What is ‘Variable Rate Demand Bond’
A bond with floating coupon payments that are adjusted at specific intervals. The bond is payable to the bondholder upon demand following an interest rate change. Generally, the current money market rate is what is used to set the interest rate, plus or minus a set percentage. As a result of this, the coupon payments can change over time.
Explaining ‘Variable Rate Demand Bond’
Although a demand bond can be redeemed at any time, bondholders are often encouraged to keep the bonds in order to continue receiving coupon payments. The floating rate of the coupon payment contributes to higher uncertainty in coupon cash flows compared to generic bonds. Some of this risk is mitigated by the redemption option.
Further Reading
- An analysis of variable rate loan contracts – www.jstor.org [PDF]
- Bond Rate, Loan Rate and Tobin's – onlinelibrary.wiley.com [PDF]
- The bond yield'conundrum'from a macro-finance perspective – papers.ssrn.com [PDF]
- Financial flow variables and the short-run determination of long-term interest rates – www.journals.uchicago.edu [PDF]
- Modeling bond yields in finance and macroeconomics – pubs.aeaweb.org [PDF]
- Bond insurance and liquidity provision: Impacts in the municipal variable rate debt market, 2008-09 – journals.sagepub.com [PDF]
- The decision to rate or not to rate: the case of municipal bonds – www.sciencedirect.com [PDF]
- Financing the response to climate change: The pricing and ownership of US green bonds – www.nber.org [PDF]
