2.13.5. Municipal Variable Rate Securities
Variable rate securities are long-term bonds with interest rates that are reset on a short-term basis. Interest rates may be reset at periodic intervals or after the occurrence of specified events or conditions. They may be determined by an auction process or by some predetermined benchmark. Traditionally, the most commonly used interest rate benchmark has been the London Interbank Offered Rate (LIBOR), which is based on projections of future short-term interest rates by a handful of large UK banks. LIBOR is gradually being phased out as an interest rate benchmark in favor of the Secured Overnight Financing Rate (SOFR). SOFR differs from LIBOR in two ways: it is based on actual, recent short-term interest rates instead of projected future rates; and it is based on rates charged by the US Federal Reserve, rather than London banks. SOFR will replace LIBOR completely by the end of June 2023.
Until recently, the most commonly used variable rate bonds were auction rate securities (ARS). With an auction rate security, interest rates are reset by Dutch auction, usually every 7, 28, or 35 days. They trade at par and are callable at par on any interest payment d