What is the difference between a variable rate bond and an auction rate security?
In many respects, an auction rate security is simply a special type of variable rate bond, with certain key differences. Unlike in the case of most other variable rate bonds, auction rate securities generally do not have a “put” feature or a liquidity provider to ensure that an investor can sell his or her holdings at their full face value. Also, the periodic reset of interest rates occurs through a unique “auction” process in which existing investors in the securities indicate whether they wish to sell their holdings outright, retain their holdings outright or retain their holdings only if the next interest reset is at or better than a rate specified by the investor. Other potential investors interesting in purchasing the securities also place orders indicating the interest rate they wish to receive on the securities. In many auction rate programs, the broker-dealer or bank appointed as the “program dealer” for the securities may also enter orders for the securities, but the program d
