Variable Rate Demand Note (VRDN)
Candlefocus EditorThe variable rate of a VRDN is determined by the issuing company and will usually be based on a benchmark interest rate. For example, a VRDN might have its rate reset every one to three months based on the Wall Street Journal Prime Rate. This provides businesses with a way to pass the risk of interest rate movements on to the investors in their offering.
We can distinguish VRDNs from other debt instruments because of their variable rate and their ability to be redeemed at any time. Additionally, VRDNs tend to have origination fees that are lower when compared to other short-term debt instruments. These features make them an attractive option for companies seeking to reduce the cost of their borrowing.
VRDNs are typically used by large companies seeking to diversify their debt portfolios. They also may be a good option for companies with a seasonal borrowing need as its variable rate and call provisions will allow them to make low-cost debt payments if their business is slow. Finally, they may also be used as part of a cooperative borrowing arrangement between two or more institutions.
Ultimately, VRDNs are a form of debt instrument that provides a company with a lower cost of borrowing, the ability to diversify its debt portfolio, and the flexibility to call the note at any time. These features make them attractive to certain companies looking to reduce their borrowing costs.