It stands for drop-lock bond; a floating-rate bond that converts into a fixed coupon obligation when a reference interest rate (market interest rate) drops below a specific level or threshold at a coupon reset date. This bond is originally a floating interest rate obligation that will convert into a fixed interest rate obligation when the threshold rate is downwardly breached. This bond combines the features of both floating- and fixed-rate bonds. The bond 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 happens, the interest rate becomes fixed at a specified rate for the remainder of the bond’s life.

Drop lock bonds, which belong to the class of asset convertibles, came into existence in the early 1980s in an environment of high interest rates.