Non-Disrupted Dealing Day”) for that ETF Constituent, (ii) the Closing Level for that Prior Dealing Day will be replaced with the Closing Level on the Prior Non-Disrupted Dealing Day for that ETF Constituent, and (iii) the Gross Dividend Amount of the ETF Constituent in respect of that Dealing Day will be replaced with the sum of the Gross Dividend Amounts of the ETF Constituent in respect of all days from and excluding the Prior Non-Disrupted Dealing Day to and including that Dealing Day.
 
 
PS-45

 
 
Extraordinary Events
 
Certain events may have the effect of any one or more of the thirteen Basket Constituents set out in Table 1 above being succeeded to, being subject to a material change in its calculation or being cancelled.  We refer to each of these events individually as an Extraordinary Event, as described in detail below.
 
(i)    For any Basket Constituent, (a) if its level or net asset value is not calculated and is not announced by the Basket Constituent Sponsor for the relevant Basket Constituent, but is calculated and announced by a successor sponsor acceptable to the index calculation agent, or (b) in the case of an index, if it is replaced by a successor index using, in the determination of the index calculation agent, the same or a substantially similar formula for and method of calculation as used in the calculation of that Basket Constituent, or (c) in the case of an ETF Constituent, if it is replaced by a successor ETF whose Reference Commodities are the same as that of the replaced ETF Constituent or whose Reference Index is either the same as that of the replaced ETF Constituent or is an index using, in the determination of the index calculation agent, the same or a substantially similar formula for and method of calculation as used in the calculation of the replaced ETF Constituent’s Reference Index and, in any case, whose sponsor is acceptable to the index calculation agent, then, in the case of clause (a), (b) or (c) above, that Basket Constituent thereinafter will be deemed to be the successor index or ETF so calculated and announced by that successor sponsor described in clause (a) above or that successor index or ETF described in clause (b) or (c) above, as the case may be, with effect from a date determined by the index calculation agent, which may make such adjustments to the Rules as it determines in good faith are appropriate to account for that change.  For the avoidance of doubt, the index calculation agent will not accept a particular successor ETF or successor index if the index calculation agent determines, in its discretion, that doing so would immediately result in the occurrence of an Extraordinary Event.  Upon the acceptance of a successor ETF or successor index, that successor will take the place of the relevant Basket Constituent.  For the avoidance of doubt, the prior performance of that successor will be used in the identification of the Unique Portfolio for future Performance Observation Periods.
 
(ii)   If an Extraordinary Event occurs in respect of a Basket Constituent, the index calculation agent, acting in good faith and a commercially reasonable manner, will select as a substitute for that Basket Constituent an exchange-traded fund or index that the index calculation agent determines, in its discretion, possesses substantially similar characteristics or provides substantially similar exposure (as considered prior to the occurrence of that Extraordinary Event, with the understanding that an exchange-traded fund can be substantially similar to an index and vice versa) as compared to the Basket Constituent that is being replaced (that substitute ETF or index being referred to herein as a “substitute ETF” or “substitute index,” respectively); in that case, the index calculation agent will, in good faith, make such adjustment(s) that it determines to be appropriate to any variable, calculation methodology, valuation terms or any other rule in relation to the relevant Index to account for that substitution; provided that the index calculation agent will not select a substitute ETF for the Cash Constituent, but may select a substitute index for the Cash Constituent; provided further that, for any Basket Constituent other than the Cash Constituent, if the index calculation agent determines, in its discretion, that no such substitute ETF and no such substitute index is available, then the index calculation agent will, in its discretion, (x) determine its good faith estimate of the closing price of that Basket Constituent as of a date on or prior to the occurrence of that Extraordinary Event and use such estimate of the closing price (without modification over time) in respect of that Basket Constituent in subsequent calculations of the Index Level of the ETF Efficiente Index until the immediately following Re-Weighting Date, (y) replace that Basket Constituent with the Cash Constituent as its substitute and (z) in good faith, make such adjustment(s) that it determines to be appropriate to any variable, calculation methodology, valuation terms or any other rule in relation to the Index to account for that substitution (for the avoidance of doubt, as a result of such a replacement of any Basket Constituent with the Cash Constituent, the aggregate Weight of the Cash Constituent would be allowed to exceed the Weighting Constraints specific to the Cash Constituent, because a portion of that aggregate Weight
 
 
PS-46

 
 
would be subject to the Weighting Constraints specific to the replaced Basket Constituent and not the Weighting Constraints specific to the Cash Constituent); provided further that for the Cash Constituent if the index calculation agent determines, in it discretion, that no such substitute index is available, then the index calculation agent will, in its discretion, calculate the level of the Cash Constituent using, in lieu of a published level for the Cash Constituent, the level for the Cash Constituent as of any future Index Business Day as determined by the index calculation agent in accordance with the formula for and method of calculating the Cash Constituent last in effect prior to the occurrence of that Extraordinary Event, but using only the types of components that comprised the Cash Constituent immediately prior to that Extraordinary Event (and in the case of components with an expiration or maturity, any components required to roll any expiring positions in accordance with the formula for and method of calculating the Cash Constituent will be permitted).  For the avoidance of doubt, the index calculation agent would not be obliged to select a particular substitute ETF or substitute index if the index calculation agent determines, in its discretion, that doing so would result in the occurrence of an Extraordinary Event in respect of that particular substitute ETF or substitute index, considering that particular substitute ETF or substitute index either (A) at the time as of which the relevant Basket Constituent would be replaced or (B) for the time period during which the relevant Basket Constituent that is being replaced had been included in the Index.  Upon the selection of a substitute ETF or substitute index, that substitute will take the place of the relevant Basket Constituent.  For the avoidance of doubt, the prior performance of that substitute will be used in the identification of the Unique Portfolio for future Performance Observation Periods.
 
Extraordinary Event” in respect of a Basket Constituent means:
 
 
(1)
for any Basket Constituent that is an index (including, for the avoidance of doubt, the Cash Constituent), the Basket Constituent Sponsor makes a material change in the formula for or the method of calculating that index or in any other way materially modifies that index (other than a modification prescribed in that formula or method to maintain that index in routine circumstances);
     
 
(2)
for any Basket Constituent that is an ETF Constituent, the sponsor of the relevant Reference Index of the ETF makes a material change in the formula for or the method of calculating that Reference Index of the ETF or in any other way materially modifies that Reference Index of the ETF (other than a modification prescribed in that formula or method to maintain that Reference Index of the ETF in routine circumstances);
     
 
(3)
for any Basket Constituent that is an ETF Constituent, the Basket Constituent Sponsor replaces the Reference Commodities or replaces the Reference Index of the ETF with a successor index that does not, in the determination of the index calculation agent, use the same or a substantially similar formula for and method of calculation as used in the calculation of the replaced Reference Index of the ETF;
     
 
(4)
for any Basket Constituent, the Basket Constituent permanently cancels the Basket Constituent, and no successor exists, or the Basket Constituent’s level or net asset value is not calculated and is not announced by the Basket Constituent Sponsor for the relevant Basket Constituent, and is not calculated and announced by a successor sponsor acceptable to the index calculation agent;
     
 
(5)
in respect of any Basket Constituent that is an index, a failure by the relevant sponsor to calculate and publish the Closing Level for such index for five consecutive Dealing Days;
     
 
(6)
an ETF Constituent is de-listed from the relevant primary exchange (as specified in Table 1 above) for that ETF Constituent, liquidated or otherwise terminated;
     
 
(7)
a Lock-In Event occurs in respect of an ETF Constituent;
 
 
 
PS-47

 
 
     
 
(8)
in respect of a Basket Constituent, at any time, the license granted (if required) by a non-affiliate of the index calculation agent to the index calculation agent (or its affiliates) to use that Basket Constituent for the purposes of the relevant Index terminates, or the index calculation agent’s rights to use the Basket Constituent for the purpose of the relevant Index is otherwise disputed by a non-affiliate of the index calculation agent, impaired or ceases (for any reason; or
     
 
(9)
the occurrence (and/or continuation) of a Change in Law.
 
A “Lock-In Event” occurs when one or more of the following events occur, and the index calculation agent determines in its sole discretion that that event or combination of events is material (although, for the avoidance of doubt, the index calculation agent has no obligation to monitor actively whether or not any of the following events has occurred):
 
 
(a)
There is an amendment, variation or modification to the offering documents of any ETF Constituent that, in the reasonable determination of the index calculation agent, would materially adversely affect the ability of market participants to trade in shares of the ETF Constituent;
     
 
(b)
The Average Daily Trading Volume of any ETF Constituent other than those specified in clause (c) of this definition of Lock-in Event declines below $50 million;
     
 
(c)
The Average Daily Trading Volume of the ETF Constituent numbered 8 (iShares® JPMorgan USD Emerging Markets Bond Fund) or the ETF Constituent numbered 10 (iShares® S&P GSCI™ Commodity-Indexed Trust) in Table 1 above or any successor to or substitute for any of these ETF Constituents declines below $7.5 million;
     
 
(d)
The Market Capitalization of any ETF Constituent declines below $500 million;
     
 
(e)
The net asset value of any ETF Constituent is not calculated or is not announced by the relevant Basket Constituent Sponsor for five consecutive Dealing Days for that ETF Constituent;
     
 
(f)
The relevant sponsor of the Reference Index of any ETF Constituent fails to calculate and publish the Closing Level for that index for five consecutive Dealing Days; or
     
 
(g)
The relevant sponsor of any ETF Constituent suspends creations or redemptions of shares of that ETF Constituent for 5 consecutive Dealing Days or announces a suspension of unlimited duration of such creations or redemptions.
     
Average Daily Trading Volume” means, with respect to an ETF Constituent and an Index Business Day, the product of (a) the average volume of trading in the shares of that ETF Constituent on all exchanges over the preceding 6 month period, as reported by Bloomberg using the function ETF Ticker US HP and selecting a 6 month range or another provider selected by the index calculation agent, and (b) the Closing Level of that ETF Constituent on that Index Business Day.
 
Market Capitalization” means, with respect to an ETF Constituent and an Index Business Day, the market capitalization of that ETF Constituent as provided by Bloomberg on the “DES” page or by another information provider selected by the index calculation agent for that ETF Constituent on that Index Business Day.
 
A “Change in Law occurs when, due to either:
 
 
(a)
the adoption of, or any change in, any applicable law, regulation or rule (including, without limitation, any tax law); or
 
 
 
PS-48

 
 
 
(b)
the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law, rule, regulation or order (including, without limitation, as implemented by the U.S. Commodity Futures Trading Commission or any exchange or trading facility); and
 
the index calculation agent determines in good faith that (x) it is contrary to such law, rule, regulation or order for any market participants that are brokers or financial intermediaries (individually or collectively) to hold, acquire or dispose of (in whole or in part) any Basket Constituent, any transaction referencing any Basket Constituent or any component of any Basket Constituent or of any Reference Index of any ETF Constituent or (y) holding a position in any Basket Constituent, any transaction referencing any Basket Constituent or any component of any Basket Constituent or of any Reference Index of any ETF Constituent is (or, but for the consequent disposal or termination thereof, would otherwise be) in excess of any allowable position limit(s) applicable to any market participants that are brokers or financial intermediaries (individually or collectively) under any such law, rule or regulation in relation to that Basket Constituent, transaction referencing the Basket Constituent or component of the Basket Constituent or of the Reference Index of the ETF Constituent, including in any case traded on any exchange(s) or other trading facility (including, without limitation, any relevant exchange).
 
Anti-dilution Adjustments
 
With respect to each ETF Constituent (or the relevant successor or substitute ETF), the index calculation agent will make anti-dilution adjustments to the Closing Level of that ETF Constituent only (a) if the shares of that ETF Constituent are subject to a share split or reverse share split, once such split has become effective, and (b) if that ETF Constituent is subject to (i) an issuance of additional shares of that ETF Constituent that is given ratably to all or substantially all holders of shares of that ETF Constituent or (ii) a distribution of shares of that ETF Constituent as a result of the triggering of any provision of the corporate charter of that ETF Constituent, once the dividend or distribution has become effective and the shares of that ETF Constituent are trading ex-dividend.  The index calculation agent will be solely responsible for the determination and calculation of any anti-dilution adjustments and any related determinations and calculations, and its determinations and calculations with respect thereto will be conclusive in the absence of manifest error.
 
Corrections
 
If (a) the Closing Level of any Basket Constituent as of any date which is published or otherwise made available in respect of the relevant Basket Constituent Sponsor is subsequently corrected and that correction is published or otherwise made available in respect of that Basket Constituent Sponsor; or (b) the index calculation agent identifies an error or omission in any of its calculations or determinations in respect of the relevant Index, then the index calculation agent may, if practicable and if the index calculation agent determines acting in good faith that such correction, error or omission (as the case may be) is material, adjust or correct the relevant calculation or determination and/or the Index Level as of any Index Business Day to take into account that correction.
 
 

 

 
 
PS-49

 
 
BASKET CONSTITUENTS OF THE INDICES
 
 
BACKGROUND ON THE SPDR® S&P 500® ETF TRUST
 
We have derived all information contained in this product supplement regarding the SPDR® S&P 500® ETF Trust, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, State Street Bank and Trust Company, as trustee of the SPDR® S&P 500® ETF Trust (“SSBTC”), and PDR Services LLC, as sponsor of the SPDR® S&P 500® ETF Trust (“PDRS”).  The SPDR® S&P 500® ETF Trust is a unit investment trust that issues securities called “Trust Units” or “Units.”  The SPDR® S&P 500® ETF Trust is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “SPY.”
 
The SPDR® S&P 500® ETF Trust is an investment company registered under the Investment Company Act of 1940, as amended.  Trust Units represent an undivided ownership interest in a portfolio of all, or substantially all, of the common stocks of the S&P 500® Index.  Information provided to or filed with the SEC by the SPDR® S&P 500® ETF Trust pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 033-46080 and 811-06125, respectively, through the SEC’s website at http://www.sec.gov.  For additional information regarding the SPDR® S&P 500® ETF Trust, SSBTC and PDRS, please see the SPDR® S&P 500® ETF Trust’s prospectus.  In addition, information about the SPDR® S&P 500® ETF Trust, SSBTC and PDRS may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and the SPDR® S&P 500® ETF Trust website at https://www.spdrs.com/product/fund.seam?ticker=SPY.  Information contained in the SPDR® S&P 500® ETF Trust’s website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
 
Investment Objective and Strategy
 
The SPDR® S&P 500® ETF Trust’s objective is to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500® Index.  See “— The S&P 500® Index” below for more information about the S&P 500® Index.  The Trust holds stocks and cash and is not actively managed by traditional methods, which typically involve effecting changes in the holdings of stocks and cash on the basis of judgments made relating to economic, financial and market considerations.  To maintain the correspondence between the composition and weightings of the stocks held by the SPDR® S&P 500® ETF Trust and the component stocks of the S&P 500® Index, which we refer to as “Index Securities,” SSBTC adjusts the holdings of the SPDR® S&P 500® ETF Trust from time to time to conform to periodic changes in the identity and/or relative weightings of the Index Securities.  SSBTC aggregates certain of these adjustments and makes changes to the holdings of the SPDR® S&P 500® ETF Trust at least monthly or more frequently in the case of significant changes to the S&P 500® Index.  Any change in the identity or weighting of an Index Security will result in a corresponding adjustment to the prescribed holdings of the SPDR® S&P 500® ETF Trust effective on any day that the New York Stock Exchange (“NYSE”) is open for business following the day on which the change to the S&P 500® Index takes effect after the close of the market.
 
