Author(s)

Vince Hooper¹, John Pointon²

¹School of Economics and Management, Xiamen University Malaysia, Kuala Lumpur, Malaysia.
²University of Plymouth, Plymouth, UK.

In this paper, a valuation framework is developed for the variable rate demand obligation (VRDO). The VRDO is a class of floating rate note whose coupon rate changes on a regular basis and is “puttable” by the bondholder, given a notice of one week to the issuer. We model the coupon rate as a geometric Brownian motion process and assume that the incidence of puts is Poisson distributed, across time. Put events are assumed to be brought about by factors such as a change in the liquidity and consumption preferences of investors or a change in a Municipal issuer’s creditworthiness. This paper is unique because as of July 2019 there exists no attempt at valuing VRDOs in the research literature.

Variable Rate Demand Obligation, Municipal Corporation, Public Policy, Stochastic Calculus

Hooper, V. and Pointon, J. (2019) A Valuation Model for the Variable Rate Demand Obligation. Journal of Mathematical Finance, 9, 388-393. doi: 10.4236/jmf.2019.93022.