Investing in Municipal Bonds in a Rising Rate Environment February, 2015

The value of patience and active management to bond fund investors After 32 years of generally downward trending interest rates, many of today’s investors have yet to experience a true bear market in fixed income. Following the recent period of record-low interest rates and the end of the Fed’s third round of quantitative easing (QE3), rates are expected to begin increasing at some point, possibly within the next 12-18 months. That leaves many fixed income investors uncertain about when and whether to invest in bonds. It’s important for investors to keep in mind that while rising interest rates usually cause bond prices to fall, falling prices don’t automatically lead to negative total returns for bond funds - and active management may help diminish the impact of rising rates on fund portfolios. When will rates rise? Interest rates fluctuate for a variety of reasons – among them are investors’ appetite for fixed income, risk tolerance, supply and demand in the bond market, and inflation expectations. Lately, the main market indicator being monitored (and typically the most visible) has been the Fed Funds rate, which sets the target for short-term rates in the market. The Fed Funds target rate has been 0.25% since December 2008, when short-term rates were cut and monetary policy was relaxed to aid recovery during the global economic crisis. Now that QE3 has ended, investors question when the Fed will raise the short-term target rate. Although the economy continues to recover from the Great Recession, economic fundamentals are improving at a slow pace. Employment is rebounding, but inflation remains low – and forward looking inflationary indicators are showing signs of slow growth. The recent collapse in commodity prices has caused the yield on 10-year Treasury securities to fall to the lowest level since May 2013. The 10-year Treasury began 2014 yielding 3.00%, with analysts’ year-end targets at approximately 3.50% – 4.00%. The 10-year ended 2014 yielding only 2.17%; and had dropped further to 1.77% as of January 15, 2015. 3.50% 3.00% 2.50%

Low point of 2013 5/1/13 1.66%

2.00%

Fed Announced Taper 12/31/13 3.04% Low point of 2014 12/16/14 2.07%

1.50% 1.00% 0.50%

10-year Treasury yield

Source: Federal Reserve Bank of New York

For more information on the Aquila Group of Funds, please visit www.aquilafunds.com

Dec-14

Oct-14

Nov-14

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Jan-13

0.00%

Feb-13

A number of domestic and global factors are creating uncertainty as to whether the Fed will increase rates in 2015, but the expectation is that rates will eventually rise. However, when that does occur, we do not anticipate that the Fed will increase rates at a rapid pace, as that could negate the work done to restore economic stability. We expect rates to increase at a manageable and non-linear pace, creating opportunities for active portfolio managers to buy and sell securities and adapt portfolios to changes in the market.

The Impact of Rising Rates Looking back at periods during which interest rates have risen significantly, it is apparent that interest rates can fluctuate somewhat erratically, which can make deciding when to invest in bond funds a challenge. 20.00% 18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00% 4.00%

2.00%

Jan-70 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

0 .00%

Fed Funds Rate

Source: Federal Reserve Bank of New York

The possibility of rising rates should not deter bond fund investors – interest rate fluctuation is part of a normal economic cycle, and the performance of bond funds is not solely tied to the incremental changes in interest rates. Bond fund total returns are generated 1 from two sources; interest payments Barclays Aggregate Index Total Return 1/30/76 - 12/31/14 on bonds (paid as fund distributions) and changes in bond prices. This is important as rates rise – active portfolio managers have opportunities, in a rising rate environment, to purchase bonds at higher yields 8% 92% and, over time, a portfolio’s income may offset, to varying degrees, a decline in the value of individual bonds, mitigating the impact on total return. Since its inception in 1976, 0% 20% 40% 60% 80% 100% approximately 92% of the Barclays Price Return Coupon Return Aggregate Index total return has been generated by income. Source: Barclays Capital

1

The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the universe of fixedrate, investment grade taxable debt. Performance of an index does not reflect management fees and expenses which are reflected in Fund performance. An investment cannot be made directly in an index.

For more information on the Aquila Group of Funds, please visit www.aquilafunds.com

Aquila Tax-Free Fund of Colorado 12.00%

Over the past 30 years, while the overall trend in interest rates has been declining, there have been several periods in which interest rates rose by as much as 4%, as measured by the Federal Funds Rate. In the chart to the right, those periods are highlighted by the grey bands. Also shown are the corresponding changes in the 10-year Treasury yield, and the yield on the 10-year Barclays Municipal Index.

