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.
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