<PAGE>
THE BOND FUND OF AMERICA, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
(as amended March 18, 1998)
This document is not a prospectus but should be read in conjunction with the
current Prospectus of The Bond Fund of America, Inc. (the "fund") dated March
1, 1998. The Prospectus may be obtained from your investment dealer or
financial planner or by writing to the fund at the following address:
The Bond Fund of America, Inc.
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
Shareholders who purchase shares at net asset value through eligible
retirement plans should note that not all of the services or features described
below may be available to them, and they should contact their employer for
details.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE NO.
<S> <C>
Description of Certain Securities 1
Investment Restrictions 6
Fund Officers and Directors 8
Management 11
Dividends, Distributions and Federal Taxes 14
Purchase of Shares 17
Redeeming Shares 24
Shareholder Account Services and Privileges 25
Execution of Portfolio Transactions 27
General Information 28
Investment Results 29
Description of Bond Ratings 34
Financial Statements Attached
</TABLE>
DESCRIPTION OF CERTAIN SECURITIES
The descriptions below are intended to supplement the material in the
Prospectus under "Investment Policies and Risks."
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk bonds
can be sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress that would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay
interest or principal or entered into bankruptcy proceedings, the fund may
incur losses or expenses in seeking recovery of amounts owed to it. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices and yields of high-yield, high-risk
bonds.
PAYMENT EXPECTATIONS - High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining
interest rate market, the fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high-yield, high-risk bond's value will decrease in a rising interest rate
market, as will the value of the fund's assets.
LIQUIDITY AND VALUATION - There may be little trading in the secondary market
for particular bonds, which may affect adversely the fund's ability to value
accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
DOWNGRADE POLICY - The fund is not normally required to dispose of a security
in the event that its rating is reduced below the current minimum rating for
its purchase (or it is not rated and its quality becomes equivalent to such a
security).
The fund's investment adviser, Capital Research and Management Company (the
Investment Adviser), attempts to reduce these risks through diversification of
the portfolio, by credit analysis of each issuer as well as by monitoring broad
economic trends and corporate developments, but there can be no assurance that
it will be successful in doing so.
OTHER MORTGAGE-RELATED SECURITIES - The fund may invest in real estate
investment conduits which are issued in portions or tranches with varying
maturities and characteristics; some tranches may only receive the interest
paid on the underlying mortgages (IOs) and others may only receive the
principal payments (POs); the values of IOs and POs are extremely sensitive to
interest rate fluctuations and prepayment rates, and IOs are also subject to
the risk of early repayment of the underlying mortgage which will substantially
reduce or eliminate interest payments. The fund does not intend to invest more
than 5% of its assets in IOs and POs.
FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When the fund agrees to purchase such securities
it assumes the risk of any decline in value of the security beginning on the
date of the agreement. When the fund agrees to sell such securities, it does
not participate in further gains or losses with respect to the securities
beginning on the date of the agreement. If the other party to such a
transaction fails to deliver or pay for the securities, the fund could miss a
favorable price or yield opportunity, or could experience a loss beginning on
the date of the agreement.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly may increase. The fund will not use these
transactions for the purpose of leveraging and will segregate liquid assets
which will be marked to market daily in an amount sufficient to meet its
payment obligations in these transactions. Although these transactions will
not be entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets, the fund
temporarily could be in a leveraged position (because it may have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets will likely occur than were it
not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
Although the fund has no current intention of doing so during the next 12
months, the fund is authorized to enter into "roll" transactions. A "roll"
transaction is the sale of GNMA certificates or other securities together with
a commitment to purchase similar, but not identical, securities at a future
date. The fund will segregate liquid assets which will be marked to market
daily in an amount sufficient to cover its obligations under "roll"
transactions. Under the Investment Company Act of 1940 (the "1940 Act"), these
transactions may be considered borrowings by the fund; accordingly, the fund
will limit these transactions, together with any other borrowings, to no more
than one-third of its total assets. Although these transactions will not be
entered into for the purpose of leveraging, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets, the fund
temporarily could be in a leveraged position (because it will have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. As the fund's aggregate commitments under these
transactions increase, the opportunity for leverage similarly increases. If
the income and gains on securities purchased with the proceeds of roll
agreements exceed the costs of the agreements, the fund's earnings or net asset
value will increase faster than otherwise would be the case; conversely, if the
income and gains fail to exceed the costs, earnings or net asset value would
decline faster than otherwise would be the case.
INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed bonds
issued by governments, their agencies or instrumentalities or corporations.
The principal value of this type of bond is periodically adjusted according to
changes in the rate of inflation. The interest rate is generally fixed at
issuance; however, interest payments are based on an inflation adjusted
principal value. For example, in a period of falling inflation, principal
value will be adjusted downward, reducing the interest payable.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The fund may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
REAL ESTATE INVESTMENT TRUSTS -- The fund may invest in debt securities issued
by real estate investment trusts (REITs), which are pooled investment vehicles
that primarily invest in real estate or real estate related loans. REITs are
not taxed on income distributed to shareholders provided they meet requirements
imposed by the Internal Revenue Code. The risks associated with REIT debt
investments are similar to the risks of investing in corporate-issued debt. In
addition, the return on REITs is dependent on such factors as the skill of
management and the real estate environment in general. Debt that is issued by
REITs is typically rated by the credit rating agencies as investment grade or
above.
CASH AND CASH EQUIVALENTS - Subject to the requirement that it maintain at
least 65% of its assets in bonds under normal market conditions, the fund may
maintain assets in cash or cash equivalents. Cash equivalents include (1)
commercial paper (short-term notes up to 9 months in maturity issued by
corporations or governmental bodies); (2) commercial bank obligations such as
certificates of deposit, (interest-bearing time deposits); and bankers'
acceptances, (time drafts on a commercial bank where the bank accepts an
irrevocable obligation to pay at maturity); (3) savings association and bank
obligations (certificates of deposit issued by mutual savings banks or savings
and loan associations); (4) securities of the U.S. Government, its agencies or
instrumentalities that at time of purchase mature, or may be redeemed, in one
year or less; and (5) corporate bonds and notes that at time of purchase
mature, or that may be redeemed, in one year or less.
CURRENCY TRANSACTIONS - The fund may enter into forward currency contracts to
protect against changes in currency exchange rates. A forward currency
contract is an obligation to purchase or sell a specific currency at a future
date and price, both of which are set at the time of the contract. The fund
intends to enter into forward currency contracts solely to hedge into the U.S.
dollar its exposure to other currencies. The fund will segregate liquid assets
which will be marked to market daily to meet its forward contract commitments
to the extent required by the Securities and Exchange Commission.
Certain provisions of the Code may affect the extent to which the fund may
enter into forward contracts. Such transactions may also affect, for U.S.
federal income tax purposes, the character and timing of income, gain or loss
recognized by the fund.
LOAN PARTICIPATIONS AND ASSIGNMENTS - Loan participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts
owed to lenders or lending syndicates to suppliers of goods or services, or to
other parties. The fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing participations, the fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to loan, nor any rights of set-off against the
borrower, and the fund may not directly benefit from any collateral supporting
the loan in which it has purchased the participation. As a result, the fund
will assume the credit risk of both the borrower and the lender that is selling
the participation. In the event of the insolvency of the lender selling a
participation, a fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
When the fund purchases assignments from lenders it will acquire direct rights
against the borrower on the loan. However, because assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a fund as the purchaser of an
assignment may differ from, and be more limited than, those held by the
assigning lender. Because there is no liquid market for such securities, the
fund anticipates that such securities could be sold only to a limited number of
institutional investors.
