Subject to Completion
Preliminary Pricing Supplement dated February 24, 2006
PRICING SUPPLEMENT
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(To prospectus supplement and prospectus dated February 25, 2005)
Pricing Supplement Number:
[LOGO OMITTED]
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series C
Notes Linked to U.S. Dollar Interest Rate Swap Rates, Series III
due April , 2011
(the "Notes")
$1,000 principal amount per unit
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The Notes:
o The Notes are designed for investors who wish to o The Notes will not be listed on any securities exchange.
receive current income in the form of quarterly
interest based upon the amount, if any, by which the o The Notes will be senior unsecured debt securities of Merrill Lynch &
30-Year U.S. Dollar Interest Rate Swap Rate exceeds Co., Inc., will be part of a series entitled "Medium-Term Notes,
the 2-Year U.S. Dollar Interest Rate Swap Rate, as Series C" and will have the CUSIP No. .
described in this pricing supplement.
o The settlement date for the Notes is expected to be April , 2006.
o 100% principal protection on the maturity date or
date of early redemption. Payment on the Maturity Date:
o For any quarter for which interest shall be payable o Unless earlier redeemed, for each $1,000 principal amount per unit of
on the Notes, we will pay such interest on the your Notes, we will pay you on the maturity date an amount equal to
day of January, April, July and October, beginning the principal amount and any accrued and unpaid interest.
in July , 2006. Interest on the $1,000 principal
amount per unit of the Notes will accrue during the Early redemption:
four initial quarterly interest periods at a rate of
6.00% per annum, and thereafter at a rate equal to o The Notes may be redeemed by us on any quarterly interest payment
the amount, if any, by which the 30-Year U.S. Dollar date on or after April , 2008 upon five business days' notice. In the
Interest Rate Swap Rate exceeds the 2-Year U.S. event we redeem the Notes, you will receive a cash amount per unit
Dollar Interest Rate Swap Rate, expressed as equal to the $1,000 principal amount plus any accrued and unpaid
percentages, on the applicable interest interest to but excluding the date of redemption.
determination date multiplied by a leverage factor,
as described in this pricing supplement. This rate
for any period other than the four initial interest
periods may be zero, but will not be less than zero.
Information included in this pricing supplement supercedes information
in the accompanying prospectus supplement and prospectus to the extent that it
is different from that information.
Investing in the Notes involves risks that are described in the "Risk
Factors" section beginning on page PS-6 of this pricing supplement and the
accompanying prospectus supplement.
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Per Unit Total
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Public offering price.......................................... $1,000.00 $
Underwriting discount.......................................... $15.00 $
Proceeds, before expenses, to Merrill Lynch & Co., Inc......... $985.00 $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this pricing supplement or the accompanying prospectus supplement and
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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Merrill Lynch & Co.
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The date of this pricing supplement is March , 2006.
TABLE OF CONTENTS
Pricing Supplement
SUMMARY INFORMATION--Q&A.......................................................................................PS-3
RISK FACTORS...................................................................................................PS-6
DESCRIPTION OF THE NOTES......................................................................................PS-10
UNITED STATES FEDERAL INCOME TAXATION.........................................................................PS-15
ERISA CONSIDERATIONS..........................................................................................PS-19
USE OF PROCEEDS AND HEDGING...................................................................................PS-20
SUPPLEMENTAL PLAN OF DISTRIBUTION.............................................................................PS-20
EXPERTS PS-20
INDEX OF CERTAIN DEFINED TERMS................................................................................PS-21
Prospectus Supplement
RISK FACTORS....................................................................................................S-3
DESCRIPTION OF THE NOTES........................................................................................S-4
UNITED STATES FEDERAL INCOME TAXATION..........................................................................S-21
PLAN OF DISTRIBUTION...........................................................................................S-28
VALIDITY OF THE NOTES..........................................................................................S-29
Prospectus
Merrill Lynch & Co., Inc..........................................................................................2
Use of Proceeds...................................................................................................2
Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends..............................................................3
The Securities....................................................................................................3
Description of Debt Securities....................................................................................4
Description of Debt Warrants.....................................................................................15
Description of Currency Warrants.................................................................................17
Description of Index Warrants....................................................................................18
Description of Preferred Stock...................................................................................24
Description of Depositary Shares.................................................................................29
Description of Preferred Stock Warrants..........................................................................33
Description of Common Stock......................................................................................35
Description of Common Stock Warrants.............................................................................38
Plan of Distribution.............................................................................................41
Where You Can Find More Information..............................................................................42
Incorporation of Information We File With the SEC................................................................42
Experts ........................................................................................................43
PS-2
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this pricing supplement and the accompanying prospectus
supplement and prospectus to help you understand the Notes Linked to U.S.
Dollar Interest Rate Swap Rates, Series III due April , 2011 (the "Notes").
You should carefully read this pricing supplement and the accompanying
prospectus supplement and prospectus to fully understand the terms of the
Notes and the tax and other considerations that are important to you in making
a decision about whether to invest in the Notes. You should carefully review
the "Risk Factors" section of this pricing supplement and the accompanying
prospectus supplement, which highlights certain risks associated with an
investment in the Notes, to determine whether an investment in the Notes is
appropriate for you.
References in this pricing supplement to "ML&Co.", "we", "us" and "our"
are to Merrill Lynch & Co., Inc., and references to "MLPF&S" are to Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
What are the Notes?
The Notes will be a series of senior debt securities issued by ML&Co.
entitled "Medium-Term Notes, Series C" and will not be secured by collateral.
The Notes will rank equally with all of our other unsecured and unsubordinated
debt. The Notes will mature on April , 2011, unless redeemed by us at an
earlier date.
Each unit will represent a single Note with a $1,000 principal amount.
You may transfer the Notes only in whole units. You will not have the right to
receive physical certificates evidencing your ownership except under limited
circumstances. Instead, we will issue the Notes in the form of a global
certificate, which will be held by The Depository Trust Company, also known as
DTC, or its nominee. Direct and indirect participants in DTC will record your
ownership of the Notes. You should refer to the section entitled "Description
of the Debt Securities--Depositary" in the accompanying prospectus.
Are there any risks associated with my investment?
Yes, an investment in the Notes is subject to certain risks. Please
refer to the section entitled "Risk Factors" in this pricing supplement and
the accompanying prospectus supplement.
What will I receive on the maturity date of the Notes?
Unless earlier redeemed, on the maturity date, for each Note that you
own, we will pay you a cash amount equal to $1,000 plus any accrued and unpaid
interest.
Will I receive interest payments on the Notes?
Interest will accrue on the Notes from and including April , 2006 or
from the most recent interest payment date for which interest, if any, has
been paid or provided for, to but excluding the maturity date or date of early
redemption. "Interest Payment Dates" for the Notes will be the day of January,
April, July and October of each year, and will include the maturity date or
date of early redemption. From and including April , 2006 to but excluding
April , 2007, interest on the Notes will accrue at a rate of 6.00% per annum.
During each subsequent quarterly interest period which begins on or after
April , 2007, interest will accrue at a rate per annum equal to:
Leverage Factor x (IRS30 - IRS2)
but in no case less than 0.00%.
where:
The "Leverage Factor" will equal a value between 16 and 18, as
determined on the date the Notes are priced for initial sale to the public
(the "Pricing Date"), and will be set forth in the final pricing supplement.
