GS $ High Yield Index GS $ HYTop Index. Rules and Methodology

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1 Goldman Sachs Global Credt Strategy Credt Indces GS $ Hgh Yeld Index GS $ HYTop Index Rules and Methodology Global Credt Strategy gs-cr-ndces@ny.emal.gs.com Important dsclosures appear at the back of ths materal. March 2006

2 Unted States Global Credt Strategy Table of Contents Page The Index Polcy Commttee...1 GS $ Hgh Yeld Index...1 GS $ HYTop Index...3 Monthly Rebalancng...7 Calculaton Methodology...7 Index Value...9 Error Correcton...9

3 Unted States Global Credt Strategy The Index Polcy Commttee The GS $ Hgh Yeld Indces Rules & Methodology The rules of the Goldman Sachs US $ Hgh Yeld Indces * are governed by the Index Polcy Commttee ( Commttee ). The Commttee s comprsed of at least 50% non- Goldman Sachs members. The Commttee has oversght over the formulaton of the rules governng the ndex. Implementaton of the rules s the responsblty of Goldman Sachs. The Commttee s decsons are bndng. The Commttee meets at least once a year to revew the rules and composton of the ndces n lght of changng market structure, though t also strves for contnuty. GS $ Hgh Yeld Index General Selecton Crtera The Goldman Sachs US $ Hgh Yeld Index s composed of US dollar-denomnated bonds ssued by corporate ssuers and rated by at least one of two ratng servces: Moody s Investors Servce, Inc. ( Moody s ) or Standard & Poor s Ratng Servces, a dvson of The McGraw-Hll Companes, Inc. ( S&P ). The ndex composton s elgble for rebalancng once a month, after the close of busness on the last busness day of the rebalancng month (the rebalancng date ). The new ndex composton s effectve on the frst busness day of the next month (the composton month ). The bonds n the US $ Hgh Yeld Index must meet the crtera descrbed below as of the close of busness fve busness days pror to the rebalancng date provded that the relevant bond data can be verfed, at Goldman Sach s sole dscreton, as of such date ( Bond Selecton Cutoff Date ). Canddates Denomnaton. Must be denomnated n US dollars. Corporate Credt. Must be corporate credt,.e., debt nstruments backed by corporate ssuers that are not secured by specfc assets. Debt of governments, soveregns, quas-soveregns, and government-backed or guaranteed enttes s excluded. Geographc Scope. The ssuer or, n the case of a fnance subsdary, the ssuer s guarantor, must be domcled n the US, Canada, Bermuda, Cayman Islands, Western Europe, or Japan. * GS $ HYTop, GS $ Hgh Yeld Index and Goldman Sachs are trademarks of Goldman, Sachs & Co. The methodology of the GS $ HYTop Index s owned by Goldman, Sachs & Co. and may be covered by one or more patents or pendng patent applcatons. 1

4 Unted States Global Credt Strategy Agency Ratngs. Bonds must be rated below nvestment grade but not n default at BB+ or lower by S&P or Ba1 or lower by Moody s as of the Bond Selecton Cutoff Date to qualfy. 1 Splt-rated (e.g., Baa3/BB+ or Ba1/BBB) ssues are excluded from the ndex. A splt-rated ssue means an ssue that s rated nvestment grade by one ratng agency and non-nvestment grade by another ratng agency. Issues rated D by S&P or that have been subject to a default press release by Moody s cannot enter the ndces; those ssues n the ndex that are subsequently downgraded to D by S&P or subject to a default press release by Moody s (as of the Bond Selecton Cutoff Date) wll be taken out of the ndex on the next rebalancng date. Notwthstandng ths lmtaton, Goldman Sachs retans the dscreton, but not the oblgaton to consder ratngs changes after the Bond Selecton Cutoff Date n assessng canddates for ncluson n the ndex. After a bond has mgrated nto hgh yeld from nvestment grade status, t must retan that status for three months (the stablzaton perod ) before t can be ncluded n the ndex. Sze. The outstandng face value of a canddate bond must be greater than or equal to $200 mllon as of the Bond Selecton Cutoff Date. Partal buybacks or add-ons wll affect the outstandng face value of a canddate bond. Goldman Sachs wll consder changes n the outstandng face value of a canddate bond as a result of partal or full buybacks or add-ons, provded that Goldman Sachs s aware of such changes as of the Bond Selecton Cutoff Date. Notwthstandng ths lmtaton, Goldman Sachs retans the dscreton, but not the oblgaton to consder changes n the outstandng face value of a canddate bond after the Bond Selecton Cutoff Date n assessng canddates for ncluson n the ndex. Age. New ssues must have frst settlement dates on or before a rebalancng date to be ncluded n the ndex for the next perod. As of a rebalancng date, bonds must be less than fve years old and have at least three years remanng to maturty. Only bonds ssued after January 1, 1997, are consdered. Bond Type. Fxed coupon bonds, zero coupon bonds, step-up bonds wth coupon schedules known at ssuance (or as functons of the ssuer s ratng), bonds wth snkng funds, medum term notes ( MTNs ), Rule 144A offerngs and callable bonds are canddates for ncluson. The followng nstruments are excluded as canddates from the ndex: preferred shares, convertble bonds, bonds wth other equty features attached (e.g., optons/warrants), perpetual maturty bonds, floatng rate notes, putables and Reg S offerngs. Bond Weghtng Bonds are weghted accordng to ther outstandng bond market captalzaton amount. 1 If a bond s part of a Medum Term Note program, and has no ndvdual ratng, the shelf ratng of the program wll be used as a proxy for the ndvdual bond ratng. 2

