Your customer, a small business owner likes investments that are short term, relatively safe from credit risk and liquid. He's heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as being reasons why they are not suitable for your customer?
Auction rate securities are intended as long-term investments.
Interest or dividend rates are reset at established intervals based on a Dutch auction.
If the auction fails, holders of ARSs may not have immediate access to his funds.
The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction.
A) II and III
B) II and IV
C) I and III
D) I and IV
Answer: C) I and III