IRS30 equals the 30-year U.S. Dollar Interest Rate Swap Rate, expressed
as a percentage, as quoted on Reuters page ISDAFIX3 on the applicable Interest
Determination Date (as defined below); and
IRS2 equals the 2-year U.S. Dollar Interest Rate Swap Rate, expressed as
a percentage, as quoted on Reuters page ISDAFIX3 on the applicable Interest
Determination Date.
If the IRS30 is equal to or less than the IRS2 on any Interest
Determination Date, the rate of
PS-3
interest for the applicable quarterly period will equal zero, and no interest
will be paid on the Interest Payment Date relating to such interest period.
Each interest period (other than the initial interest period of April ,
2006 to July , 2006) will commence on, and will include, an Interest Payment
Date, and will extend to, but will exclude, the next succeeding Interest
Payment Date, maturity date or early redemption date, as the case may be. The
"Interest Determination Date" for any interest period will be the second
Business Day (as defined herein) prior to the first day of such period.
If any Interest Payment Date is not a Business Day (as defined herein),
payment will be made on the immediately succeeding Business Day and no
additional interest will accrue.
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Examples
Set forth below are three examples of interest rate calculations per
each $1,000 principal amount per Note, assuming a hypothetical 30-Year
U.S. Dollar Interest Rate Swap Rate of 5.101%, a hypothetical Leverage
Factor of 17 and the following hypothetical 2-Year U.S. Dollar Interest
Rate Swap Rates:
Example 1--The hypothetical 30-Year U.S. Dollar Interest Rate Swap Rate is 50
basis points below the 2-Year U.S. Dollar Interest Rate Swap Rate:
Hypothetical Level of the 30-Year U.S. Dollar Interest Rate Swap Rate: 5.101%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap Rate: 5.601%
Interest Rate = 17 x (5.101% - 5.601%) = 0.00% per annum (interest rate
cannot be less than 0%) Quarterly Interest Payment (per unit) = $1,000 x
0.00% x (90/360) = $0
Example 2-- The hypothetical 30-Year U.S. Dollar Interest Rate Swap Rate
exceeds the 2-Year U.S. Dollar Interest Rate Swap Rate by 50 basis points:
Hypothetical Level of the 30-Year U.S. Dollar Interest Rate Swap Rate: 5.101%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap
Rate: 4.601%
Interest Rate = 17 x (5.101% - 4.601%) = 8.50% per annum
Quarterly Interest Payment (per unit) = $1,000 x 8.50% x (90/360) = $21.25
Example 3-- The hypothetical 30-Year U.S. Dollar Interest Rate Swap Rate
exceeds the 2-Year U.S. Dollar Interest Rate Swap Rate by 100 basis points:
Hypothetical Level of the 30-Year U.S. Dollar Interest Rate Swap Rate: 5.101%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap Rate: 4.101%
Interest Rate = 17 x (5.101% - 4.101%) = 17.00% per annum
Quarterly Interest Payment (per unit) = $1,000 x 17.00% x (90/360) = $42.50
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How does the early redemption feature work?
The Notes may be redeemed by us on any Interest Payment Date on or after
April , 2008 upon five Business Days' notice. In the event we redeem the Notes
prior to the stated maturity date, you will receive a cash amount per unit
equal to the $1,000 principal amount, plus any accrued and unpaid interest to
but excluding the Early Redemption Date (as defined herein).
For more specific information about the early redemption feature, please
see the section entitled "Description of the Notes--Early Redemption at the
Option of ML&Co." in this pricing supplement.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
Notes over their term based upon an estimated yield for the Notes. We have
determined this estimated yield, in accordance with regulations issued by the
U.S. Treasury Department, solely in order for you to calculate the amount of
taxes that you will owe each year as a result of owning a Note. This estimated
yield is neither a prediction nor a guarantee of what the actual yield on the
Notes will be. We have determined that this estimated yield will equal % per
annum, compounded quarterly. For further information, see "United States
Federal Income Taxation" in this pricing supplement.
PS-4
Will the Notes be listed on a stock exchange?
The Notes will not be listed on any securities exchange and we do not
expect a trading market for the Notes to develop, which may affect the price
that you receive for your Notes upon any sale prior to the maturity date. You
should review the section entitled "Risk Factors--A trading market for the
Notes is not expected to develop and if trading does develop, the market price
you may receive or be quoted for your Notes on a date prior to the stated
maturity date will be affected by this and other important factors including
our costs of developing, hedging and distributing the Notes" in this pricing
supplement.
What price can I expect to receive if I sell the Notes prior to the stated
maturity date?
In determining the economic terms of the Notes, and consequently the
potential return on the Notes to you, a number of factors are taken into
account. Among these factors are certain costs associated with creating,
hedging and offering the Notes. In structuring the economic terms of the
Notes, we seek to provide investors with what we believe to be commercially
reasonable terms and to provide MLPF&S with compensation for its services in
developing the Notes.
If you sell your Notes prior to the stated maturity date, you will
receive a price determined by market conditions for the Notes. This price may
be influenced by many factors, such as interest rates and the volatility of
the spread in U.S. dollar swap rates, and the expectations of the amount, if
any, by which the 30-Year U.S. Dollar Interest Rate Swap Rate will exceed the
2-Year U.S. Dollar Interest Rate Swap Rate. In addition, the price, if any, at
which you could sell your Notes in a secondary market transaction is expected
to be affected by the factors that we considered in setting the economic terms
of the Notes, namely the underwriting discount paid in respect of the Notes
and other costs associated with the Notes, and compensation for developing and
hedging the product. Depending on the impact of these factors, you may receive
significantly less than the principal amount per unit of your Notes if sold
before the stated maturity date.
In a situation where there had been no change in the spread between the
30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate and no changes in the market conditions or any other
relevant factors from those existing on the date of this pricing supplement,
the price, if any, at which you could sell your Notes in a secondary market
transaction is expected to be lower than the principal amount per unit. This
is due to, among other things, our costs of developing, hedging and
distributing the Notes. Any potential purchasers for your Notes in the
secondary market are unlikely to consider these factors.
What is the role of MLPF&S?
Our subsidiary MLPF&S is the underwriter for the offering and sale of
the Notes.
After the initial offering, MLPF&S currently intends to buy and sell
Notes to create a secondary market for holders of the Notes, and may stabilize
or maintain the market price of the Notes during their initial distribution.
However, MLPF&S will not be obligated to engage in any of these market
activities or continue them once it has started.
What is the role of Merrill Lynch Capital Services, Inc?
Merrill Lynch Capital Services, Inc. ("MLCS") will be our agent for
purposes of calculating, among other things, the interest payable on the
Notes. Under certain circumstances, these duties could result in a conflict of
interest between MLCS as our subsidiary and its responsibilities as
calculation agent.
What is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis.
For information about ML&Co., see the section entitled "Merrill Lynch &
Co., Inc." in the accompanying prospectus. You should also read the other
documents we have filed with the SEC, which you can find by referring to the
section entitled Where You Can Find More Information" in the accompanying
prospectus.
PS-5
RISK FACTORS
Your investment in the Notes will involve certain risks. You should
consider carefully the following discussion of risks and the discussion of
risks included in the accompanying prospectus supplement before you decide
that an investment in the Notes is suitable for you.
