Variable-Rate Securities
Variable-rate securities are long-term bonds with interest rates that are reset on a short-term basis. Interest rates may be reset at periodic intervals or after the occurrence of specified events or conditions. They may be determined by an auction process or by some predetermined index, such as the London Interbank Offered Rate (LIBOR) or the SIFMA Municipal Swap Index.
Until recently, the most commonly used type of variable-rate bonds were auction rate securities (ARS). With an auction rate security, interest rates are reset by Dutch auction, usually every 7, 28, or 35 days. The bonds trade at par and are callable at par on any interest payment date at the option of the issuer. With a Dutch auction, existing bondholders willing to sell and potential investors enter a competitive bidding process through sealed bids. Each bid specifies the number of securities (in $25,000 denominations) that the bidder is willing to purchase at the lowest interest rate it will accept. The lowes