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It is the municipal security for which the interest rates are reset periodically (weekly, monthly, semi-annual, or flexible).
The floating-rate municipal bond liquidity option can provide investors with long-term investment tax-exempt income. The holder can liquidate the security through features like put/tender at par.
The variable rate demand obligation can be used to maintain a short duration while increasing credit quality.
The municipalities can issue tax-exempt debt security for long-term financing, like for 20 to 30 years, at short-term rates.
The VRDO trades as short-term alternative finance investment bonds that are made to provide extra stability as it benefits from the Letter of Credit (LOC) that pledges repayment of the principal and interest.
It gives higher liquidity where the investors can sell the contract at par during a specified reset period to enhance liquidity and offer a variable yield.
Some risks are associated with the investment option, like the credit risk of the municipality/ issuer and the LOC provider.
In case of a decline in interest rate, the yield can be very low, and if the issuer calls (retire) the bonds early, it can lower the overall benefits.
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