Auction Rate Securities Fraud Lawyer

Anatomy of an Auction Rate Bond

When a city, a corporation, or a non-profit organization needs to borrow money, whether for expansion, development, or day-to-day operations, they may choose to sell bonds as one way of obtaining capital. Bonds are debt instruments – essentially written promises to repay a debt. However, unlike a bank loan, bonds are set up so that the “seller” is the borrower, while the “buyer” is the lender. When an investor purchases a bond, therefore, he or she is supplying money to the seller with the expectation of being repaid with interest over time.

Typically, a bond consists of several elements. The principal, or face value, is the sum which the city, corporation, or non-profit borrows and is the price at which the bond is sold. The interest rate is calculated as a percentage of the principal, and is usually set at a fixed rate for the duration of the bond (though not in auction rate securities and bonds). Finally, the maturity date or maturity period designates when the bond comes due, i.e., the date on which the borrower is expected to pay back the full face value of the bond.

Auction rate bonds differ slightly from the “traditional” model in that they do not carry a fixed interest rate. Instead, auction rate bonds are considered variable rate debt and have interest rates which are reset periodically (every 7, 28, or 35 days) using a Dutch auction system which allows prospective buyers to bid on the available securities. The securities are then sold at the clearing rate, or the lowest interest rate at which all available bonds have a buyer.

Many investment and brokerage firms misrepresented auction rate securities as risk-free, cash-equivalent investments in order to unload unwanted auction rate paper onto customers before the market went sour. If you have suffered financially due to the fraudulent practices of an investment firm or bank, contact an auction rate securities fraud lawyer at 800-220-9341 today.