Variable Rate Demand Bond

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DEFINITION of 'Variable Rate Demand Bond'

A bond with floating coupon payments that are adjusted at specific intervals. The bond is payable to the bondholder upon demand following an interest rate change. Generally, the current money market rate is what is used to set the interest rate, plus or minus a set percentage. As a result of this, the coupon payments can change over time.

BREAKING DOWN 'Variable Rate Demand Bond'

Although a demand bond can be redeemed at any time, bondholders are often encouraged to keep the bonds in order to continue receiving coupon payments. The floating rate of the coupon payment contributes to higher uncertainty in coupon cash flows compared to generic bonds. Some of this risk is mitigated by the redemption option.

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    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  3. How does the bond market react to changes in the Federal Funds Rate?

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    The holding period return yield formula can be used to compare the yields of different bonds in your portfolio over a given ... Read Full Answer >>
  5. What is the relationship between current yield and yield to maturity (YTM)?

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