Variable Coupon Renewable Note (VCR)

A Variable Coupon Renewable Note (VCR) is a short-term debt security whose interest rate is periodically reset and whose principal is automatically reinvested at each maturity. The coupon varies with a reference short-term rate (commonly the 91‑day Treasury bill rate) plus a fixed spread. VCRs continue to roll over until the holder requests redemption.

Key features

Coupon rate reset periodically (commonly on a weekly basis) as a fixed spread over a reference short-term rate.
Principal is automatically reinvested at each reset/maturity, creating a continuous roll-over.
Coupon payments are typically distributed on a scheduled basis (often quarterly).
Many VCRs include an embedded put option that allows the holder to require the issuer to repurchase the note on specified dates (commonly coupon dates) at par.

How it works

An initial term and reference rate are specified (e.g., 91‑day T‑bill + spread).
At each reset interval the issuer sets the new coupon based on the current reference rate plus the agreed spread.
Unless the holder redeems, the principal is reinvested automatically at the new rate and the note continues to roll.
Interest accrues and is paid according to the note’s payment schedule (for example, quarterly).
On designated put dates the holder can exercise the embedded put and require the issuer to repurchase the note at par.

How VCRs differ from similar instruments

Variable Coupon Renewable Note (VCR): coupon reset frequently (often weekly) and typically referenced to short-term Treasury bill rates (e.g., 91‑day T‑bill).
Variable Rate Renewable Note (VRR): coupon reset less frequently (often monthly) and frequently tied to commercial paper or other short-term money‑market rates.

Advantages

Automatic reinvestment provides ongoing exposure to prevailing short-term rates without active rollover by the investor.
Frequent resets allow the coupon to track current short-term interest rates closely.
The embedded put option gives holders periodic opportunities to exit at par.

Risks and considerations

Credit risk: the investor is exposed to the issuer’s credit quality.
Reinvestment risk: automatic rollover may reset into lower rates if market yields fall.
Liquidity and complexity: terms (reset frequency, reference rate, spreads, put mechanics) vary by issue and can be complex.
Interest-rate volatility: frequent resets mean income can fluctuate substantially.

Takeaways

VCRs are renewable short-term notes with coupons that reset against a reference short-term rate plus a spread.
They provide continuous reinvestment and periodic coupon payments, often with an embedded put option to exit at par on specified dates.
Investors should weigh the convenience of automatic rollover and rate tracking against issuer credit risk, reinvestment risk, and contractual complexity.