Variable Coupon Renewable Note (VCR)
Definition of Variable Coupon Renewable Note (VCR)
A variable coupon renewable note (VCR) is a renewable fixed income security with variable coupon rates that are intermittently reset. The renewable note is a type of debt security with a week by week maturity. The principal of this security is reinvested automatically at new interest rates consistently it matures.
Understanding Variable Coupon Renewable Note (VCR)
A variable coupon renewable note (VCR) is a debt security that matures consistently, with the principal reinvested at another interest rate that is reset at a fixed spread over a reference rate.
Generally, the coupon is set consistently at a fixed spread over the Treasury bill rate, explicitly the 91-day T-bill. The security is reinvested automatically and continuously, until the owner of the security requests that the security is to be no longer reinvested. T-bills, which the initial rate of the VCR is linked to, are backed by the full faith and credit of the U.S. government and have a maturity of one year or less.
The coupon on a VCR note is payable quarterly, reestablishing continuously at the quarterly intervals. Thus, like clockwork, the maturity of the note extends another 91 days. It has a embedded put option that permits the note holder to exercise the put, or "put" the notes to the issuer at par on coupon dates. This means that an issuer presented with a put notice is obligated to buy back the note from the debt holder, but at a lower spread to the reference rate.
VCR notes are somewhat different from variable rate renewable notes (VRR). While coupon rates on VCRs fluctuate week by week, rates on VRRs change monthly. In addition, the coupon rate on variable rate renewable notes equals a fixed spread over the 1-month commercial paper rate.
In effect, variable rate renewable notes will bear interest at a predetermined rate that will be reset occasionally founded on the 1-month commercial paper rate and any spread as well as spread multiplier, subject to the base interest rate and the maximum interest rate, if any.
Highlights
- Variable coupon renewable note matures consistently, with the principal reinvested at another interest rate that is reset at a fixed spread over a reference rate.
- The note is reinvested automatically and continuously until the owner requests otherwise.
- Typically, this reference rate is the 91-day Treasury bill rate.
