Definition of Variable Coupon Renewable Note (VCR)
Let me explain what a variable coupon renewable note (VCR) is directly to you: it's a renewable fixed income security with variable coupon rates that get reset periodically. As a type of debt security, it has a weekly maturity, and the principal is automatically reinvested at new interest rates every week when it matures.
Key Takeaways
You need to know that a variable coupon renewable note matures every week, with the principal reinvested at a new interest rate reset at a fixed spread over a reference rate. Typically, this reference rate is the 91-day Treasury bill rate. The note is reinvested automatically and continuously until you, as the owner, request otherwise.
Understanding Variable Coupon Renewable Note (VCR)
I'm going to break this down for you: a variable coupon renewable note (VCR) is a debt security that matures every week, with the principal reinvested at a new interest rate reset at a fixed spread over a reference rate. Usually, the coupon is set weekly at a fixed spread over the Treasury bill rate, specifically the 91-day T-bill. This security reinvests automatically and continuously until you, the owner, request that it no longer be 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, renewing continuously at quarterly intervals. So, every 91 days, the maturity of the note extends another 91 days. It has an embedded put option that lets you, the note holder, exercise the put or 'put' the notes to the issuer at par on coupon dates. This means the issuer, when served with a put notice, is obligated to buy back the note from you at a lower spread to the reference rate.
VCR notes are somewhat different from variable rate renewable notes (VRR). While coupon rates on VCRs vary weekly, rates on VRRs vary 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 specified rate that will be reset periodically based on the 1-month commercial paper rate and any spread and/or spread multiplier, subject to the minimum interest rate and the maximum interest rate, if any.
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