What are variable rate demand obligations and tender option bonds?
Variable-rate demand obligations (VRDOs) are debt securities that bear interest at a floating, or variable, rate adjusted at specified intervals (daily, weekly, or monthly) according to a specific index or through a remarketing process. Holders can redeem these securities at designated times. Issuers offer VRDOs in order to access the short-term market to obtain lower interest rates. Tender option bonds (TOBs) are similar to VRDOs but are synthetically created by a bond dealer with long-term bonds purchased in either the primary or secondary markets. Both VRDOs and TOBs are short-term, tax-exempt instruments whose yield is reset daily or weekly based on an index of short-term municipal rates. VRDOs and TOBs are purchased at par, the face value of the security. Each structure includes a liquidity facility which provides a “put” or demand feature. This allows the bondholder (e.g., a fund) to put the security back to the remarketing agent and receive face value plus accrued interest with
