PRICING SUPPLEMENT
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(To MTN prospectus supplement,
general prospectus supplement
and prospectus each dated March 31, 2006)
Pricing Supplement Number: 2536
[LOGO OMITTED]
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series C
Notes Linked to the 10-Year/2-Year U.S. Dollar Interest Rate Swap Rates,
Series 2
due June 6, 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 receive current income in
the form of quarterly interest based upon the amount, if any, by which the
10-Year U.S. Dollar Interest Rate Swap Rate exceeds the 2-Year U.S. Dollar
Interest Rate Swap Rate, as described in this pricing supplement.
o 100% principal protection on the maturity date or date of early redemption.
o For any quarter for which interest shall be payable on the Notes, we will
pay such interest on the 6th day of March, June, September and December,
beginning in September 2006. Interest on the $1,000 principal amount per
unit of the Notes will accrue during the two initial quarterly interest
periods at a rate of 6.50% per annum, and thereafter at a rate equal to the
amount, if any, by which the 10-Year U.S. Dollar Interest Rate Swap Rate
exceeds the 2-Year U.S. Dollar Interest Rate Swap Rate, expressed as
percentages, on the applicable interest determination date multiplied by a
leverage factor, as described in this pricing supplement. This rate for any
period other than the two initial interest periods may be zero, but will
not be less than zero.
o The Notes will not be listed on any securities exchange.
o The Notes will be senior unsecured debt securities of Merrill Lynch & Co.,
Inc., will be part of a series entitled "Medium-Term Notes, Series C". The
Notes will have the CUSIP No. 59018YXG1.
o The settlement date for the Notes is expected to be June 6, 2006.
Payment on the maturity date:
o Unless earlier redeemed, for each $1,000 principal amount per unit of your
Notes, we will pay you on the maturity date an amount equal to the
principal amount and any accrued and unpaid interest.
Early redemption:
o The Notes may be redeemed by us on any quarterly interest payment date on
or after June 6, 2009 upon five business days' notice. In the event we
redeem the Notes, 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 date of redemption.
Information included in this pricing supplement supersedes information
in the accompanying MTN prospectus supplement, general 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 PAGE
S-3 OF THE ACCOMPANYING MTN PROSPECTUS SUPPLEMENT.
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Per Unit Total
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Public offering price.............................................. $1,000.00 $14,757,000
Underwriting discount.............................................. $15.00 $221,355
Proceeds, before expenses, to Merrill Lynch & Co., Inc............. $985.00 $14,535,645
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 MTN prospectus supplement, general
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 June 1, 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
Medium-Term Notes, Series C Prospectus Supplement
(the "MTN prospectus supplement")
RISK FACTORS...............................................................S-3
DESCRIPTION OF THE NOTES...................................................S-4
UNITED STATES FEDERAL INCOME TAXATION.....................................S-22
PLAN OF DISTRIBUTION......................................................S-29
VALIDITY OF THE NOTES.....................................................S-30
Debt Securities, Warrants, Preferred Stock,
Depositary Shares and Common Stock Prospectus Supplement
(the "general prospectus supplement")
MERRILL LYNCH & CO., INC...................................................S-3
USE OF PROCEEDS............................................................S-3
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.......................S-4
THE SECURITIES.............................................................S-4
DESCRIPTION OF DEBT SECURITIES.............................................S-5
DESCRIPTION OF DEBT WARRANTS..............................................S-16
DESCRIPTION OF CURRENCY WARRANTS..........................................S-18
DESCRIPTION OF INDEX WARRANTS.............................................S-20
DESCRIPTION OF PREFERRED STOCK............................................S-25
DESCRIPTION OF DEPOSITARY SHARES..........................................S-32
DESCRIPTION OF PREFERRED STOCK WARRANTS...................................S-36
DESCRIPTION OF COMMON STOCK...............................................S-38
DESCRIPTION OF COMMON STOCK WARRANTS......................................S-42
PLAN OF DISTRIBUTION......................................................S-44
WHERE YOU CAN FIND MORE INFORMATION.......................................S-45
INCORPORATION OF INFORMATION WE FILE WITH THE SEC.........................S-46
EXPERTS...................................................................S-46
Prospectus
WHERE YOU CAN FIND MORE INFORMATION..........................................2
INCORPORATION OF INFORMATION WE FILE WITH THE SEC............................2
EXPERTS......................................................................2
PS-2
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this pricing supplement and the accompanying MTN prospectus
supplement, general prospectus supplement and prospectus to help you
understand the Notes Linked to the 10-Year/2-Year U.S. Dollar Interest Rate
Swap Rates, Series 2 due June 6, 2011 (the "Notes"). You should carefully read
this pricing supplement and the accompanying MTN prospectus supplement,
general 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 MTN 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 June 6, 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 general prospectus
supplement.
