DEFINITION of 'Auction Rate Bond - ARB'

A debt security with an adjustable interest rate and fixed term of 20-30 years. An auction rate bond's (ARB) interest rate is determined through a modified Dutch auction (where the price starts high and gets lower and lower until buyers are found) on a set schedule every seven, 14, 28 or 35 days. Non-profit institutions and municipalities utilize ARBs as a means to reduce borrowing costs for long-term financing.

BREAKING DOWN 'Auction Rate Bond - ARB'

The rates on ARBs are set in a similar way to how rates on new U.S. Treasury bills are set when they are issued. However, when an auction fails due to a lack of buyers, both bondholders and bond issuers are negatively impacted. The bondholders can't sell what is supposed to be a liquid investment and issuers are forced to pay higher default rates (set when the bonds were initially sold).

RELATED TERMS
  1. Reverse Auction

    A type of auction in which sellers bid for the prices at which ...
  2. Auction House

    A company that facilitates the buying and selling of assets, ...
  3. Dutch Auction

    1. A public offering auction structure in which the price of ...
  4. Auction

    A system where potential buyers place competitive bids on assets ...
  5. Auction Market Preferred Stock ...

    A type of dutch auction that involves a process used to reset ...
  6. Absolute Auction

    A type of auction where the sale is awarded to the highest bidder. ...
Related Articles
  1. Investing

    Explaining Dutch Auction

    A Dutch auction is a public offering auction.
  2. Investing

    Germany Auctions Bonds at Negative Rates

    More than ten trillion dollars worth of debt now carries a negative yield. German bunds are the latest.
  3. Managing Wealth

    Top Ways To Profit From Storage Auctions

    Here are some extremely valuable tips to help you become an expert at finding deals at storage auctions.
  4. Investing

    Gulf Of Mexico Still A Hotspot

    A recent auction proves that oil companies are still making moves in the Gulf of Mexico. Find out which companies are making the big plays.
  5. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  6. Investing

    Banks Take Extra $3.5 Billion Cash Ahead of Brexit

    As liquidity concerns grow for European banks heading into next week's Brexit vote, the Bank of England is holding additional Repo auctions to ensure banks have enough liquidity heading into ...
  7. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  8. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  9. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  10. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
RELATED FAQS
  1. What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ... Read Answer >>
  2. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
  3. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  4. What types of investors are susceptible to interest rate risk?

    Learn how bondholders are more susceptible to interest rate risk than equity investors because of the direct correlation ... Read Answer >>
  5. What is affected by the interest rate risk?

    Find out more about interest rate risk, how bond prices are affected by interest rate fluctuations and how interest rate ... Read Answer >>
  6. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center