What characterizes a variable-rate demand obligation in terms of investor rights before maturity?

A variable-rate demand obligation (VRDO) typically allows investors certain rights that distinguish it from other types of obligations. The correct option highlights the right to redeem the investment at par value plus accrued interest before maturity, which is a key characteristic of VRDOs. This feature provides investors with liquidity, enabling them to sell back the bond to the issuer at its face value if needed, along with any accrued interest to that point.

Investors in VRDOs appreciate this right because it mitigates interest rate risk; if interest rates rise, they can redeem the obligation and reinvest elsewhere. This structure is particularly advantageous in a fluctuating interest rate environment, as it enhances the security of the investor’s capital.

In contrast, fixed interest rates do not apply to VRDOs, as their interest payments fluctuate with market rates. Additionally, while the option to convert into equity may appeal to some investors, it is not a standard feature of VRDOs. Automatic extension of maturity is also not a characteristic of VRDOs, as they are typically designed with a demand feature that can lead to redemption rather than extension. Thus, the right to redeem at par plus accrued interest is a defining quality of these instruments, making it the appropriate choice.