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 MTN 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 June 6, 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 6th day of
March, June, September and December of each year, and will include the
maturity date or date of early redemption. From and including June 6, 2006 to
but excluding December 6, 2006, interest on the Notes will accrue at a rate of
6.50% per annum. During each subsequent quarterly interest period which begins
on or after December 6, 2006, interest will accrue at a rate per annum equal
to:
Leverage Factor x (IRS10 - IRS2)
but in no case less than 0.00%.
where:
The "Leverage Factor" equals 16.75. IRS10 equals the 10-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).
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. IRS10 and IRS2 will be calculated as described herein if
the relevant Reuters pages are not available.
PS-3
If the IRS10 is equal to or less than the IRS2 on any Interest
Determination Date, the rate of 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 June 6,
2006 to September 6, 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 scheduled Business Day (as defined herein) prior to the first day of
such period.
If any Interest Payment Date is not a Business Day, payment will be made
on the immediately succeeding Business Day and no additional interest will
accrue as a result of such delayed payment.
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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 10-Year U.S.
Dollar Interest Rate Swap Rate of 5.663%, a Leverage Factor of 16.75 and
the following hypothetical 2-Year U.S. Dollar Interest Rate Swap Rates:
Example 1--The hypothetical 10-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 10-Year U.S. Dollar Interest Rate Swap Rate: 5.663%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap Rate: 6.163%
Interest Rate = 16.75 x (5.663% - 6.163%) = 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 10-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 10-Year U.S. Dollar Interest Rate Swap Rate: 5.663%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap Rate: 5.163%
Interest Rate = 16.75 x (5.663% - 5.163%) = 8.38% per annum
Quarterly Interest Payment (per unit) = $1,000 x 8.38% x (90/360) = $20.938
Example 3-- The hypothetical 10-Year U.S. Dollar Interest Rate Swap Rate
exceeds the 2-Year U.S. Dollar Interest Rate Swap Rate by 150 basis points:
Hypothetical Level of the 10-Year U.S. Dollar Interest Rate Swap Rate: 5.663%
Hypothetical Level of the 2-Year U.S. Dollar Interest Rate Swap Rate: 4.163%
Interest Rate = 16.75 x (5.663% - 4.163%) = 25.13% per annum
Quarterly Interest Payment (per unit) = $1,000 x 25.13% x (90/360) = $62.813
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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
June 6, 2009 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 5.52%
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 10-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
10-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 general prospectus supplement. You should also
read the other documents we have filed with the SEC, which you can find by
referring to the sections entitled "Where You Can Find More Information" in
the accompanying general prospectus supplement and 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 MTN 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 two initial periods, will be linked to the amount, if any, by which
the 10-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 two
initial Interest Payment Dates) during the term of the Notes. If the 10-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 two initial fixed interest payments, even if
spreads between the 10-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 10-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 10-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 10-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 10-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.
The Notes are subject to early redemption
We may redeem all of the Notes on any quarterly Interest Payment Date on
or after June 6, 2009 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 10-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.
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
10-Year U.S. Dollar Interest Swap Rate and 2-year U.S. Dollar Interest Swap
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.
PS-6
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 5.00% 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 10-Year Interest Rate Swap Rate, and
without considering any other factors which may affect these rates
differently, the spread between the 10-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 other factors
which may tend to widen or narrow the spread between the 10-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.
