USD Callable Dual Range Accrual Notes

Good Timing Economic Rationale Robust Performance Attractive Coupon

29th October 2007

With a 50 bps rate cut on 18th Sept and a slowing economy, the US yield curve looks set to steepen Lehman Brothers Global economics estimates a 3.75% one year target for the Fed funds rate. The futures market is pricing in at least a further 25 basis points easing by the years end Historically, a cycle of rate cuts has always been accompanied by the widening of the USD 30y2y spreads It is an opportune timing for investors to take a view on low short term rates and a steepening curve by means of Dual Range Accrual Notes Past performance over the last 10 years indicates that the note accrues coupons 99.71% of the time

Yield Curve Insights

Forwards have been poor indicators of realized spreads. Given todays tight forward spreads, it is inexpensive for investors to take a steepening position on the yield curve Historically, credit weakness and unexpected economic shocks have led to steeper curves. This makes a non inversion position strategic in the current market turmoil Implied volatility often overstates realized volatility. Short vega strategies like Range Accrual notes have always had positive carry
Spread (% ) 4.0 3.2 2.4 1.6 0.8 0.0
USD 30y -2y Spre ad US BBB Spread over LIBO R

Wider credit spreads have meant higher CMS spreads

Indicative Terms and Conditions

Issuer Currency Tenor Effective Date Tenor Coupon Lehman Brothers Treasury Co. B.V. (A1 / A+) USD 10 years 19th November 2007 10 years (Subject to Issuers Call Option) 8.48% * D/N p.a. payable Quarterly subject to Condition 1 AND Condition 2 (CMSUSD30y CMSUSD 2y) 0.00% 3m LIBOR < 7.00% NC3m, callable quarterly thereafter
Rate (%)

Forward Curves and Historical Returns

Fwd. Spreads 1.00% 0.50% 0.00% -0.50% 2007

Tighter spreads, inexpensive notes

2008 2009

2010 2011

2012

2013 2014

2015 2016

2017

USD 30y - 2y Forward Spread

Wider 30y-2y spreads during rate cuts

6.00 4.00 2.00

Condition 1 Condition 2 Call Option

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

3m LIBOR

US D30y - 2y S pread

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2007

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