The value of Trust Units fluctuates in relation to changes in the value of the holdings of the SPDR® S&P 500® ETF Trust. The market price of each individual Trust Unit may not be identical to the net asset value of such Trust Unit.
 
 
PS-50

 

 
The SPDR® S&P 500® ETF Trust may not be able to replicate exactly the performance of the S&P 500® Index because the total return generated by the SPDR® S&P 500® ETF Trust’s portfolio of stocks and cash is reduced by the expenses of the SPDR® S&P 500® ETF Trust and transaction costs incurred in adjusting the actual balance of the SPDR® S&P 500® ETF Trust’s portfolio.  In addition, it is possible that the SPDR® S&P 500® ETF Trust may not always fully replicate the performance of the S&P 500® Index due to the unavailability of certain Index Securities in the secondary market or due to other extraordinary circumstances.
 
As of June 12, 2012, the SPDR® S&P 500® ETF Trust’s three largest holdings were Apple Inc., Exxon Mobil Corporation and International Business Machines Corporation and its three largest sectors were information technology, financials and health care.
 
Holdings Information
 
The following tables summarize the SPDR® S&P 500® ETF Trust’s top holdings in individual companies and by sector as of June 12, 2012.
 
 
Top Holdings in Individual Securities as of June 12, 2012
 
Name
Weight
Apple Inc.
4.48%
Exxon Mobil Corporation
3.20%
International Business Machines 
1.88%
Microsoft Corporation
1.83%
AT&T Inc
1.73%
General Electric Company
1.72%
Chevron Corporation
1.66%
Johnson & Johnson
1.45%
Procter & Gamble Company
1.44%
The Coca Cola Company
1.42%
 
 
 
Top Holdings by Sector as of June 12, 2012
 
Sector
Percentage of
Total Holdings
Information Technology
19.83%
Financials
14.17%
Health Care
11.82%
Consumer Staples
11.40%
Consumer Discretionary
11.17%
Energy
10.72%
Industrials
10.47%
Utilities
3.77%
Materials
3.41%
Telecommunication Services
3.22%

 
PS-51

 
 
The information above was compiled from the SPDR® S&P 500® ETF Trust’s website, without independent verification.  Information contained in the SPDR® S&P 500® ETF Trust’s website is not incorporated by reference in, and should not be considered a part of, this product supplement.
 
Disclaimer
 
The notes are not sponsored, endorsed, sold or promoted by the SPDR® S&P 500® ETF Trust, SSBTC or PDRS.  None of the SPDR® S&P 500® ETF Trust, SSBTC or PDRS makes any representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes.  None of the SPDR® S&P 500® ETF Trust, SSBTC or PDRS has any obligation or liability in connection with the operation, marketing, trading or sale of the notes.
 
 
The S&P 500® Index
 
We have derived all information contained in this product supplement regarding the S&P 500® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, Standard & Poor’s Financial Services LLC (“S&P”).  The S&P 500® Index was developed by S&P and is calculated, maintained and published by S&P.  S&P has no obligation to continue to publish, and may discontinue the publication of, the S&P 500® Index.
 
The S&P 500® Index is reported by Bloomberg L.P. under the ticker symbol “SPX.”
 
On November 4, 2011, The McGraw-Hill Companies, Inc. (“McGraw-Hill”), the owner of the S&P Indices business, and CME Group Inc. (“CME Group”), the 90% owner of the CME Group and Dow Jones & Company, Inc. joint venture that owns the Dow Jones Indexes business, announced a new joint venture, S&P/Dow Jones Indices, which will own the S&P Indices business and the Dow Jones Indexes business, including the S&P 500® Index.  McGraw-Hill and CME Group expect the S&P/Dow Jones Indices to be operational in the first half of 2012, subject to regulatory approval and other conditions.
 
The S&P 500® Index is intended to provide a performance benchmark for the U.S. equity markets.  The calculation of the level of the S&P 500® Index (discussed below in further detail) is based on the relative value of the aggregate Market Value (as defined below) of the common stocks of 500 companies (the “S&P Component Stocks”) as of a particular time as compared to the aggregate average Market Value of the common stocks of 500 similar companies during the base period of the years 1941 through 1943.  Historically, the “Market Value” of any S&P Component Stock was calculated as the product of the market price per share and the number of the then-outstanding shares of such S&P Component Stock.  As discussed below, on March 21, 2005, S&P began to use a new methodology to calculate the Market Value of the S&P Component Stocks and on September 16, 2005, S&P completed its transition to the new calculation methodology.  The 500 companies are not the 500 largest companies listed on the New York Stock Exchange (the “NYSE”) and not all 500 companies are listed on such exchange.  S&P chooses companies for inclusion in the S&P 500® Index with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the U.S. equity market.  S&P may from time to time, in its sole discretion, add companies to, or delete companies from, the S&P 500® Index to achieve the objectives stated above.  Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the company’s common stock is widely-held and the Market Value and trading activity of the common stock of that company.
 
On March 21, 2005, S&P began to calculate the S&P 500® Index based on a half float-adjusted formula, and on September 16, 2005, the S&P 500® Index became fully float-adjusted.  S&P’s criteria for selecting stocks for the S&P 500® Index was not changed by the shift to float adjustment.  However, the adjustment affects each company’s weight in the S&P 500® Index (i.e., its Market Value).
 
 
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Under float adjustment, the share counts used in calculating the S&P 500® Index reflect only those shares that are available to investors, not all of a company’s outstanding shares.  S&P defines three groups of shareholders whose holdings are subject to float adjustment:
 
 
·
holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups;
 
 
·
holdings by government entities, including all levels of government in the United States or foreign countries; and
 
 
·
holdings by current or former officers and directors of the company, founders of the company or family trusts of officers, directors or founders, as well as holdings of trusts, foundations, pension funds, employee stock ownership plans, or other investment vehicles associated with and controlled by the company.
 
However, treasury stock, stock options, equity participation units, warrants, preferred stock, convertible stock and rights are not part of the float.  In cases where holdings in a group exceed 10% of the outstanding shares of a company, the holdings of that group will be excluded from the float-adjusted count of shares to be used in the S&P 500® Index calculation.  Mutual funds, investment advisory firms, pension funds or foundations not associated with the company and investment funds in insurance companies, shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees, and, if a company has multiple classes of stock outstanding, shares in an unlisted or non-traded class if such shares are convertible by shareholders without undue delay and cost, are also part of the float.  Shares held in a trust to allow investors in countries outside the country of domicile (e.g., ADRs, CDIs and Canadian exchangeable shares) are normally part of the float.
 
For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares, defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceed 10% of the outstanding shares, by the total shares outstanding.  (On March 21, 2005, the S&P 500® Index moved halfway to float adjustment, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500® Index between March 21, 2005 and September 16, 2005 was 0.90.  On September 16, 2005, S&P began to calculate the S&P 500® Index on a fully float-adjusted basis, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500® Index on and after September 16, 2005 is 0.80.)  The float-adjusted Index is calculated by dividing the sum of the IWF multiplied by both the price and the total shares outstanding for each stock by the Index Divisor.  For companies with multiple classes of stock, S&P calculates the weighted average IWF for each stock using the proportion of the total company market capitalization of each share class as weights.
 
As of the date of this product supplement, the S&P 500® Index is calculated using a base-weighted aggregate methodology: the level of the S&P 500® Index reflects the total Market Value of all 500 S&P Component Stocks relative to the S&P 500® Index’s base period of 1941–43 (the “Base Period”).
 
An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time.
 
The actual total Market Value of the S&P Component Stocks during the Base Period has been set equal to an indexed value of 10.  This is often indicated by the notation 1941–43=10.  In practice, the daily calculation of the S&P 500® Index is computed by dividing the total Market Value of the S&P Component Stocks by a number called the Index Divisor.  By itself, the Index Divisor is an arbitrary number.  However, in the context of the calculation of the S&P 500® Index, it is the only link to the original Base Period level of the S&P 500® Index.  The Index Divisor keeps the S&P 500® Index comparable over time and is the manipulation point for all adjustments to the S&P 500® Index (“Index Maintenance”).
 
 
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Index Maintenance includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends and stock price adjustments due to company restructurings or spin-offs.
 
To prevent the level of the S&P 500® Index from changing due to corporate actions, all corporate actions which affect the total Market Value of the S&P 500® Index require an Index Divisor adjustment.  By adjusting the Index Divisor for the change in total Market Value, the level of the S&P 500® Index remains constant.  This helps maintain the level of the S&P 500® Index as an accurate barometer of stock market performance and ensures that the movement of the S&P 500® Index does not reflect the corporate actions of individual companies in the S&P 500® Index.  All Index Divisor adjustments are made after the close of trading and after the calculation of the closing level of the S&P 500® Index.  Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the S&P 500® Index and do not require Index Divisor adjustments.
 
The table below summarizes the types of Index Maintenance adjustments and indicates whether or not an Index Divisor adjustment is required.
 
Type of
Corporate Action
Comments
Divisor
Adjustment
Company added/ deleted
Net change in market value determines divisor adjustment.
Yes
Change in shares outstanding
Any combination of secondary issuance, share repurchase or buy back – share counts revised to reflect change.
Yes
Stock split
Share count revised to reflect new count.  Divisor adjustment is not required since the share count and price changes are offsetting.
No
Spin-off
If the spun-off company is not being added to the index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun-off unit).
Yes
Spin-off
Spun-off company added to the index, another company removed to keep number of names fixed.  Divisor adjustment reflects deletion.
Yes
Change in IWF due to a corporate action or a purchase or sale by an inside holder
Increasing (decreasing) the IWF increases (decreases) the total market value of the index.  The divisor change reflects the change in market value caused by the change to an IWF.
Yes
Special dividend
When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index market value.
Yes
 
 
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Type of
Corporate Action
Comments
Divisor
Adjustment
Rights offering
Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price.  The calculation assumes that the offering is fully subscribed.  Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid.
Yes
 
Stock splits and stock dividends do not affect the Index Divisor, because following a split or dividend, both the stock price and number of shares outstanding are adjusted by S&P so that there is no change in the Market Value of the S&P Component Stock.  All stock split and dividend adjustments are made after the close of trading on the day before the ex-date.
 
Each of the corporate events exemplified in the table requiring an adjustment to the Index Divisor has the effect of altering the Market Value of the S&P Component Stock and consequently of altering the aggregate Market Value of the S&P Component Stocks (the “Post-Event Aggregate Market Value”).  In order that the level of the S&P 500® Index (the “Pre-Event Index Value”) not be affected by the altered Market Value (whether increase or decrease) of the affected Component Stock, a new Index Divisor (“New Divisor”) is derived as follows:
 
Post-Event Aggregate Market Value
   = 
Pre-Event Index Value
New Divisor

New Divisor
  =  
Post-Event Aggregate Market Value
Pre-Event Index Value

 
A large part of the Index Maintenance process involves tracking the changes in the number of shares outstanding of each of the S&P 500® Index companies.  Four times a year, on a Friday close to the end of each calendar quarter, the share totals of companies in the S&P 500® Index are updated as required by any changes in the number of shares outstanding.  After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the total Market Value of the S&P 500® Index.  In addition, any changes over 5% in the current common shares outstanding for the S&P 500® Index companies are carefully reviewed on a weekly basis, and when appropriate, an immediate adjustment is made to the Index Divisor.
 
 
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BACKGROUND ON THE iSHARES® RUSSELL 2000 INDEX FUND
 
We have derived all information contained in this product supplement regarding the iShares® Russell 2000 Index Fund, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, iShares® Trust, BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”). The iShares® Russell 2000 Index Fund is an investment portfolio maintained and managed by iShares® Trust.  BFA is currently the investment adviser to the iShares® Russell 2000 Index Fund. The iShares® Russell 2000 Index Fund is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “IWM.”
 
iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the iShares® Russell 2000 Index Fund. Information provided to or filed with the SEC by iShares® Trust pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov. For additional information regarding iShares® Trust, BFA and the iShares® Russell 2000 Index Fund, please see the prospectus dated August 1, 2011 (as may be supplemented from time to time). In addition, information about iShares® Trust and the iShares® Russell 2000 Index Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and the iShares® website at www.ishares.com.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or any terms supplement.
 
Investment Objective and Strategy
 
The iShares® Russell 2000 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Russell 2000® Index.  See “— The Russell 2000® Index” below for more information about the Russell 2000® Index. The iShares® Russell 2000 Index Fund’s investment objective and the Russell 2000® Index may be changed without shareholder approval.
 
As of June 12, 2012, the iShares® Russell 2000 Index Fund’s three largest holdings were American Campus Communities, Inc., Kilroy Realty Corporation and Salix Pharmaceuticals, Ltd., and its three largest sectors were financial services, consumer discretionary and producer durables.
 
The iShares® Russell 2000 Index Fund uses a representative sampling strategy (as described below under “— Representative Sampling”) to try to track the Russell 2000® Index. The iShares® Russell 2000 Index Fund generally invests at least 90% of its assets in the securities of the Russell 2000® Index and in depositary receipts representing securities of the Russell 2000® Index. The iShares® Russell 2000 Index Fund may invest the remainder of its assets in securities not included in the Russell 2000® Index, but which BFA believes will help the iShares® Russell 2000 Index Fund track the Russell 2000® Index. The iShares® Russell 2000 Index Fund also may invest its other assets in futures contracts, options on futures contracts, options and swaps, as well as cash and cash equivalents, including shares of money market funds affiliated with BFA or its affiliates.
 