LOANS OF PORTFOLIO SECURITIES - Although the fund has no current intention of
doing so during the next 12 months, the fund is authorized to lend portfolio
securities to selected securities dealers or to other institutional investors
whose financial condition is monitored by Capital Research and Management
Company (the "Investment Adviser"). The borrower must maintain with the fund's
custodian collateral consisting of cash, cash equivalents or U.S. Government
securities equal to at least 100% of the value of the borrowed securities, plus
any accrued interest. The Investment Adviser will monitor the adequacy of the
collateral on a daily basis. The fund may at any time call in a loan of its
portfolio securities and obtain the return of the loaned securities. The fund
will receive any interest paid on the loaned securities and a fee or a portion
of the interest earned on the collateral. The fund will limit its loans of
portfolio securities to an aggregate of one-third of the value of its total
assets, measured at the time any such loan is made.
INVERSE FLOATING RATE NOTES - The fund is authorized to invest up to 1% of the
fund's net assets in inverse floating rate notes (a type of derivative
instrument). These notes have rates that move in the opposite direction of
prevailing interest rates; thus, a change in prevailing interest rates will
often result in a greater change in the instruments' interest rates. As a
result, these instruments may have a greater degree of volatility than other
types of interest-bearing securities.
PORTFOLIO TRADING - The fund intends to engage in portfolio trading when the
Investment Adviser believes that the sale of a security owned by the fund and
the purchase of another security of better value can enhance principal and/or
increase income. A security may be sold to avoid any prospective decline in
market value in light of what is evaluated as an expected rise in prevailing
yields, or a security may be purchased in anticipation of a market rise (a
decline in prevailing yields). A security also may be sold and a comparable
security purchased coincidentally in order to take advantage of what is
believed to be a disparity in the normal yield and price relationship between
the two securities, or in connection with a "roll" transaction as described in
the Prospectus under "Securities and Investment Techniques."
STRATEGIC PORTFOLIO ADJUSTMENT - The composition of the fund's portfolio will
change from time to time primarily in response to expected changes in interest
rates and in the yield relationships among sectors of the fixed-income market.
The Investment Adviser continually monitors the creditworthiness of companies,
the price and yield relationships among different sections of the debt market
and the outlook for interest rates in general and in particular parts of the
debt market. Yield relationships among securities of various types of issuers,
maturities, coupon rates or quality ratings frequently change in response to
changing supply-demand influences in the market. When it appears to the
Investment Adviser that the yield relationships may change, the composition of
the portfolio may be adjusted, should such changes offer the opportunity to
further the fund's investment objective. Changes may also be made if the
Investment Adviser believes that there is a temporary disparity among
individual securities of comparable characteristics. Some such changes may
result in short-term gains or losses to the fund. This information, which is
shared among the Investment Adviser's other departments and its affiliates,
makes up a part of the Investment Adviser's investment decisions.
PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover (100% or more) involves correspondingly greater transaction costs in
the form of dealer spreads or brokerage commissions, and may result in the
realization of net capital gains, which are taxable when distributed to
shareholders. Fixed-income securities are generally traded on a net basis and
usually neither brokerage commissions nor transfer taxes are involved. The
fund does not anticipate its portfolio turnover will exceed 100% annually. The
fund's portfolio turnover rate would equal 100% if each security in the fund's
portfolio were replaced once per year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last 10 years.
INVESTMENT RESTRICTIONS
The fund has adopted certain additional investment restrictions which may not
be changed without approval of the holders of a majority of its outstanding
shares. Such majority is defined by the Investment Company Act of 1940 ("1940
Act") as the vote of the lesser of (i) 67% or more of the outstanding voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present in person or by proxy, or (ii) more
than 50% of the outstanding voting securities. Investment limitations
expressed in the following restrictions are considered at the time securities
are purchased. These restrictions provide that the fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities) if, immediately after and
as a result of such investment (a) more than 5% of the value of the fund's
total assets would be invested in securities of the issuer; or (b) the fund
would hold more than 10% of the voting securities of the issuer; or (c) 25% or
more of the value of the fund's assets would be invested in a single industry.