5 Unted States Global Credt Strategy Subndces The bonds comprsng the subndces are a subset of the bonds n the composte ndces and therefore have to pass the same elgblty tests. Bonds are assgned to specfc ssuer enttes and ndustry sectors by Goldman Sachs. Also, f a bond s rated by only one agency (Moody s or S&P), or f both agences classfy t n the same qualty sector (BB, B, CCC, CC or C), t wll be ncluded n the correspondng qualty sector subndex. For bonds wth splt ratngs, the hgher ratng wll preval n determnng qualty sector ncluson. For purposes of selectng canddates for the subndces, an ssuer s defned by the Bloomberg tcker (.e., all bonds sharng a tcker are attrbuted to a common ssuer). Base date The base date for the ndex s December 31, GS $ HYTop Index The GS $ HYTop Index ( HYTop Index ) s a basket of 50 bonds, 2 rebalanced monthly on the rebalancng date, desgned to provde a balanced representaton of the US dollar hgh yeld corporate market through some of the most lqud hgh yeld corporate bonds avalable. All 50 bonds n the basket are equally prce-weghted n returns (assumng same quantty of each bond). For purposes of selectng canddates for the ndex, an ssuer s defned by the Bloomberg tcker (.e., all bonds sharng a tcker are attrbuted to a common ssuer). General Selecton Crtera 1. Qualfed Entrants. Bonds must satsfy all the condtons for ncluson n the GS $ Hgh Yeld Index TM. 2. Mnmum Runs & Lockouts. Mnmum Run. Any bond whch enters the HYTop Index must reman n the Index for a mnmum of sx months, provded t mantans elgblty for the GS $ Hgh Yeld Index TM durng that perod. Lockout Perod. A bond that drops out of the HYTop Index at rebalancng faces a three-month lockout perod before t can reenter the HYTop Index. 3. Dsqualfcaton. Bonds are dsqualfed from canddacy n the HYTop Index for any of the followng reasons: 2 The number of bonds n the HYTop Index changed to 50 from 30 on Aprl 1,

6 Unted States Global Credt Strategy Securty Type and Issuer. US dollar denomnated bonds for foregn corporate ssuers (.e., Yankee bonds) and debt ssued by Goldman Sachs Group, Inc. or any of ts afflates are excluded. Zeros and zero step-ups (GAINS) are also excluded. Age. As of any rebalancng date, bonds must have less than 15 years remanng to maturty. Tender Offers and Calls. Any bond subject to a frm call or tender offer n the month mmedately followng the rebalancng date wll be excluded, provded that Goldman Sachs s aware of such tender offer or call as of the Bond Selecton Cutoff Date. Lockout Perod. A bond s dsqualfed f t s wthn a lockout perod. Mnmum Potental Run. In order to satsfy the mnmum run requrement, a bond must have at least three years and sx months remanng to maturty when t enters the HYTop Index. Tradng Dffculty. If after complyng wth the relevant rules, a bond s selected whch s hard to obtan n the market (e.g. on account of such bond beng owned by very few holders) and may result n a fal-to-delver stuaton, Goldman Sachs, n ts sole dscreton, may replace such bond wth the bond wth the next-hghest lqudty score, provded the replacement bond comples wth all applcable selecton rules. 4. Lqudty Score. Every bond s assgned a lqudty score that approxmates the ease of transacton executon. The lqudty score s computed to four decmal places and s an addtve composte of three factors: Lqudty Score = Raw Score + Issuer Premum + Incumbency Premum Raw Score. The Raw Score s a functon of the age and sze of the bond, wth parameters constructed by studyng actual trader nputs. The formula reflects the fact that larger ssues are more lqud but become less lqud wth age. Raw Score = ( 1. 5 ln(sze) ) exp( avg age) where sze s the face amount outstandng for the bond n mllons, and avg age s the face-weghted average age n years of all add-ons plus the orgnal prncpal. For example, f a $1 bllon face bond that s one year old had a $1 bllon add-on sx months ago, avg age would be 0.75 year. 4