You may not earn a return on your investment
The interest payable on the Notes during any quarterly period, except
for the four initial periods, will be linked to the amount, if any, by which
the 30-Year U.S. Dollar Interest Rate Swap Rate exceeds the 2-Year U.S. Dollar
Interest Rate Swap Rate as of the relevant Interest Determination Date. As a
result, the possibility exists that you could receive little or no payment of
interest on one or more or all Interest Payment Dates (except for the four
initial Interest Payment Dates) during the term of the Notes. If the 30-Year
U.S. Dollar Interest Rate Swap Rate does not exceed the 2-Year U.S. Dollar
Interest Rate Swap Rate on any of the Interest Determination Dates over the
term of the Notes, your return on the Notes would be limited to the principal
amount of the Notes plus the four initial fixed interest payments, even if
spreads between the 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year
U.S. Dollar Interest Rate Swap Rate were positive during the term of the Notes
(but not on any Interest Determination Date).
The spread between the 30-Year U.S. Dollar Interest Rate Swap Rate and
the 2-Year U.S. Dollar Interest Rate Swap Rate has at times in the past been
negative. A negative spread (or absence of a spread) between the 30-Year U.S.
Dollar Interest Rate Swap Rate and 2-Year U.S. Dollar Interest Rate Swap Rate
on an Interest Determination Date would result in no payment of interest on
the related Interest Payment Date. We have no control over domestic and
international economic, financial, political and other events, or the over-all
supply and demand for relevant U.S. dollar denominated securities, that may
affect the amount by which the 30-Year U.S. Dollar Interest Rate Swap Rate
exceeds or does not exceed the 2-Year U.S. Dollar Interest Rate Swap Rate.
Historically, the level of the spread between the 30-Year U.S. Dollar Interest
Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate has been
variable, and such variability may be expected in the future. However, past
experience is not necessarily indicative of what may occur in the future.
Interest payments on the Notes are expected to be correlated to the spread
between long-term interest rates and short-term interest rates, and this
spread is affected by a number of factors
The interest payable on the Notes is generally, but not necessarily,
expected to increase during periods of falling interest rates, and to decrease
during periods of rising interest rates. Although short-term and long-term
interest rates may tend to increase or decrease at the same time, long-term
interest rates may increase or decrease more gradually than short-term
interest rates in a given period. When this occurs, the spread between the
30-year Treasury rate and 2-year Treasury rate would be expected to narrow
during periods of rising interest rates and to widen during periods of falling
interest rates. However, long-term interest rates may not move more gradually
than short term rates in all economic and political environments.
The spread between long-term interest rates and short-term interest
rates may be influenced by a number of additional factors, including (but not
limited to) monetary policies, fiscal policies, inflation, general economic
conditions and public expectations with respect to such factors. The effect
that any single factor may have on interest rate spreads may be partially
offset by other factors. Certain factors that may influence interest rates may
affect short-term interest rates more dramatically than long-term interest
rates, or vice versa. For example, short-term interest rates may be more
directly and more immediately affected than long-term interest rates by
certain governmental actions. The Federal Reserve Board, for instance, has
increased its short-term rate target from 1% to 4.5% over the last several
months, and this target rate may be increased further in the coming months.
Tightening monetary policies by the Federal Reserve Board may generate higher
short-term interest rates; but, if these policies limit or reduce expectations
of inflation, the expectation may lead to less dramatic increases in long-term
interest rates. To the extent that further increases in short-term target
rates or other monetary policies might tend to increase the 2-Year Interest
Rate Swap Rate at a rate faster than the 30-Year Interest Rate Swap Rate, and
without considering any other factors which may affect these rates
differently, the spread between the 30-Year Interest Rate Swap Rate and the
2-Year Interest Rate Swap Rate would be expected to narrow, reducing the rate
at which interest would accrue on the Notes, perhaps to zero. We cannot
predict the future actions of the Federal Reserve Board, or
PS-6
other factors which may tend to widen or narrow the spread between the 30-Year
Interest Rate Swap Rate and the 2-Year Interest Rate Swap Rate.
The spread between long-term interest rates and short-term interest
rates may narrow or become negative due to expectations of a recession or poor
economic conditions. Expectations that a recession will be associated with
falling short-term interest rates may lead investors to shift from short-term
Treasury notes to long-term Treasury notes in order to "lock in" long-term
rates. Such a shift could raise the price (and lower the yield) of long-term
Treasury notes relative to short-term Treasury notes. However, a number of
other factors may lead to a narrowing of interest rate spreads, and a decrease
in the interest payable on the Notes, even in the absence of expectations of a
recession or economic slowdown.
Foreign investment in U.S. dollar denominated government debt, and U.S.
investment in competing debt obligations denominated in foreign currencies,
may also affect the spread between long-term interest rates and short-term
interest rates. Expectations of appreciation in the U.S. dollar may lead to a
narrowing in the spread between long-term interest rates and short-term
interest rates as a result of a relative increase in the demand for long-term
Treasury notes by foreign and U.S. investors, which would increase the price
and lower the yield on such obligations. Expectations that appreciation in the
U.S. dollar may reduce pressure on the Federal Reserve Board to maintain high
short-term interest rates in order to maintain the value of the U.S. dollar
may also lead to reduced short-term interest rates. To the extent that
appreciation in the U.S. dollar results in a narrowing of the spread between
long-term interest rates and short-term interest rates, interest payments on
the Notes would decrease.
The Notes are subject to early redemption
We may redeem all of the Notes on any quarterly Interest Payment Date on
or after April , 2008 upon 5 Business Days' notice. In the event that we
redeem the Notes prior to the stated maturity date, you will receive only the
$1,000 for each $1,000 principal amount of your Notes plus any accrued and
unpaid interest to but excluding the Early Redemption Date, and you will not
receive the benefit of any future interest payments. In the case of an early
redemption you will not benefit from any increases or expected increases in
the spread between the 30-Year U.S. Dollar Interest Rate Swap Rate and the
2-Year U.S. Dollar Interest Rate Swap Rate after the Early Redemption Date and
prior to the original stated maturity date. Your Notes are less likely to
become subject to early redemption during periods when interest is accruing on
the Notes at a rate below that which we would pay on our traditional interest
bearing debt securities having a maturity equal to the remaining term of the
Notes, and more likely to become subject to early redemption during periods
when interest is accruing on the Notes at a rate above that which we would pay
on our traditional interest bearing debt securities having a maturity equal to
the remaining term of the Notes.
Your yield may be lower than the yield on other debt securities of comparable
maturity
The yield that you receive on your Notes may be less than the return you
could earn on other investments. Your yield may be less than the yield you
would earn if you bought a traditional interest bearing debt security of
ML&Co. with the same stated maturity date. Your investment may not reflect the
full opportunity cost to you when you take into account factors that affect
the time value of money.
The Notes will bear interest at a per annum rate of 6.00% during the
four initial interest periods. As of February 17, 2006, the spread between the
30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate was 0.029%. If this spread should remain unchanged
until the initial Interest Determination Date which will occur in April 2007,
and assuming a Leverage Factor of 17, the midpoint of the range of 16 to 18,
interest on the Notes would accrue during the quarterly interest period which
will begin April , 2007 at a per annum rate of 0.493%. The rate at which
interest will accrue on the Notes will therefore decline following the initial
interest period unless the spread between the 30-Year U.S. Dollar Interest
Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate widens
sufficiently.