Each of the electric utility, natural gas distribution, natural gas pipeline,
combined electric and natural gas utility, and telephone industries shall be
considered as a separate industry for this purpose;
2. Invest in companies for the purpose of exercising control or management;
3. Knowingly purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
4. Buy or sell real estate in the ordinary course of its business; however,
the fund may invest in debt securities secured by real estate or interests
therein or issued by companies, including real estate investment trusts, which
invest in real estate or interests therein;
5. Buy or sell commodities or commodity contracts in the ordinary course of
its business, provided, however, that this shall not prohibit the fund from
purchasing or selling currencies including forward currency contracts;
6. Invest more than 15% of the value of its net assets in securities that are
illiquid;
7. Engage in the business of underwriting of securities of other issuers,
except to the extent that the disposal of an investment position may
technically constitute the fund an underwriter as that term is defined under
the Securities Act of 1933;
8. Make loans in an aggregate amount in excess of 10% of the value of the
fund's total assets, taken at the time any loan is made, provided, (i) that the
purchase of debt securities pursuant to the fund's investment objectives and
entering into repurchase agreements maturing in seven days or less shall not be
deemed loans for the purposes of this restriction, and (ii) that loans of
portfolio securities as described under "Loans of Portfolio Securities," shall
be made only in accordance with the terms and conditions therein set forth;
9. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short;
10. Purchase securities at margin;
11. Borrow money except from banks for temporary or emergency purposes, not in
excess of 5% of the value of the fund's total assets;
12. Mortgage, pledge, or hypothecate any of its assets;
13. Purchase or retain the securities of any issuer, if those individual
officers and directors of the fund, its investment adviser, or distributor,
each owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer.
The fund has adopted the following non-fundamental investment policies, which
may be changed by action of the Board of Directors without shareholder
approval: (a) the fund will not invest more than 5% of its total assets in
securities of companies having, together with their predecessors, a record of
less than three years of continuous operation, and (b) the fund will not
purchase partnership interests or invest in leases to develop, or explore for,
oil, gas or minerals.
Notwithstanding Investment Restriction #3, the fund may invest in securities
of other investment companies if deemed advisable by its officers in
connection with the administration of a deferred compensation plan adopted by
Directors pursuant to an exemptive order granted by the Securities and Exchange
Commission.
Notwithstanding Investment Restriction #9, the fund has no current intention
(at least during the next 12 months) to sell securities short to the extent the
fund contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
FUND OFFICERS AND DIRECTORS
Directors and Director Compensation
(with their principal occupations during the past five years)#
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
AND AGE WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
REGISTRANT DURINGPAST 5 (INCLUDING (INCLUDING OF FUND
YEARS VOLUNTARILY VOLUNTARILY BOARDS/2/
(POSITIONS DEFERRED DEFERRED ON
WITHIN THE COMPENSATION/1/) COMPENSATION/1/) WHICH
ORGANIZATIONS FROM THE FUND FROM ALL FUNDS DIRECTOR
LISTED MAY DURING FISCAL MANAGED BY SERVES
HAVE CHANGED YEAR ENDED CAPITAL RESEARCH
DURING THIS 12/31/97 AND MANAGEMENT
PERIOD) COMPANY/2/
<S> <C> <C> <C> <C> <C>
H. Frederick Director Private $9,211/3/ $163,300 18
Christie Age: 64 Investor.
P. O. Box 144 Former
Palos Verdes, President and
CA 90274 Chief
Executive
Officer, The
Mission Group
(non-utility
holding
company,
subsidiary of
Southern
California
Edison
Company)
+Don R. Director President none/4/ none/4/ 12
Conlan (retired),
Age: 62 The Capital
1630 Milan Group
Avenue Companies,
South Inc.