7 Unted States Global Credt Strategy Issuer Premum. Issuer Premum gves the bggest ssuers n the market a hgher overall Lqudty Score. The aggregate age-adjusted debt of every ssuer ( sze * exp(-0.15 * avg age)) s calculated, and the largest one dentfed (MAX). Issuer Premum Issuer Aggregate Age Adjusted Debt =12 MAX The bond wth the hghest Raw Score (of an ssuer) s awarded the full Issuer Premum, and every other bond (of the ssuer) s awarded a fracton of the full Issuer Premum proportonate to the rato of ts Raw Score to the hghest Raw Score of the ssuer. For purposes of computng the Issuer Premum, aggregate debt outstandng of any ssuer shall nclude all dollar-denomnated, US-ssued notes and bonds. Aggregate debt outstandng wll exclude commercal paper, preferred shares and non-us debt. Incumbency Premum. Bonds that were members of the HYTop Index n the pror month are assgned an Incumbency Premum to ther lqudty score to reflect the noton that a new entry canddate would have to outscore an ncumbent by a reasonable margn of addtonal lqudty n order to justfy the expense of the trade. All bonds from ncumbent ssuers are granted the followng Incumbency Premum: Incumbency Premum = { exp(-015. exp(-015. avg age), avg age), ncumbent bond non-ncumbent bond The non-ncumbent bonds from an ncumbent ssuer are granted a reduced premum to facltate a potental move to a new ssue from the same ssuer at the next rebalancng date. 5. Market Profle. To ensure that the HYTop Index reflects the composton of the broad hgh yeld market, the GS $ Hgh Yeld Index TM s profled annually every November 1. The date was chosen because t s roughly equvalent to the end of the tradtonal bond-underwrtng season. The broad market s segmented nto ndex cells. The percentage par amounts outstandng n each cell of the GS $ Hgh Yeld Index TM determne the bond allocaton for the HYTop Index durng the followng 12 months. The broad market s profled across ndustry sector dmensons by segmentng the bonds nto fve baskets, whch represent the followng ndustry sectors: Consumer Cyclcal, Consumer Other, Industrals & Materals, Telecommuncaton & Technology, and Utltes & Energy. The current profle s dsplayed n Table 1. 5

8 Unted States Global Credt Strategy Table 1: November 1, 2005 Market Profle Sector Bond Count Consumer Cyclcal 11 Consumer Other 12 Industrals & Materals 8 Telecommuncaton & Technology 11 Utltes & Energy 8 Source: Goldman Sachs Global Credt Strategy 6. Selecton Process. Whle the Market Profle s constant for a whole year, the bonds consttutng the HYTop Index are chosen at the end of every month to fll the matrx accordng to ther lqudty scores. The qualfed entrants n each cell are ranked based on ther lqudty scores and chosen n descendng order of lqudty subject to one-ssue per ssuer per cell. In the event that there are nsuffcent qualfed entrants to fll the predetermned number of bonds n any cell, the HYTop Index s rebalanced wth fewer than 50 bonds. 7. Tes n Bond Qualfcatons. The ncluson and excluson crtera descrbed above may result n the dentfcaton of canddates that equally satsfy the general selecton crtera of the ndex. In the event that the qualfed entrants for the ndex equally satsfy the selecton crtera, Goldman Sachs shall rank the qualfed entrants accordng to the followng characterstcs and n the order lsted: Incumbency, most recent ssue, longest length to maturty, and alphabetcal lstng by CUSIP number. 8. Rule Precedence n the Selecton Procedure n the HYTop Index Rules for ncluson n the GS $ Hgh Yeld Index TM have prorty over all rules for ncluson n the HYTop Index. If a bond does not qualfy for the broad ndex, then t cannot be a selecton for the HYTop Index. Even f a bond n the HYTop Index s n ts mnmum run when t s dsqualfed from the GS $ Hgh Yeld Index TM, t wll be removed from the HYTop Index. The rules for the Mnmum Run and the Lockout Perod take precedence over the other rules for the HYTop selecton (specfcally, the dsqualfcaton, selecton process and tes rules). Thus, a mnmum run bond whch s dsqualfed from the HYTop but whch stll qualfes for the broad ndex remans n the ndex. Ths could happen, for example, f a bond's status as a "yankee ssue" changes due to a corporate merger. A locked out bond wll not be selected, even f t scores hgh and otherwse qualfes. 6