PS-7
A trading market for the Notes is not expected to develop and, if trading does
develop, the market price you may receive or be quoted for your Notes on a
date prior to the stated maturity date will be affected by this and other
important factors, including our costs of developing, hedging and distributing
the Notes
The Notes will not be listed on any securities exchange and we do not
expect a trading market for the Notes to develop. Although our affiliate
MLPF&S has indicated that it currently expects to bid for Notes offered for
sale to it by holders of the Notes, it is not required to do so and may cease
making those bids at any time. The limited trading market for your Notes may
affect the price that you receive for your Notes if you do not wish to hold
your investment until the maturity date.
If MLPF&S makes a market in the Notes, the price it quotes would reflect
any changes in market conditions and other relevant factors. In addition, the
price, if any, at which you could sell your Notes in a secondary market
transaction is expected to be affected by the factors that we considered in
setting the economic terms of the Notes, namely the underwriting discount paid
in respect of the Notes and other costs associated with the Notes, including
compensation for developing and hedging the product. This quoted price could
be higher or lower than the principal amount. Furthermore, there is no
assurance that MLPF&S or any other party will be willing to buy the Notes.
MLPF&S is not obligated to make a market in the Notes.
Assuming there is no change in the spread between the 30-Year U.S.
Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap
Rate and no change in market conditions or any other relevant factors, the
price, if any, at which MLPF&S or another purchaser might be willing to
purchase your Notes in a secondary market transaction is expected to be lower
than the principal amount. This is due to, among other things, the fact that
the principal amount included, and secondary market prices are likely to
exclude, underwriting discount paid with respect to, and the developing and
hedging costs associated with, the Notes.
Many factors affect the trading value of the Notes; these factors interrelate
in complex ways and the effect of any one factor may offset or magnify the
effect of another factor
The trading value of the Notes will be affected by factors that
interrelate in complex ways. The effect of one factor may offset the increase
in the trading value of the Notes caused by another factor and the effect of
one factor may exacerbate the decrease in the trading value of the Notes
caused by another factor. The following paragraphs describe the expected
impact on the trading value of the Notes given a change in a specific factor,
assuming all other conditions remain constant.
The spread between the 30-Year U.S. Dollar Interest Rate Swap Rate and
the 2-Year U.S. Dollar Interest Rate Swap Rate is expected to affect the
trading value of the Notes. We expect that the trading value of the Notes will
depend substantially on the amount, if any, by which the level of the 30-Year
U.S. Dollar Interest Rate Swap Rate exceeds the level of the 2-Year U.S.
Dollar Interest Rate Swap Rate and the future expectations of the amount, if
any, by which the 30-Year U.S. Dollar Interest Rate Swap Rate will exceed the
2-Year U.S. Dollar Interest Rate Swap Rate. In general, the value of the Notes
will increase when the spread between the 30-Year U.S. Dollar Interest Rate
Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate increases and the
value of the Notes will decrease when the spread between the 30-Year U.S.
Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap
Rate decreases.
Changes in the volatility of the spread between the 30-Year U.S. Dollar
Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate are
expected to affect the trading value of the Notes. Volatility is the term used
to describe the size and frequency of price and/or market fluctuations. If the
volatility of the 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year
U.S. Dollar Interest Rate Swap Rate increases or decreases, the trading value
of the Notes may be adversely affected.
As the time remaining to the stated maturity date of the Notes
decreases, the "time premium" associated with the Notes is expected to
decrease. We anticipate that before their stated maturity date, the Notes may
trade at a value above that which would be expected based on the level of
interest rates and the spread between the 30-Year U.S. Dollar Interest Rate
Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate. This difference
will reflect a "time premium" due to expectations concerning the spread
between the 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S.
Dollar Interest Rate Swap Rate during the period before the stated maturity
date of the
PS-8
Notes. However, as the time remaining to the stated maturity date of the Notes
decreases, we expect that this time premium will decrease, lowering the
trading value of the Notes.
Changes in our credit ratings may affect the trading value of the Notes.
Our credit ratings are an assessment of our ability to pay our obligations.
Consequently, real or anticipated changes in our credit ratings may affect the
trading value of the Notes. However, because the return on your Notes is
dependent upon factors in addition to our ability to pay our obligations under
the Notes, such as the average percentage increase, if any, in the level of
the Index over the term of the Notes, an improvement in our credit ratings
will not reduce the other investment risks related to the Notes.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the Notes of a given change in some of
the factors listed above will be less if it occurs later in the term of the
Notes than if it occurs earlier in the term of the Notes.
Amounts payable on the Notes may be limited by state law
New York State law governs the 1983 Indenture under which the Notes will
be issued. New York has usury laws that limit the amount of interest that can
be charged and paid on loans, which includes debt securities like the Notes.
Under present New York law, the maximum rate of interest is 25% per annum on a
simple interest basis. This limit may not apply to debt securities in which
$2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We promise, for the benefit of the holders of the Notes, to the
extent permitted by law, not to voluntarily claim the benefits of any laws
concerning usurious rates of interest.
Potential conflicts of interest could arise
Our subsidiary MLCS is our agent for the purposes of calculating the
interest payable on the Notes. Under certain circumstances, MLCS as our
subsidiary and its responsibilities as calculation agent for the Notes could
give rise to conflicts of interests. These conflicts could occur, for
instance, in connection with judgments that it would be required to make in
the event of unavailability of the 30-Year U.S. Dollar Interest Rate Swap Rate
and the 2-Year U.S. Dollar Interest Rate Swap Rate. MLCS is required to carry
out its duties as calculation agent in good faith and using its reasonable
judgment. However, because we control MLCS, potential conflicts of interest
could arise.
We expect to enter into arrangements to hedge the market risks
associated with our obligation to pay the amounts due on the maturity date on
the Notes. We may seek competitive terms in entering into the hedging
arrangements for the Notes, but are not required to do so, and we may enter
into such hedging arrangements with one of our subsidiaries or affiliated
companies. Such hedging activity is expected to result in a profit to those
engaging in the hedging activity, which could be more or less than initially
expected, but which could also result in a loss for the hedging counterparty.
Tax consequences
You should consider the tax consequences of investing in the Notes. See
"United States Federal Income Taxation" in this pricing supplement.
PS-9
DESCRIPTION OF THE NOTES
ML&Co. will issue the Notes as a series of senior debt securities
entitled "Medium-Term Notes, Series C" under the 1983 Indenture, which is more
fully described in the accompanying prospectus. The Notes will mature on April
, 2011. Information included in this pricing supplement supercedes information
in the accompanying prospectus supplement and prospectus to the extent that it
is different from that information. The CUSIP number for the Notes is .
We may redeem the Notes prior to the maturity date at the times
described below. The Notes will not be subject to repayment at the option of
the holder prior to the maturity date.