Representative Sampling
 
The iShares® Russell 2000 Index Fund pursues a “representative sampling” strategy in attempting to track the performance of the Russell 2000® Index. The iShares® Russell 2000 Index Fund invests in a representative sample of securities in the Russell 2000® Index that collectively has an investment profile similar to the Russell 2000® Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Russell 2000® Index. The iShares® Russell 2000 Index Fund may or may not hold all of the securities that are included in the Russell 2000® Index.
 
 
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Correlation
 
The Russell 2000® Index is a theoretical financial calculation, while the iShares® Russell 2000 Index Fund is an actual investment portfolio.  The performance of the iShares® Russell 2000 Index Fund and the Russell 2000® Index may vary due to transaction costs, non-U.S. currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the iShares® Russell 2000 Index Fund’s portfolio and the Russell 2000® Index resulting from legal restrictions (such as diversification requirements) that apply to the iShares® Russell 2000 Index Fund but not to the Russell 2000® Index or due to the use of representative sampling.  “Tracking error” is the difference between the performance (return) of the iShares® Russell 2000 Index Fund’s portfolio and that of the Russell 2000® Index.  BFA expects that, over time, the iShares® Russell 2000 Index Fund’s tracking error will not exceed 5%.  Because the fund uses a representative sampling indexing strategy, it can be expected to have a greater tracking error than if it used a replication indexing strategy.  “Replication” is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
 
Industry Concentration Policy
 
The iShares® Russell 2000 Index Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the Russell 2000® Index is concentrated.  For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities) and repurchase agreements collateralized by U.S. government securities are not considered to be issued by members of any industry.
 
Holdings Information
 
As of June 12, 2012, 99.89% of the iShares® Russell 2000 Index Fund’s holdings consisted of equity securities, 0.16% consisted of cash and -0.04% consisted of other assets, including dividends booked but not yet received.  The following tables summarize the iShares® Russell 2000 Index Fund’s top holdings in individual companies and by sector as of such date.
 
Top holdings in individual securities as of June 12, 2012
 
Company
Percentage of Total Holdings
American Campus Communities
0.29%
Kilroy Realty Corporation
0.28%
Salix Pharmaceuticals, Ltd.
0.27%
Jack Henry & Associates, Inc.
0.26%
Extra Space Storage, Inc.
0.26%
Onyx Pharmaceuticals, Inc.
0.26%
Home Properties Inc.
0.26%
Concur Technologies, Inc.
0.26%
National Retail Properties, Inc.
0.25%
ARIAD Pharmaceuticals, Inc.
0.25%
 

Top holdings by sector as of June 12, 2012
 
Sector
Percentage of Total Holdings
Financial Services
24.51%
 
 
 
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Sector
Percentage of Total Holdings
Consumer Discretionary
14.97%
Producer Durables
14.05%
Technology
13.49%
Health Care
13.23%
Materials & Processing
6.78%
Energy
5.29%
Utilities
4.31%
Consumer Staples
3.26%
S-T Securities
0.16%
 

The information above was compiled from the iShares® website, without independent verification.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement.
 
Disclaimer
 
The notes are not sponsored, endorsed, sold or promoted by BFA. BFA makes no representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes. BFA has no obligation or liability in connection with the operation, marketing, trading or sale of the notes.
 
The Russell 2000® Index
 
We have derived all information contained in this product supplement regarding the Russell 2000® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, Russell Investments (“Russell”).  The Russell 2000® Index was developed by Russell Investment Group (formerly, Frank Russell Company) and is calculated, maintained and published by Russell, a subsidiary of Russell Investment Group.  Russell has no obligation to publish, and may discontinue the publication of, the Russell 2000® Index.
 
The Russell 2000® Index is reported by Bloomberg L.P. under the ticker symbol “RTY.”
 
The Russell 2000® Index measures the capitalization-weighted price performance of the small-cap stocks included in the Russell 2000® Index (the “Component Stocks”) and is designed to track the performance of the small capitalization segment of the U.S. equity market.  All stocks included in the Russell 2000® Index are traded on a major U.S. exchange.  The companies included in the Russell 2000® Index are the middle 2,000 of the companies that form the Russell 3000ETM Index, which is composed of the 4,000 largest U.S. companies as determined by total market capitalization and represents approximately 99% of the U.S. equity market.
 
Selection of Stocks Underlying the Russell 2000® Index.  The Russell 2000® Index is a sub-index of the Russell 3000ETM Index.  To be eligible for inclusion in the Russell 3000ETM Index, and, consequently, the Russell 2000® Index, a company’s stock must be listed on the last trading day in May of a given year, and Russell must have access to documentation on that date verifying the company’s eligibility for inclusion.  Eligible initial public offerings are added to Russell U.S. indices at the end of each calendar quarter, based on total market capitalization rankings within the market-adjusted capitalization breaks established during the most recent reconstitution.  To be added to any Russell U.S. index during a quarter outside of reconstitution, initial public offerings must meet all Russell U.S. index eligibility requirements as well as the following criteria: on the last trading day
 
 
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of the month prior to quarter-end, (i) the company’s stock must price and trade and (ii) the company must rank larger in total market capitalization than the market-adjusted smallest company in the Russell 3000ETM Index as of the most recent reconstitution.
 
U.S. companies are eligible for inclusion in the Russell 3000ETM Index and, consequently, the Russell 2000® Index.  Russell uses the following method for determining whether a company is a U.S. company.  If a company incorporates in, has a stated headquarters location in, and also trades in the same country (ADRs and ADSs are not eligible), the company is assigned to its country of incorporation.  If any of the three do not match, Russell then defines 3 Home Country Indicators (“HCIs”).  The HCIs are as follows:
 
 
·
country of incorporation;
 
 
·
country of headquarters; and
 
 
·
country of the most liquid exchange as defined by 2-year average daily dollar trading volume (“ADDTV”) from all exchanges within a country.
 
After the HCIs are defined, the next step in the country assignment involves an analysis of assets by location.  Russell cross-compares the primary location of the company’s assets with the three HCIs.  If the primary location of assets matches ANY of the HCIs, then the company is assigned to its primary asset location.
 
If there is not enough information to determine a company’s primary country of assets, Russell uses the primary location of the company’s revenue for the same cross-comparison and assigns the company to the appropriate country in a similar fashion.  In 2011, Russell began using an average of two years of assets or revenues data for analysis to reduce potential turnover.
 
If conclusive country details cannot be derived from assets or revenue, Russell assigns the company to the country where its headquarters are located unless the country is a Benefit Driven Incorporation (“BDI”) country.  If the country in which its headquarters are located is a BDI country, the company is assigned to the country of its most liquid stock exchange.  The BDI countries are Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Channel Islands, Cook Islands, Curacao, Faroe Islands, Gibraltar, Isle of Man, Liberia, Marshall Islands, Panama, Saba, Sin Eustatius, Sint Maarten and Turks and Caicos Islands.
 
The following securities are specifically excluded from the Russell U.S. indices: (i) stocks that are not traded on a major U.S. exchange (Bulletin Board, Pink Sheet and over-the-counter (OTC) securities are not eligible); (ii) preferred stock, convertible preferred stock, redeemable shares, participating preferred stock, warrants, rights and trust receipts; and (iii) royalty trusts, limited liability companies, closed-end investment companies (business development companies, or “BDCs,” are eligible), blank check companies, special purpose acquisition companies (“SPACs”) and limited partnerships.
 
The primary criterion used to determine the initial list of securities eligible for the Russell 3000ETM Index and, consequently, the Russell 2000® Index is total market capitalization, which is defined as the total number of outstanding shares times the closing price of the shares as of the last trading day in May for those securities being considered at annual reconstitution.  Initial public offering eligibility is determined each quarter.  Common stock, non-restricted exchangeable shares and partnership units/membership interests (in certain cases) are used to calculate a company’s total market capitalization.  Exchangeable shares are shares that may be exchanged at any time, at the holder’s option, on a one-for-one basis for common stock.  Partnership units/membership interests represent an economic interest in a limited partnership or limited liability company.  Russell includes partnership units/membership interests as part of total market capitalization when the company in question is a holding company whose sole asset is its partnership units/membership interests in an underlying entity.  In these cases, total market capitalization will be calculated based on 100% of
 
 
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the value of all partnership units/membership interests.  Any other form of shares—such as preferred or convertible preferred stock, redeemable shares, participating preferred stock, warrants and rights or trust receipts—is excluded from the calculation.  If multiple share classes of common stock exist, they are combined.  In cases where the common stock share classes act independently of each other (e.g., tracking stocks), each class is considered for inclusion separately.
 
During annual reconstitution, a stock’s closing price on its primary exchange on the last trading day in May is used to determine total market capitalization.  If a stock does not trade on its primary exchange, the lowest price from another major U.S. exchange is used.  In cases where multiple share classes have been combined, the price of the primary trading vehicle (usually the most liquid) is used in the total market capitalization calculations.  Primary trading vehicles are determined by the last two years’ average trading volume, as of the last trading day in May.  For new members, the common share class with the highest trading volume will be considered the primary trading vehicle, and its associated price and trading symbol will be included in the Russell U.S. indices.
 
Companies with only a total market capitalization of less than $30 million are not eligible for inclusion in the Russell 3000ETM Index or, consequently, the Russell 2000® Index.
 
In addition, companies with only 5% or less of their shares available in the marketplace are not eligible for inclusion in the Russell 3000ETM Index or, consequently, the Russell 2000® Index.  Also, stocks must have a closing price at or above $1.00 on their primary exchange on the last trading day in May to be eligible for inclusion in the Russell 2000® Index at annual reconstitution.  In order to reduce unnecessary turnover, if an existing Russell 2000® Component Stock’s closing price is less than $1.00 on its primary exchange on the last trading day in May, it will be considered eligible if the average of the daily closing prices from its primary exchange during the month of May is equal to or greater than $1.00.  Furthermore, if a stock, new or existing, does not have a close price at or above $1.00 on its primary exchange on the last trading day in May, but does have a close price at or above $1.00 on another major U.S. exchange on that day, the stock will be eligible for inclusion.  Quarterly initial public offering additions must have a close price at or above $1.00 on the last day of their eligibility period in order to qualify for index inclusion.
 
Companies that produce unrelated business taxable income (UBTI) are restricted from ownership for tax-exempt investors.  In recognition of this, Russell screens all REITs and PTPs, removing any security from eligibility that generates or has historically generated UBTI and has not taken steps to block UBTI to equity holders.  The research process is conducted as part of Russell’s annual rebalance effort.  Additional screening will not be assessed or changed outside of the reconstitution period.  Information used to confirm UBTI impact includes the following publicly available sources: 10-K, SEC Form S-3, K-1, company annual report, dividend notices and the company website.
 
The Russell 2000® Index is reconstituted annually to reflect changes in the marketplace.  The list of companies is ranked based on total market capitalization as of the last trading day in May, with the actual reconstitution occurring on the last Friday in June each year, except that if the last Friday in June of any year is the 28th, 29th or 30th, reconstitution will occur on the preceding Friday.  Changes in the Component Stocks are pre-announced and subject to change if any corporate activity occurs or if any new information is received prior to release.
 
Capitalization Adjustments.  As a capitalization-weighted index, the Russell 2000® Index reflects changes in the capitalization, or market value, of the Component Stocks relative to the capitalization on a base date.  The current Russell 2000® Index value is calculated by adding the market values of the Component Stocks, which are derived by multiplying the price of each stock by the number of available shares, to arrive at the available market capitalization of the 2,000 stocks.  The available market capitalization is then divided by a divisor, which represents the “adjusted” capitalization of the Russell 2000® Index on the base date of December 31, 1986.  To calculate the Russell 2000® Index, last sale prices will be used for exchange-traded and NASDAQ stocks.  If a
 
 
 
 
 
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Component Stock is not open for trading, the most recently traded price for that security will be used in calculating the Russell 2000® Index.  In order to provide continuity for the Russell 2000® Index’s value, the divisor is adjusted periodically to reflect events including changes in the number of common shares outstanding for Component Stocks, company additions or deletions, corporate restructurings and other capitalization changes.
 
Available shares are assumed to be shares available to the public for purchase.  Exclusion of capitalization held by other listed companies and large holdings of private investors (10% or more) is based on information recorded in SEC corporate filings, including DEF 14, 424B and 10K filings (but not 13F filings), or other reliable sources in the event of missing or questionable data.
 
The following types of shares are removed from total market capitalization to arrive at available market capitalization:
 
 
·
Corporate cross-owned shares — shares of a company in the Russell 2000® Index held by another member of a Russell index (including Russell Global Indexes).  Any percentage held in this class will be adjusted;
 
 
·
Large corporate and private holdings — shares held by a listed corporation not in the Russell 2000® Index, by an individual or by a group of individuals acting together if the holding constitutes 10% or more of shares outstanding.  However, not to be included in this class are institutional holdings, which are shares held by investment companies, partnerships, insurance companies, mutual funds, banks or venture capital firms, unless these firms have a direct relationship to the company in the Russell 2000® Index, in which case the holdings are considered strategic holdings and are excluded;
 
 
·
ESOP or LESOP shares — shares held by an Employee Stock Ownership Plan (“ESOP”) or a Leveraged Employee Stock Ownership Plan (“LESOP”) that comprise 10% or more of shares outstanding;
 
 
·
Unlisted share classes — classes of common stock that are not traded on a U.S. securities exchange;
 
 
·
Initial public offering lock-ups — shares locked up during an initial public offering are not available to the public and will be excluded from the market value at the time the initial public offering enters the Russell 2000® Index; and
 
 
·
Government Holdings:
 
 
·
Direct government holders — those holdings listed as “government of” are considered unavailable and will be removed entirely from available shares;
 
 
·
Indirect government holders — shares held by government investment boards and/or investment arms will be treated similarly to large private holdings and removed if the holding is greater than 10% of shares outstanding; and
 
 
·
Government pensions — any holding by a government pension plan is considered an institutional holding and will not be removed from available shares.
 
Corporate Actions Affecting the Russell 2000® Index.  The Russell 2000® Index is adjusted in response to certain corporate actions when the actions are final.  Russell determines whether a corporate action is final based on sources of public information including company press releases, SEC filings, exchange notifications and Bloomberg or other sources that Russell deems reliable.  If Russell determines that an action was not final after communication was given to clients, the changes to the Russell 2000® Index will still occur.  Prior to the completion of a corporate action,
 
 
 
PS-61

 
 
 
Russell estimates the effective date.  Russell then adjusts the anticipated effective date based on public information until the date is considered final.  Depending on the time on a given day that an action is determined to be final, Russell either (1) applies the action after the close of the current market day (t); or (2) applies the action after the close of the following day (t+1).  Russell applies the following methodology guidelines when adjusting the Russell 2000® Index in response to corporate actions:
 
 
·
“No Replacement” Rule — Securities that leave the Russell 2000® Index, between reconstitution dates, for any reason (e.g., mergers, acquisitions or other similar corporate activity) are not replaced.  Thus, the number of securities in the Russell 2000® Index over a year will fluctuate according to corporate activity.
 
