Uncovering Income in a Rising-Rate Environment

ederated Uncovering Income in a Rising-Rate Environment NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

The Yield-Seekers Challenge Strategies for a Rising-Rate Environment As the economy continues to recover, investors are keenly aware that the days of historically low interest rates are numbered. But there s no telling just when rates will rise, how fast or how much. In the meantime, they face the challenge of pursuing income in the current low-yield environment, protecting against future rising rates and seeking opportunities when yields do move up. The bottom line is that timing the bond market is as unwise a pursuit as timing the stock market.the key is to make sound decisions based on risk tolerance, timeline and investing goals. A well-diversified portfolio is a solid first step. In addition, using past rising-rate periods as a guide, there are strategies investors may want to consider as they navigate an evolving rate and market environment. Diversification does not assure a profit nor protect against loss. 1 Federated

When rates rise, not all asset classes respond the same Rising-rate periods differ according to the economic backdrop and market dynamics in place at the time. For example, the length and pace of the increases, employment picture and impact of inflation are key influences. It s true that bond prices would come under pressure in a rising-interest-rate environment, but corporate, high-yield and municipal bonds may benefit from an improving economy and continued low defaults. In addition, floating-rate securities generate income that keeps pace with rising rates. Meanwhile, market and economic factors as well as global events all influence equity performance, including that of dividend-paying stocks, which have been long-favored for their income-producing potential. Because of the many variables inherent in each rising-rate period, strategic allocations to and within a broad range of income-generating asset classes may be the best approach for pursuing long-term income. Not All Income Sectors Have Declined During Rising-Rate Environments Source: Morningstar, Inc. Past performance is no guarantee of future results. This chart is for illustrative purposes only and not representative of performance for any particular investment. Investments cannot be made directly in an index. Asset Class Allocation and Rising Rates Investors seeking income and looking to mitigate interest-rate risks and inflation may benefit by pursuing some combination of the following strategies: Short-Duration Bonds High-Yield Bonds Floating-Rate Securities Emerging-Markets Debt Dividend-Paying Stocks Federated 2

Short-Duration Bonds Short-duration bonds can range from ultrashort, with durations ranging from three months to one year, to short-term bonds with durations of one to three years. As their name suggests, these bonds tend to be less sensitive to rate movements compared to intermediate- and long-term bonds largely because they are less exposed to economic cycles, which tend to span longer timeframes. Because of their minimal interest-rate exposure, short-duration bonds may benefit investors in a rising-rate environment. In addition, yields of short-duration bond funds are able to adjust more quickly during periods of rising rates compared to longerduration bond funds, as the proceeds of maturing bonds can be reinvested into higher coupon securities at a faster rate. With the exception of the ultrashorts, short-duration bonds include a range of sectors with a corresponding range of credit qualities, offering investors the opportunity to pursue enhanced returns. An actively managed short-term bond fund composed of multiple fixed-income sectors may help investors meet their investment objectives particularly within a rising-rate environment. If Rates Rise, Short-Duration Bonds Should Experience Smaller Losses than Longer-Term Bonds 2-Year Treasury 10-Year Treasury 1 0.04% 0 1-Year Total Return (%) -1-2 -3-4 -5-6 -2.08% -0.45% -5.92% -0.94% -7-8 -9-10 -9.66% +50 bps +100 bps +150 bps This hypothetical chart illustrates 2- and 10-year Treasury bonds 1-year total return if interest rates were to change by 50, 100 and 150 basis points based on the current yield as of 3/31/15.The current yield for the 2-year Treasury is 0.56% and for the 10-year Treasury is 1.92%. 3 Federated For illustrative purposes only. Actual interest rate changes will vary. Returns presented are not representative of the performance of any particular investment. Source: Bloomberg as of 3/31/15. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.

