A security that is issued with a variable or floating interest rate, but that converts to a fixed-rate security if its reference rate reaches or falls below a predetermined level. The conversion from a floating-rate to a fixed-rate security can be viewed as an embedded option for a cap and a floor on the fixed income security. Usually, these features are used to protect borrowers from high interest rates.
|||In the U.K., the term "droplock mortgage" refers to variable interest rate mortgages that can be converted to a fixed rate by the borrower without incurring a penalty or paying additional fees. Droplock mortgages are attractive when interest rates are perceived to be heading higher.
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