 
·
Mergers and Acquisitions — Mergers and acquisitions result in changes to the membership and weighting of members within the Russell 2000® Index.  In the event a merger or acquisition occurs between a member of the Russell 2000® Index and another member of a Russell index, the acquired company is deleted and its market capitalization moves to the acquiring company’s stock according to the terms of the merger; hence, if the merger or acquisition occurs between members of the Russell 2000® Index, it has no effect on the Russell 2000® Index’s total capitalization.  Cross-ownership of the surviving entity is determined by a weighted average (by market value as of t-1) of the cross-ownership of the two previous companies.  If Russell is able to determine that the action is final prior to 1:00 p.m. Eastern Standard Time on a given day, the action will be applied after the close of the current day (t).  If Russell is able to determine that the action is final after 1:00 p.m. Eastern Standard Time on a given day, the action will be applied after the close of the following day (t+1).  If the acquiring company is a member of the Russell 2000® Index but the acquired company is not a member of any Russell index, the acquiring company’s shares are adjusted at month-end.  If the acquired company is a member of the Russell 2000® Index but the acquiring company is not a member of any Russell index, there are two possibilities:
 
 
·
Reverse Merger — If the acquiring company is a private, non-publicly traded company or OTC company, Russell will review the action to determine if it is considered a reverse merger, defined as a transaction that results in a publicly traded company that meets all requirements for inclusion in a Russell index.  If it is determined that an action is a reverse merger, the newly formed entity will be placed in the appropriate market capitalization index after the close of the day following the completion of the merger (t+1), using the market-adjusted breakpoints from the most recent reconstitution.  The acquired company will be removed from the current index simultaneously.  Cross-ownership will be determined on the basis of the most recent SEC filings.
 
 
·
Standard Action — The acquired company is deleted after the action is final.  If Russell is able to determine that the action is final prior to 1:00 p.m. Eastern Standard Time on a given day, the action will be applied after the close of the current day (t).  If Russell is able to determine that the action is final after 1:00 p.m. Eastern Standard Time on a given day, the action will be applied after the close of the following day (t+1).
 
 
·
Reincorporations — Members of the Russell 2000® Index that reincorporate to another country are analyzed for country assignment during annual reconstitution, as long as they continue to trade in the United States.  Members of the Russell 2000® Index that reincorporate to another country and no longer trade in the United States are immediately deleted from the Russell 2000® Index.  Companies that reincorporate to the United States are assessed for membership during annual reconstitution.
 
 
·
Reclassifications of Shares (Primary Vehicles) — Primary vehicles will not be assessed or changed outside of a reconstitution period unless the existing class ceases to exist.  In the event of extenuating circumstances signaling a necessary primary vehicle change, proper notification will be made.
 
 
 
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·
Rights Offerings — A right offered to shareholders is reflected in the Russell 2000® Index only if the value of the right is at a premium to the market price.  If the subscription price is at a premium to the market price, the right is reflected in the Russell 2000® Index at the market open on the ex-date (for both transferable and non-transferable rights).  The price is adjusted to account for the value of the right, and shares are increased according to the terms of the offering.  If the rate is not available by the market close on the ex-date, the changes will be applied at the end of the subscription period.  If the rate becomes available on the ex-date, the changes will be delayed one day.  Late notifications also will delay the price and share adjustments by one day.  Russell will not apply rights issued in anticipation of a takeover event or entitlements that give shareholders the right to purchase ineligible securities such as convertible debt.
 
 
·
Changes to Shares Outstanding — Changes to shares outstanding due to buybacks (including Dutch auctions), secondary offerings, merger activity with a non-Russell index member and other potential changes are updated at the end of the month (with the exception of June) in which the change is reflected in vendor-supplied updates and verified by Russell using an SEC filing.  For a change in shares to occur, the cumulative change to available shares must be greater than 5%.  These share changes are communicated to premier clients three trading days prior to month-end and include shares provided by the vendor and verified by Russell four days prior to month-end.  The float factor determined at reconstitution is applied to the new shares issued or bought back.  If any new shares issued are unavailable according to the filing, that portion will not be added to the Russell 2000® Index.
 
 
·
Spin-offs and Initial Public Offerings — The only additions between reconstitution dates are as a result of spin-offs and initial public offerings.  Spin-off companies are added to the parent company’s index and capitalization tier of membership if the spin-off company is sufficiently large.  To be eligible, the spun-off company must rank larger in total market capitalization than the market-adjusted smallest company in the Russell 3000ETM Index as of the most recent reconstitution.  If the spun-off company is not large enough to be added to the Russell 2000® Index and is not trading on a “when-issued” basis, the Russell 2000® Index will recognize the performance of the spin-off during its first day of trading through a synthetic price/performance of the parent company.  This will allow holders one trading day to liquidate positions and replicate the Russell 2000® Index.  If the spun-off company is not large enough to be added to the Russell 2000® Index but is trading on a when-issued basis, the Russell 2000® Index will remove the spun-off company’s value by using the when-issued price.  If a U.S. spin-off occurs from a Russell Global ex-U.S. Index member, the spun-off company will be placed in the parent’s index and capitalization tier of the Russell Global Index.  If the price of a spin-off is not available, a price will be established by first using an exchange-provided estimate or a Russell-calculated estimate if the exchange does not provide one.  At the close of the first day of trading, a synthetic price/performance will be calculated to account for the actual opening price of the spin-off.  This price/performance is calculated to capture the accurate performance of both the spin-off and parent for the day.  Real-time calculations will reflect only the estimated performance of the two companies as actual performance is not captured until end of day.
 
 
·
Tender Offers — A company acquired as a result of a tender offer is removed if (1) the initial tender offer has expired, (2) shareholders have validly tendered, not withdrawn, and the share have been accepted for payment, (3) all regulatory requirements have been fulfilled and (4) the acquirer will seek to complete the acquisition via a short-form merger or by compulsorily acquiring any remaining shares outstanding.  In the case where a tender offer completes and does not result in the full acquisition of the target company, Russell will make a share adjustment to the target company’s shares, on a date pre-announced by Russell, in cases where the available shares have decreased by 30% or more.
 
 
 
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·
Delisted Stocks — When Component Stocks are deleted as a result of exchange delisting or reconstitution, the price used will be the closing primary exchange price on the day the action is final (t) or the closing OTC price on the following day (t+1).  For stocks continuing to trade on the primary exchange, if Russell determines that the action is final prior to 1:00 p.m. Eastern Standard Time on a given day, the deletes will be applied after the close of the current day (t), using the last traded price.  If, instead, Russell determines that the action is final after 1:00 p.m. Eastern Standard Time on a given day, the deletes will be applied after the close of the following day (t+1), using the closing OTC price.  Stocks previously halted that fail to trade on the primary exchange prior to being moved to OTC will always be removed the following day (t+1) at the OTC closing price, regardless of the time of notification.
 
 
·
Bankruptcy and Voluntary Liquidations — A company that files for a Chapter 7 liquidation bankruptcy or that files a liquidation plan will be removed from the Russell 2000® Index at the time of filing.  A company that files for a Chapter 11 reorganization bankruptcy will remain a member of the Russell 2000® Index, unless the company’s stock is delisted from the primary exchange, in which case normal delisting rules apply.  If a company files for bankruptcy, its stock is delisted, and it can be confirmed that the stock will not trade OTC, Russell may remove the stock at a nominal price of $0.0001.
 
 
·
Change of Company Structure — In the event that a company changes its corporate designation from that of a Business Development Corporation, Russell will remove the member as ineligible for index inclusion and provide two-days’ notice of its removal.
 
 
·
Stock Distributions — A price adjustment for a stock distribution is applied on the ex-date of the distribution.  When the distribution is a fixed amount of stock distributed on the ex-date, Russell increases the number of shares on the ex-date.  When the distribution is an undetermined amount of stock based on future earnings and profits to be distributed at a future date, Russell increases the number of shares on the pay-date.
 
 
·
Dividends — Gross dividends are included in the daily total return calculation of the Russell 2000® Index on the basis of their ex-dates.  The ex-date is used rather than the pay-date because the marketplace price adjustment for the dividend occurs on the ex-date.  Monthly, quarterly and annual total returns are calculated by compounding the reinvestment of dividends daily.  The reinvestment and compounding is at the total index level, not at the security level.  Stock prices are adjusted to reflect special cash dividends on the ex-date.  If a dividend is payable in stock and cash and the stock rate cannot be determined by the ex-date, the dividend is treated as all cash.
 
 
·
Halted Stocks — When a stock’s trading has been halted, Russell holds the stock at its most recent closing price until trading is resumed or it is officially delisted.  In addition, Russell will review stocks in two categories for removal: (1) stocks halted due to financial difficulty, debt or cash flow issues for a period longer than 40 calendar days and (2) those stocks suspended due to exchange listing rules or legal regulatory issues longer than one calendar quarter.  Determination for removal will be made on a case-by-case basis and based upon reasonable likelihood of trade resumption and likelihood of residual value returned to equity holders.  Should removal be deemed appropriate, it will be announced with monthly share changes and removed on month-end at zero value (though for system purposes the actual value used is $0.0001).
 
Pricing of Securities Included in the Russell 2000® Index.  Primary exchange closing prices are used in the daily Russell 2000® Index calculations.  FT Interactive data is used as the primary source for U.S. security prices, income, and total shares outstanding.
 
 
 
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BACKGROUND ON THE iSHARES® MSCI EAFE INDEX FUND
 
We have derived all information contained in this product supplement regarding the iShares® MSCI EAFE Index Fund (the “EFA Fund”), including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, iShares® Trust,  BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”).  The EFA Fund is an investment portfolio maintained and managed by iShares® Trust.  BFA is currently the investment adviser to the EFA Fund.  The EFA Fund is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “EFA.”
 
iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the EFA Fund.  Information provided to or filed with the SEC by iShares® Trust pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov.  For additional information regarding iShares® Trust, BFA and the EFA Fund, please see the EFA Fund’s prospectus.  In addition, information about iShares® and the EFA Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and the iShares® website at www.ishares.com.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
Investment Objective and Strategy
 
The EFA Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in developed European, Australasian and Far Eastern markets, as measured by the MSCI EAFE® Index.  The EFA Fund holds equity securities traded primarily in certain developed markets.  The MSCI EAFE® Index was developed by MSCI Inc. (“MSCI”) as an equity benchmark for international stock performance, and is designed to measure equity market performance in certain developed markets.  For more information about the MSCI EAFE® Index, please see “Background on the MSCI Indices” in this product supplement.
 
As of March 31, 2012, the EFA Fund holdings by country consisted of the following 23 developed market country indices or regions: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.  In addition, as of June 12, 2012, the EFA Fund’s three largest holdings by country were the United Kingdom, Japan and Switzerland.  As of such date, its three largest equity securities were Nestle S.A., HSBC Holdings plc, and Vodafone Group plc, and its three largest sectors were financials, industrials and consumer staples.
 
The EFA Fund uses a representative sampling indexing strategy (as described below under “Representative Sampling”) to try to track the MSCI EAFE® Index.  The EFA Fund generally invests at least 90% of its assets in securities of the MSCI EAFE® Index and depository receipts representing securities of the MSCI EAFE® Index.  In addition, the EFA Fund may invest up to 10% of its assets in securities not included in the MSCI EAFE® Index but which BFA believes will help the EFA Fund track the MSCI EAFE® Index and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates.
 
Representative Sampling
 
The EFA Fund pursues a “representative sampling” indexing strategy in attempting to track the performance of the MSCI EAFE® Index, and generally does not hold all of the equity securities
 
 
 
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included in the MSCI EAFE® Index.  The EFA Fund invests in a representative sample of securities that collectively has an investment profile similar to the MSCI EAFE® Index.  Securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the MSCI EAFE® Index.
 
Correlation
 
The MSCI EAFE® Index is a theoretical financial calculation, while the EFA Fund is an actual investment portfolio.  The performance of the EFA Fund and the MSCI EAFE® Index will vary due to transaction costs, foreign currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances, and differences between the EFA Fund’s portfolio and the MSCI EAFE® Index resulting from legal restrictions (such as diversification requirements) that apply to the EFA Fund but not to the MSCI EAFE® Index or the use of representative sampling.  “Tracking error” is the difference between the performance (return) of the EFA Fund’s portfolio and that of the MSCI EAFE® Index.  BFA expects that, over time, the EFA Fund’s tracking error will not exceed 5%. The EFA Fund, using a representative sampling indexing strategy, can be expected to have a greater tracking error than a fund using a replication indexing strategy.  Replication is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
 
Industry Concentration Policy
 
The EFA Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the MSCI EAFE® Index is concentrated.  For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities) and repurchase agreements collateralized by U.S. government securities are not considered to be issued by members of any industry.
 
Holdings Information
 
As of June 12, 2012, 99.03% of the EFA Fund’s holdings consisted of equity securities, 0.01% consisted of cash and 0.95% was in other assets, including dividends booked but not yet received.  The following tables summarize the EFA Fund’s top holdings in individual companies and by sector as of June 12, 2012.
 
Top holdings in individual securities as of June 12, 2012
 
Company
Percentage of
Total Holdings
Nestle S.A.
2.05%
HSBC Holdings plc
1.62%
Vodafone Group plc
1.47%
BP plc
1.33%
Novartis AG-Reg
1.31%
Royal Dutch Shell plc
1.26%
Glaxosmithkline plc
1.23%
Roche Holding AG
1.23%
Toyota Motor Corp
1.13%
BHP Billiton Limited
1.09%

 
 
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Top holdings by sector as of June 12, 2012
 
Sector
Percentage of
Total Holdings
Financials
21.91%
Industrials
12.55%
Consumer Staples
11.81%
Consumer Discretionary
10.47%
Health Care
9.99%
Materials
9.72%
Energy
8.35%
Telecommunication Services
5.49%
Information Technology
4.56%
Utilities
4.19%
Other/Undefined
0.97%

 
The information above was compiled from the iShares® website, without independent verification.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
Disclaimer
 
The securities are not sponsored, endorsed, sold or promoted by BTC.  BTC makes no representations or warranties to the owners of the securities or any member of the public regarding the advisability of investing in the securities.  BTC has no obligation or liability in connection with the operation, marketing, trading or sale of the securities.
 
