Droplock Security

DEFINITION of 'Droplock Security'

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.

BREAKING DOWN 'Droplock Security'

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.

RELATED TERMS
  1. Fixed-Rate Mortgage

    A mortgage that has a fixed interest rate for the entire term ...
  2. Convertible ARM

    An Adjustable Rate Mortgage (ARM) that gives the borrower the ...
  3. Variable Rate Mortgage

    A type of home loan in which the interest rate is not fixed. ...
  4. Market Conversion Price

    An investor's effective cost to purchase common stock when it ...
  5. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  6. Reference Rate

    An interest rate benchmark upon which a floating-rate security ...
Related Articles
  1. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  2. Personal Finance

    Mortgage Basics: Fixed-Rate Mortgages

    By Lisa SmithA fixed-rate mortgage is a loan that charges a set rate of interest that does not change throughout the life of the loan. It is the traditional loan used to finance the purchase ...
  3. Personal Finance

    Try This Home-Equity-Line-of-Credit Hybrid

    This product is essentially a home-equity loan and home equity line of credit (HELOC) hybrid, and it has its own quirks, benefits and drawbacks.
  4. Trading

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  5. Investing

    Forecasting Mortgage Rates: Buy, Sell Or Refi?

    If you're paying off a mortgage or plan to buy a home, chances are you pay attention to where mortgage rates are heading. Consider these scenarios.
  6. Personal Finance

    Mortgage Basics: Conclusion

    By Lisa SmithLet's recap what we've learned in this tutorial: At its most basic, a mortgage is a loan used to purchase a house. There are two primary types of mortgages: fixed rate and ...
  7. Personal Finance

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  8. ETFs & Mutual Funds

    Why Include Convertible Securities in Your Portfolio

    What are convertible securities and why you should include them in your portfolio.
  9. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  10. Personal Finance

    Mortgage Basics: Variable-Rate Mortgages

    By Lisa SmithA variable-rate mortgage, also commonly referred to as an adjustable-rate mortgage or a floating-rate mortgage, is a loan in which the rate of interest is subject to change. When ...
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. What is a 'busted' convertible bond?

    Learn about busted convertible bonds; these are hybrid securities with conversion prices significantly higher than the market ... Read Answer >>
  3. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  4. What are the main advantages of fixed income securities?

    Learn why the addition of fixed income securities are common among investors who are attempting to limit their exposure to ... Read Answer >>
  5. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
  6. What are the characteristics of a marketable security?

    Find out what it takes for a financial asset to be considered a marketable security, including its liquidity, intent of use ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center