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Abstract: 

Variable rate demand obligations (VRDOs) provide issuers the ability to fund long-term capital projects by simulating short-term financing techniques. VRDOs enable issuers to take advantage of interest rates at the lowest end of the yield curve by giving bondholders the opportunity to put their bonds back to the issuer at par value. Issuers can realize substantial debt service cost savings by issuing VRDO bonds. This article summarizes the main features of VRDOs and provides a case study of their use by the New York City Municipal Water Finance Authority.

Keywords: Variable Tax-Exempt Interest; interest rate adjustments; demand feature; liquidity support; conversion; bond insurance; asset-liability match

Affiliations:  1: Merill Lynch & Co.