Lenders Option Borrowers Option
A long term borrowing instrument with periodic interest re-fixings, which incorporates two linked options:
- An option for the lender to set revised (usually higher) interest rates at predetermined interest reset dates - for example annually. This is the Lender's option.
- A linked option for the borrower (exercisable only if the Lender’s option is exercised) either to pay the revised interest rate, or else to redeem the bond. This is the Borrower’s option.
LOBOs have been issued for maturities of up to 50 years.
Each of the two embedded options can be complex to value with precision, potentially making the composite borrowing instrument difficult for some less sophisticated borrowers to evaluate.
Also written 'Lender's Option Borrower's Option'.