December 2005

PROtected Structured PERmal NotesCapital Guaranteed Product linked to the Permal FX, Financials and Futures Fund

The Safe Way to Play Hedge Funds

PROSPER Notes

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Contents

The Premise Permal… a “pioneer” The Structure Contact us

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The premise

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Institutional and Retail Clients are attracted to hedge funds by the promise of:• Diversification benefits• Better and different risk/return profiles from their existing investments

But they are put off, to some extent, by these problems:• The actual and perceived risks (blow-up, black box, no liquidity) • Regulations that discourage direct investments in hedge funds

• Various tax and administrative issues

Facts and Problems

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• Capital guaranteed products linked to an alternative investment funds have been seen as the answer to these problems

• They eliminate the risk by offering Noteholders a 100% principal protected vehicle enabling them to benefit from most of the upside of a hedge fund portfolio

• Capital guaranteed products overcome the regulatory hurdles by optimizing allocation to hedge funds through an unsubordinated EMTN (meeting regulators’ concerns for investor protection)

The Solution

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• Notes (EMTN)

• Issued by Royal Bank of Scotland

• Structured by Merrill Lynch International (also Calculation Agent)

• Maturity of 5 years, in USD

• 100% capital guaranteed at maturity

• Linked to the performance of the Permal FX, Financials and Futures Fund, a fund of alternative investment funds, with emphasis on directional and macro strategy managers

• CPPI mechanism:

• 100% initial exposure to the fund on day one (subject to interest rates)

• Potential leverage up to 200% exposure

• Multiplier of 5

• Coupon payments: on each anniversary year, the Note pays a coupon equal to

the positive performance of the CPPI, capped at 6% on that year.

Characteristics

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Permal… a “pioneer”

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Permal… a “pioneer”

• One of the pioneers in multi-manager funds since 1973– “Multi-manager funds are all the rage these days.

Permal pioneered the concept and is still one of the best at it.”

• Solid long-term performance– $100,000 invested in original fund at its inception

in 1973 is worth $16.1 million today (over 5 times the S&P 500)

• Stable and experienced management team, providing….

– Access to highly regarded industry managers– Ongoing selection and monitoring process– Risk management / dynamic asset allocation

• Permal FX, Financials and Futures Fund provides access to some of the best CTA and macro trading managers of the industry

A pioneer in the multi-manager hedge fund industry…..

Financial Times

June 2003

Hedge Funds Review

November 2002

Forbes, February 2002

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Permal… a “pioneer”

Permal FX, Financials and Futures at a glance

Manager Permal IM

Strategy Futures/CTA

Country focus None

Inception date February 1992

Currency USD

Current size >4 billion

Redemption frequency Monthly / 20 days*

* Notice period

YTD performance (09/05) 7.8% p.a.Performance since 01/96 10.6% p.a.

Fund’s Main Characteristics Performance

0

500

1000

1500

2000

2500

3000

3500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Why Permal?

Qualitative rationale

• The Fund manager benefits from the recognition of the largest institutional clients worldwide.

• The Fund is investing in some of the best hedge funds, which are often closed.

Quantitative rationale

• The Fund has been consistently performing over the past years, with an annualised return

above of 8% almost every calendar year.

• The volatility of the Fund has consistently been below 6% p.a., thanks to the diversification

between managers.

• The Fund is therefore an optimal candidate for a CPPI-type strategy

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The Structure

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Protected Permal FX Notes

The CPPI Strategy:

The PROtected Structured PERmal Notes use a dynamic CPPI (Constant Proportion Portfolio Insurance) strategy. The objectives are to:• Capture most of the upside in rising markets• Preserve the capital in declining markets

The Notes are linked to an Index which follows an algorithmic, pre-defined asset allocation mechanism. The Index allocates assets between the Market Asset Units (i.e. the Permal FX Fund) and Reserve Asset Units (Cash). The Cushion is defined as the difference between the Index and the present value of 100% at Maturity.

As the Cushion increases…The Index is adjusted so that it consists of more units of the Fund, thus

allowing the investor to profit increasingly from the Fund gains.

As the Cushion decreases…The Index is adjusted so that it consists of more units of Reserve Assets.

This reduces the exposure of the investment to further decreases in the Fund.

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Protected Permal FX Notes

Fund

Rising

Fund

Rising

Higher investmentin Fund

Higher investmentin Fund

TimeTime

Fund

Fund

Fund FallingFund Falling

Higher investmentin Cash

Higher investmentin Cash

The CPPI Strategy:

The PROtected Structured PERmal Notes provide a 100% Protection with a dynamic allocation process.

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Protected Permal FX Notes

Back-testing:

Using the historical performance of Permal FX during the last 5 years and the current yield curve, the PROtected Structured Permal Notes would have performed by 25.3% at maturity, and would have delivered four coupons of 6% each year (2001, 2002, 2003 and 2004).

50.0%

75.0%

100.0%

125.0%

150.0%

Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05

CPPI Index

Exposure

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Protected Permal FX Notes

The PROtected Structured PERmal Notes provide the investor with a dynamic exposure to the Permal FX Fund, with a full capital protection at Maturity.

Characteristics:

• Maturity 5 years

• Currency USD

• Protection 100% at Maturity

• Initial Exposure 100% (indicative, to be determined on strike date)

• Maximum Exposure 200%

• Coupon Annual Coupon linked to the performance of the CPPI, cap at

6%

• Strategy Constant Proportion Portfolio Insurance Strategy:

– If Permal FX performs well, exposure to the Fund is dynamically increased

– If Permal FX performs badly, exposure to the Fund is dynamically decreased

• Targets Absolute Returns, that are uncorrelated to equity and bond markets

• Expected low volatility of the PROtected Structured PERmal Notes, with annual performance-

linked coupons (similar to bond investments).

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Contact us

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Merrill Lynch and Fund Derivatives

National Bank of Bahrain:

Riyad Yousif Phone +973-17-205532 Fax +973-17-213503 email riyadh.yousif@nbb.com.bh

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Disclaimer

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