In a variable-rate demand obligation, what happens when an investor redeems the obligation prior to maturity?

When an investor redeems a variable-rate demand obligation prior to maturity, they receive par value plus accrued interest. This mechanism is in place because variable-rate demand obligations typically feature interest rates that fluctuate based on market conditions. As a result, the investor is compensated not only for the principal amount of the investment (the par value) but also for the interest that has accumulated up to the point of redemption. This ensures that the investor is fairly compensated for the time value of their investment, reflecting both the par value and the interest earned while holding the obligation.

In contrast, options that suggest receiving just the current market value or only the par value do not account for the accrued interest, which represents the earnings that the investor would have accumulated until the point of redemption. Additionally, the offering price refers to the initial sale price of the obligation and does not accurately reflect the amount an investor would receive upon redemption. Therefore, the correct response encapsulates the total amount due to the investor at the time of early redemption.