Variable rate demand notes

Variable rate demand notes (VRDNs), also called variable rate demand obligations, are a type of short-term municipal debt. When you buy a VRDN, you’re buying a variable-rate bond that includes a put option.

On a set schedule (often every few weeks or months), the note’s interest rate resets to match current market rates. That means the interest you receive can change from one reset period to the next, unlike a traditional bond with a fixed coupon.

If you don’t like the new rate after a reset, you can use the put option. A put option on a bond gives the bondholder the right to sell the bond back to the issuer at par value. In other words, the investor can choose to exit the investment at par on the put dates.

VRDNs (and other variable-coupon bonds) typically don’t experience large market price swings when interest rates change. Here’s why:

• If interest rates rise, the coupon is expected to reset higher on the next reset date.
• The bond can be put back to the issuer at par, which helps keep the market price close to par.