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 periodically reset. The renewable note is a type of debt security with a weekly maturity. The principal of this security is reinvested automatically at new interest rates every week it matures.
Understanding Variable Coupon Renewable Note (VCR)
Every week, a debt instrument known as a variable coupon renewable note (VCR) expires, and the principal is reinvested at a new interest rate reset at a specified spread above a reference rate.
The coupon is typically set at a predetermined margin above the rate on Treasury bills, especially the 91-day T-bill, once a week. Until the security owner orders that the security be no longer reinvested, the protection is automatically and constantly reinvested. The starting rate of the VCR is tied to T-bills, which have a one-year maturity or less and are guaranteed by the complete confidence and credit of the United States government.
On a VCR note, the coupon is due every three months and keeps repeating at those intervals. As a result, every 91 days, the note’s maturity extends by 91 days. The note holder may execute the embedded put option or “put” the directives to the issuer on coupon days at par. This implies that if an issuer receives a set notice, they must purchase the letter back from the debt holder for a spread less than the reference rate.
Notes designated variable rate renewables (VRR) and VCR notes are different. Coupon rates change every week for VCRs and every month for VRRs. Furthermore, on variable-rate renewable notes, the coupon rate is equivalent to a set spread over the rate for commercial paper issued for one month.
Subject to the minimum and maximum interest rates, if applicable, variable rate renewable notes will effectively bear interest at a defined rate that will be adjusted periodically based on the 1-month commercial paper rate and any spread multiplier.
Conclusion
- The principal of a variable coupon renewable note is reinvested at a new interest rate that is reset at a specified spread over a reference rate each week when the note expires.
- This reference rate is usually the rate on 91-day Treasury bills.
- Until the owner specifies a different course of action, the note is automatically and constantly reinvested.
