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| Variable Rate Demand Note |
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A debt instrument that represents borrowed funds that are payable on demand and accrue interest based on a prevailing money market rate, such as the prime rate. The interest rate applicable to the borrowed funds is specified from the outset of the debt, and is typically equal to the specified money market rate plus an extra margin.
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Because money market interest rates, such as the bank prime rate, are variable over time, the interest rate applicable to this type of demand note is variable as well. Every time the prevailing money market rate changes, a variable rate demand note's interest rate is adjusted accordingly.
As the name implies, these debt instruments are payable on demand. This means that the lender of the funds can request repayment of the entire debt amount at its discretion, and the funds must be repaid once the demand has been made.
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