9 Unted States Global Credt Strategy All of the bonds n ther mnmum run wll be selected, even f ths results n more bonds than normally allowed n a partcular sector. Furthermore, f crcumstances result n multple mnmum run bonds from the same ssuer n the same sector, all of the mnmum run bonds wll reman n that sector. Fnally, f there are more mnmum run bonds qualfyng for a sector than would normally be allowed n the sector, all mnmum run bonds wll be selected, and the ndex wll rebalance wth the excess bond(s) n that sector and n the overall HYTop Index. 9. Bond weghtng Bonds are equally prce-weghted n returns (assumng equal quantty of each bond). 10. Base date Monthly Rebalancng The base date for the ndex s December 31, The composton of the ndces s held constant for any gven calendar month to ensure contnuty durng the month and to avod changes unrelated to the prce movements of the bonds. Calculaton Methodology The GS $ Hgh Yeld Index TM s treated as a portfolo, where each bond s weght s equal to ts market captalzaton. The HYTop Index attrbutes the same prce-weght n returns to each ndvdual bond (assumng equal quantty of each bond). Calculatons are made on a daly bass, usng md prces 3 provded by Goldman Sachs at approxmately 4 p.m. Eastern Tme, wth reference to the market condtons prevalng at that moment. Total Return The components of the total return are prce changes, accrued nterest, coupon payments, and renvestment ncome on cash flows receved durng the composton month. The month-to-date total return s frst computed on a daly bass for each sngle bond accordng to the followng formula: MTD TR ( P = 1, + A 1, ) ( P 0, + A ( P 0, 0, ) + C + A 0, ) r days (1 + ) d 3 Md prces are defned as the md-ponts between the bd- and the offer-sde prces of a bond. 7

10 Unted States Global Credt Strategy Where: P 0 = Clean (flat) md prce on the rebalancng date. If new, P 0 equals the clean (flat) offer-sde prce on the rebalancng date. P 1 = Clean (flat) md prce on the calculaton date. If the bond s leavng the ndex, P 1 equals the clean (flat) bd-sde prce on the rebalancng date. A = Accrued nterest as of the rebalancng date. 0 A = Accrued nterest as of the calculaton date. 1 C = Coupon payment receved. r = US $ one-month LIBID rate as of the coupon payment date. d = Day-count conventon for the reference LIBID nstrument. For called or tendered bonds, Goldman Sachs shall convert the bond to cash and carry at LIBID rates through the end of the month. If a bond s called/tendered, the month to date return for that partcular bond wll be calculated as follows: MTD TR ( P = ( c) 1, + A ( c) 1, r ) (1 + ( c) days d ( P ( c) 0, ) ( P + A 0, 0, ) + A 0, ) + C r days (1 + ) d ( c) ( c) In the above formula P 1, and A 1, are the prce and accrued nterest at the tme (c) Goldman Sachs becomes aware of the effectve call/tender. r refers to the one-month (c) LIBID rate on that date and days refers to the number of days that expred snce then. Then, a weghted average of the ndvdual total returns s calculated usng the begnnngof-the-perod market value of each bond as follows: MTD Index TR = MTD Index TR weght bond Where, for the GS $ Hgh Yeld Index: weght Face Amount ( P0, + A0, ) = Face Amount j ( P0, j + A0, j ) bond j 8