ML&Co. will issue the Notes in denominations of whole units each with a
$1,000 principal amount per unit. You may transfer the Notes only in whole
units. You will not have the right to receive physical certificates evidencing
your ownership except under limited circumstances. Instead, we will issue the
Notes in the form of a global certificate, which will be held by The
Depositary Trust Company, also known as DTC, or its nominee. Direct and
indirect participants in DTC will record your ownership of the Notes. You
should refer to the section entitled "Description of Debt
Securities--Depositary" in the accompanying prospectus.
The Notes will not have the benefit of any sinking fund.
Payment on the Maturity Date
On the maturity date (unless earlier redeemed), for each unit of Notes
that you own, we will pay you a cash amount equal to $1,000, plus any accrued
and unpaid interest.
Interest
Interest will accrue from and including April , 2006, for the initial
interest period, or the most recent Interest Payment Date (as defined below),
to but excluding the day of January, April, July and October of each year or
the maturity date (or date of early redemption) (each an "Interest Payment
Date"). Interest on the Notes will accrue during the four initial quarterly
interest periods at the rate of 6.00% per annum. During the interest period
beginning on April , 2007 and during each quarterly interest period
thereafter, interest will accrue on the Notes at a rate per annum on the
$1,000 principal amount per Note equal to:
Leverage Factor x (IRS30 - IRS2)
but in no case less than 0.00%.
where:
The "Leverage Factor" will equal a value between 16 and 18, as
determined on the date the Notes are priced for initial sale to the public
(the "Pricing Date"), and will be set forth in the final pricing supplement
made available in connection with sales of the Notes.
"IRS30" equals the 30-year U.S. Dollar Interest Rate Swap Rate,
expressed as a percentage, as quoted on Reuters page ISDAFIX3 on the
applicable Interest Determination Date (as defined below); and
"IRS2" equals the 2-year U.S. Dollar Interest Rate Swap Rate, expressed
as a percentage, as quoted on Reuters page ISDAFIX3 on the applicable Interest
Determination Date.
If the 30-year U.S. Dollar Interest Rate Swap Rate and/or the 2-year
U.S. Dollar Interest Rate Swap Rate are not quoted on Reuters page ISDAFIX3,
or any page substituted therefor, then the 30-year U.S. Dollar Interest Rate
Swap Rate and the 2-year U.S. Dollar Interest Rate Swap Rate will be a
percentage determined on the basis of the mid-market semi-annual swap rate
quotations provided by three banks chosen by MLCS at approximately 11:00 a.m.,
New York City time, on that day, and, for this purpose, the semi-annual swap
rate means the mean of the bid
PS-10
and offered rates for the semi-annual fixed leg, calculated on the basis of a
360-day year consisting of twelve 30-day months, of a fixed for floating U.S.
dollar interest rate swap transaction with a term equal to 30 years or 2
years, as applicable, commencing on the applicable Interest Determination Date
and in a representative amount with an acknowledged dealer of good credit in
the swap market, where the floating leg, calculated on the actual number of
days in a 360-day year, is equivalent to USD-LIBOR-BBA with a designated
maturity of three months. The Calculation Agent will request the principal New
York City office of each of the three banks chosen by MLCS to provide a
quotation of its rate. If at least three quotations are provided, the rate for
the relevant Interest Determination Date will be the arithmetic mean of the
quotations. If two quotations are provided, the rate for the relevant Interest
Determination Date will be the arithmetic mean of the two quotations. If only
one quotation is provided, the rate for the relevant Interest Determination
Date will equal that one quotation. If no quotations are available, then the
30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate will be the rates the Calculation Agent, in its sole
discretion, determines to be fair and reasonable under the circumstances at
approximately 11:00 a.m., New York City time, on the relevant date.
Each interest period (other than the initial interest period) will
commence on, and will include, an Interest Payment Date, and will extend to,
but will exclude, the next succeeding Interest Payment Date, maturity date or
early redemption date, as the case may be. The "Interest Determination Date"
for any period will be the second Business Day (as defined below) prior to the
first day of such period.
We will pay this interest to the persons in whose names the Notes are
registered on the fifteenth calendar day immediately preceding each Interest
Payment Date. Interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months. If an Interest Payment Date falls on a day that
is not a Business Day (as defined below), that interest payment will be made
on the next Business Day and no additional interest will accrue.
"Business Day" means any day other than a Saturday or Sunday that is
neither a legal holiday nor a day on which banking institutions in The City of
New York are authorized or required by law, regulation or executive order to
close.
The 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate
The 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S.
Dollar Interest Rate Swap Rate are interest rate swap rates. An interest rate
swap rate is, as of any day, the fixed interest rate that would be required
under then current market conditions to enter into a swap transaction in
exchange for a hypothetical stream of payments based on floating interest
rates over a period of either 30 years or 2 years, as applicable, periodically
reset to LIBOR. With respect to ISDAFIX3, such fixed rate is assumed to be
paid semi-annually on the basis of a 360-day year consisting of twelve 30-day
months, and the floating rate is assumed to be based on 3 month LIBOR payable
quarterly on the basis of the actual number of days elapsed in a 360-day year.
As an example of the above, an interest rate swap based on a 30-Year
U.S. Dollar Interest Rate Swap Rate of 6% would indicate that two swap
counterparties have agreed to exchange interest rate payments, where
Counterparty A is paying 6% semi-annually, for 30 years on a predetermined
fixed notional amount to Counterparty B, and Counterparty B is paying 3 month
LIBOR on a quarterly basis for thirty years on the same predetermined notional
amount to Counterparty A.
PS-11
The following table sets forth the historical month-end spread between
the 30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate from January 1992 to January 2006. This data is not
intended to be indicative of the future performance of the spread between the
30-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate or what the value of the Notes may be. Any historical
upward or downward trend in the spread between the 30-Year U.S. Dollar
Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate
during any period set forth below is not an indication that interest payments
are more or less likely to increase or decrease in value at any time over the
term of the Notes.*
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Jan. 2.956 3.389 2.476 0.656 1.299 1.009 0.542 0.609 0.337 1.032 2.585 3.230 3.126 1.358 0.216
Feb. 2.890 3.290 2.355 0.860 1.284 0.872 0.427 0.565 0.276 1.101 2.573 3.229 3.226 1.207
Mar. 2.612 3.264 2.230 0.814 1.120 0.761 0.363 0.811 0.047 1.477 2.281 3.367 3.236 1.071
Apr. 2.916 3.397 1.849 0.925 1.078 0.747 0.367 0.801 0.037 1.666 2.485 3.333 2.968 0.984
May 2.925 3.001 1.688 1.062 0.957 0.788 0.302 0.634 0.031 1.761 2.516 3.189 2.802 0.817
Jun. 3.250 2.970 1.664 1.059 0.977 0.766 0.200 0.751 0.077 1.732 2.788 3.329 2.581 0.656
Jul. 3.399 2.753 1.629 1.167 0.904 0.601 0.285 0.755 0.092 1.917 3.161 3.759 2.514 0.570
Aug. 3.586 2.518 1.609 0.993 0.980 0.695 0.617 0.839 0.090 1.926 2.878 3.411 2.535 0.509
Sept. 3.857 2.504 1.510 0.874 1.020 0.593 0.900 0.831 0.272 2.540 3.028 3.466 2.302 0.454
Oct. 3.495 2.414 1.361 0.858 1.041 0.548 1.201 0.684 0.269 2.633 3.349 3.284 2.230 0.467
Nov. 2.941 2.474 0.720 1.005 0.971 0.347 0.612 0.625 0.375 2.652 3.051 3.110 2.000 0.394
Dec. 3.120 2.475 0.245 0.968 0.927 0.330 0.635 0.527 0.463 2.691 3.257 3.243 1.786 0.230
* Investors in the Notes may not realize a return consistent with the
historical data presented even if equally favorable historical spreads occur
during the term of the Notes, since the Notes are subject to early redemption.
