You may not have heard of the term “auction rate preferred securities.”
Yet.
If you have not, you probably will soon. Essentially, these are longer-term investments but they have an unusual feature: an interest rate that resets – usually every 7, 14, 28 or 45 days.
The “trick” to making this work is having multiple broker-dealers maintaining an orderly auction market. This provides liquidity for sellers to get out (raise cash) and allow buyers to move in. If the broker-dealers walk away from the market, the whole thing collapses like a house of cards.
Even though you may never have owned auction rate preferred securities, why should this be important to you? [click to continue…]
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