Friday, February 15, 2008
Auction Rate Securities Market
--Auction-rate securities are initially sold as long-term bonds but are effectively turned into short-term securities through auctions typically held every seven, 28 or 35 days. Issuers reap the low financing costs associated with short-term debt, while investors gain liquidity through the frequent sales. --While the bulk of the market is municipal debt, student lenders and closed-end mutual funds also raise money in this market. Estimates on the breakdown vary, but the municipal sector is thought to be $200 billion to $250 billion, with student lending accounting for less than $100 billion. --Failures to resell these securities began cropping up last month, but this week the number jumped, leaving investors -- mainly corporate treasurers but also wealthy individuals -- with paper they expected to exchange for cash. Auction-rate securities are preferred by those looking for a place to park funds for short periods of time.