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 6.50% during the two
initial interest periods. As of June 1, 2006, the spread between the 10-Year
U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate
Swap Rate was 0.19%. If this spread should remain unchanged until the initial
Interest Determination Date which will occur in December 2006, and including a
Leverage Factor of 16.75, interest on the Notes would accrue during the
quarterly interest period which will begin December 6, 2006 at a per annum
rate of 3.1825%. The rate at which interest will accrue on the Notes will
therefore decline following the initial interest period unless the spread
between the 10-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 10-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 10-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 10-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 10-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 10-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 10-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 10-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 10-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 10-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 10-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 10-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 general prospectus supplement. The Notes
will mature on June 6, 2011. Information included in this pricing supplement
supersedes information in the accompanying MTN prospectus supplement, general
prospectus supplement and prospectus to the extent that it is different from
that information. The CUSIP number for the Notes is 59018YXG1.
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 general prospectus supplement.
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 June 6, 2006, for the initial
interest period, or the most recent Interest Payment Date (as defined below),
to but excluding the 6th day of March, June, September and December 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 two initial
quarterly interest periods at the rate of 6.50% per annum. During the interest
period beginning on December 6, 2006 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 (IRS10 - IRS2)
but in no case less than 0.00%.
where:
The "Leverage Factor" equals 16.75.
"IRS10" equals the 10-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 10-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 10-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 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 10 years or 2 years, as
PS-10
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 10-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 scheduled 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 as a result of
such delayed payment.
"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.
All determinations made by the calculation agent, absent a determination
of a manifest error, will be conclusive for all purposes and binding on ML&Co.
and the holders and beneficial owners of the Notes.
The 10-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate
The 10-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 10 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 10-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 ten years on a predetermined
fixed notional amount to Counterparty B, and Counterparty B is paying 3 month
LIBOR on a quarterly basis for ten years on the same predetermined notional
amount to Counterparty A.
PS-11
The following table sets forth the historical month-end spread between
the 10-Year U.S. Dollar Interest Rate Swap Rate and the 2-Year U.S. Dollar
Interest Rate Swap Rate from January 1992 to May 2006. This data is not
intended to be indicative of the future performance of the spread between the
10-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 10-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. 2.28% 2.38% 1.69% 0.43% 0.92% 0.73% 0.34% 0.27% 0.36% 0.72% 2.22% 2.42% 2.36% 0.90% 0.10%
Feb. 2.22% 2.21% 1.62% 0.56% 0.92% 0.45% 0.25% 0.39% 0.35% 0.78% 2.09% 2.33% 2.41% 0.83% -0.01%
Mar. 2.01% 2.23% 1.74% 0.55% 0.83% 0.62% 0.22% 0.58% 0.11% 1.03% 1.95% 2.48% 2.35% 0.76% 0.11%
Apr. 2.28% 2.31% 1.47% 0.65% 0.84% 0.56% 0.20% 0.55% 0.08% 1.28% 2.00% 2.49% 2.31% 0.63% 0.26%
May 2.23% 2.02% 1.27% 0.65% 0.81% 0.57% 0.18% 0.56% 0.09% 1.43% 1.96% 2.23% 2.20% 0.47% 0.20%
Jun. 2.47% 1.92% 1.26% 0.67% 0.76% 0.53% 0.16% 0.63% 0.06% 1.48% 2.13% 2.34% 1.98% 0.35%
Jul. 2.49% 1.84% 1.28% 0.77% 0.73% 0.38% 0.17% 0.63% 0.15% 1.56% 2.41% 2.94% 1.88% 0.34%
Aug. 2.63% 1.72% 1.17% 0.68% 0.72% 0.51% 0.45% 0.62% 0.09% 1.52% 2.21% 2.70% 1.81% 0.27%
Sept. 2.72% 1.72% 1.11% 0.57% 0.77% 0.40% 0.43% 0.65% 0.20% 1.88% 2.16% 2.62% 1.61% 0.22%
Oct. 2.42% 1.70% 1.06% 0.59% 0.76% 0.35% 0.67% 0.50% 0.23% 2.08% 2.39% 2.55% 1.55% 0.26%
Nov. 2.15% 1.83% 0.54% 0.66% 0.61% 0.22% 0.46% 0.53% 0.24% 2.13% 2.26% 2.35% 1.39% 0.20%
Dec. 2.20% 1.73% 0.07% 0.67% 0.72% 0.21% 0.34% 0.40% 0.28% 2.28% 2.33% 2.50% 1.19% 0.09%
* 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 June 1, 2006, the spread between the 10-Year U.S. Dollar Interest
Rate Swap Rate and the 2-Year U.S. Dollar Interest Rate Swap Rate was 0.19%.
