Investor Protection Guide: Auction Rate Securities

Auction rate securities (ARS) are debt or preferred equity securities whose interest rates are periodically re-set through auctions and which are issued with long-term maturities or in perpetuity. ARS were promoted as being as safe as CDs, but 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 typically long-term variable rate debt with interest payments determined on a 7, 28, or 35-day basis, when rates rise, interest expenses and volatility will rise, making ARS a 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 is now generally defunct.

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