Variable rate bond

A variable rate bond is a bond whose stated interest rate varies as a percentage of a baseline indicator, such as the prime rate.  Jumps in the baseline indicator can lead to substantial increases in interest rates, so this is a riskier form of financing for the issuer. The risk of higher interest rate costs can be mitigated by adding a redemption option to the bond agreement, whereby the issuer can choose to buy back bonds if interest rates increase to an excessive degree.