 
 
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BACKGROUND ON THE MSCI INDICES
 
We have derived all information contained in this product supplement regarding the MSCI EAFE® Index and the MSCI Emerging Markets Index (each, an “MSCI Index” and together, the “MSCI Indices”), including, without limitation, their make-up, method of calculation and changes in their components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, MSCI Inc. (“MSCI”).  The MSCI Indices are calculated, maintained and published by MSCI.  MSCI has no obligation to continue to publish, and may discontinue publication of, any of the MSCI Indices.
 
Transition
 
On March 28, 2007, MSCI announced changes to the methodology used by MSCI to calculate its Standard and Small Cap Indices. The transition of the Standard and Small Cap Indices to the MSCI Global Investable Market Indices occurred in two phases, the first completed as of November 30, 2007 and the second completed as of May 30, 2008.  The current index calculation methodology used to formulate the MSCI Indices (and which is also used to formulate the MSCI Global Investable Market Indices) (the “MSCI Global Investable Market Indices Methodology”) was implemented as of June 1, 2008.
 
The MSCI EAFE® Index
 
The MSCI EAFE® Index is a free float-adjusted market capitalization index intended to measure the equity market performance of certain developed markets.  The MSCI EAFE® Index is calculated daily in U.S. dollars and published in real time every 15 seconds during market trading hours.  As of June 13, 2012, the MSCI EAFE® Index consisted of the following 23 developed market country indices or regions: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.  The MSCI EAFE® Index is reported by Bloomberg L.P. under the ticker symbol “MXEA.”
 
The MSCI Emerging Markets Index
 
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of global emerging markets.  The MSCI Emerging Markets Index is calculated daily in U.S. dollars and published in real time every 15 seconds during market trading hours.  As of June 13, 2012, the MSCI Emerging Markets Index consisted of the following 20 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Malaysia, Mexico, Peru, Philippines, Poland, Russian Federation, South Korea, South Africa, Taiwan, Thailand and Turkey.  The MSCI Emerging Markets Index is reported by Bloomberg L.P. under the ticker symbol “MXEF.”
 
Constructing the MSCI Global Investable Market Indices
 
MSCI undertakes an index construction process that involves: (i) defining the Equity Universe; (ii) determining the Market Investable Equity Universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying Index Continuity Rules for the MSCI Standard Index; (v) creating style segments within each size segment within each market; and (vi) classifying securities under the Global Industry Classification Standard (the “GICS”).
 
The “relevant market” with respect to a single country index is equivalent to the single country, except in DM-classified countries in Europe (as described below), where all such countries are first aggregated into a single market for index construction purposes.  Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the MSCI Global Investable Market Indices Methodology.
 
 
 
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The “relevant market” with respect to a composite index includes each of the single countries which comprise the composite index.
 
The “Global Investable Equity Universe” is the aggregation of all Market Investable Equity Universes.  The “DM Investable Equity Universe” is the aggregation of all the Market Investable Equity Universes for Developed Markets.
 
Defining the Equity Universe
 
(i)   Identifying Eligible Equity Securities: The Equity Universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as Developed Markets (“DM”), Emerging Markets (“EM”) or Frontier Markets (“FM”).  All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, exchange traded funds, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the Equity Universe. Real Estate Investment Trusts (“REITs”) in some countries and certain income trusts in Canada are also eligible for inclusion.
 
(ii)  Country Classification of Eligible Securities: Each company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.
 
Determining the Market Investable Equity Universes
 
A Market Investable Equity Universe for a market is derived by applying investability screens to individual companies and securities in the Equity Universe that are classified in that market. A market is equivalent to a single country, except in DM Europe, where all DM countries in Europe are aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the Global Investable Market Indices methodology.
 
The investability screens used to determine the Investable Equity Universe in each market are as follows:
 
 
(i)
Equity Universe Minimum Size Requirement: This investability screen is applied at the company level. In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization.  A company will meet this requirement if its cumulative free float-adjusted market capitalization is within the top 99% of the Equity Universe sorted in descending order by full market capitalization.
 
 
(ii)
Equity Universe Minimum Float-Adjusted Market Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have a free float-adjusted market capitalization equal to or higher than 50% of the Equity Universe Minimum Size Requirement.
 
 
(iii)
DM and EM Minimum Liquidity Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have adequate liquidity as measured by the Annualized Traded Value Ratio (“ATVR”) and the Frequency of Trading.  The ATVR screens out extreme daily trading volumes, taking into account the free float-adjusted market capitalization size of securities.  The aim of the 12-month and 3-month ATVR together with 3-month Frequency of Trading is to select securities with a sound long and short-term liquidity.  A minimum liquidity level of 20% of 3-month ATVR and 90% of 3-month Frequency of
 
 
 
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Trading over the last 4 consecutive quarters, as well as 20% of 12-month ATVR are required for the inclusion of a security in a Market Investable Equity Universe of a Developed Market.  A minimum liquidity level of 15% of 3-month ATVR and 80% of 3-month Frequency of Trading over the last 4 consecutive quarters, as well as 15% of 12-month ATVR are required for the inclusion of a security in a Market Investable Equity Universe of an Emerging Market.
 
In instances when a security does not meet the above criteria, the security will be represented by a relevant liquid eligible Depository Receipt if it is trading in the same geographical region.  Depository Receipts are deemed liquid if they meet all the above mentioned criteria for 12-month ATVR, 3-month ATVR and 3-month Frequency of Trading.
 
 
(iv)
Global Minimum Foreign Inclusion Factor Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe.
 
 
(v)
The Minimum Length of Trading Requirement: This investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a Market Investable Equity Universe, the new issue must have started trading at least four months before the implementation of the initial construction of the index or at least three months before the implementation of a semi-annual index review. This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the Minimum Length of Trading Requirement and may be included in a Market Investable Equity Universe and the Standard Index outside of a Quarterly or semi-annual index review.
 
Defining Market Capitalization Size Segments for Each Market
 
Once a Market Investable Equity Universe is defined, it is segmented into the following size-based indices:
 
 
·
Investable Market Index (Large + Mid + Small)
 
 
·
Standard Index (Large + Mid)
 
 
·
Large Cap Index
 
 
·
Mid Cap Index
 
 
·
Small Cap Index
 
Creating the Size Segment Indices in each market involves the following steps: (i) defining the Market Coverage Target Range for each size segment; (ii) determining the Global Minimum Size Range for each size segment; (iii) determining the Market Size-Segment Cutoffs and associated Segment Number of Companies; (iv) assigning companies to the size segments; and (v) applying final size-segment investability requirements and index continuity rules.
 
Index Continuity Rules for the Standard Indices
 
In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other index construction rules, a minimum number of five constituents will be maintained for a DM Standard Index and a minimum number of three constituents will be maintained for an EM Standard Index.
 
If after the application of the index construction methodology, a Standard Index contains fewer than five securities in a Developed Market or three securities in an Emerging Market, then the
 
 
 
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largest securities by free float-adjusted market capitalization are added to the Standard Index in order to reach five constituents in that Developed Market or three in that Emerging Market.  At subsequent index reviews, if the free float-adjusted market capitalization of a non-index constituent is at least 1.50 times the free float-adjusted market capitalization of the smallest existing constituent after rebalancing, the larger free float-adjusted market capitalization security replaces the smaller one.
 
Creating Style Indices within Each Size Segment
 
All securities in the investable equity universe are classified into Value or Growth segments using the MSCI Global Value and Growth methodology.
 
Classifying Securities under the Global Industry Classification Standard
 
All securities in the Global Investable Equity Universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor’s, the Global Industry Classification Standard (“GICS”).  The GICS entails four levels of classification: (1) sector; (2) industry groups; (3) industries; (4) sub-industries.  Under the GICS, each company is assigned uniquely to one sub-industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS.
 
Maintenance of the MSCI Global Investable Market Indices
 
The MSCI Global Investable Market Indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability and low index turnover.
 
In particular, index maintenance involves:
 
 
(i)
semi-annual index reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices, which include:
 
 
·
updating the indices on the basis of a fully refreshed Equity Universe;
 
 
·
taking buffer rules into consideration for migration of securities across size and style segments; and
 
 
·
updating FIFs and Number of Shares (“NOS”).
 
The objective of the SAIRs is to systematically reassess the various dimensions of the Equity Universe for all markets on a fixed semi-annual timetable. A SAIR involves a comprehensive review of the Size Segment and Global Value and Growth Indices.
 
(ii)      quarterly index reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:
 
 
·
including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index;
 
 
·
allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR; and
 
 
·
reflecting the impact of significant market events on FIFs and updating NOS.
 
 
 
 
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QIRs are designed to ensure that the indices continue to be an accurate reflection of the evolving equity marketplace. This is achieved by a timely reflection of significant market driven changes that were not captured in the index at the time of their actual occurrence but are significant enough to be reflected before the next SAIR.  QIRs may result in additions or deletions due to migration to another Size Segment Index, and changes in FIFs and in NOS.  Only additions of significant new investable companies are considered, and only for the Standard Index.  The buffer zones used to manage the migration of companies from one segment to another are wider than those used in the SAIR.  The style classification is reviewed only for companies that are reassigned to a different size segment.
 
 
(iii)
Ongoing event-related changes.  Ongoing event-related changes to the indices are the result of mergers, acquisitions, spin-offs, bankruptcies, reorganizations and other similar corporate events.  They can also result from capital reorganizations in the form of rights issues, bonus issues, public placements and other similar corporate actions that take place on a continuing basis.  These changes generally are reflected in the indices at the time of the event.  Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading.
 
Announcement Policy
 
The results of the SAIRs are announced at least two weeks in advance of their effective implementation dates as of the close of the last business day of May and November.  The results of the QIRs are announced at least two weeks in advance of their effective implementation dates as of the close of the last business day of February and August.  All changes resulting from corporate events are announced prior to their implementation.
 
The changes are typically announced at least ten business days prior to the changes becoming effective in the indices as an “expected” announcement, or as an “undetermined” announcement, when the effective dates are not known yet or when aspects of the event are uncertain. MSCI sends “confirmed” announcements at least two business days prior to events becoming effective in the indices, provided that all necessary public information concerning the event is available. The full list of all new and pending changes is delivered to clients on a daily basis, between 5:30 p.m. and 6 p.m., US Eastern Time through the Advance Corporate Events (ACE) File.
 
In exceptional cases, events are announced during market hours for same or next day implementation. Announcements made by MSCI during market hours are usually linked to late company disclosure of corporate events or unexpected changes to previously announced corporate events.
 
In the case of secondary offerings representing more than 5% of a security’s number of shares for existing constituents, these changes will be announced prior to the end of the subscription period when possible and a subsequent announcement confirming the details of the event (including the date of implementation) will be made as soon as the results are available.
 
Both primary equity offerings and secondary offerings for U.S. securities, representing at least 5% of the security’s number of shares, will be confirmed through an announcement during market hours for next day or shortly after implementation, as the completion of the events cannot be confirmed prior to the notification of the pricing.
 
Early deletions of constituents due to bankruptcy or other significant cases are announced as soon as practicable prior to their implementation.
 
 
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Index Calculation
 
Price Index Level
 
The MSCI Indices are calculated using the Laspeyres’ concept of a weighted arithmetic average together with the concept of chain-linking.  As a general principle, today’s index level is obtained by applying the change in the market performance to the previous period index level.
 
 
Where:
 
 
·
PriceIndexLevelUSDt-1 is the Price Index level in USD at time t-1.
 
 
·
IndexAdjustedMarketCapUSDt is the Adjusted Market Capitalization of the index in USD at time t.
 
 
·
IndexInitialMarketCapUSDt is the Initial Market Capitalization of the index in USD at time t.
 
 
·
PriceIndexLevelLocalt-1 is the Price Index level in local currency at time t-1.
 
 
·
IndexAdjustedMarketCapForLocalt is the Adjusted Market Capitalization of the index in USD converted using FX rate as of t-1 and used for local currency index at time t.
 
Note: IndexInitialMarketCapUSD was previously called IndexUnadjustedMarketCapPreviousUSD
 
Security Price Index Level
 
 
Where:
 
 
·
SecurityPriceIndexLevelt-1 is Security Price Index level at time t-1.
 
 
·
SecurityAdjustedMarketCapForLocalt is the Adjusted Market Capitalization of security s in USD converted using FX rate as of t-1.
 
 
·
SecurityInitialMarketCapUSDt is the Initial Market Capitalization of security s in USD at time t.
 
 
·
EndOfDayNumberOfSharest-1 is the number of shares of security s at the end of day t-1.
 
 
·
PricePerSharet is the price per share of security s at time t.
 
 
·
PricePerSharet-1 is the price per share of security s at time t-1.
 
 
 
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·
InclusionFactort is the inclusion factor of security s at time t. The inclusion factor can be one or the combination of the following factors: Foreign Inclusion Factor, Domestic Inclusion Factor Growth Inclusion Factor, Value Inclusion Factor, Index Inclusion Factor.
 
 
·
PAFt is the Price Adjustment Factor of security s at time t.
 
 
·
FXratet -1 is the FX rate of the price currency of security s vs USD at time t-1. It is the value of 1 USD in foreign currency.
 
 
·
ICIt is the Internal Currency Index of price currency at time t. The ICI is different than 1 when a country changes the internal value of its currency (e.g., from Turkish Lira to New Turkish Lira – ICI = 1,000,000).
 
 
·
ICIt-1 is the Internal Currency Index of price currency at time t-1.
 
Index Market Capitalization
 
IndexAdjustedMarketCapUSDt 
 
 
Where:
 
 
·
EndOfDayNumberOfSharest-1 is the number of shares of security s at the end of day t-1.
 
 
·
PricePerSharet is the price per share of security s at time t.
 
 
·
PricePerSharet-1 is the price per share of security s at time t-1.
 
 
·
InclusionFactort is the inclusion factor of security s at time t. The inclusion factor can be one or the combination of the following factors: Foreign Inclusion Factor, Domestic Inclusion Factor Growth Inclusion Factor, Value Inclusion Factor, Index Inclusion Factor.
 
 
·
PAFt is the Price Adjustment Factor of security s at time t.
 
 
·
FXratet is the FX rate of the price currency of security s vs USD at time t. It is the value of 1 USD in foreign currency.
 
 
·
FXratet -1 is the FX rate of the price currency of security s vs USD at time t-1. It is the value of 1 USD in foreign currency.
 
 
·
ICIt is the Internal Currency Index of price currency at time t. The ICI is different than 1 when a country changes the internal value of its currency (e.g., from Turkish Lira to New Turkish Lira – ICI = 1,000,000).
 
