Series 7: 3.2.3.3.2 Variable-Rate Securities

3.2.3.3.2  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. Until recently, 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 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.

Until recently, the most commonly used type of variable-rate bonds were a