Variable rate demand note (VRDN)
Also known as: VRDN, variable rate demand obligation (VRDO)
A variable rate demand note (VRDN) is a long-term municipal security with an interest rate that resets at short intervals and a demand (put) feature letting the holder sell it back at par, giving it the profile of a short-term investment.
A variable rate demand note is a municipal debt security that blends long-term financing for the issuer with short-term flexibility for the investor. Although the note may have a stated maturity of 20 or 30 years, its interest rate resets at short, regular intervals — often daily or weekly — to keep the rate in line with current short-term market rates.
The other defining feature is the demand (put) option: at each reset, the holder can "put" the note back — tendering it at par value plus accrued interest — rather than continue holding it. A remarketing agent then resells tendered notes to new investors. Most VRDNs are also supported by a bank letter of credit or similar liquidity facility that stands behind the purchase price if remarketing fails, which strengthens their credit profile.
Because the rate stays current and the holder can exit at par on short notice, VRDNs trade with very little price volatility and are treated as short-term instruments despite their long stated maturities. That combination makes them a staple holding of tax-exempt money market funds and a cash-management tool for investors who want municipal income without interest rate risk.
VRDNs show up on the securities exams under short-term municipal debt. The Series 7 covers their mechanics — rate resets, the put feature, and credit support — and the SIE tests them alongside other short-term municipal notes, so know how a VRDN differs from fixed-rate municipal bonds and anticipation notes.
Key takeaways
- A VRDN is long-term municipal debt whose interest rate resets at short intervals, often daily or weekly.
- The demand (put) feature lets holders tender the note back at par plus accrued interest at each reset.
- A letter of credit or liquidity facility from a bank typically backs the tender price.
- Frequent resets and the put at par keep the price stable, so VRDNs behave like short-term instruments.
- They are common holdings in tax-exempt money market funds and are tested as short-term municipal debt on the SIE and Series 7.