3.4.2 Long-Term, Variable-Rate Debt

3.4.2 Long-Term, Variable-Rate Debt

Variable rate debt is a popular and important tool for many local public agency issuers in providing additional flexibility to better manage their long term debt programs. Long term, variable rate bonds generally come in the form of indexed bonds, variable-rate debt obligations (VRDO), and floating-rate notes. See Section 2.2.2.3, Variable-Rate Debt.

The interest rate on variable rate debt is periodically reset in accordance with the terms under which the debt has been issued, and the rate of interest payable on the outstanding debt will generally change over the term of the issue with change in interest rates. Variable rate municipal debt is generally sold to institutional investors in minimum denominations of $100,000 or more and interest is payable more frequently than with fixed rate debt, usually monthly. Variable rate debt is generally issued with a single maturity and with monthly, twice per year, or annual mandatory sinking fund payments. There are four main types of long term, variable rate debt:

Figure 2-1 provides an illustration of cash flows in a variable rate debt structure.