Bidding in auctions of auction rate securities

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Auction rate securities (ARS) are a type of floating rate debt, with interest rates that reset periodically, allowing a long-term bond to act as a short-term investment. At the end of each reset period, the interest rate on existing ARS bonds and shares is determined by a Dutch auction, in which the bondholders have the opportunity to sell their shares to investors. The new interest rate, also known as the compensation level, is defined as the lowest interest rate at which all shares available, or if all of the shares for sale) may be sold to buyers.

Types of offers ARS

When you enter into an ARS auction, buyers and sellers have several bidding options. The interaction of all bids determines the fate of the auction and the interest rate paid to bondholders until the next auction takes place.

- Sales Order - Existing bondholders who wish to exit the market or to convert all or part of their holdings in money would go into a sales order. A sell order is an instruction to sell shares regardless of what the interest rate on auction turns out to be.

- Buy easy-purchase orders are placed by potential investors wishing to purchase shares of ARS. They consist of two parts: a) the number of shares the investor wants to buy, and b) the minimum interest rate that the investor agrees in order to buy shares.

- Keep Order - If one wants the bondholders to maintain their investments regardless of the new interest rate, you place an order waiting. Shares covered by an order of waiting are not included in the ARS auction.

- Keep in Rate Order - Bondholders may choose to enter into an outlet for the event, which says to retain their existing shares if the interest rate is fixed at a certain amount or higher. Literally identical to a purchase order, in practice.

Auction Result

After all bids have been submitted, the rate of compensation is determined. As mentioned above, this rate is defined as the minimum interest rate at which there are no offers sufficient to cover all the available actions. This is the ideal result of a rod ARS. However, many other less "favorable" outcomes are possible:

All-Hold Auction - If all bondholders choose to hold their shares, regardless of new interest rate, an all-hold auction is declared, and the interest rate is reset to a predetermined "all-hold rate ", which is typically lower than the market rate.

Failed Auction - If there are not enough bids to cover all the available actions, the ARS auction fails and actions can not be sold. Interest rates are reset to a predetermined penalty rate, which is usually higher to compensate for the bondholders who have not been able to sell their shares .......