Auction rate securities (ARS) are bonds in which the interest rate is reset on a recurring basis -- sometimes as often as every seven days -- through a Dutch Auction.
Both corporate bonds and municipal debt issues are available in ARS form.
The minimum amount needed to purchase an ARS is generally around $25,000. As a result the ARS market -- which largely collapsed in early 2008 -- is limited to institutional investors and the wealthy.
Following the market difficulties of 2008, a large number of class-action lawsuits were filed against the Wall Street institutions that dominated the market. The suits allege that Citigroup, UBS AG, Morgan Stanley, Merrill Lynch and others misled investors and marketed the securities as being nearly as safe as cash.