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Format of PrefLetter: Page 3

The third page of PrefLetter is commentary on the issues highlighted in the table on page 2. Each paragraph consists of (at least!) three parts:

• Ticker Symbol: : This is the ticker symbol currently used on the Toronto Stock Exchange to denote the stock.
• Embedded Options: The options embedded within the recommended issues are listed here. Given the wide variety of options and the need for extensive explanation of some of them, it was not aesthetically pleasing to incorporate this information in the summary table ... but the information is important enough that it should be readily accessible to subscribers. The compromise was to include the information in the commentary.
• Description & Rationale for Recommendation: This is, obviously, a highly variable area of the letter. Sometimes the issuer itself will need an introduction (e.g., Split Share Corporations will generally have their underlying portfolios and coverage ratios reported); at other times I will be content simply to state the name of the issuer (e.g., I will not normally explain the business of a major Canadian bank). In this section the investment characteristics of the issue will be explained and, generally, a comparison of these characteristics to other issues which may be considered similar.

There are some terms occasionally used on this page to describe SplitShare Corporations that might be unfamiliar to some readers:

• Asset Coverage: this is the ratio of dollars available to the corporation to meet its obligations to preferred share-holders, against the size of these obligations. If, for instance, a unit in a split share corporation (comprised of a Preferred Share and a Capital Unit) has a value of $16.00, when the corporation has an obligation to redeem the Preferred Share at $10.00 at some point in the future. The corporation thus has $16 available to meet its $10 obligation, and the Asset Coverage is therefore 1.6:1.
• Market Coverage: Split share preferreds will not necessarily trade at their redemption price. As with bonds, the price will fluctuate and the total return promised will be a combination of the expected dividends and the difference between the market price and the expected redemption price. The Market Coverage ratio is the ratio between the dollars available to meet the corporation's obligations to preferred shareholders to the market price. If the preferred share in the example above is trading on the market at $8.00 (not at its future redemption price of $10), then the Market Coverage is $16:$8, or 2:1
• Income Coverage: Is the ratio between the fund's income (derived from its investment portfolio) and its expenses including preferred share dividends. If a fund has income of $0.60 per unit, has expenses of $0.05 per unit and pays a preferred share dividend of $0.45 (with one preferred share per unit), then Income Coverage is $0.60 : ($0.05 + $0.45) = $0.60 : $0.50, expressed as the ratio 1.2:1.

One page is not a lot of space for all this explanation, so the detailed look at the monthly recommendations continues on page 4.