11 Unted States Global Credt Strategy For the HYTop Index: weght ( P0, + A0, ) = ( P0, j + A0, j ) bond j Index Value All ndces were set at 100 at ncepton on December 31, The Index Level reflects the cumulatve performance of the hstorcally actve bonds n the ndex snce ncepton. It s calculated by Error Correcton Index Levelcalculato n date = Index Levelrebalancng date MTD Index TR Inaccuraces arsng from the selecton of consttuent bonds, classfcaton or prcng of such bonds, or errors because of technology, such as codng errors, may result n errors n the computaton of the ndex. In case of such errors/naccuraces, Goldman Sachs n ts sole dscreton may restate the ndex to correct such pror errors/naccuraces n the ndex. In some cases, a restatement of the ndex may result n a materal change n the prce of the ndex. In the event that a restatement results n a materal change n the prce of the ndex, as defned by Goldman Sachs n ts sole dscreton, Goldman Sachs wll promptly notfy the Commttee of the nature of the naccuracy/error and the mpact of a restatement on the prce of the ndex pror to restatng the ndex. 9

12 Unted States Global Credt Strategy Copyrght The Goldman Sachs Group, Inc. All rghts reserved. The data and nformaton presented n ths manual reflect the methodology for determnng the composton and calculaton of the GS $ Hgh Yeld Index and the GS $ HYTop Index (together, the Indces ). Ths manual and the Indces are compled and publshed by, and are the exclusve property of, Goldman, Sachs & Co. ( GS&Co. ). The composton of the Indces as determned and publshed by GS&Co. s dspostve. Ths manual descrbes the rules and methodology used by GS&Co. n determnng such composton and calculatng such value. Nether ths manual nor any set of procedures, however, are capable of antcpatng all possble crcumstances and events that may occur wth respect to the Indces and the methodology for ther composton, weghtng and calculaton. Accordngly, a number of subjectve judgments must be made n connecton wth the operaton of the Indces that cannot be adequately reflected n ths manual. All questons of nterpretaton wth respect to the applcaton of the provsons of ths manual, ncludng any determnatons that need to be made n the event of a market emergency or other extraordnary crcumstances, wll be resolved by GS&Co., n consultaton wth the Polcy Commttee where approprate. GS&Co. s commtted to mantanng the Indces as lqud, tradable ndces that serve as the best possble benchmark for hgh yeld bond nvestng. We also recognze that the detaled rules-based approach contaned n the manual may not at all tmes be able to reflect the underlyng lqudty and condton of a specfc market, partcularly n perods of extraordnary market volatlty or rapd technologcal change. Further, modfcatons to the methodology used to calculate the Indces, and consequently ths manual, may be necessary from tme to tme. GS&Co. reserves the rght to make such changes or refnements to the rules and methodology set forth n ths manual, n consultaton wth the Polcy Commttee, as t beleves necessary n order to preserve and enhance the utlty of the Indces as benchmark for certan nvestment grade bond market performance and the tradablty of the Indces. GS&Co. also reserves the rght to take such acton wth respect to the Indces, as t deems necessary or approprate n order to address market emergences or other extraordnary market events or condtons. Wherever practcable, any such changes or actons wll be publcly announced pror to the effectve date. The nformaton n ths manual s prvate and use s not ntended, and should not be construed, as an offer to sell, or a solctaton of an offer to purchase, any securtes or other fnancal nstruments. We are not solctng any acton based upon ths materal. Ths materal does not take nto account the partcular nvestment objectves, fnancal stuaton or needs of ndvdual clents. Each of GS&Co. and ts afflates and ther offcers, drectors and employees may have postons or engage n transactons n securtes or other fnancal nstruments based on, or ndexed to, or otherwse related to the Indces. GS&Co. shall not have no lablty, contngent or otherwse, to any person or entty for the qualty, accuracy, tmelness and/or completeness of the Indces or any data ncluded n ths manual, or for delays, omssons or nterruptons n the delvery of the Indces or data related thereto. GS&Co. makes no warranty, express or mpled, as to the results to be obtaned by any person or entty n connecton wth any use of the Indces, ncludng but not lmted to the tradng of or nvestments n products based on or ndexed or related to the Indces, any data related thereto or any components thereof. GS&Co. makes no express or mpled warrantes, and hereby expressly dsclams all warrantes of merchantablty or ftness for a partcular purpose or use wth respect to the nformaton contaned n ths manual, the Indces or any data related thereto. Wthout lmtng any of the foregong, n no event shall GS&Co. have any lablty for any specal, puntve, ndrect, or consequental damages (ncludng lost profts), n connecton wth any use by any person of the Indces or any products based on or ndexed or related thereto, even f notfed of the possblty of such damages. There are no thrd party benefcares of any agreements or arrangements between GS&Co. and any lcensors of the Indces. 10