Auction Rate Securities: Auction rate securities (ARS) are long-term debt instruments with interest rates that reset through periodic short-term auctions which occur every 7, 28 or 35 days. If there are insufficient buyers, then the auction “fails” and holders are unable to liquidate their investment through the auction. A failed auction is not a default of the debt instrument, but does set a new, generally higher interest rate in accordance with the original terms of the debt instrument.
The result of a failed auction is that the ARS continues to pay interest in accordance with its terms; however, liquidity for holders is limited until there is a successful auction, until such time as another market for ARS develops or until the ARS are called by the issuer. Auctions continue to be held as scheduled until the ARS matures or until it is called.
As of March 1, 2008, the Company held approximately $24.6 million in principal amount of ARS which have AAA (S&P) or Aaa (Moody's) credit ratings, the highest credit ratings provided by these organizations. The ARS represented approximately 25% of the Company's cash, cash equivalents, and short-term and long-term investments at March 1, 2008.
The stated maturity of the underlying securities for the ARS held by the Company ranges from 20 to 35 years. All of the Company's ARS are collateralized by student loans and the repayment of such loans is substantially backed by the United States government.