 
·
ICIt-1 is the Internal Currency Index of price currency at time t-1.
 
 
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Corporate Events
 
Mergers and Acquisitions
 
As a general principle, MSCI implements M&As as of the close of the last trading day of the acquired entity or merging entities (last offer day for tender offers), regardless of the status of the securities (index constituents or non-index constituents) involved in the event. MSCI uses market prices for implementation. This principle applies if all necessary information is available prior to the completion of the event and if the liquidity of the relevant constituent(s) is not expected to be significantly diminished on the day of implementation. Otherwise, MSCI will determine the most appropriate implementation method and announce it prior to the changes becoming effective in the indices.
 
Tender Offers
 
In tender offers, the acquired or merging security is generally deleted from an index at the end of the initial offer period, when the offer is likely to be successful and / or if the free float of the security is likely to be substantially reduced (this rule is applicable even if the offer is extended), or once the results of the offer have been officially communicated and the offer has been successful and the security’s free float has been substantially reduced, if all required information is not available in advance or if the offer’s outcome is uncertain. The main factors considered by MSCI when assessing the outcome of a tender offer (not in order of importance) are: the announcement of the offer as friendly or hostile, a comparison of the offer price to the acquired security’s market price, the recommendation by the acquired company’s board of directors, the major shareholders’ stated intention whether to tender their shares, the required level of acceptance, the existence of pending regulatory approvals, market perception of the transaction, official preliminary results if any, and other additional conditions for the offer.
 
In certain cases, securities may be deleted earlier than the last offer day.  For example, in the case of tender offers in the United Kingdom, a security is typically deleted two business days after the offer is declared unconditional in all respects.
 
Increases in a security’s number of shares resulting from acquisition of non-listed companies and conversion of unlisted shares are implemented at the next regularly scheduled Index Review following completion of the event.
 
Increases in a security’s number of shares resulting from acquisition of listed non-index constituent securities representing at least 5% of the security’s number of shares are generally implemented as of the close of the last trading day of the acquired entity if all necessary information is available prior to the completion of the event or if such information is not available prior to the completion of the event, as soon as practicable following the completion of the event. Changes representing less than 5% of the security’s number of shares are implemented at the next regularly scheduled Index Review following the completion of the event.
 
If a security is deleted from an index, the security will not be reinstated immediately after its deletion even when the tender offer is subsequently declared unsuccessful and/or the free float of the security is not substantially reduced. It may be reconsidered for index inclusion at the following regularly scheduled index review.
 
Late Announcements of Completion of Mergers and Acquisitions
 
When the completion of an event is announced too late to be reflected as of the close of the last trading day of the acquired or merging entities, implementation occurs as of the close of the following day or as soon as practicable thereafter. In these cases, MSCI uses a calculated price for the acquired or merging entities. The calculated price is determined using the terms of the transaction and the price of the acquiring or merged entity, or, if not appropriate, using the last trading day’s market price of the acquired or merging entities.
 
 
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Conversions of Share Classes
 
Conversions of a share class into another share class resulting in the deletion and/or addition of one or more classes of shares are implemented as of the close of the last trading day of the share class to be converted.
 
Spin-Offs
 
On the ex-date of a spin-off, a PAF is applied to the price of the security of the parent company. The PAF is calculated based on the terms of the transaction and the market price of the spun-off security. If the spun-off entity qualifies for inclusion, it is included as of the close of its first trading day.  In cases of spin-offs of partially owned companies, the post-event free float of the spun-off entity is calculated using a weighted average of the existing shares and the spun-off shares, each at their corresponding free float. Any resulting changes to FIFs and/or DIFs are implemented as of the close of the ex-date.
 
In cases of spin-offs of partially-owned companies, the post-event free float of the spun-off entity is calculated using a weighted average of the existing shares and the spun-off shares, each at their corresponding free float. Any resulting changes to FIFs and/or DIFs are implemented as of the close of the ex-date.
 
When the spun-off security does not trade on the ex-date, a “detached” security is created to avoid a drop in the free float-adjusted market capitalization of the parent entity, regardless of whether the spun-off security is added or not. The detached security is included until the spun-off security begins trading, and is deleted thereafter. Generally, the value of the detached security is equal to the difference between the cum price and the ex price of the parent security.
 
Corporate Actions
 
Corporate actions such as splits, stock dividends and rights issues, which affect the price of a security, require a price adjustment. In general, the PAF is applied on the ex-date of the event to ensure that security prices are comparable between the ex-date and the cum date. To do so, MSCI adjusts for the value of the right and/or the value of the special assets that are distributed and the changes in number of shares and FIF, if any, are reflected as of the close of the ex-date. In general, corporate actions do not impact the free float of the securities because the distribution of new shares is carried out on a pro rata basis to all existing shareholders. Therefore, MSCI will generally not implement any pending number of shares and/or free float updates simultaneously with the event.
 
If a security does not trade for any reason on the ex-date of the corporate action, the event will be generally implemented on the day the security resumes trading.
 
Share Placements and Offerings
 
Changes in number of shares and FIF resulting from primary equity offerings representing at least 5% of the security’s number of shares are generally implemented as of the close of the first trading day of the new shares, if all necessary information is available at that time. Otherwise, the event is implemented as soon as practicable after the relevant information is made available. A primary equity offering involves the issuance of new shares by a company. Changes in number of shares and FIF resulting from primary equity offerings representing less than 5% of the security’s number of shares are deferred to the next regularly scheduled index review following the completion of the event. For public secondary offerings of existing constituents representing at least 5% of the security’s number of shares, where possible, MSCI will announce these changes and reflect them shortly after the results of the subscription are known. Secondary public offerings that, given lack of sufficient notice, were not reflected immediately will be reflected at the next regularly scheduled index review. Secondary offerings involve the distribution of existing shares of current shareholders’ in a listed company and are usually pre-announced by a company or by a company’s shareholders and open for public subscription during a pre-determined period.
 
 
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Debt-to-Equity Swaps
 
In general, large debt-to-equity swaps involve the conversion of debt into equity originally not convertible at the time of issue. In this case, changes in numbers of shares and subsequent FIF and/or DIF changes are implemented as of the close of the first trading day of the newly issued shares, or shortly thereafter if all necessary information is available at the time of the swap. In general, shares issued in debt-to-equity swaps are assumed to be issued to strategic investors. As such, the post event free float is calculated on a pro forma basis assuming that all these shares are non-free float. Changes in numbers of shares and subsequent FIF and/or DIF changes due to conversions of convertible bonds or other convertible instruments, including periodical conversions of preferred stocks and small debt-to-equity swaps are implemented at a following regularly scheduled index review.
 
Suspensions and Bankruptcies
 
MSCI will remove from an index as soon as practicable companies that file for bankruptcy, companies that file for protection from their creditors. MSCI will delete from an index after 40 business days of suspension securities of companies facing financial difficulties (e.g., liquidity issues, debt repayment issues, companies under legal investigation, etc.) with at least two business days advance notice. Subsequently, if and when these securities resume normal trading, they may be considered as a potential addition to an index at the next scheduled semi-annual index review.  Securities of companies suspended due to pending corporate events (e.g., merger, acquisition, etc.), will continue to be maintained in an index until they resume trading regardless of the duration of the suspension period. When the primary exchange price is not available, MSCI will delete securities at an over the counter or equivalent market price when such a price is available and deemed relevant. If no over the counter or equivalent price is available, the security will be deleted at the smallest price (unit or fraction of the currency) at which a security can trade on a given exchange. For securities that are suspended, MSCI will carry forward the market price prior to the suspension during the suspension period.
 
 
 
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BACKGROUND ON THE iSHARES® BARCLAYS 20+ YEAR TREASURY BOND FUND
 
We have derived all information regarding the iShares® Barclays 20+ Year Treasury Bond Fund (the “20+ Treasury Fund”) contained in this product supplement, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification. Such information reflects the policies of, and is subject to change by, iShares®, Inc. (“iShares®”), iShares® Trust, BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”). BFA is currently the investment advisor to the 20+ Treasury Fund and is a wholly owned subsidiary of BTC, which in turn is a wholly owned subsidiary of BlackRock, Inc. The 20+ Treasury Fund is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “TLT.”
 
The iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the 20+ Treasury Fund. Information provided to or filed with the SEC by iShares® Trust pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov. For additional information regarding the 20+ Treasury Fund, please see the 20+ Treasury Fund’s prospectus. In addition, information about iShares® and the 20+ Treasury Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and the iShares® website at www.ishares.com. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
Investment Objective and Strategy
 
The 20+ Treasury Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the long-term sector of the United States Treasury market as defined by the Barclays Capital U.S. 20+ Year Treasury Bond Index (the “20+ Treasury Index”).
 
BFA uses a “passive” or indexing approach to try to achieve the investment objective of the 20+ Treasury Fund. The 20+ Treasury Fund does not try to “beat” the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued. The 20+ Treasury Fund uses a representative sampling indexing strategy (as described below under “Representative Sampling”) to try to track the 20+ Treasury Index.
 
The 20+ Treasury Fund may or may not hold all of the securities in the 20+ Treasury Index. The 20+ Treasury Fund generally invests at least 90% of its assets in the bonds included in the 20+ Treasury Index and at least 95% of its assets in U.S. government bonds. The 20+ Treasury Fund may invest up to 10% of its assets in U.S. government bonds not included in the 20+ Treasury Index, but which BFA believes will help the 20+ Treasury Fund track the 20+ Treasury Index. The 20+ Treasury Fund also may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA.  The 20+ Treasury Fund may lend securities representing up to one-third of the value of the 20+ Treasury Fund’s total assets (including the value of the collateral received).
 
Representative Sampling
 
Representative sampling is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the 20+ Treasury Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the 20+ Treasury Index.
 
 
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Correlation
 
The 20+ Treasury Index is a theoretical financial calculation while the 20+ Treasury Fund is an actual investment portfolio. The performance of the 20+ Treasury Fund and the 20+ Treasury Index may vary due to transaction costs, non-U.S. currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the portfolio of the 20+ Treasury Fund and that of the 20+ Treasury Index resulting from legal restrictions (such as diversification requirements) that apply to the 20+ Treasury Fund but not to the 20+ Treasury Index or to the use of representative sampling. “Tracking error” is the difference between the performance (return) of the portfolio of the 20+ Treasury Fund and that of the 20+ Treasury Index. BFA expects that, over time, the 20+ Treasury Fund’s tracking error will not exceed 5%. Because the 20+ Treasury Fund uses a representative sampling indexing strategy, it can be expected to have a larger tracking error than if it used a replication indexing strategy. “Replication” is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
 
Industry Concentration Policy
 
The 20+ Treasury Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the 20+ Treasury Index is concentrated. For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
 
Holdings Information
 
The holding information for the 20+ Treasury Fund is updated on a daily basis. As of June 12, 2012, 99.36% of the 20+ Treasury Fund’s holdings consisted of bonds, 0.01% consisted of cash and 0.63% was in other assets, including dividends booked but not yet received. The following tables summarize the top 10 holdings of the 20+ Treasury Fund as of such date.
 
 
Top 10 Holdings as of June 12, 2012
 
Security
Percentage of Total Holdings
U.S. Treasury Bonds, 05/15/2041, 4.38%
8.56%
U.S. Treasury Bonds, 02/15/2040, 4.62%
8.32%
U.S. Treasury Bonds, 11/15/2040, 4.25%
8.26%
U.S. Treasury Bonds, 05/15/2040, 4.38%
8.08%
U.S. Treasury Bonds, 02/15/2041, 4.75%
8.06%
U.S. Treasury Bonds, 11/15/2039, 4.38%
7.89%
U.S. Treasury Bonds, 08/15/2040, 3.88%
7.87%
U.S. Treasury Bonds, 08/15/2041, 3.75%
7.75%
U.S. Treasury Bonds, 08/15/2039, 4.50%
5.98%
U.S. Treasury Bonds, 05/15/2039, 4.25%
5.66%
 
The information above was compiled from the iShares® website. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
 
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Disclaimer
 
The notes are not sponsored, endorsed, sold or promoted by BTC.  BTC makes no representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes.  BTC has no obligation or liability in connection with the operation, marketing, trading or sale of the notes.
 
The Barclays Capital U.S. 20+ Year Treasury Bond Index
 
We have derived all information contained in this product supplement regarding the Barclays Capital U.S. 20+ Year Treasury Bond Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, Barclays Capital Inc. (“BCI”).  The Barclays Capital U.S. 20+ Year Treasury Bond Index is calculated, maintained and published by BCI. BCI is under no obligation to continue to publish, and may discontinue publication of, the Barclays Capital U.S. 20+ Year Treasury Bond Index.
 
The Barclays Capital U.S. 20+ Year Treasury Bond Index measures the performance of public obligations of the U.S. Treasury. The Barclays Capital U.S. 20+ Year Treasury Bond Index is market capitalization weighted, includes all publicly issued U.S. Treasury securities that meet the criteria for inclusion and is rebalanced once a month on the last calendar day of the month. The U.S. Treasury securities included in the Barclays Capital U.S. 20+ Year Treasury Bond Index must have a remaining maturity of greater than 20 years, are rated investment grade (at least Baa3 by Moody’s Investors Service, Inc. or BBB- by Standard and Poor’s Financial Services, LLC) and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed-rate and non-convertible. Certain special issuances, such as state and local government series bonds (“SLGs”) and coupon issues that have been stripped from assets already included, are excluded from the Barclays Capital U.S. 20+ Year Treasury Bond Index.
 
 
 
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BACKGROUND ON THE iSHARES® IBOXX $ INVESTMENT GRADE CORPORATE BOND FUND
 
We have derived all information regarding the iShares® iBoxx $ Investment Grade Corporate Bond Fund  (the “Investment Grade Bond Fund”) contained in this product supplement, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, iShares®, Inc. (“iShares®”), iShares® Trust, BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”). BFA is currently the investment adviser to the Investment Grade Bond Fund and is a wholly owned subsidiary of BTC, which in turn is a wholly owned subsidiary of BlackRock, Inc.  The Investment Grade Bond Fund is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “LQD.”
 
iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the Investment Grade Bond Fund.  Information provided to or filed with the SEC by iShares® pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov.  For additional information regarding iShares® Trust, BFA and the Investment Grade Bond Fund, please see the Investment Grade Bond Fund’s prospectus.  In addition, information about iShares® and the Investment Grade Bond Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and then iShares® website at www.ishares.com.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered part of, this product supplement or the relevant terms supplement.
 