High-Yield Bonds Although all bonds to one degree or another are affected by interest-rate movements, the high-yield market tends to be less sensitive to potential rate increases. One reason is because high-yield bonds incremental yield or spread over Treasury and high-quality corporate bond yields serves as a cushion, helping to mitigate the impact of rising rates. Typically, when spreads are above long-term medians, high yield is more sensitive to economic conditions and equity prices and not as interest-rate sensitive. A second reason why high-yield bonds are less sensitive to increasing interest rates is that rising rates typically correspond to an improving economic environment, growing corporate profits and stronger balance sheets, all of which tend to reduce default rates. The resulting improved performance at the issuing company can have a significant positive impact on the price of a high-yield bond, adding to its total return. Even when high yield is generating relatively modest absolute returns, it can still offer attractive relative returns in a rising-rate environment. High-Yield Bonds Have Delivered Positive Returns During Past Rising-Rate Periods* Yield Total Return of Time Period Length of Time Increase High-Yield Bonds 9/30/98-1/31/00 16 Months 2.24% 3.07% 12/31/08-12/31/09 12 Months 1.63% 58.21% 4/30/13-12/31/13 8 Months 1.36% 2.57% *Source: Morningstar, Inc. High-yield bonds represented by Barclays U.S. Corporate High Yield U.S. Dollar Index. Past performance is no guarantee of future results. This chart is for illustrative purposes only and not representative of performance for any particular investment. This chart is for a selected time period. Results over different periods would have varied. Investments cannot be made directly in an index. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment grade-securities. Federated 4

Floating-Rate Securities Floating-rate securities offer the unique benefit of generating income that keeps pace with changes in market interest rates, making them particularly beneficial when rates are rising. Specifically, the interest rates on these securities are pegged to prevailing short-term rates and are reset (typically every 30 to 90 days) at a spread over a recognized short-term interest rate such as the London Interbank Offered Rate or Libor.As a result, floating-rate securities generally exhibit less sensitivity to changes in interest rates than fixed-rate bonds. Floating-rate debt may include corporate, municipal and asset-backed securities, adjustable-rate mortgages and trade finance and senior bank loans, both investment-grade and non-investment-grade. In exchange for taking additional credit risk, the non-investment-grade trade finance and bank loan sectors provide income potential that is competitive with longer-duration fixed-income investments while mitigating interest-rate risk. In addition, because these loans are typically secured by the company s assets (or, in the case of trade finance loans, the goods being financed), they offer the dual advantages of higher potential credit premiums than investment-grade bonds and higher recovery rate, and therefore lower volatility, than unsecured loans. Along with their goal of protecting principal during rising-rate periods, floating-rate bonds also seek to offer the potential to diversify a fixed-income portfolio both through their distinct structure and historically low correlation to other fixed-income investments. Floating-Rate Bonds Seek to Offer Price Stability and Rising Income When Rates Rise Fixed-Rate Bonds Floating-Rate Bonds Variable and floating-rate loans and securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much or as quickly as interest rates in general. Conversely, variable and floating-rate loans and securities generally will not increase in value as much as fixed-rate debt instruments if interest rates decline. In addition to the risks generally associated with debt instruments, such as credit, market, interest rate, liquidity and derivatives risks, bank loans are also subject to the risk that the value of the collateral securing a loan may decline, be insufficient to meet the obligations of the borrower or be difficult to liquidate. 5 Federated

Emerging-Markets Debt Once considered a risky niche opportunity, the emerging-markets debt asset class has grown in size and improved in quality. Because of their greater economic diversification, with more focus on domestic services and consumer spending versus commodity exports, emerging markets have become one of the strongest components of the global economy. Even though growth in many of these markets has slowed, expectations for future growth remains far above that of developed countries. Strengthening fiscal and monetary oversight among emerging economies combined with youthful demographics, growing urbanization and a burgeoning middle class all point to the potential for a positive, long-term growth trend. The emerging-markets debt asset class has attracted investors for several reasons: A growing corporate sector Economic stability in some emerging economies is allowing the corporate sector to flourish. Because government borrowing needs are manageable, the cost and availability of credit for corporate borrowers continues to improve. A range of opportunities Emerging markets offer a mix of sovereign, corporate and structured debt just as developed markets do. Securities can be denominated in either foreign or U.S. currencies, delivering further diversification and return potential. The search for yield Lower growth forecasts in developed markets have and likely will continue to keep interest rates lower than the market expects, which should keep the hunt for yield high on investors radar. The increasing differentiation among emergingmarket countries in terms of economic growth potential, monetary policy frameworks and strength of their financial systems support an actively managed approach that focuses on the fundamentals underpinning each country. Emerging Markets Have Generated Attractive Returns During Past Rising-Rate Periods Rising-Rate Period 10/31/98 to 1/31/00 Rising-Rate Period 12/31/08 to 12/31/09 Source: Morningstar, Inc. Growth of hypothetical $10,000 investment. These charts are for illustrative purposes only and not representitive of performance for any particular investment. These charts are for selected time periods. Results over different time periods would have varied. Investments cannot be made directly in an index. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging markets securities can be significantly more volatile than the prices of securities in developed countries and currency risk and political risks are accentuated in emerging markets. Federated 6

