What are Auction Rate Securities characterized by?

Auction Rate Securities are characterized by debt or preferred equity securities that have periodically re-set interest rates. This means that these securities are structured in a way where the interest rate is not fixed; instead, it is determined through a bidding process known as an auction, which typically occurs at regular intervals.

Investors submit bids indicating the interest rate they are willing to accept, and the resulting rate is set based on the highest bid accepted. This periodically-adjusting aspect helps to align the interest rate with current market conditions, making them appealing for investors who seek options that can potentially provide good yields when interest rates are favorable.

The periodic resetting feature distinguishes Auction Rate Securities from other types of investments that may offer fixed rates or different payment structures, such as the options that imply guaranteed income until maturity or consistent high yields from fixed investments.