Auction Rate Securities' Market Woes

Auction Rate Securities (ARS) are long-term, variable rate bonds whose yields are tied to short-term interest rates.  While ARS have a long-term nominal maturity, their yields are reset through a modified Dutch auction at predetermined short-term intervals, usually every seven, 28, or 35 days.  With the issues' ties to short-term interest rates, many corporations and high-net-worth individuals were sold these securities as juiced-up municipal money market funds with no risk. 

The lack of liquidity in the credit markets has highlighted that there are indeed risks in these securities.  A recent article by James Churchill, which was featured in Registered Rep, provides good insight into the troubles facing both investors and the brokerage firms that peddled the securities. 

Please click here  for the article. If you have any questions or comments, e-mail me at bradb@innovestinc.com.