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april2013 Interest Rate Linked Structured Investments summary tableofcontents Morgan Stanley Structured Investments offer Investors can use structured investments to: 2 Introduction to Interest Rate Linked investors a range of investment opportuni- • express a market view (bullish, bearish or Structured Investments ties with varying features that may provide market neutral) 4 Implementing Interest Rate Linked clients with the building blocks they need to • complement an investment objective (conserva- Structured Investments in Your Portfolio pursue their specific financial goals. tive, moderate or aggressive) or 4 Enhanced Yield Investments A flexible and evolving segment of the • gain access or hedge an exposure to a variety capital markets, structured investments typi- of underlying asset classes 5 Fixed-to-Floating Rate Notes cally combine a debt security with exposure In addition to the credit risk of the issuer, 5 Range Accrual Notes to an individual underlying asset or a basket investing in structured investments involves of underlying assets, such as common stocks, risks that are not associated with investments 7 Curve Accrual Notes indices, exchange-traded funds, foreign cur- in ordinary fixed or floating rate debt securities. 8 Leveraged Curve Notes rencies or commodities, or a combination of Please read and consider the risk factors set forth 10 Interest Rate Hybrid Notes them. Structured investments are originated under “Selected Risk Considerations” beginning and offered by financial institutions and come on page 16 of this document as well as the specific 12 Notes with Automatic Redemption in a variety of forms, such as certificates risk factors contained in the offering documents Feature 1 of deposit (CDs), units or warrants. Most, for any specific structured investment. 13 Securities With Payment at Maturity however, are senior unsecured notes of the There are many types of structured invest- Linked to an Interest Rate issuer. As a result, an investor will be exposed ments which link to different classes of underlying 14 InflationProtectionInvestments to the creditworthiness of the issuer for all assets, such as equities, commodities, interest payments on the notes. Structured investments rates and currencies. This document focuses 15 Additional Information and Resources are not a direct investment in the underlying on structured investments linked to reference 16 Selected Risk Considerations asset and investors do not have any access to, interest rates, which are referred to as “Interest or security interest in, the reference asset. Rate Linked Structured Investments.” 20 Important Information 1 Structured investments can take the form of a CD, which is a bank deposit insured by the Federal Deposit Free Writing Prospectus Insurance Corp. (FDIC), an independent agency of the U.S. government. The deposit amount, but not unreal- Registration Statement No. 333-178081 ized gains, is insured up to applicable limits. This document, however, mainly discusses structured investments Dated December 7, 2012 that are debt securities. Filed Pursuant To Rule 433 This material is not a product of Morgan Stanley, Morgan Stanley Wealth Management or Citigroup's research department and it should not be regarded as a research report. interest rate linked structured investments Introduction to Interest Rate Linked Structured Investments nterest rate linked structured invest- • term premium (the additional rate influenced by Federal Reserve deci- I ments are an alternative to traditional of return over and above the rate on sions and interbank liquidity. These fixed or floating rate bonds. They pro- a short-dated instrument, required to instruments have terms ranging from vide investors with an opportunity to persuade investors to hold instruments overnight to up to one year. express a view on a specific benchmark with a long period to maturity) Short-Term interest rate, with the possibility of It is important to understand the Short-term interest rates encompass earning above-market returns relative to effects and relative importance of these bonds and swaps with one to five years traditional fixed income instruments of different factors and how they change to maturity. These rates are generally comparable maturity and credit quality. and interact over time. influenced by Federal Reserve expec- Additionally, they may provide a way Benchmark Interest Rates tations and the short-term economic to diversify underlying interest rate A benchmark interest rate is the lowest outlook, as well as supply and demand exposure within a traditional equity rate that investors will accept for a non- in the market place. and fixed income portfolio. U.S. Treasury investment. It is the yield Medium-Term (“Belly of the Curve”) Interest rate linked structured invest- on the most recently issued Treasury Medium-term interest rates include ments often involve a higher degree security plus a premium. Benchmark bonds and swaps with five to 10 years of risk than traditional fixed income rates typically move in tandem with to maturity. These rates are generally securities because they are typically Treasury rates over time. For additional influenced by the economic outlook for long-dated and may not pay interest for information about benchmark rates, the next business cycle and supply and substantial periods of time, depending please see the section titled “Additional demand in the bond market. on the performance of the underlying Information and Resources” on page Long-Term asset. In some cases, they may not pro- 15 of this document. Long-term interest rates encompass vide for the return of all or any principal There are several benchmark inter- bonds and swaps with greater than at maturity. est rates and they generally fall into 10 years to maturity. This sector of Factors That Drive Interest Rates the four categories based on the time rates is generally influenced by the Interest rates are influenced by one to maturity (ultra short-term, short- economic outlook, inflation expec- or more of the following interrelated term, medium-term and long-term) tations and supply and demand. An factors, among others: as described below. increase in inflation expectations tends • inflation levels and expectations Understanding Time to Maturity to cause long-term rates to increase, • supply and demand of goods and Interest rates are typically divided as investors desire to be compensated services into four categories based on the time for anticipated decreased purchasing • business cycle expectations to maturity. power in the future. • general economic outlook Ultra Short-Term The benchmark interest rates as- • Federal Reserve target rate Ultra short-term interest rates include sociated with each of these maturity • governmental policies and programs Federal Funds, the London Interbank ranges have recently experienced relating to the financial markets and Offered Rate (LIBOR) and Three- significant volatility compared to their financial regulations, and Month Treasury Bill. They are heavily historic levels, as a result of, among 2 morganstanley | 2013 other factors, the financial crisis and the same quality. It is one of the tools An inverted yield curve is one in the related global debt concerns. You that economists and investors use to which short-term rates exceed long- should carefully read and consider the forecast the direction of the economy. term rates. Historically considered risk factors set forth under “Selected Types of Yield Curves a leading indicator of a recession, an Risk Considerations” beginning on Yield curves typically form one of three inverted yield curve normally results page 16 of this document, as well as principal shapes: normal, inverted when the Federal Reserve raises short- the specific risk factors included in and flat. term rates in an attempt to slow the the offering documents for any par- Typically, long-term interest rates are economy. The inverted yield curve’s ticular investment before you decide higher than short-term rates because accuracy as a predictor of a slowdown, to invest. lenders/investors require a greater return however, has diminished in recent years. Understanding the Yield Curve to tie up their money over longer time A flat yield curve depicts short- and The yield curve is a graphic illustra- periods. Thus, a normal, or upwardly long-term rates as nearly identical, tion that plots the difference between sloping, yield curve indicates that the and it is often interpreted as a sign of short-term and long-term bonds of economy is growing. uncertainty in the economy. The Importance of the Yield Curve The yield curve is a key statistic used by economists and investors An inverted yield curve is one in which short-term rates exceed long-term to forecast the direction of the economy. It measures the difference rates. Historically considered a leading indicator of a recession, an inverted between long-term and short-term interest rates. Typically, long- yield curve normally results when the Federal Reserve raises short-term term interest rates are higher than short-term rates because lenders / rates in an attempt to slow the economy. The inverted yield curve’s accuracy investors require a greater return to tie up their money over longer as a predictor of a slowdown, however, has diminished in recent years. time periods. Thus, a normal, or upwardly sloping, yield curve A flat yield curve depicts short- and long-term rates as nearly identical, indicates that the economy is growing. and it is often interpreted as a sign
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