Dear Clients and Friends,
For Colorado residents, the City of Denver has announced the issuance of Denver Mini Bonds that pay very good interest rates. There are several caveats to the offer, which I want you to understand before investing. Also please keep in mind this is not something you can do with our firm, but must be done directly with the City of Denver.
The bonds have two different terms, 9 years and 14 years, and pay annual interest of 4.38 percent and 4.89 percent respectively. This interest is tax-free when it comes to federal and state tax. The City of Denver has a very strong balance sheet as evidenced by AAA ratings. While these bonds are not FDIC guaranteed like a bank account, they are general obligation bonds backed by the full faith and credit of the City of Denver.
There are some idiosyncrasies that I’d like you to understand before considering these bonds.
Limit of $20,000 per investor. These bonds are denominated in $500 increments and no more than 40 bonds can be purchased per Colorado person.
You’re not guaranteed access to the bonds. It’s likely in my opinion that these bonds will be oversubscribed – have more demand for them than there is supply. For that reason, if you’d like to invest you should do so quickly as there are no guarantees that your order will be fulfilled.
Interest is only accrued and is not paid until maturity. While these bonds indeed pay 4.38 and 4.89 percent annual interest, bondholders will not receive this interest until the bonds mature 9 and 14 years from now. If you need the cash flow in the interim, these are not the bonds for you. If you’re using these bonds to hold your emergency funds, look at other options.
The bonds are almost completely illiquid. Whatever funds you put into these bonds should not be needed for the next 9 or 14 years, depending on the maturity. Once you purchase the bonds, it seems there is very little recourse for selling the bonds and getting your principal back. In essence, the option is to wait until the bonds mature to get your principal (and interest).
You only can use taxable funds to purchase these bonds. Don’t consider these bonds for your IRA, Roth, or retirement plan accounts. It doesn’t appear it’s possible to hold these bonds in retirement accounts. Of course holding tax-free municipal bonds in retirement accounts is rarely advisable.
They cannot be held at traditional custodians. Unlike most bonds which you can hold with custodians such as Schwab, Pershing, or TD Ameritrade, these bonds must be held directly by you and on record with the City of Denver.
Ultimately I think these can be a great option for the right investor as the interest is significantly above market rates. But you should read the caveats above and the offering document with the City of Denver to make sure these are the right options for you.
For more information and to purchase the bonds, go here: http://bit.ly/WQm5E0. The bonds are available only from August 4th through the 8th, although orders can be (and should be) entered before that time.
Clients who have any questions about whether these are advisable in your situation, please feel free to email me. They are a good opportunity for the right investor.