A floating rate note that converts into a fixed coupon obligation when a reference interest rate (or index) is traded through on the downside. This note is initially issued with a floating rate of interest which becomes a fixed-rate note if the reference rate or index drops below a certain limit (downside trigger or threshold) at a coupon reset date. This note combines the features of both floating- and fixed-rate notes. The note resets semiannually (or periodically in general) at a specified margin (spread) above a base rate, such as six-month LIBOR. This floating rate resetting continues until the base rate is at or below a specified trigger rate on an interest rate fixing date or sometimes on two successive interest fixing dates. Once that is the case, the interest rate becomes fixed at a specified rate for the remainder of the note’s life.
Drop lock notes, which belong to the class of asset convertibles, came into existence in the early 1980s in an environment of high interest rates.
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