The following graph sets forth the historical spread between the 10-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 10-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 10-Year Treasury Rate and 2-Year Treasury Rate,
respectively. The first graph below reflects the correlation between the
month-end 10-Year U.S. Dollar Interest Rate Swap Rate relative to the
month-end 10-Year Treasury Rate during the period from January 1992 to May
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.
[GRAPHIC OMITTED--Graph shows month end rates for the 10-Year U.S. Dollar
Interest Rate Swap Rate and 10-Year Treasury Rate from January 1992 to May
2006.
The following table lists the 10-Year U.S. Dollar Interest Rate Swap Rate month end rates reflected in the omitted graph:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Jan. 7.86% 6.72% 5.94% 7.99% 5.96% 6.83% 5.99% 5.40% 7.51% 5.91% 5.76% 4.41% 4.53% 4.51% 5.03%
Feb. 7.82% 6.36% 6.49% 7.55% 6.54% 6.72% 6.11% 6.03% 7.42% 5.80% 5.54% 4.11% 4.37% 4.79% 5.07%
Mar. 8.00% 6.37% 7.19% 7.58% 6.76% 7.27% 6.17% 6.01% 7.27% 5.85% 6.07% 4.24% 4.23% 4.94% 5.39%
Apr. 7.94% 6.30% 7.46% 7.45% 7.06% 7.09% 6.17% 6.06% 7.40% 6.15% 5.63% 4.19% 4.99% 4.65% 5.57%
May 7.67% 6.49% 7.52% 6.68% 7.19% 7.02% 6.09% 6.42% 7.63% 6.18% 5.55% 3.72% 5.14% 4.40% 5.68%
Jun. 7.46% 6.12% 7.70% 6.60% 7.20% 6.89% 6.00% 6.62% 7.26% 6.32% 5.35% 3.86% 5.06% 4.33%
Jul. 7.01% 6.13% 7.47% 6.81% 7.15% 6.42% 6.05% 6.90% 7.26% 5.85% 5.08% 5.00% 4.96% 4.72%
Aug. 7.00% 5.72% 7.52% 6.67% 7.22% 6.77% 5.81% 6.99% 7.00% 5.65% 4.68% 4.96% 4.57% 4.45%
Sept. 6.72% 5.71% 7.97% 6.57% 7.04% 6.55% 5.22% 6.85% 6.92% 5.25% 4.25% 4.37% 4.56% 4.79%
Oct. 7.06% 5.79% 8.17% 6.39% 6.67% 6.37% 5.37% 6.86% 6.87% 4.90% 4.46% 4.71% 4.45% 5.08%
Nov. 7.30% 6.17% 8.28% 6.15% 6.36% 6.33% 5.53% 6.99% 6.65% 5.45% 4.72% 4.71% 4.76% 5.04%
Dec. 7.04% 6.13% 8.21% 5.96% 6.75% 6.22% 5.45% 7.17% 6.13% 5.80% 4.23% 4.65% 4.64% 4.94%
The following table lists the 10-Year Treasury Rate month end rates reflected
in the omitted graph:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Jan. 7.27% 6.35% 5.65% 7.58% 5.57% 6.51% 5.51% 4.65% 6.67% 5.14% 5.03% 3.97% 4.14% 4.13% 4.52%
Feb. 7.25% 6.02% 6.13% 7.20% 6.10% 6.55% 5.62% 5.29% 6.42% 4.91% 4.88% 3.70% 3.97% 4.37% 4.55%
Mar. 7.53% 6.02% 6.74% 7.19% 6.33% 6.91% 5.65% 5.23% 6.02% 4.92% 5.41% 3.81% 3.84% 4.49% 4.85%
Apr. 7.59% 6.01% 7.04% 7.06% 6.67% 6.71% 5.68% 5.35% 6.22% 5.35% 5.10% 3.85% 4.50% 4.20% 5.06%
May 7.32% 6.15% 7.15% 6.28% 6.85% 6.66% 5.55% 5.62% 6.27% 5.38% 5.04% 3.36% 4.65% 3.99% 5.13%
Jun. 7.12% 5.78% 7.32% 6.21% 6.72% 6.49% 5.45% 5.79% 6.02% 5.41% 4.80% 3.51% 4.59% 3.92%
Jul. 6.71% 5.81% 7.11% 6.43% 6.80% 6.01% 5.50% 5.91% 6.04% 5.06% 4.48% 4.42% 4.48% 4.28%
Aug. 6.61% 5.45% 7.18% 6.29% 6.94% 6.34% 4.97% 5.98% 5.72% 4.85% 4.14% 4.45% 4.12% 4.02%
Sept. 6.36% 5.38% 7.60% 6.18% 6.70% 6.11% 4.41% 5.88% 5.80% 4.59% 3.60% 3.94% 4.12% 4.33%
Oct. 6.79% 5.43% 7.81% 6.02% 6.34% 5.84% 4.61% 6.02% 5.76% 4.25% 3.94% 4.30% 4.03% 4.55%