See "Risk Factors--The Notes are subject to early redemption" above.
As of February 17, 2006, the spread between the 30-Year U.S. Dollar
Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate was
0.029%.
The following graph sets forth the historical spread between the 30-Year
U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate
Swap Rate presented in the preceding table.
[GRAPHIC OMITTED]
PS-12
Historical movements in the 30-Year U.S. Dollar Interest Rate Swap Rate
and 2-Year U.S. Dollar Interest Rate Swap Rate are highly, but not perfectly,
correlated to movements in the 30-Year Treasury Rate and 2-Year Treasury Rate,
respectively. The first graph below reflects the correlation between the
month-end 30-Year U.S. Dollar Interest Rate Swap Rate relative to the
month-end 30-Year Treasury Rate during the period from January 1992 to January
2006; the second graph reflects the correlation between the month-end 2-Year
U.S. Dollar Interest Rate Swap Rate relative to the month-end 2-Year Treasury
Rate during the same period.
30-Year Rates
[GRAPHIC OMITTED]
2-Year Rates
[GRAPHIC OMITTED]
PS-13
Early Redemption at the Option of ML&Co.
ML&Co., in its sole discretion, may redeem the Notes, in whole but not
in part, on any quarterly Interest Payment Date beginning on April , 2008, to
but excluding the maturity date (the date on which the early redemption, if
any, occurs being the "Early Redemption Date") by giving notice to the trustee
at least five scheduled Business Days prior to the Early Redemption Date. Any
date on which we give notice to the trustee that we are redeeming the Notes is
referred to as the "Early Redemption Notice Date". The notice to the trustee
will specify the Early Redemption Date. The trustee will provide notice of the
early redemption election to the registered holders of the Notes, specifying
the Early Redemption Date. While the Notes are held at the depositary, the
registered holder will be the depositary, and the depositary will receive
notice of the early redemption. So long as the depositary is the registered
holder of the Notes, notice of our election to exercise the early redemption
option will be forwarded as more fully described in the accompanying
prospectus under "Description of Debt Securities--Depositary".
Events of Default and Acceleration
In case an Event of Default with respect to any Notes has occurred and
is continuing, the amount payable to a holder of Notes upon any acceleration
permitted by the Notes, with respect to each $1,000 principal amount of Notes,
will be equal to an amount as described under "--Payment on the Maturity Date"
above, calculated as though the date of default were the maturity date for the
Notes.
In case of default in payment of the Notes, whether on the stated
maturity date, upon early redemption or upon acceleration, from and after that
date the Notes will bear interest, payable upon demand of their holders, at
the rate of % per annum, to the extent that payment of such interest shall be
legally enforceable, on the unpaid amount due and payable on that date in
accordance with the terms of the Notes to the date payment of that amount has
been made or duly provided for.
PS-14
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Sidley Austin LLP, tax counsel
to ML&Co., as to certain United States federal income tax consequences of the
purchase, ownership and disposition of the Notes. This opinion is based upon
laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below supplements the
discussion set forth under the section entitled "Certain United States Federal
Income Tax Considerations" that is contained in the accompanying prospectus
supplement and supercedes that discussion to the extent that it contains
information that is inconsistent with that which is contained in the
accompanying prospectus supplement. The discussion below deals only with Notes
held as capital assets and does not purport to deal with persons in special
tax situations, such as financial institutions, insurance companies, regulated
investment companies, real estate investment trusts, dealers in securities or
currencies, traders in securities that elect to mark to market, tax-exempt
entities or persons holding Notes in a tax-deferred or tax-advantaged account
(except to the extent specifically discussed below), persons whose functional
currency is not the United States dollar, persons subject to the alternative
minimum tax or persons holding Notes as a hedge against currency risks, as a
position in a "straddle" or as part of a "hedging", "conversion" or
"integrated" transaction for tax purposes. It also does not deal with holders
other than original purchasers (except where otherwise specifically noted in
this pricing supplement). The following discussion also assumes that the issue
price of the Notes, as determined for United States federal income tax
purposes, equals the principal amount thereof. If a partnership holds the
Notes, the tax treatment of a partner will generally depend upon the status of
the partner and the activities of the partnership. Thus, persons who are
partners in a partnership holding the Notes should consult their own tax
advisors. Moreover, all persons considering the purchase of the Notes should
consult their own tax advisors concerning the application of the United States
federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the Notes arising
under the laws of any other taxing jurisdiction.
As used in this pricing supplement, the term "U.S. Holder" means a
beneficial owner of a Note that is for United States federal income tax
purposes (a) a citizen or resident of the United States, (b) a corporation,
partnership or other entity treated as a corporation or a partnership that is
created or organized in or under the laws of the United States, any state
thereof or the District of Columbia (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations),
(c) an estate the income of which is subject to United States federal income
taxation regardless of its source, (d) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust or (e) any other person whose income or
gain in respect of a Note is effectively connected with the conduct of a
United States trade or business. Notwithstanding clause (d) of the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to
that date that elect to continue to be treated as United States persons also
will be U.S. Holders. As used herein, the term "non-U.S. Holder" means a
beneficial owner of a Note that is not a U.S. Holder.
U.S. Holders
We have received an opinion from our counsel, Sidley Austin LLP, that
the Notes will be treated as indebtedness for United States federal income tax
purposes and that the Notes will be subject to the special regulations issued
by the U.S. Treasury Department governing contingent payment debt instruments
(the "CPDI regulations"). Moreover, pursuant to the terms of the Notes, we and
you will agree, for United States federal income tax purposes, to treat the
Notes as debt instruments that are subject to the CPDI regulations. Pursuant
to these regulations, U.S. Holders of the Notes will be required to accrue
interest income on the Notes, in the amounts described below, regardless of
whether the U.S. Holder uses the cash or accrual method of tax accounting.
The CPDI regulations provide that a U.S. Holder must accrue an amount of
ordinary interest income, as original issue discount for United States federal
income tax purposes, for each accrual period prior to and including the
maturity date of the Notes that equals:
(1) the product of (i) the adjusted issue price (as defined below) of
the Notes as of the beginning of the accrual period; and (ii) the
comparable yield to maturity (as defined below) of the Notes,
adjusted for the length of the accrual period;
PS-15
(2) divided by the number of days in the accrual period; and
(3) multiplied by the number of days during the accrual period that
the U.S. Holder held the Notes.
A Note's issue price is the first price to the public at which a
substantial amount of the Notes are sold, excluding sales to bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The adjusted issue price of a
Note is its issue price increased by any interest income previously accrued,
determined without regard to any adjustments to interest accruals described
below, and decreased by the amount of any projected payments, as defined
below, previously made with respect to the Note.