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

10-Year Barclays Muni Index Yield

10-Year Treasury Yield

Fed Funds Rate

Source: Barclays Capital, Federal Reserve Bank of New York

$8.00

$6.00

$4.00

$2.00

$10.74

$10.89

$10.28

$10.63

$10.39

$10.14

$10.21

$9.88

$10.40

$10.34

$10.83

$10.68

$10.75

$10.31

$10.31

$9.98

$10.63

$10.64

$10.55

$10.43

$10.76

$9.82

$10.37

$9.76

$9.80

$9.66

$9.51

$10.00

$10.14

$12.00

The investment strategy of Aquila TaxFree Fund of Colorado emphasizes investment-grade bonds to manage credit risk and intermediate maturities to manage interest rate risk. This chart illustrates the year-end Net Asset Value of Fund shares since the inception of the Fund in 1987, along with the periods in which the Federal Funds Rate rose by more than 4%.

$0.00

. While past performance of the Fund does not guarantee future performance results, it is worthwhile to review the magnitude of past movements in market rates and the corresponding change in the Net Asset Value of the Fund.

For more information on the Aquila Group of Funds, please visit www.aquilafunds.com

To better understand how the Aquila Tax-Free Fund of Colorado strategy has historically performed in periods of rising interest rates, look at the following hypothetical illustrations, assuming a $10,000 initial investment in the Fund, made shortly before three different periods in which the Fed Funds rate increased markedly. In all three periods, the Fed Funds rate increased at a relatively steady pace, until monetary policy was adjusted. Each illustration assumes at least a threeyear investment in the Fund, and shows the total return of the Class A share based on maximum offering price (MOP) and net asset value (NAV). The Fund’s Y share is shown after its inception date of 4/30/1996. The break-even indicators show the point at which the investments return, for the first time, to the initial invested value. Illustration 1: Hypothetical investment of $10,000 in Aquila Tax-Free Fund of Colorado, March 1994 - June 1997 with effective Fed Funds Target Rates.

Illustration 2: Hypothetical investment of $10,000 in Aquila Tax-Free Fund of Colorado, February 1999 - February 2002 with effective Fed Funds Target Rates.

Illustration 3: Hypothetical investment of $10,000 in Aquila Aquila Tax-Free Fund of Colorado, February 2004 - February 2007 with effective Fed Funds Target Rates.

PERFORMANCE STATISTICS AS OF 12/31/2014 CUMULATIVE RETURN

AVERAGE ANNUAL RETURN

Share Class

4th Quarter

1 year

5 year

10 year

Since Inception 5/21/1987

Total Fund Operating Expense

Contractual Cap

A (NAV) A (MOP)

1.62% - 2.41%

7.71% 3.39%

4.13% 3.29%

3.83% 3.40%

5.34% 5.18%

0.72% 0.72%

0.70% 0.70%

Performance data represents past performance, but does not guarantee future results. Investment return and principal value will fluctuate; shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the data presented. Performance current to the most recent month-end is available at 800-437-1020, or www.aquilafunds.com. Class A shares have a maximum sales charge of 4.00%. Different classes of shares are offered and their performance will vary due to differences in sales charges and fees. Class A performance at maximum offering price (MOP) illustrates effect of the full sales charge. For more information on the Aquila Group of Funds, please visit www.aquilafunds.com

The Aquila Group of Funds Approach The investment approach we follow in managing municipal bond funds is based on a disciplined style focused on an average intermediate portfolio maturity, in order to manage interest rate sensitivity, and bonds of investment grade quality coupled with our credit research, in order to manage credit risk. Over the history of our funds, intermediate maturity and high-quality bonds have demonstrated a relatively high degree of market liquidity. This has enabled us to maintain portfolio integrity in a wide variety of market environments, in that the sale of individual bond holdings has not changed the intermediate, high-quality characteristics of the portfolio. Disciplined Style Intermediate Maturity – Manage Interest Rate Sensitivity Investment Grade Quality and Credit Research - Manage Credit Risk Portfolio Liquidity Portfolio Integrity

Our Single-State Municipal Bond Funds Aquila Tax-Free Trust of Arizona Aquila Tax-Free Fund of Colorado Hawaiian Tax-Free Trust Aquila Churchill Tax-Free Fund of Kentucky Aquila Tax-Free Trust of Oregon Aquila Narragansett Tax-Free Income Fund (RI) Aquila Tax-Free Fund For Utah

This material must be preceded or accompanied by a copy of the Fund’s current prospectus. Before investing in the Fund, carefully read about and consider the objectives, risks, charges, expenses, and other information found in the Fund prospectus. Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative change, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification. For certain investors, some dividends may be subject to federal and state taxes, including the Alternative Minimum Tax. Consult your professional tax adviser.

NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE | NOT NCUA INSURED Aquila Distributors, Inc. | 800-437-1020 | www.aquilafunds.com