What type of securities benefit from higher coupons as the Fed hikes rates?

• A. Investment Grade
• B. Commercial Mortgage-Backed Securities
• C. Floating Rate Securities
• D. High Yield

Answer: (C)

Floating Rate Securities benefit from higher coupons as the Federal Reserve hikes rates because their interest payments are typically tied to a reference rate, such as the LIBOR or SOFR, which increases in a rising rate environment. As the Fed raises interest rates, the base rate that these securities reference also rises, leading to higher coupon payments for investors. This structure allows holders of floating rate securities to capitalize on the increasing rates, making them particularly attractive during periods of monetary tightening. The increased yield helps to offset the risk of rate hikes and provides a more favorable return compared to fixed-rate securities, which do not benefit in the same way as interest rates rise.