The CPDI regulations require that we provide to U.S. Holders, solely for
United States federal income tax purposes, a schedule of the projected amounts
of payments, which we refer to as projected payments, on the Notes. This
schedule must produce the comparable yield. Solely for purposes of applying
the CPDI regulations to the Notes, ML&Co. has determined that the projected
payments for the Notes consist of estimates of the quarterly interest payments
on the Notes and a payment on the maturity date of the principal amount
thereof. For purposes of illustrating the application of the CPDI regulations
to the Notes in this preliminary pricing supplement, ML&Co. has utilized a
hypothetical comparable yield for the Notes equal to 5.12% per annum,
compounded quarterly. The actual comparable yield for purposes of applying the
CPDI regulations to the Notes will be determined on the Pricing Date and will
depend upon actual market interest rates (and thus ML&Co.'s borrowing costs
for debt instruments with comparable maturities) as of that date. The actual
comparable yield will also be set forth in the final pricing supplement
delivered to you in connection with the initial sale of the Notes. Neither the
hypothetical comparable yield nor the actual comparable yield is an estimate
of what the actual yield will be on the Notes. U.S. Holders may also obtain
the actual projected payment schedule by submitting a written request for such
information to Merrill Lynch & Co., Inc., Corporate Secretary's Office, 222
Broadway, 17th Floor, New York, New York 10038 or to
corporatesecretary@exchange.ml.com.
For United States federal income tax purposes, a U.S. Holder must use
the comparable yield and the schedule of projected payments in determining its
interest accruals, and the adjustments thereto described below, in respect of
the Notes, unless the U.S. Holder timely discloses and justifies the use of
other estimates to the Internal Revenue Service (the "IRS"). A U.S. Holder
that determines its own comparable yield or schedule of projected payments
must also establish that our comparable yield or schedule of projected
payments is unreasonable.
The comparable yield and the schedule of projected payments are not
determined for any purpose other than for the determination of a U.S. Holder's
interest accruals and adjustments thereof in respect of the Notes for United
States federal income tax purposes and do not constitute a projection or
representation regarding the actual amounts payable on the Notes.
Amounts treated as interest under the CPDI regulations are treated as
original issue discount for all purposes of the Code.
Adjustments to Interest Accruals on the Notes
If, during any taxable year, a U.S. Holder receives actual payments with
respect to the Notes for that taxable year that in the aggregate exceed the
total amount of projected payments for that taxable year, the U.S. Holder will
incur a "net positive adjustment" under the CPDI regulations equal to the
amount of that excess. The U.S. Holder will treat a "net positive adjustment"
as additional interest income for the taxable year.
If a U.S. Holder receives in a taxable year actual payments with respect
to the Notes for that taxable year that in the aggregate were less that the
amount of projected payments for that taxable year, the U.S. Holder will incur
a "net negative adjustment" under the CPDI regulations equal to the amount of
such deficit. This adjustment will (a) reduce the U.S. Holder's interest
income on the Notes for that taxable year, and (b) to the extent of any excess
after the application of (a), give rise to an ordinary loss to the extent of
the U.S. Holder's interest income on the Notes during prior taxable years,
reduced to the extent that interest was offset by prior net negative
adjustments.
PS-16
Sale, Exchange or Redemption of the Notes
Generally, the sale, exchange or redemption of a Note will result in
taxable gain or loss to a U.S. Holder. The amount of gain or loss on a taxable
sale, exchange or redemption will be equal to the difference between (a) the
amount realized by the U.S. Holder on that sale, exchange or redemption and
(b) the U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted
tax basis in a Note on any date will generally be equal to the U.S. Holder's
original purchase price for the Note, increased by any interest income
previously accrued by the U.S. Holder (determined without regard to any
adjustments to interest accruals described above), and decreased by the amount
of any projected payments, as defined above, previously made to the U.S.
Holder through that date. Gain recognized upon a sale, exchange or redemption
of a Note will generally be treated as ordinary interest income; any loss will
be ordinary loss to the extent of interest previously included in income, and
thereafter, capital loss (which will be long-term if the Note is held for more
than one year). The deductibility of net capital losses by individuals and
corporations is subject to limitations.
Unrelated Business Taxable Income
Section 511 of the Internal Revenue Code of 1986, as amended (the
"Code"), generally imposes a tax, at regular corporate or trust income tax
rates, on the "unrelated business taxable income" of certain tax-exempt
organizations, including qualified pension and profit sharing plan trusts and
individual retirement accounts. In general, if the Notes are held for
investment purposes, the amount of income or gain realized with respect to the
Notes will not constitute unrelated business taxable income. However, if a
Note constitutes debt-financed property (as defined in Section 514(b) of the
Code) by reason of indebtedness incurred by a holder of a Note to purchase the
Note, all or a portion of any income or gain realized with respect to such
Note may be classified as unrelated business taxable income pursuant to
Section 514 of the Code. Moreover, prospective investors in the Notes should
be aware that whether or not any income or gain realized with respect to a
Note which is owned by an organization that is generally exempt from U.S.
federal income taxation pursuant to Section 501(a) of the Code constitutes
unrelated business taxable income will depend upon the specific facts and
circumstances applicable to such organization. Accordingly, any potential
investors in the Notes that are generally exempt from U.S. federal income
taxation pursuant to Section 501(a) of the Code are urged to consult with
their own tax advisors concerning the U.S. federal income tax consequences to
them of investing in the Notes.
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount) on a Note, unless the non-U.S. Holder is a direct or
indirect 10% or greater shareholder of ML&Co., a controlled foreign
corporation related to ML&Co. or a bank receiving interest described in
Section 881(c)(3)(A) of the Code. However, income allocable to non-U.S.
Holders will generally be subject to annual tax reporting on IRS Form 1042-S.
For a non-U.S. Holder to qualify for the exemption from taxation, any person,
U.S. or foreign, that has control, receipt or custody of an amount subject to
withholding, or who can disburse or make payments of an amount subject to
withholding (the "Withholding Agent") must have received a statement that (a)
is signed by the beneficial owner of the Note under penalties of perjury, (b)
certifies that the owner is a non-U.S. Holder and (c) provides the name and
address of the beneficial owner. The statement may generally be made on IRS
Form W-8BEN (or other applicable form) or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of that change by filing a new IRS
Form W-8BEN (or other applicable form). Generally, an IRS Form W-8BEN provided
without a U.S. taxpayer identification number will remain in effect for a
period starting on the date the form is signed and ending on the last day of
the third succeeding calendar year, unless a change in circumstances makes any
information on the form incorrect. If a Note is held through a securities
clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. Under certain circumstances, the signed statement must be accompanied
by a copy of the applicable IRS Form W-8BEN (or other applicable form) or the
substitute form provided by the beneficial owner to the organization or
institution.
Under current law, a Note will not be includible in the estate of a
non-U.S. Holder unless the individual is a direct or indirect 10% or greater
shareholder of ML&Co. or, at the time of the individual's death, payments in
PS-17
respect of that Note would have been effectively connected with the conduct by
the individual of a trade or business in the United States.
