What is the difference between a fixed rate and variable rate bond?
The traditional form of bond pays a fixed rate of interest until maturity. This will be stated as the bond’s interest rate or “coupon” rate. Fixed rate bonds typically pay interest semi-annually on specific interest payment dates. For example, if you own $10,000 of a bond with a coupon rate of 5%, you typically would be paid $500 of interest annually, payable in semi-annual installments of $250. Variable rate demand obligations or notes, often referred to as VRDOs or VRDNs, pay interest based on a variable rate, that is, a rate of interest that is adjusted from time to time. Typically, interest rates will be reset on a specific schedule of periodic adjustments. The periodic resets in these cases can occur daily, weekly, monthly, semi-annually, annually, or even less frequently. The interest rate reset may be based on the best estimate of a broker-dealer or bank, acting as remarketing agent, as the rate in the then-current marketplace necessary to allow the bonds to be resold to investo
