The bonds are long-term securities, but weekly or monthly auctions are held to set the interest rates and give holders the option of selling the securities. ARS were promoted as being as safe as CDs, with a better yield than CDs or money market funds. Consumers were told they would have easy access to their investments. However, because ARS are long term variable rate debt with interest payments determined on a 7, 28, or 35-day basis. When rates rise, interest expense and volatility will rise, making ARS higher risk investment than fixed rate debt. The auction market collapsed in February 2008, and investors holding such securities have been unable to liquidate their investments. The ARS market has become defunct.
For more information, see:
- Securities and Exchange Commission (SEC): http://www.sec.gov/news/press/2006/2006-83.htm The SEC Cease-and-Desist Order of 2006.
- Financial Industry Regulatory Authority (FINRA): http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/P038207 FINRA’s investor alert on Auction Rate Securities: What Happens When Auctions Fail.