Fixed-rate debt pays the same coupon for its entire life; floating-rate debt resets periodically at a spread over a reference rate — “SOFR + 550” recalculated as the reference moves. The choice allocates interest-rate risk: fixed puts it on the lender, floating puts it on the borrower, and the 2022 rate cycle taught both sides what that means.
The trade and where each lives
Fixed rate gives lenders locked income and full price sensitivity — when market rates rise, existing fixed coupons are worth less, and long fixed bonds fall hardest (the 2022 bond drawdown in one sentence). Borrowers get payment certainty. Fixed dominates the bond markets, agency mortgages, and long-duration lending. Floating rate gives lenders income that rises with rates and minimal price sensitivity from rate moves (the coupon resets instead of the price) — the reason private credit portfolios and BDCs, overwhelmingly floating, saw income surge through 2022–23. The transferred risk landed on borrowers: floating-rate LBO and commercial real estate debt repriced upward in real time, compressing coverage ratios — which is why the era’s credit stress concentrated in floating-rate borrowers, and why rate caps and swaps (hedges converting floating exposure to fixed, at a cost that spiked exactly when needed) became underwriting line items. Mechanics worth knowing: SOFR replaced LIBOR as the U.S. reference rate; floors (minimum reference-rate levels, common in credit agreements) protect lender income in low-rate environments; and reset frequency (monthly/quarterly) sets how fast changes transmit. The advisor’s framing for income products: floating-rate yield is rate-linked in both directions — the same mechanism that lifted distributions on the way up reduces them when policy rates fall, a projection every current-yield conversation should include.
Related terms
Coupon · Private Credit · BDC · DSCR · Basis Points
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
