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Variable-Rate Demand Note

August 24, 2024 Fixed Income

A variable-rate demand note combines a frequently reset interest rate with a demand feature that may let investors tender the note at par.

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A variable-rate demand note (VRDN) is a debt security with a frequently reset interest rate and a demand feature that may allow the holder to tender the note for purchase at par on specified notice terms. The structure can feel cash-like in normal markets, but it depends on the issuer, remarketing process, liquidity support, and governing documents.

Key Takeaways

  • A VRDN combines a reset-rate coupon with a demand or tender feature.
  • Many VRDNs reset daily or weekly, but the exact schedule comes from the official documents.
  • Liquidity support may come from a bank letter of credit, standby purchase agreement, self-liquidity, or another arrangement.
  • The demand feature is not a substitute for checking issuer credit, support-provider credit, tax status, and failed-remarketing provisions.

How A VRDN Works

$$ \text{VRDN Rate} = \text{Remarketed or Formula Rate} $$

Unlike a simple floating-rate note, a VRDN often depends on a remarketing agent that resets the rate to help place tendered notes with buyers. If buyers are unavailable, the liquidity facility or other support arrangement may be used, subject to its terms and limits.

What To Verify

FeatureWhy It Matters
Reset periodDetermines how quickly income changes.
Demand noticeDetermines when and how the holder can tender.
Remarketing agentAffects rate setting and resale process.
Liquidity facilitySupports tender payments when remarketing fails.
Expiration or termination eventsCan change liquidity and risk abruptly.
Tax statusMunicipal VRDN income may have tax features that need professional review.
Minimum denominationSome instruments are designed for institutional-size transactions.

Practical Example

A municipal VRDN resets weekly and allows investors to tender with seven days’ notice. If the remarketing agent finds new buyers, the investor receives par from the tender process. If the security cannot be remarketed, the outcome depends on the liquidity facility and the exact documents. That is why the tender feature should be verified rather than treated as an unconditional guarantee.

VRDN vs. Money Market Fund

FeatureVRDNMoney Market Fund
Legal formIndividual debt security.Pooled investment company.
LiquidityDepends on tender and support terms.Depends on fund rules, portfolio, and market conditions.
Credit exposureIssuer and any support provider.Diversified portfolio exposure.
Rate behaviorReset by formula, remarketing, or documents.Portfolio yield changes as holdings reset or mature.

Common Mistakes

  • Calling a VRDN risk-free because it has a demand feature.
  • Ignoring liquidity-facility expiration, substitution, or termination events.
  • Assuming a corporate demand note, municipal VRDN, and bank note all work the same way.
  • Focusing on tax-exempt yield without checking after-tax suitability.
  • Treating short reset frequency as protection against credit deterioration.

Public Source Checks

FAQs

What is the main feature of a VRDN?

The key feature is the combination of a frequently reset rate and a demand or tender right that may let the holder seek par purchase under stated terms.

Is a VRDN guaranteed to be liquid?

No. Liquidity depends on remarketing, the liquidity facility, support-provider performance, document terms, and market conditions.
Revised on Sunday, June 21, 2026
Variable-Rate Demand Bond
Variable-Rate Security