DEFINITION of 'Auction Rate Bond  ARB'
A debt security with an adjustable interest rate and fixed term of 2030 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. Nonprofit institutions and municipalities utilize ARBs as a means to reduce borrowing costs for longterm 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).

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A bond that can be redeemed by the issuer prior to its maturity. ... 
Annual Percentage Rate  APR
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