Dividend-Paying Stocks Improving economic fundamentals should continue to support rising equity prices. But at a time when the increasing need for income intersects with a potentially more volatile environment, a dividend-focused strategy is worth a closer look.with their historic contribution to total return and ability to provide a consistent income stream, dividendpaying stocks have the potential to play a key role in meeting long-term income needs. Dividend growth historically has kept up with most inflation environments.* Dividends may help to offset negative returns during down markets. High-quality, high-dividend-paying stocks have outperformed during previous rising-rate periods.* The ability of dividends to mitigate risk stems in part from their relative stability. Companies that pay dividends especially increasing dividends are more likely to be mature and well established and generate excellent cash flow. Among dividend-paying stocks, those that paid growing dividends have easily outperformed non-dividend payers as well as companies whose dividends have remained flat.** *Sources: Ned Davis and Bureau of Labor Statistics. **Source: Ned Davis. During a Recent Rising-Rate Period, Dividend-Paying Stocks Delivered Higher Income and Total Return than Bonds Cumulative Total Return (%) 4/30/13-12/31/13 Total Return 11.82% Dow Jones Select Dividend Index 2.83% Income 8.99% Price Appreciation Total Return -9.14% 10-Year Treasury Index -10.50% Price Depreciation 1.36% Income -12-10 -8-6 -4-2 0 2 4 6 8 10 12 7 Federated Sources: Morningstar, Inc. and Bloomberg. BofA Merrill Lynch U.S. Treasury Current 10-Year Index was used. Past performance is no guarantee of future results. This chart is for illustrative purposes only and not representative of performance for any particular investment. This chart is for a selected time period. Results over different periods would have varied. Investments cannot be made directly in an index. There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non-dividend-paying stocks. Bonds offer an interest rate to the Bondholder for the period of time that the Bondholder owns the bonds. Investors purchasing stocks and bonds incur different types of risks with each asset class. When purchasing stocks, an investor risks the possibility that the stock will decline in price, forcing them to sell his shares at a loss, or that the dividends will be smaller than he expected. When an investor purchases bonds, he risks that the borrower will default on the loan, causing them to lose money on his investment. Additionally, bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. This example does not show the tax consequences of each type of investment. In return for their higher growth potential, stock prices are more volatile than those of bonds. The 10-year treasury yield at 4/30/13 was 1.67% and 3.03% at 12/31/13 with an increase of 1.36% for the time period.

An uncertain rate environment calls for a steady investment approach There are no risk-free assets that generate returns, but there are strong opportunities in all market cycles. That s why, when it comes to fixed income in particular and investing in general, a manager s experience, judgment and expertise are critical. The skill of investing is to generate returns and protect portfolios in adverse as well as favorable conditions. For more than 55 years, Federated has guided investors through the ups and downs of the financial markets. Our experienced investment professionals have proven that well-researched security selections, combined with continuous risk management, have positioned investors for success over multiple market cycles. Their ability to identify, source and access attractive investment opportunities is key and second only to their focus on maintaining consistency and stability while pursuing maximum total return. Federated 8

