Auction Rate Securities

There are many ways that investors can invest their money over a long term period. Long term investments are known to be more secure than short term investments are. One of the tools the investors use for long term investments is called auction-rate securities. Auction-rate securities, also called ARSs, have a long term maturity date. The interest rates that ARSs pay can fluctuate during the life of the investment. Interest rates can be reset through periodic auctions that dictate the investment’s interest rates. However, most of these auctions have failed in the beginning of 2008. Even though interest rate auctions have been held, the interest rates that auction-rate securities pay have been relatively stagnant when compared to other types of investments.

During 1988, auction-rate securities first hit the scene by Goldman Sachs. The invention of auction-rate securities origins can be found back in 1984 from Lehman Brothers. Auctions are held at specific intervals during the life of the auction-rate security’s contract. These intervals or dates when auctions are held can be every 7 days, 28 days and every 35 days. When the auction closes, the interest that is accrued during those times will be paid. Some auction-rate securities issue coupons that payout every month. The many different types of auction-rate securities will dictate which direction the investor will take.

During that last 10 years, it has become more and more expensive to acquire a loan from a bank. These new difficulties created an entire new market for investors to earn a return from. The higher demands on borrowers have increased the amount of auctions that are held with auction-rate securities. Auctions create an environment of flexibility for investors who are searching for lower costs, which have become an attractive selling point for investors. All these factors play a role in the recent growth that is associated with ARSs.

Auctions also add a certain amount liquidity that is a necessity for investors who are looking for other opportunities in the market. During the early part of 2008, auction-rate securities reached an all time high of $200 billion. This is because loans became more expensive during the last 10 years, except after the banking collapse of 2008. However, the majority of investors who could take advantage of these figures were high rollers or elite investors. A minimum investment of $25,000 is needed to invest in auction-rate securities, which cut out a lot of lower level investors.

Once the banking collapse of 2008 hit the investors, the amount of failed auctions began to rise. Since then, most securities in this type of investment haven’t moved an inch. The U.S. state attorney general is currently investigating the buy back of all these securities that total $50 billion. The largest market that deals with auction-rate securities is the student loan auction rate securities. Because of all the recent difficulties with the markets, accurately predicting what will happen with auction-rate securities in the future seems presently impossible.

On October 30, 2010, the Wall Street Journal reported a recent update dealing with auction-rate securities stating that they remain frozen since the early part of 2008. The Wall Street Journal also states that thousands of investors are still holding those securities with no apparent way of getting rid of them. It’s estimated that around $330 billion in ARSs remain frozen. One of the only ways that investors can get out of auction-rate securities is by selling them for as low as 70 cents on the dollar. The recent changes within the markets prove that auction-rate securities do poorly when the economy begins to slow down. While the future of auction-rate securities is still uncertain, investors should be aware that they may make a comeback if the economy starts to pick back up again.

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