An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should not recommend which of the following municipal securities? A. A variable-rate demand obligation (VRDO)B. An auction-rate security (ARS)C. A tax-anticipation note (TAN)D. A bond anticipation note (BAN)

B. An auction-rate security (ARS)

Explanation:

An auction-rate security (ARS) is a debt security (either municipal or corporate securities) with long-term maturities usually between 20 to 30 years and has its interest rates reset periodically through dutch auctions, such as every 7, 14, 28, 35, 49, or 91 days.

Also, an auction-rate security (ARS) is typically structured as preferred equity securities, which are issued by closed-end funds.

An auction-rate security (ARS) and a variable rate demand obligation (VRDO) are both long-term securities having short-term trading features.

Generally, an auction rate security (ARS) doesn't have a put feature that would permit the holder to sell the securities to a third party or back to the issuer of the securities. Thus, if the dutch auction fails, the investor in question wouldn't have an immediate access to his funds.

Hence, RR should NOT recommend an auction-rate security (ARS) since investor will need access to the funds in four months.

Lastly, tax-anticipation note (TAN) and bond anticipation note (BAN) are both short-term municipal notes and can easily be sold in the secondary market if their maturities is above four (4) months in duration.

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