Federated s Investments for a Rising-Rate Environment Fund Type Fund Name Ticker Symbols Short-Duration Bond Floating Rate High-Yield Bond Emerging-Market Bond Dividend-Paying Equity Balanced/Hybrid Federated Government Ultrashort Duration Fund Federated Municipal Ultrashort Fund Federated Ultrashort Bond Fund Federated Adjustable Rate Securities Fund Federated Short-Term Income Fund Federated U.S. Government Securities Fund: 1-3 Years Federated Short-Intermediate Total Return Bond Fund Federated Short-Intermediate Duration Municipal Trust Federated Floating Rate Strategic Income Fund Federated High Income Bond Fund, Inc. Federated High Yield Trust Federated Institutional High Yield Bond Fund Federated Municipal High Yield Advantage Fund Federated Emerging Market Debt Fund Federated Equity Income Fund, Inc. Federated International Strategic Value Dividend Fund Federated Strategic Value Dividend Fund Federated Capital Income Fund Federated Muni and Stock Advantage Fund A: FGUAX IS: FGUSX SS: FEUSX A: FMUUX IS: FMUSX A: FULAX IS: FULIX SS: FULBX IS: FEUGX SS: FASSX A: FTIAX IS: FSTIX SS: FSISX Y: FSTYX IS: FSGVX SS: FSGIX Y: FSGTX A: FGCAX IS: FGCIX R: SRBRX SS: FGCSX A: FMTAX IS: FSHIX SS: FSHSX A: FRSAX C: FRICX IS: FFRSX A: FHIIX B: FHBBX C: FHICX A: FHYAX C: FHYCX IS: FHTIX SS: FHYTX IS: FIHBX A: FMOAX B: FMOBX C: FMNCX F: FHTFX IS: FMYIX A: IHIAX B: IHIBX C: IHICX IS: EMDIX A: LEIFX B: LEIBX C: LEICX F: LFEIX IS: LEISX R: FDERX A: IVFAX C: IVFCX IS: IVFIX A: SVAAX C: SVACX IS: SVAIX A: CAPAX B: CAPBX C: CAPCX F: CAPFX IS: CAPSX R: CAPRX A: FMUAX B: FMNBX C: FMUCX F: FMUFX IS: FMUIX 9 Federated Mutual funds are subject to risks and fluctuate in value.

To learn more about investing in a rising-rate environment call 1-800-341-7400 or visit FederatedInvestors.com.

ederated Federated Investors, Inc. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Contact us at FederatedInvestors.com or call 1-800-341-7400. 45249 (5/15) Federated Securities Corp., Distributor Federated is a registered trademark of Federated Investors, Inc. 2015 Federated Investors, Inc. Investors should carefully consider the fund s investment objectives, risks, charges and expenses before investing. To obtain a summary prospectus or prospectus containing this and other information, contact us or visit FederatedInvestors.com. Please carefully read the summary prospectus or prospectus before investing. Past performance is no guarantee of future results. BofA Merrill Lynch U.S. Treasury Current 10-Year Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury note. Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indices are rebalanced monthly by market capitalization. Barclays U.S. Corporate High Yield Bond Index is an unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues) and at least one year to maturity. Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollardenominated leveraged loan market. Average values are computed over the Index for coupon, current yield, initial spread and price. The average coupon, current yield and initial spread are weighted by market value (amount outstanding multiplied by the price) at the end of the measurement period for each loan currently paying interest in the Index. Total return is computed for each loan, which is the percent change in the value of each loan during the measurement period. Total return is the sum of three components: principal, interest and reinvestment return. Dow Jones Select Dividend Index universe is defined as all dividend-paying companies in the Dow Jones U.S. Total Market Index that have a non-negative historical five-year dividend-per-share growth rate, a fiveyear average dividend earnings-per-share ratio of less than or equal to 60%, and three-month average daily trading volume of 200,000 shares. Current index components are included in the universe regardless of their dividend payout ratio. J.P. Morgan Emerging Markets Bond Index Global tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, eurobonds. The performance of the index does not reflect the deduction of expenses associated with a fund, such as investment management fees. By contrast, the performance of the fund reflects the deduction of the fund expenses, including sales charges if applicable. Indexes are unmanaged and cannot be invested in directly. London Interbank Offered Rate (Libor) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.