~ Dimensional

Does It Pay to Extend Credit?

10%

8% Compound Returns

6%

4%Standard Deviation

2%

0%

Quality Government AAA AA A BBB High Yield

CompoundReturns ('Yo)

StandardDeviation (%)

7.14 7.53 7.75 7.96 8.59 9.18

4.12 4.27 4.67 5.03 4.94 9.44

Gcvern nert laR'1f; i3 Baidays us Government Bond index Intermediate AAA rating is Barclays US Intermediate Credit Aaa Index AA rating is Bardays US tntermeoiate Credit Aa index. A rating is Barclays US Intermediate Credit Ain:e\( EBB rating s Bardays US Intermediate Credit Baa Index. High Yield raling is Barclays High Yield Composite Bond Index Intermediate. Barclavs data, formerly Lehman Brothers. provided by Bardays Bank PLC. 40

~ Dimensional

Does It Pay to Extend Maturities?Extending too far may result in diminishing returns/risk tradeoff

4 AnnualizedStandard Deviation

• Not all investors define riskas standard deviation. Someinvestors may seek to hedgelong-term liabilities using long-term bonds.

QUARTERLY: 1964-2012

14

8AnnualizedCompound Returns

• Historically, longer-maturityinstruments have higherstandard deviations and havenot provided consistentlygreater returns.

12

10

6

2

a

One-Month Six-Month One-Year Five-Year Twenty-YearUS Treasury US Treasury US Treasury US Treasury US Govt.

Maturity Bills Bills Notes Notes Bonds

AnnualizedCompound 5.22 5.95 6.16 7.17 7.68Returns (%)

AnnualizedStandard 1.49 1_83 2.37 6.14 11.49Deviation (%)

Past perfcrnance IS 110 guarantee of lucre results. Source: One-Month US Treasury BiRs. Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provdec by Ibbotson Associates. Sk-Mon:h US Treasury8i!1s o'oviced by CRSP (1964-1977) and BolA Merrill Lynch (1978-present). Ore-Year US Treasu;y Notes provided by CRSP (1964-May 1991) and BofA Merlill Lvnch (June 1991-present). Ibbotson data © Stocks, Bends Bils, ancinflation Yearbook M. Ibbotson Associates. Chicago (annually updated work by Roger G. Ibbotson ano Rex A. Sinql!efield). CRSP data provided by the Center for Research in Security Prices, University of Chicaga The BofA Mer'ill L~nchlr'dices are used with permssior copyright 20',3 Merrill Lynch. Pierce, Fenner & Smith incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank 01 ;\merca crrpxaon 38

~ Dimensional

Capturing Term Premiums in a Global Contexta a

High

Low

ShortTerm

For il1l5lraiive pUmos8S only.

LocalCurrency

Dimensional employsmarket-driven decisionmaking to global bondallocations.

ForeignCurrency A

ForeignCurrency B

Reliable term spread andterm premium relationshipsexist.

Focus on the steepestcurves with highestexpected returns.

Long

45

~ Dimensional

Expected Premium Capture: Credit SpreadsUsing reliable statistical relationships to maximize expected returns

Narrow credit spreads generallylead to lower credit premiums.

• Reduce credit risk.

co'.ijIIIUo~

Wide credit spreads generallylead to higher credit premiums.

• Increase credit risk.

Narrow WideCredit Spreads

For illuslla:ive purposes Jl1ly. 41

~ Dimensional

Dimensional's Value Added through TradingBond trading analysis

21 bps 22 bps

On the buy side, the averageadjacent buy price is higher thanDimensional's buy price.

DIMENSIONAL BUYS

Agency Corporate

Higher

7 bps Higher

Trade before Trade after Trade before Trade after

DIMENSIONAL SELLS -

-8 bps -8 bpsLower

On the sell side, the averageadjacent sell price is lower thanDimensional's sell price.

Agency

Trade before Trade after

Corporate

Trade before Trade after

Lower

-14 bps

-26 bps

Data compiled by Dimensional. TRACE-eligible corporate and agency bond trades from January 1, 2011,10 December 31, 2011. 47