Nov. 6.93% 5.82% 7.90% 5.75% 6.05% 5.86% 4.72% 6.19% 5.47% 4.74% 4.22% 4.34% 4.36% 4.50%
Dec. 6.69% 5.79% 7.83% 5.57% 6.42% 5.74% 4.65% 6.44% 5.11% 5.03% 3.82% 4.26% 4.22% 4.39%
GRAPHIC OMITTED--Graph shows month end rates for the 2-Year U.S. Dollar
Interest Rate Swap Rate and 2-Year Treasury Rate from January 1992 to May
2006.
The following table lists the 2-Year U.S. Dollar Interest Rate Swap Rate month end rates reflected in the omitted graph:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Jan. 5.58% 4.34% 4.25% 7.56% 5.04% 6.10% 5.66% 5.13% 7.15% 5.19% 3.54% 1.99% 2.17% 3.62% 4.93%
Feb. 5.60% 4.15% 4.87% 7.00% 5.62% 6.27% 5.86% 5.64% 7.07% 5.03% 3.45% 1.77% 1.97% 3.96% 5.09%
Mar. 5.99% 4.14% 5.45% 7.03% 5.93% 6.65% 5.95% 5.43% 7.16% 4.82% 4.12% 1.76% 1.88% 4.19% 5.28%
Apr. 5.66% 3.99% 6.00% 6.80% 6.22% 6.53% 5.97% 5.51% 7.32% 4.87% 3.63% 1.70% 2.67% 4.02% 5.31%
May 5.44% 4.47% 6.25% 6.03% 6.38% 6.45% 5.92% 5.86% 7.54% 4.76% 3.59% 1.49% 2.94% 3.93% 5.49%
Jun. 4.99% 4.20% 6.44% 5.93% 6.44% 6.36% 5.84% 5.99% 7.21% 4.84% 3.22% 1.52% 3.09% 3.98%
Jul. 4.52% 4.29% 6.19% 6.04% 6.42% 6.04% 5.88% 6.27% 7.11% 4.29% 2.68% 2.06% 3.08% 4.39%
Aug. 4.37% 4.00% 6.35% 5.99% 6.51% 6.26% 5.36% 6.37% 6.90% 4.13% 2.47% 2.26% 2.76% 4.18%
Sept. 4.00% 3.99% 6.86% 6.00% 6.27% 6.15% 4.79% 6.20% 6.72% 3.38% 2.10% 1.75% 2.94% 4.57%
Oct. 4.64% 4.09% 7.11% 5.80% 5.91% 6.02% 4.70% 6.36% 6.64% 2.82% 2.07% 2.17% 2.91% 4.82%
Nov. 5.15% 4.35% 7.74% 5.49% 5.75% 6.11% 5.07% 6.47% 6.41% 3.32% 2.46% 2.36% 3.38% 4.84%
Dec. 4.84% 4.40% 8.14% 5.29% 6.03% 6.01% 5.11% 6.77% 5.85% 3.52% 1.90% 2.15% 3.45% 4.85%
The following table lists the 2-Year Treasury Rate month end rates reflected
in the omitted graph:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Jan. 5.10% 4.16% 4.12% 7.24% 4.92% 5.92% 5.31% 4.57% 6.59% 4.59% 3.15% 1.70% 1.82% 3.28% 4.52%
Feb. 5.25% 3.90% 4.67% 6.77% 5.42% 6.08% 5.53% 5.14% 6.54% 4.40% 3.06% 1.51% 1.65% 3.59% 4.68%
Mar. 5.59% 3.95% 5.19% 6.78% 5.76% 6.42% 5.56% 4.98% 6.49% 4.18% 3.72% 1.50% 1.58% 3.79% 4.82%
Apr. 5.43% 3.80% 5.74% 6.59% 6.05% 6.28% 5.57% 5.06% 6.68% 4.28% 3.23% 1.49% 2.31% 3.65% 4.86%
May 5.18% 4.24% 5.99% 5.84% 6.24% 6.20% 5.53% 5.41% 6.67% 4.19% 3.21% 1.33% 2.54% 3.59% 5.05%
Jun. 4.82% 4.01% 6.18% 5.80% 6.11% 6.06% 5.48% 5.53% 6.36% 4.24% 2.81% 1.30% 2.69% 3.64%
Jul. 4.40% 4.12% 5.99% 5.87% 6.22% 5.73% 5.49% 5.62% 6.29% 3.80% 2.25% 1.74% 2.68% 4.01%
Aug. 4.14% 3.86% 6.14% 5.85% 6.34% 5.96% 4.77% 5.73% 6.15% 3.65% 2.15% 1.96% 2.40% 3.82%
Sept. 3.79% 3.86% 6.59% 5.86% 6.10% 5.78% 4.27% 5.60% 5.97% 2.85% 1.70% 1.47% 2.61% 4.18%
Oct. 4.39% 3.99% 6.83% 5.61% 5.74% 5.61% 4.11% 5.79% 5.92% 2.42% 1.67% 1.82% 2.56% 4.39%
Nov. 4.79% 4.22% 7.40% 5.35% 5.59% 5.76% 4.52% 6.01% 5.61% 2.83% 2.06% 2.05% 3.01% 4.42%
Dec. 4.56% 4.24% 7.69% 5.15% 5.87% 5.65% 4.54% 6.24% 5.10% 3.05% 1.59% 1.84% 3.07% 4.40%
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 June 6, 2009, 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 general
