We will keep this thread to Retail Cash Management Products unless people want to learn about institutional ones also. Reason why I recommend sticking to retail ones for most people on this board is because they can be bought at many places with small min buy in. While institutional ones in general require either a Private Bank account or investment banking account and require much larger min buy in.

Retail Cash Management Products Defined:

An Auction Rate Security (ARS) is a debt instrument with a long-term nominal maturity for which the interest rate is reset through a dutch auction process, which resets the coupon rate (or dividend rate). Auctions are typically held every 1, 7, 28, or 35 days; interest on these securities is paid at the end of each auction period, or based on a separate schedule. In a dutch auction, a broker-dealer submits bids, on behalf of current and prospective investors, to the auction agent. Based on the submitted bids, the auction agent will set the next interest rate by determining the lowest rate to clear the total outstanding amount of ARS.
ARS holders do not have the right to put their securities back to the issuer; as a result no bank liquidity facility is required.
As bank liquidity has become more expensive, the auction market has become increasingly attractive to issuers seeking the low cost and flexibility of variable rate debt.

Pros and Cons of Auction Rate Securities

For issuers, ARS offer low financing cost, in some cases more attractive than traditional variable rate debt obligations (VDROs). No third-party bank support is required, and there are typically fewer parties to the financing process. ARS eliminates renewal risk and the risk of increased fees. There is no exposure to bank rating downgrades, and ARS offer the same flexibility found in traditional VRDOs.

For buyers, ARS provide a slightly higher after tax yield/ taxable yeild than money market instruments due to their complexity. Most securities are AAA rated as well as federal, state and local tax exempt but there are taxable version as well. They also provide an opportunity to diversify one's cash equivalent holdings. They require much lower min purchase amounts over VRDO's.

Some negative aspects of ARS include lower liquidity and potential drops in the coupon rate. Lower rate then VRDO's.

Auction Rate Securities Overview

The interest rate on ARS is determinded through a Dutch auction process. The total number of shares available to auction at any given period is determined by the number of existing bond holders who wish to sell or hold bonds only at a minimum yield. Existing holders and potential investors enter a competitive bidding process through broker/dealer(s). Buyers specify the number of shares, in denominations of $25,000, they wish to purchase with the lowest interest rate they are willing to accept.Each bid and order size is ranked from lowest to highest minimum bid rate. The lowest bid rate at which all the shares can be sold at par establishes the interest rate, otherwise known as the “clearing rate”. This rate is paid on the entire issue for the upcoming period. Investors who bid a minimum rate above the clearing rate receive no bonds, while those whose minimum bid rates were at or below the clearing rate receive the clearing rate for the next period.

Most places like Fidelity, Etrade, Scwaab, Citibank, BOA do not allow you enter a competitive bid unless your buying a large block normally over $1Million.

There are is something else called a Prefered auction rate securities theses are offered by Pimco, Nueven and Blackrock. I would stay away from these as you are buying debt from closed ended bond funds.

Just like anything else depending on where you buy your ARS from the rates will vary. I buy some from Citigroup and there rates tend to be ok. I have noticed some time Fidelity rates are better tho. And as the rate is based by demand rate leader can change from place to place. But both Citibank and Fidelity will tell you expected yeild so if you dont like what you hear you can always sell your position in 1 ARS and swap to another. I personally dont bother as I would be switching position more than likely every week.

Fidelity shows you there inventory online. You goto research then fixed income then under Muni hit resets to see current day offers. They only show you inventory tho durning market hours. Citibank requires you either call your assigned broker or an 800 number to get info on them.

Currently these instruments are yeilding taxable rates between 5.18-5.33% from Citibank. Remember bonds are quoted as a rate so you need to compound them yourself or compare them savings account APR and not APY which is compouded.

Fell free to ask any questions I will try to answer them as best I can.

BTW this are super low risk. In 20 years they have been offered there has never been 1 issue that has defaulted nor a failed auction. But I am sure either is possible.

So basically if we dont have 1mil+ to play with this isnt for us?

The OP says: "Most places like Fidelity, Etrade, Scwaab, Citibank, BOA do not allow you enter a competitive bid unless your buying a large block normally over $1 Million." So where exactly can you get say just one $25,000 share?

$1million = Submit a bid through a broker for a block of shares at an interest rate you specify.
$25,000 = Buy ARS that broker has purchased in auction

This the correct distinction?

Smith Barney Web page explaining ARS in details

Here is a better explanation of how ARS work and how Citigroup runs them. This web page is from SB web page. Only things I can see different from CPB and SB is that SB web page does not mention you are required to buy $1 Million + blocks to be allow to place "Hold order at a rate" and "Buy at Rate" orders. So it might be very possible that SB has the same rules that CPB does. I know Fidelity web page does not let you place a competitive bid at all. You have to call over the phone and they allow large block buyers to place them.

Look at the URL in ScootyPuffSr's post and click on See Current offerings. Most seem to be tax exempt and thus have the lower tax-exempt type rates.

Am I wrong to think that Fidelity will charge a minimum of $75 dollars to enter and exit one of these ARS? Their commission sheet states $1.50 per bond per transaction, which would yield $37.50 to purchase a 25K minimum block and another $37.50 to exit your position. If so, then at least through Fidelity, transaction costs can significantly cut into your earnings...

Thanks for the reply, dolmar.

CMEtrader said:So basically, these notes are bought at par (not discount like tbills)and interest (at the rate which is set via dutch auction process on the specified auction reset date) is paid on the next reset date? i.e. intrest is deposited into your trading account after the 1/7/28 day period and then the process starts over again and you can hold/buy more/or sell. Is this right?

Yes except not all issues pay interest at each reset. Some issues pay montly but thoses seem to be daily resets for the most part but not always. I have seen some weekly ones also trade with accured interest.

CMEtrader said: GE Interest Plus
Less than $15,000 - 4.80 Rate / 4.91% Yield (APY)
$15,000 to $49,999 - 5.05 Rate / 5.17% Yield (APY)
$50,000 and more - 5.30 Rate / 5.43% Yield (APY)

They are paying the same thing as ARS not better. I have seen ARS on Fidelity and Citibank going as high as a rate of 5.40% for 28 and 35 day issues. Also CMEtrader you keep forgeting one thing most MMF in general are quoted as APY thus they are compounding the rate. All bonds are quoted in terms of rate as you really cant compound the interest inside of the bond. But you can always deposit the interest into another account to compound. If you happen to get a weekly coupon payment on your interest payment and deposit it into higher yeilding MMF you should be able to out preform GE account just because you are copounding more often so even if you savings accounts pays a little less your APY between ARS and copounded interest in your savings account should end up being a little more than GE.

Also as far as Vangaurd tax-free MMF you also need to consider 1 more thing they all hold between 5-20% ATM bonds. If you buy AMT-exempt ARS they are paying between 3.4-3.5% which is same as Vangaurd MMF which is one of the highest yeilding one but if you are subject to ATM you going to pay taxes holding Vanguard fund on the % of AMT bonds that fund holds. For Example NY and CA are about 18% which will lower your return and if you are not subjext to AMT both Citibank and Fidelity and many other places also sell ARS that are subject to AMT and are currently paying closer to 3.7-4%.