Backup withholding
Backup withholding at the applicable statutory rate of United States
federal income tax may apply to payments made in respect of the Notes to
registered owners who are not "exempt recipients" and who fail to provide
certain identifying information (such as the registered owner's taxpayer
identification number) in the required manner. Generally, individuals are not
exempt recipients, whereas corporations and certain other entities generally
are exempt recipients. Payments made in respect of the Notes to a U.S. Holder
must be reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. Compliance with the identification procedures
described in the preceding section would establish an exemption from backup
withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the
broker must withhold on the entire purchase price, unless either (a) the
broker determines that the seller is a corporation or other exempt recipient
or (b) the seller provides, in the required manner, certain identifying
information (e.g., an IRS Form W-9) and, in the case of a non-U.S. Holder,
certifies that the seller is a non-U.S. Holder (and certain other conditions
are met). This type of sale must also be reported by the broker to the IRS,
unless either (a) the broker determines that the seller is an exempt recipient
or (b) the seller certifies its non-U.S. status (and certain other conditions
are met). Certification of the registered owner's non-U.S. status would be
made normally on an IRS Form W-8BEN (or other applicable form) under penalties
of perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment
to a beneficial owner would be allowed as a refund or a credit against the
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
PS-18
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit
plan (a "plan") subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consider the fiduciary standards of ERISA
in the context of the plan's particular circumstances before authorizing an
investment in the Notes. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the
documents and instruments governing the plan, and whether the investment would
involve a prohibited transaction under Section 406 of ERISA or Section 4975 of
the Code.
Section 406 of ERISA and Section 4975 of the Code prohibit plans, as
well as individual retirement accounts and Keogh plans subject to Section 4975
of the Code (also "plans") from engaging in certain transactions involving
"plan assets" with persons who are "parties in interest" under ERISA or
"disqualified persons" under the Code ("parties in interest") with respect to
the plan or account. A violation of these prohibited transaction rules may
result in civil penalties or other liabilities under ERISA and/or an excise
tax under Section 4975 of the Code for those persons, unless exemptive relief
is available under an applicable statutory, regulatory or administrative
exemption. Certain employee benefit plans and arrangements including those
that are governmental plans (as defined in section 3(32) of ERISA), certain
church plans (as defined in Section 3(33) of ERISA) and foreign plans (as
described in Section 4(b)(4) of ERISA) ("non-ERISA arrangements") are not
subject to the requirements of ERISA or Section 4975 of the Code but may be
subject to similar provisions under applicable federal, state, local, foreign
or other regulations, rules or laws ("similar laws").
The acquisition of the Notes by a plan with respect to which we, MLPF&S
or certain of our affiliates is or becomes a party in interest may constitute
or result in a prohibited transaction under ERISA or Section 4975 of the Code,
unless those Notes are acquired pursuant to and in accordance with an
applicable exemption. The U.S. Department of Labor has issued five prohibited
transaction class exemptions, or "PTCEs", that may provide exemptive relief if
required for direct or indirect prohibited transactions that may arise from
the purchase or holding of the Notes. These exemptions are:
(1) PTCE 84-14, an exemption for certain transactions determined or
effected by independent qualified professional asset managers;
(2) PTCE 90-1, an exemption for certain transactions involving
insurance company pooled separate accounts;
(3) PTCE 91-38, an exemption for certain transactions involving bank
collective investment funds;
(4) PTCE 95-60, an exemption for transactions involving certain
insurance company general accounts; and
(5) PTCE 96-23, an exemption for plan asset transactions managed by
in-house asset managers.
The Notes may not be purchased or held by (1) any plan, (2) any entity
whose underlying assets include "plan assets" by reason of any plan's
investment in the entity (a "plan asset entity") or (3) any person investing
"plan assets" of any plan, unless in each case the purchaser or holder is
eligible for the exemptive relief available under one or more of the PTCEs
listed above or another applicable similar exemption. Any purchaser or holder
of the Notes or any interest in the Notes will be deemed to have represented
by its purchase and holding of the Notes that it either (1) is not a plan or a
plan asset entity and is not purchasing those Notes on behalf of or with "plan
assets" of any plan or plan asset entity or (2) with respect to the purchase
or holding, is eligible for the exemptive relief available under any of the
PTCEs listed above or another applicable exemption. In addition, any purchaser
or holder of the Notes or any interest in the Notes which is a non-ERISA
arrangement will be deemed to have represented by its purchase and holding of
the Notes that its purchase and holding will not violate the provisions of any
similar law.
PS-19
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
important that fiduciaries or other persons considering purchasing the Notes
on behalf of or with "plan assets" of any plan, plan asset entity or non-ERISA
arrangement consult with their counsel regarding the availability of exemptive
relief under any of the PTCEs listed above or any other applicable exemption,
or the potential consequences of any purchase or holding under similar laws,
as applicable.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the Notes will be used as described
under "Use of Proceeds" in the accompanying prospectus and to hedge market
risks of ML&Co. associated with its obligations in connection with the Notes.
SUPPLEMENTAL PLAN OF DISTRIBUTION
MLPF&S has advised ML&Co. that it proposes initially to offer all or
part of the Notes to a dealer that will resell the Notes to the public at the
offering price set forth on the cover page of this pricing supplement. MLPF&S
expects to reallow the discount received by it in connection with its purchase
of Notes to the dealer. After the initial public offering, the public offering
price and the discount allowed to the dealer may be changed. MLPF&S is
offering the Notes subject to receipt and acceptance and subject to MLPF&S's
right to reject any order in whole or in part. Proceeds to be received by
ML&Co. will be net of the underwriting discount and expenses payable by ML&Co.
EXPERTS
The consolidated financial statements, the related financial statement
schedule, and management's report on the effectiveness of internal control
over financial reporting incorporated in this pricing supplement by reference
from Merrill Lynch & Co., Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004 have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
With respect to the unaudited interim condensed consolidated financial
information for the three-month periods ended April 1, 2005 and March 26,
2004, the three-month and six-month periods ended July 1, 2005 and June 25,
2004 and the three-month and nine-month periods ended September 30, 2005 and
September 24, 2004 which is incorporated herein by reference, Deloitte &
Touche LLP, an independent registered public accounting firm, have applied
limited procedures in accordance with the standards of the Public Company
Accounting Oversight Board (United States) for reviews of such information.
However, as stated in their reports included in Merrill Lynch & Co., Inc.'s
Quarterly Reports on Form 10-Q for the quarters ended April 1, 2005, July 1,
2005 and September 30, 2005 and incorporated by reference herein, they did not
audit and they do not express opinions on that interim financial information.
Accordingly, the degree of reliance on their reports on such information
should be restricted in light of the limited nature of the review procedures
applied. Deloitte & Touche LLP are not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their reports on the unaudited
interim condensed consolidated financial information because those reports are
not "reports" or a "part" of the registration statement prepared or certified
by an accountant within the meaning of Sections 7 and 11 of the Act.
PS-20
INDEX OF CERTAIN DEFINED TERMS
Business Day..............................................................PS-11
Interest Determination Date................................................PS-4
Interest Payment Date......................................................PS-3
Leverage Factor............................................................PS-3
Notes......................................................................PS-1
Pricing Date...............................................................PS-3
PS-21
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Merrill Lynch & Co., Inc.
Medium-Term Notes, Series C
Notes Linked to U.S. Dollar Interest Rate Swap Rates, Series III
due April , 2011
$1,000 principal amount per unit
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PRICING SUPPLEMENT
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Merrill Lynch & Co.
March , 2006
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