Liquid Yield Option Note (LYON)

What Is Liquid Yield Option Note (LYON)?

Liquid yield option notes (LYONs) are a form of zero-coupon convertible bonds that permits the holder or issuer to change over the note into a fixed number of company shares.

Merrill Lynch presented the primary LYON for Waste Management (WM) in 1985.

Understanding Liquid Yield Option Notes (LYONs)

A zero-coupon convertible is a fixed income instrument that consolidates the features of a zero-coupon bond with that of a convertible bond. Due to the zero-coupon feature, the bond pays no interest and is hence issued at a discount to par value, while the convertible feature means that bondholders have the option to change over bonds into common stock of the issuer at a certain conversion price.

LYONs are zero-coupon convertible bonds. These bonds are additionally callable (which gives the issuer the right to buy them back) and putable (which gives the holder the right to sell them back). These three characteristics and the reality they offer no coupons made them a financial innovation when initially presented.

LYONs are considered synthetic instruments. Being a synthetic vehicle means they have a structure that recreates the cash flow of other financial instruments. The convertible feature permits them to be changed over into a foreordained number of the underlying company's shares at certain times during the bond's life, for the most part at the watchfulness of the bondholder. The put idea of the LYON permits the bondholder to force the issuer to repurchase the security at indicated dates before maturity. The repurchase price is set at the hour of issue and is as a rule at par value.

Special Considerations

While the convertible and put features award the investor, the callable feature awards the issuer. A callable bond is one that can be called for redemption by the issuer before it develops. Issuers generally do this when interest rates dip and they can set aside cash by reclaiming bonds right away. At the point when this occurs, the bond will pay a pre-decided price in view of its current age.

The zero-coupon LYON won't provide the investor with a normal flow of income. A zero-coupon bond is a debt security that doesn't pay interest or coupon. It is generally offered at a deep discount and delivers its profit at maturity with redemption at full face value.

Liquid Yield Option Note Issuers

Merrill Lynch designed and filled in as the primary underwriter for LYONs. An investor deciding to change their LYON over completely to common stock would receive shares of the bond's issuer. When the conversion of a LYON to stock is complete, the holder is qualified for the rights as a whole and dividends of a normal stockholder in that company.

Notwithstanding Waste Management, a few notable companies that issued LYONs through Merrill Lynch incorporate Eastman Kodak, American Airlines, Motorola, and Marriott.

Features

• LYONs are callable, which gives the issuer the right to buy them back, and putable, which gives the holder the right to sell them back.
• LYONs have a foreordained conversion feature that permits either the holder or issuer to change them over completely to a fixed number of shares of common stock.
• Liquid yield option notes (LYONs), presented by Merrill Lynch in 1985, are a form of zero-coupon convertible bonds.