The State of Ohio and Fifth Third Securities Inc. are launching an innovative bond offering Monday that's designed specifically to meet the needs of individual investors.
The $30 million offering of tax-exempt municipal bonds differs in several ways from traditional bond offerings that normally are snapped up by mutual funds and other institutional investors, according to John Rolander, vice president and manager of fixed-income trading at the Fifth Third Bank unit.
What's not different is that the interest is exempt from federal and Ohio income taxes
So the interest rate the bonds pay in the final year - it will increase from 3.35 percent in 2007 to 3.60 percent before they mature in 2016 - would be equivalent to earning a taxable rate of more than 6 percent for someone in the highest federal and state tax brackets.
While the tax benefit is what makes municipal bonds attractive to certain investors, the ones Ohio and Fifth Third will have have other investor-friendly features as well for individuals:
Unlike traditional bonds, they will be sold at par, which means that if someone buys $5,000 of bonds (they're sold in $5,000 increments), she'll pay exactly $5,000.
"There are no commissions, fees or premiums assessed to investors," Rolander said. Instead, any fees earned by brokers are already imbedded in the price, which makes the transactions less complex and more transparent for individuals, he said.
The offering will be open for an entire week (as long as any bonds remain unsold), not just an hour or two, giving individuals a chance to consider the terms and decide whether the bonds are a suitable investment for them.
It will be available through a large network of broker-dealers, giving greater access to more small investors. Interested individual investors can call Fifth Third Securities for information or contact their own brokers.
"The new issue market is typically not available to retail investors. They have to buy in the secondary after they've been marked up," Rolander said of most other bond offerings.
Fifth Third is underwriting the bond offering and working with the state to broaden its investor base, which lowers its cost of borrowing. If the $30 million offering is successful, Fifth Third expects to do more and larger such deals in the future, Rolander said.
"Based on the feedback we're getting, I wish it was closer to $100 million. The phone's been ringing off the hook," he said Friday.
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