Investment Objective and Strategy
 
The Investment Grade Bond Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of a segment of the U.S. investment grade corporate bond market as defined by the iBoxx® $ Liquid Investment Grade Index (the “Investment Grade Bond Index”).
 
BFA uses a “passive” or indexing approach to try to achieve the investment objective of the Investment Grade Bond Fund.  The Investment Grade Bond Fund does not try to “beat” the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued.  The Investment Grade Bond Fund uses a representative sampling indexing strategy (as described below under “— Representative Sampling”) to try to track the Investment Grade Bond Index.
 
The Investment Grade Bond Fund may or may not hold all of the securities in the Investment Grade Bond Index.  The Investment Grade Bond Fund generally invests at least 90% of its assets in securities of the Investment Grade Bond Index and at least 95% of its assets in investment grade corporate bonds.  The Investment Grade Bond Fund also may invest in bonds not included in the Investment Grade Bond Index, but which BFA believes will help the Investment Grade Bond Fund track the Investment Grade Bond Index.  The Investment Grade Bond Fund may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA.
 
Representative Sampling
 
Representative sampling involves investing in a representative sample of securities that collectively has an investment profile similar to the Investment Grade Bond Index.  The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the Investment Grade Bond Index.
 
 
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Correlation
 
The Investment Grade Bond Index is a theoretical financial calculation while the Investment Grade Bond Fund is an actual investment portfolio.  The performance of the Investment Grade Bond Fund and the Investment Grade Bond Index may vary due to transaction costs, non-U.S. currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the Investment Grade Bond Fund’s portfolio and the Investment Grade Bond Index resulting from legal restrictions (such as diversification requirements) that apply to the Investment Grade Bond Fund but not to the Investment Grade Bond Index or to the use of representative sampling. “Tracking error” is the difference between the performance (return) of the Investment Grade Bond Fund’s portfolio and that of the Investment Grade Bond Index.  BFA expects that, over time, the Investment Grade Bond Fund’s tracking error will not exceed 5%.  Because the Fund uses a representative sampling indexing strategy, it can be expected to have a larger tracking error than if it used a replication indexing strategy.  “Replication” is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
 
Industry Concentration Policy
 
The Investment Grade Bond Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the Investment Grade Bond Index is concentrated.  For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
 
Holdings Information
 
The holding information for the Investment Grade Bond Fund is updated on a daily basis. As of June 11, 2012, 98.65% of the Fund’s holdings consisted of bonds, 0.08% consisted of cash and 1.26% was in other assets, including dividends booked but not yet received.  The following tables summarize the top 10 holdings of the Investment Grade Bond Fund as of such date.
 
Top 10 Holdings as of June 11, 2012
 
Security
Percentage of Total Holdings
AT&T Inc. (maturing 2018)
0.54%
Wells Fargo & Company
0.53%
AT&T Inc. (maturing 2039)
0.53%
Wal-Mart Stores Inc.
0.50%
American International Group Inc.
0.48%
General Electric Capital Corp. (maturing 2038)
0.48%
Credit Suisse New York, NY
0.48%
JPMorgan Chase & Co.
0.45%
General Electric Capital Corp. (maturing 2018)
0.45%
Citigroup Inc.
0.44%

 
The information above was compiled from the iShares® website, without independent verification. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
 
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Disclaimer
 
The notes are not sponsored, endorsed, sold or promoted by BTC.  BTC makes no representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes.  BTC has no obligation or liability in connection with the operation, marketing, trading or sale of the notes.
 
The iBoxx® $ Liquid Investment Grade Index
 
We have derived all information contained in this product supplement regarding the IG Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  That information reflects the policies of, and is subject to change by, Markit Group Limited (“Markit”).  The IG Index is calculated, maintained and published by Markit.  Markit has no obligation to continue to calculate and publish, and may discontinue calculation and publication of, the IG Index.
 
The IG Index is reported by Bloomberg L.P. under the ticker symbol “IBOXIG.”
 
The IG Index is designed to reflect the performance of the U.S. dollar investment-grade corporate bond market.  The IG Index is market-value weighted concept with an issuer cap of 3%.
 
The IG Index consists of investment grade U.S. dollar-denominated bonds issued by corporate issuers from developed countries and rated by at least one of three rating services: Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating Services.  The IG Index composition is rebalanced once a month, after the close of business on the last day of each month (the “rebalancing date”).  The new IG Index composition becomes effective on the first business day of the next month (the “composition month”).
 
The bonds in the IG Index must meet all the criteria described below as of the close of business three business days prior to the rebalancing date, provided that the relevant bond data can be verified, at Markit’s sole discretion, as of such date (the “Bond Selection Cut-off Date”).
 
The IG Index is multi-contributor priced.  Prices for the bonds in the IG Index are sourced from a number of leading market makers.  The received quotes are subject to a quality control process which is intended to exclude stale or off-market prices, and the quotes that pass the quality control are consolidated to the IG Index price.  Additionally, the IG Index rules and their application are governed by two committees:
 
 
·
Technical Committee: composed of representatives of the price contributing market makers and banks.  The Technical Committee meets once a month in order to arbitrate monthly rebalancing, and to monitor market developments.  It also provides assistance in the identification of eligible constituents, especially in the instance where the eligibility or the classification of a bond is unclear or contentious.  Additionally, the Technical Committee discusses any market developments which may warrant index rule changes, provides recommendations on changes to the rules, and reviews whether a country should be deemed ineligible due to financial sanctions.
 
 
·
Oversight Committee: composed of representatives from a broad range of asset managers.  The purpose of the oversight Committee is to review the recommendations and decisions of the Technical Committee and also to provide consultation and approval on any market developments which may warrant rule changes.
 
Selection Criteria for the iBoxx® $ Liquid Investment Grade Index
 
The following selection criteria are applied to select the constituents for the IG Index: bond type, credit rating, time to maturity, amount outstanding, classification, lockout period and minimum run.
 
 
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Bond Type.  Only fixed-rate bonds whose cash flow can be determined in advance are eligible for the IG Index.  the IG Index is comprised solely of bonds.  Treasury Bills and other money market instruments are not eligible.  The IG Index includes only U.S. dollar-denominated bonds.
 
In particular, bonds with the following characteristics are included: fixed coupon bonds, step-up bonds with coupon schedules known at issuance (or as functions of the issuer’s rating), sinking funds and amortizing bonds, medium-term notes, callable bonds and putable bonds.
 
The following instrument types are specifically excluded from the Index: preferred shares, optionally and mandatorily convertible bonds, subordinated bank debt or insurance debt with mandatory contingent conversion features or with any conversion options before the first call date, bonds with other equity features attached (e.g., options/warrants), private placements, perpetual bonds, floating rate notes, pay-in-kind bonds (during the pay-in-kind period), zero coupon bonds, zero step-ups (GAINS) and bonds with differences between accrual and coupon payment periods and monthly-paying bonds.
 
Any bond subject to a firm call or tender offer in the month immediately following the rebalancing date will be excluded from the IG Index, provided that Markit is aware of that tender offer or call as of the Bond Selection Cut-off Date.
 
Credit Rating.  All bonds in the IG Index must have a Markit iBoxx Rating of investment grade.  Ratings from the following three credit rating agencies are considered for the calculation of the Markit iBoxx Rating: Fitch Ratings (“Fitch”), Moody’s Investor Service  (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”).  Investment grade is defined to be BBB- or above from Fitch or S&P and Baa3 or above from Moody’s.  If a bond is rated by more than one of the foregoing agencies, then the Markit iBoxx Rating is the average of the provided ratings.  The rating is consolidated to the nearest rating grade.  Rating notches are not used.  In case of an ID change or exchange of a Rule 144A/Regulation S offering into a registered bond the ratings from the Rule 144A/Regulation S offering are also used for the registered bond.
 
Time to Maturity.  To qualify for entry in the IG Index, bonds must have at least three years and six months remaining time to maturity. Bonds in the IG Index must have maturities of at least three years at the rebalancing date.
 
Amount Outstanding.  The outstanding face value of all bonds denominated in U.S. dollars from the issuer must be greater than or equal to $2 billion as of the Bond Selection Cut-off Date.  The outstanding face value of a bond must be greater than or equal to $750 million as of the Bond Selection Cut-off Date.  Partial buybacks or increases will affect the outstanding face value of a prospective bond.  Markit considers changes to the outstanding face value of a candidate bond as a result of partial or full buybacks or increases, provided that Markit is aware of such changes as of the Bond Selection Cut-off Date.
 
Bond Classification.  The bond must be corporate credit, i.e., debt instruments backed by corporate issuers that are not secured by specific assets.  Debt issued by governments, sovereigns, quasi-sovereigns and government-backed or guaranteed entities is excluded.
 
Bonds must be denominated in U.S. dollars, publicly registered in the United States with the SEC and clear and settle through The Depository Trust Company.  Eurobonds are excluded.
 
Bonds from countries classified as developed markets based on the “Markit Global Economic Development Classification” are eligible for the IG Index.  As of March 2012, the issuer or, in the case of a finance subsidiary, the issuer’s guarantor, must be domiciled and the country of risk must be in Andorra, Australia, Austria, Belgium, Bermuda, Canada, Cayman Islands, Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Spain, Sweden, Switzerland, United States or the United Kingdom in order
 
 
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to be eligible for inclusion in the IG Index.  A new country is added to the IG Index if it is classified as a developed market based on the “Markit Global Economic Development Classification”.  A country is no longer eligible for the IG Index if it is classified as an emerging market based on the “Markit Global Economic Development Classification”.  The “Markit Global Economic Development Classification” is updated once per year.  The results are published at the end of July.  The inclusion or exclusion of a country becomes effective at the end of the October following that publication.
 
Lockout Period. A bond that drops out of the IG Index at the rebalancing day is excluded from re-entering the IG Index for a three-month period.  The rule for the lockout period takes precedence over the other rules for the IG Index selection.  A locked out bond will not be selected, even if it qualifies for the IG Index.
 
Minimum Run.  Any bond that enters the IG Index must remain in the IG Index for a minimum of six months, provided it is not downgraded to high yield, defaulted or fully redeemed in that period.
 
Annual Index Review.
 
The rules for the IG Index are reviewed once per year during the annual index review process to ensure that the IG Index provides a balanced representation of the U.S. dollar-denominated liquid investment grade corporate debt market.  The results of the annual index review become available at the end of October.
 
Index Rebalancing
 
The IG Index is rebalanced every month, on the last business day of the month after the close of business, i.e., the rebalancing date.  Changes to amounts outstanding are taken into account only if they are publicly known three business days before the end of the month.  Changes in ratings are taken into account only if they are publicly known two business days before the end of the month.  New bonds issued are taken into account if they are publicly known to settle until the last calendar day of the month, inclusive, and if their rating has become known at least three business days before the end of the month.
 
In a first step, the selection criteria set out above are applied to the universe of U.S. dollar-denominated bonds.  Bond ratings and amount outstanding are used as of the Bond Selection Cut-off Date. Maturity dates remain fixed for the life of the bond.  Only bonds with a first settlement date on or before the Bond Selection Cut-off Date are included in the selection process.  Once the eligible bond universe has been defined, the weight for each bond is determined and if necessary capped, applying an issuer cap of 3%.  The weights and capping factors are determined on the last business day of each month using the end-of-month market values.
 
Consolidation of Contributed Quotes
 
Index calculation is based on bid and ask quotes provided by the contributing banks.  As of March 2012, the following banks supply bond prices: Barclays Capital, BNP Paribas, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Scotland and UBS.
 
The quotes pass through a two-step consolidation process.  The first filter tests the technical validity of the quotes. The following parameters are tested: whether bid and ask quotes are non-negative, whether the bid quote is lower than the ask quote and whether the bid-ask spread is within 500 basis points.
 
In the second filter, the dispersion of the quotes that pass the technical validity is checked.  A pre-defined margin will be set around a control quote to define an area within which a quote of a bond is expected to be.  This margin is set per sector/rating combination and is reviewed monthly.  All quotes that fall within this margin are eligible for consolidation.  The control quote is determined by applying: (a) all observable quotes available to Markit, (b) the Markit iBoxx Forward
 
 
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Matrix or (c) manual quote verification, which includes verification with trading desks at contributing banks, market quotes available via commercial feeds, return consolidation and news feeds.  This manual quote verification requires at least three independent price sources and must be full documented.  The control quote is determined by applying these sequentially (i.e., only if one determinant fails will the next determinant be used).
 
The consolidated bid and ask prices are then calculated from the remaining quotes.  If fewer than two quotes are valid, no consolidated price can be generated.  If two or three quotes are received, the consolidated price is determined as the arithmetical mean of these quotes.  If four or more quotes are received, the highest and lowest quotes are eliminated.  Thereafter the arithmetic average of the remaining quotes is calculated to determine the consolidated price.
 
In case the consolidation fails due to missing contributions or because not enough eligible bonds passed the control quote margin test, the contributing banks will be informed immediately in order to revise their quotes for the relevant securities.  Until the next successful consolidation, the price of the affected bond used to calculate the Index is determined by using the Markit iBoxx Forward Matrix.  The Markit iBoxx Forward Matrix uses country, currency, rating, issuer, industry, coupon and maturity to identify for each bond a group of securities will similar characteristics.  The pricing of this bond is then linked to the movement of the swap or zero curves.  The bonds in the matrix cell are used to calculate the appropriate spreads of the unconsolidated bond.  A matrix of a certain number of the top closest bonds is established and their most recent historical spreads over the treasury zero curve are weighted to calculate a spread distribution.  The price of the bond with missing contributions is calculated using the result average spreads.
 
Calculation of the iBoxx® $ Liquid Investment Grade Index
 
Calculations are performed daily, using consolidated iBoxx bid prices at approximately 4 p.m. Eastern Time.
 
The total return of the IG Index is calculated using the price changes, accrued interest, interest payments and reinvestment income on cash flows received during the composition month.
 
Treatment of Special Intra-Month Events
 
If a bond is fully redeemed intra-month, the bond effectively ceases to exist.  In all calculations, the redeemed bond is treated as cash based on the last consolidated price, the call price or the repurchase price, as applicable.  A redemption factor and redemption price are used to treat these events in the IG Index and in calculations relating thereto.  In addition, the clean price of the bond is set to the redemption price, and the interest accrued until the redemption date is treated as an irregular coupon payment.
 
If a bond is identified as trading flat of accrued, the accrued interest on the bond is set to zero in the total return index calculation and the bond is excluded from the calculation of all bond and index analytical values.
 
