Auction Rate Security - ARS

DEFINITION of 'Auction Rate Security - ARS'

A debt security that is sold through a dutch auction. The auction rate security (ARS) is sold at an interest rate that will clear the market at the lowest yield possible. This ensures that all bidders on an ARS receive the same yield on the debt issue.

The interest rate is reset periodically.

BREAKING DOWN 'Auction Rate Security - ARS'

In essence, an auction rate security is a long-term debt issue, but it acts as if it were a shorter term issue. This is because interest rates are reset approximately every month, depending on whether the issue is tax exempt, and the interest is paid either shortly after the auction yield is settled or every quarter or half year.