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Investor Alert
Auction Rate Securities: What Happens When Auctions Fail
Recent developments in the credit market have led many of the Auction Rate Securities (ARS) auctions to fail, which may prevent existing investors from selling their ARS holdings. As a result, ARS investors who treated these securities as a ready source of cash are finding themselves short on readily available funds. In response, some issuers of ARS have announced redemptions of shares, generally at par value. In some cases, however, the issuer only offers to redeem some but not all of the outstanding shares. This may leave some investors with holdings they are unable to liquidate.
Loss of liquidity does not mean that you cannot ever get your money back. But, if you need money in a hurry, any illiquid investment can be a financial hardship. This Alert lets investors know about some of the options available to them in the event their ARS investment becomes illiquid. It also helps investors to understand what can happen when an issuer makes a call for a partial redemption.
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Read the Regulatory Notice to learn more about a broker-dealer's obligations during partial redemptions.
Catastrophe Bonds and Other Event-Linked Securities
Where there is uncertainty, there are always bets—the question is who wins. From horse racing to the price of gold, people have always speculated on uncertainty. This new alert informs investors about event-linked securities—financial instruments that allow investors to speculate on a variety of events, including catastrophes such as hurricanes, earthquakes, and pandemics.
Event-linked securities currently offer higher interest rates than similarly rated corporate bonds. But, if a triggering catastrophic event occurs, holders can lose most or all of their principal and unpaid interest payments. This is precisely what happened to funds that owned bonds linked to U.S. hurricane risk when Hurricane Katrina struck.
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Investor Information
Margin Account Mechanics
Want some basic facts and guidance about trading securities in a margin account, including accompanying risks? FINRA provides a number of valuable resources:
Purchasing on Margin, Risks Involved With Trading in a Margin Account
Understanding Margin Accounts, Why Brokers Do What They Do
Mortgage-Backed Securities
Also called MBSs, mortgage-backed securities are bonds secured by home and other real estate loans. They are created when a number of these loans, usually with similar characteristics, are pooled together. For instance, a bank offering home mortgages might round up $10 million worth of such mortgages. That pool is then sold to a federal government agency like Ginnie Mae or a Government Sponsored Agency (GSE) such as Fannie Mae, or Freddie Mac, or to a securities firm to be used as the collateral for the new MBS.
Unlike most bonds that pay semiannual coupons, investors in mortgage-backed securities receive monthly payments of interest AND principal. Because of the general complexity of mortgage-backed securities, and the difficulty that can accompany assessing the creditworthiness of an issuer, use caution when considering these securities.
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Questions? Search our FAQ database.
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- browse frequently asked questions by topic or category.
If you don't find an answer, use the "Ask an Expert" link within any FAQ and the system automatically routes new questions to the right subject matter expert, who will provide responses via email.
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