Some bonds have predefined coupon changes that lead to a change in the annual coupon over the life of the bond. In all instances, the coupon change must be a fixed amount on top of a fixed coupon, i.e. floating coupon bonds are not eligible for the IG Index.  The two main categories of bonds with coupon changes of this nature are step-up bonds and event-driven bonds.  Step-up bonds have a pre-defined coupon schedule that cannot change during the life of the bond.  That coupon schedule is used in all bond calculations.  Event-driven bonds’ coupons may change upon the occurrence (or non-occurrence) of specified events, such as ratings changes, failure to register a bond or failure to complete a merger.  In the calculation of the HY Index and the analytics, the coupon schedule as of the calculation date is used.  Any events occurring after the calculation date are ignored in the determination of the applicable coupon schedule.
 
 
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BACKGROUND ON THE iSHARES® IBOXX $ HIGH YIELD CORPORATE BOND FUND
 
We have derived all information regarding the iShares® iBoxx $ High Yield Corporate Bond Fund (the “High Yield Bond Fund”) contained in this product supplement, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information, without independent verification.  Such information reflects the policies of, and is subject to change by, iShares®, Inc. (“iShares®”), iShares® Trust, BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”). BFA is currently the investment adviser to the High Yield Bond Fund and is a wholly owned subsidiary of BTC, which in turn is a wholly owned subsidiary of BlackRock, Inc.  The High Yield Bond Fund is an exchange-traded fund (“ETF”) that trades on the NYSE Arca, Inc. (“NYSE Arca”) under the ticker symbol “HYG.”
 
iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the High Yield Bond Fund.  Information provided to or filed with the SEC by iShares® pursuant to the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov.  For additional information regarding iShares® Trust, BFA and the High Yield Bond Fund, please see the High Yield Bond Fund’s prospectus.  In addition, information about iShares® and the High Yield Bond Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and then iShares® website at www.ishares.com.  Information contained in the iShares® website is not incorporated by reference in, and should not be considered part of, this product supplement or the relevant terms supplement.
 
Investment Objective and Strategy
 
The High Yield Bond Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the U.S. dollar-denominated liquid high yield corporate bond market as defined by the iBoxx® $ Liquid HY Index (the “HY Index”).
 
BFA uses a “passive” or indexing approach to try to achieve the investment objective of the High Yield Bond Fund.  The High Yield Bond Fund does not try to “beat” the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued.  The High Yield Bond Fund uses a representative sampling indexing strategy (as described below under “— Representative Sampling”) to try to track the HY Index.
 
The High Yield Bond Fund may or may not hold all of the securities in the HY Index.  The High Yield Bond Fund generally invests at least 90% of its assets in the bonds of the HY Index.  However, the High Yield Bond Fund may at times invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents, including money market funds advised by BFA, as well as in high yield corporate bonds not included in the HY Index, but which BFA believes will help the High Yield Bond Fund track the HY Index.
 
Representative Sampling
 
Representative sampling involves investing in a representative sample of securities that collectively has an investment profile similar to the HY Index.  The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the HY Index.
 
Correlation
 
The HY Index is a theoretical financial calculation while the High Yield Bond Fund is an actual investment portfolio.  The performance of the High Yield Bond Fund and the HY Index may vary due to transaction costs, non-U.S. currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the High Yield Bond Fund’s portfolio and the HY Index resulting from legal restrictions (such as diversification requirements) that apply to the High Yield Bond Fund but not to the HY Index or to the use of representative sampling. “Tracking error” is the difference between the performance (return) of the High Yield Bond Fund’s
 
 
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portfolio and that of the HY Index.  BFA expects that, over time, the High Yield Bond Fund’s tracking error will not exceed 5%.  Because the High Yield Bond Fund uses a representative sampling indexing strategy, it can be expected to have a larger tracking error than if it used a replication indexing strategy.  “Replication” is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
 
Industry Concentration Policy
 
The High Yield Bond Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the HY Index is concentrated.  For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities and securities of state or municipal governments and their political subdivisions are not considered to be issued by members of any industry.
 
Holdings Information
 
The holding information for the High Yield Bond Fund is updated on a daily basis. As of June 11, 2012, 96.29% of the High Yield Bond Fund’s holdings consisted of bonds, 1.42% consisted of cash and 2.29% was in other assets, including dividends booked but not yet received.  The following tables summarize the top 10 holdings of the High Yield Bond Fund as of such date.
 
Top 10 Holdings as of June 11, 2012
 
Security
Percentage of Total Holdings
BlackRock Funds III
1.42%
Sprint Nextel Corporation
0.71%
CIT Group Inc. (maturing 2/15/19)
0.63%
Intelsat, (Bermuda), Ltd.
0.59%
HCA Inc.
0.57%
Springleaf Finance Corp.
0.53%
First Data Corp.
0.50%
Samson Investment Co.
0.49%
Energy Transfer Equity LP
0.47%
CIT Group Inc. (maturing 05/02/2016)
0.46%

 
The information above was compiled from the iShares® website, without independent verification. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this product supplement or the relevant terms supplement.
 
Disclaimer
 
The notes are not sponsored, endorsed, sold or promoted by BTC.  BTC makes no representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes.  BTC has no obligation or liability in connection with the operation, marketing, trading or sale of the notes.
 
 
 
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The iBoxx® $ Liquid High Yield Index
 
We have derived all information contained in this product supplement regarding the iBoxx® $ Liquid High Yield Index (the “HY Index”) including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information.  Such information reflects the policies of, and is subject to change by, Markit Group Limited (“Markit”).  The HY Index is calculated, maintained and published by Markit.  Markit has no obligation to continue to publish, and may discontinue publication of, the HY Index.
 
The HY Index is reported by Bloomberg L.P. under the ticker symbol “IBOXHY.”
 
The HY Index is designed to reflect the performance of the U.S. dollar-denominated high yield corporate bond market.  The HY Index is market-value weighted with an issuer cap of 3%.
 
The HY Index consists of sub-investment grade U.S. dollar-denominated bonds issued by corporate issuers from developed countries and rated by at least one of three rating services: Fitch Ratings, Moody’s Investors Service or Standard & Poor’s Rating Services (each a “Ratings Agency” and collectively the “Ratings Agencies”).  The HY Index composition is rebalanced once a month, after the close of business on the last business day of the rebalancing month (the “rebalancing date”). The new HY Index composition becomes effective on the first business day of the next month (the “composition month”).
 
The bonds in the HY Index must meet all the criteria described below as of the close of business three business days prior to the rebalancing date, provided that the relevant bond data can be verified, at Markit’s sole discretion, as of such date (the “Bond Selection Cut-off Date”).
 
The HY Index is multi-contributor priced.  Prices for the bonds in the HY Index are sourced from a number of leading market makers.  The received quotes are subject to a quality control process which is intended to exclude stale or off-market prices, and the quotes that pass the quality control are consolidated to the HY Index price.  Additionally, the HY Index rules and their application are governed by two committees:
 
 
·
Technical Committee: composed of representatives of the price contributing market makers and banks.  The Technical Committee meets once a month in order to arbitrate monthly rebalancing, and to monitor market developments.  It also provides assistance in the identification of eligible constituents, especially in the instance where the eligibility or the classification of a bond is unclear or contentious.  Additionally, the Technical Committee discusses any market developments which may warrant index rule changes, provides recommendations on changes to the rules, and reviews whether a country should be deemed ineligible due to financial sanctions.
 
 
·
Oversight Committee: composed of representatives from a broad range of asset managers.  The purpose of the oversight Committee is to review the recommendations and decisions of the Technical Committee and also to provide consultation and approval on any market developments which may warrant rule changes.
 
Selection Criteria for the iBoxx® $ Liquid High Yield Index
 
The following selection criteria are applied to determine the constituents for the HY Index: bond type, credit rating, time to maturity, amount outstanding, classification, lockout period and minimum run.
 
Bond Type.  Only fixed-rate bonds whose cash flow can be determined in advance are eligible for the HY Index.  The HY Index is comprised solely of bonds.  Treasury Bills and other money market instruments are not eligible.  The HY Index includes only U.S. dollar denominated bonds.
 
 
 
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In particular, bonds with the following characteristics are included: fixed coupon bonds, step-up bonds with coupon schedules known at issuance (or as functions of the issuer’s rating), sinking funds and amortizing bonds, medium term notes, Rule 144A offerings, callable bonds and putable bonds.
 
The following instrument types are specifically excluded from the HY Index: preferred shares, optionally and mandatorily convertible bonds, subordinated bank or insurance debt with mandatory contingent conversion features or with any conversion options before the first call date, bonds with other equity features attached (e.g., options or warrants), private placements, perpetual bonds, floating rate notes, pay-in-kind bonds (during the pay-in-kind period), zero coupon bonds, zero step-ups (GAINS), bonds with differences between accrual and coupon payment periods and monthly-paying bonds, and Regulation S offerings.
 
Any bond subject to a firm call or tender offer in the month immediately following the rebalancing date will be excluded from the HY Index, provided that Markit is aware of that tender offer or call as of the Bond Selection Cut-off Date.
 
Credit Rating.  Bonds in the HY Index must have a Markit iBoxx Rating of sub-investment grade, which is defined as BB+ or lower by S&P or Fitch or Ba1 or lower by Moody’s, but the bonds must not be in default.  If a bond is rated by more than one of the foregoing ratings agencies, then the Markit iBoxx Rating is the average of the provided ratings.  The rating is consolidated to the nearest rating grade in accordance with Appendix 4.3 to the Markit iBoxx Rules.  Rating notches are not used.  Issues rated D by Fitch or S&P, or that have been subject to a default press release by Moody’s cannot enter the HY Index.  Those issues in the HY Index that are subsequently downgraded to D by Fitch or S&P or subject to a default press release by Moody’s (as of the Bond Selection Cut-off Date) will be taken out of the HY Index on the next rebalancing date. After a bond has migrated into high yield from investment grade status, it must retain that status for three months (the “stabilization period”) before it can be included in the HY Index.  In case of an ID change or changes of a 144A version into a registered bond, the ratings from the 144A bond also are used for the registered bond.
 
Time to Maturity.  To qualify for entry in the HY Index, bonds must have at least one year and six months remaining time to maturity. Bonds in the HY Index must have maturities of at least one year at the rebalancing date.  As of issuance the time to maturity of the bonds should be fifteen years or less.
 
Amount Outstanding.  The outstanding face value of all bonds denominated in U.S. dollars from the issuer must be greater than or equal to $1 billion as of the Bond Selection Cut-off Date.  The outstanding face value of a bond must be greater than or equal to $400 million as of the Bond Selection Cut-off Date.  Partial buybacks or increases will affect the outstanding face value of a prospective bond.  Markit considers changes to the outstanding face value of a candidate bond as a result of partial or full buybacks or increases, provided that Markit is aware of such changes as of the Bond Selection Cut-off Date.
 
Bond Classification.  The bond must be corporate credit, i.e., debt instruments backed by corporate issuers that are not secured by specific assets. Debt issued by governments, sovereigns, quasi-sovereigns and government-backed or guaranteed entities is excluded.
 
Bonds must be denominated in U.S. dollars.
 
Bonds from countries classified as developed markets based on the “Markit Global Economic Development Classification” are eligible for the HY Index.  As of March 2012, the issuer or, in the case of a finance subsidiary, the issuer’s guarantor, must be domiciled and the country of risk must be in Andorra, Australia, Austria, Belgium, Bermuda, Canada, Cayman Islands, Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal,
 
 
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San Marino, Singapore, Spain, Sweden, Switzerland, United States or the United Kingdom in order to be eligible for inclusion in the HY Index.  A new country is added to the HY Index if it is classified as a developed market based on the “Markit Global Economic Development Classification”.  A country is no longer eligible for the HY Index if it is classified as an emerging market based on the “Markit Global Economic Development Classification”.  The “Markit Global Economic Development Classification” is updated once per year.  The results are published at the end of July.  The inclusion or exclusion of a country becomes effective at the end of the October following that publication.
 
Lockout Period.  A bond that drops out of the HY Index at the rebalancing day is excluded from re-entering the index for a three-month period.  The rule for the lockout period takes precedence over the other rules for the HY Index selection. A locked out bond will not be selected, even if it qualifies for the HY Index
 
Minimum Run.  Any bond that enters the HY Index must remain in the index for a minimum of six months, provided it is not upgraded to investment grade, defaulted or fully redeemed in that period.
 
Annual Index Review
 
The rules for the HY Index are reviewed once per year during the annual index review process to ensure that the HY Index provides a balanced representation of the U.S. dollar denominated liquid high yield corporate debt market.  The results of the annual index review become effective at the end of October.
 
Index Rebalancing.
 
The HY Index is rebalanced every month, on the last business day of the month after the close of business, i.e., the rebalancing date.  Changes to amounts outstanding are taken into account only if they are publicly known three business days before the end of the month.  Changes in ratings are taken into account only if they are publicly known two business days before the end of the month.  New bonds issued are taken into account if they are publicly known to settle until the last calendar day of the month, inclusive, and if their rating has become known at least three business days before the end of the month.
 
In a first step, the selection criteria set out above are applied to the universe of U.S. dollar-denominated bonds.  Bond ratings and amount outstanding are used as of the Bond Selection Cut-off Date.  Maturity dates remain fixed for the life of the bond.  Only bonds with a first settlement date on or before the Bond Selection Cut-off Date are included in the selection process.  Once the eligible bond universe has been defined, the weight for each bond is determined and if necessary capped, applying an issuer cap of 3%.  The weights and capping factors are determined on the last business day of each month using the end-of-month market values.
 
Consolidation of Contributed Quotes.
 
Index calculation is based on bid and ask quotes provided by the contributing banks. As of March 2012, the following banks supply bond prices: Barclays Capital, BNP Paribas, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland and UBS.
 
The quotes pass through a two-step consolidation process.  The first filter tests the technical validity of the quotes. The following parameters are tested: whether bid and ask quotes are non-negative, whether the bid quote is lower than the ask quote and whether the bid-ask spread is within 500 basis points.
 
In the second filter, the dispersion of the quotes that pass the technical validity is checked.  A pre-defined margin will be set around a control quote to define an area within which a quote of a bond is expected to be.  This margin is set per sector/rating combination and is reviewed monthly.  All quotes that fall within this margin are eligible for consolidation.  The control quote is
 
 
 
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determined by applying: (a) all observable quotes available to Markit, (b) the Markit iBoxx Forward Matrix or (c) manual quote verification, which includes verification with trading desks at contributing banks, market quotes available via commercial feeds, return consolidation and news feeds.  This manual quote verification requires at least three independent price sources and must be full documented.  The control quote is determined by applying these sequentially (i.e., only if one determinant fails will the next determinant be used).