prospectus supplement 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 then current Federal Funds Rate, reset daily, determined as described in
the accompanying MTN prospectus supplement, 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 "United States Federal Income
Taxation" that is contained in the accompanying MTN prospectus supplement and
supersedes that discussion to the extent that it contains information that is
inconsistent with that which is contained in the accompanying MTN 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 in the partnership 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 scheduled to have been 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. In particular, ML&Co. has determined that the comparable yield for
the Notes is 5.52% per annum, compounded quarterly. The comparable yield is
not an estimate of what the actual yield will be on the Notes. U.S. Holders
may also obtain the 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 Internal Revenue Code of 1986,
as amended (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.
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
PS-16
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 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
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
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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 general prospectus supplement 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 directly to the public on a fixed price basis at the
offering price set forth on the cover page of this pricing supplement. After
the initial public offering, the public offering price may be changed. The
obligations of MLPF&S are subject to certain conditions and it is committed to
take and pay for all of the Notes if any are taken.
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 30, 2005 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 periods ended March 31, 2006 and April 1, 2005, 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 a review of such information. However, as stated in their
report dated May 5, 2006 included in Merrill Lynch & Co., Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 and incorporated by
reference herein, they did not audit and they do not express an opinion on
that unaudited interim condensed consolidated financial information.
Accordingly, the degree of reliance on their report 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 report on the unaudited interim
condensed consolidated financial information because that report is not a
"report" 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 the 10-Year/2-Year U.S. Dollar Interest Rate Swap Rates,
Series 2
due June 6, 2011
$1,000 principal amount per unit
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PRICING SUPPLEMENT
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Merrill Lynch & Co.
June 1, 2006
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