What is auction security?
Auction, ARS, is the type of debt tool at which the interest rate is changed after the tool is released. This change in interest rate is usually performed using a process known as the Dutch auction. City bonds and corporate bonds are two common examples of auction security, although preferred stock problems can also be classified in this way.
Debt tools that can be categorized as securities that are evaluated by the auction rate share several characteristics. First, the instrument carries nominal maturity, which is considered long -term than short -term. Secondly, the conditions related to the issue of the debt instrument allow the regulation of the interest rate through the Dutch auction mechanism. It is important to note that not all types of bonds or preferred stock problems are suitable for this category.
concept on the adjustment of interest rates in auctionThe environment was first introduced at the end of the 80s. During the auction, a broker or seller will submit an offer to modify the current interest rate of bond or current dividends in a given preferred problem with shares. The offer is presented to the auction agent once the offer is announced. When the auction declares that the offer will be closed, evaluates offers and determines a new interest rate or dividend. Usually this is the lowest rate that will be selected and assigned to secure the auction. The date at which the interest rate is changed is usually called the reset date.
Depending on the market involved, the auction rate may occur to auction anywhere from each seven days to the intervals of thirty -five calendar days. There are several securities classes that may appear daily, while reset data appear regularly within a month, quarter and year. However, some securities can re -relocate the next day after the auction.
Many investors consider secureAuction rates for an excellent investment opportunity. However, there are people who are not for this type of investment strategy. Usually cited problems with the auction security rate are that the process can generally reduce the liquidity of the bank and can also create a decrease in coupon level.