Auction Rate Securities and Auction Rate Preferred Stocks are debt instruments with adjustable dividends that are determined through a Dutch auction process. These instruments can have long maturities or in the case of preferred stocks, no set maturity.
Since 2008, many auctions have failed with respect to auction rate securities. Many investors continue to own these positions without the ability to exit them. Our approach with Auction Rate Instruments is to analyze them on a discounted cash flow basis. We calculate fair value by determining the expected cash flow and applying an appropriate discount rate that reflects market risks.