Pasadena, CA
91030
Diane C. Director CEO and 8,700 43,000 12
Creel President,
Age: 49 The Earth
100 W. Technology
Broadway Corporation
Suite 5000
Long Beach,
CA 90802
Martin Director Chairman, 8,825/3/ 132,400 15
Fenton, Jr. Senior
Age:62 Resource
4350 Group
Executive (management
Drive of senior
Suite 101 living
San Diego, CA centers)
92121-2116
Leonard R. Director President, 9,267/3/ 45,800 12
Fuller Fuller
Age: 51 Consulting
4333 (management
Admiralty Way consultants)
Suite 841 ETH
Marina del
Rey, CA 90292
+*Abner D. President, Senior Vice none/4/ none/4/ 12
Goldstine PEO and President
Age: 68 Director and Director,
Capital
Research and
Management
Company
+**Paul G. Chairman Capital
Haaga, of the Research and none/4/ none//4// 14
Jr.Age: 49 Board Management
Company,
Executive
Vice
President and
Director
Herbert Director Private $8,843 $70,800 13
Hoover III Investor
Age: 70
1520 Circle
Drive
San Marino,
CA 91108
Richard G. Director Chairman, 8,854/3/ 97,600 13
Newman President and
Age: 63 CEO,
3250 Wilshire AECOM
Boulevard Technology
Los Angeles, Corporation
CA 90010-1599 (architectural
engineering)
Peter C. Director Retired. 8,867/3/ 45,800 12
Valli Former
Age: 71 Chairman and
45 Sea Isle CEO, BW/IP
Drive International
Long Beach, Inc.
CA 90803 (industrial
manufacturing)
</TABLE>
+ Directors who are considered "interested persons of the fund as defined in
the 1940 Act, on the basis of their affiliation with the fund's Investment
Adviser,Capital Research and Management Company.
* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025.
** Address is 333 South Hope Street, Los Angeles, CA 90071
/1/ Amounts may be deferred by eligible directors under a non-qualified
deferred compensation plan adopted by the Fund in 1993. Deferred amounts
accumulate at an earnings rate determined by the total return of one or more
funds in The American Funds Group as designated by the Director.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 28 funds: AMCAP Fund, American Balanced Fund, Inc., American
High-Income Municipal Bond Fund, Inc., American High-Income Trust, American
Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management Trust of
America, Capital Income Builder, Inc., Capital World Growth and Income Fund,
Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, The U. S. Treasury Money Fund of America, U.S. Government Securities
Fund and Washington Mutual Investors Fund, Inc. Capital Research and
Management Company also manages American Variable Insurance Series and Anchor
Pathway Fund which serve as the underlying investment vehicle for certain
variable insurance contracts; and Bond Portfolio for Endowments, Inc. and
Endowments, Inc. whose shares may be owned only by tax-exempt organizations.
/3/ Since the deferred compensation plan's adoption, the total amount of
deferred compensation accrued by the fund (plus earnings thereon) as of the
fiscal year ended December 31, 1997 for participating Directors is as follows:
H. Frederick Christie ($13,051), Martin Fenton, Jr. ($18,907), Leonard R.
Fuller ($13,821), Richard G. Newman ($35,642) and Peter C. Valli ($34,154).
Amounts deferred and accumulated earnings thereon are not funded and are
general unsecured liabilities of the fund until paid to the Director.
/4/ Don R. Conlan, Abner D. Goldstine and Paul G. Haaga, Jr. are affiliated
with the Investment Adviser and, accordingly, receive no compensation from the
fund.
OFFICERS
(with their principal occupations during the past five years)#
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S) DURING
REGISTRANT PAST 5 YEARS
<S> <C> <C> <C>
David C. Barclay 41 Vice President Vice President, Capital Research and
11100 Santa Monica Blvd. Management Company
Los Angeles, CA 90025
Michael J. Downer 43 Vice President Senior Vice President - Fund Business
333 South Hope Street Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Mary C. Hall 40 Vice President Senior Vice President - Fund Business
135 South State College Management Group, Capital Research and
Blvd. Management Company
Brea, CA 92821
John H. Smet 41 Vice President Vice President, Capital Research and
11100 Santa Monica Blvd. Management Company
Los Angeles, CA 90025
Julie F. Williams 49 Secretary Vice President - Fund Business
333 South Hope Street Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Anthony W. Hynes, Jr. 35 Treasurer Vice President - Fund Business
135 South State College Management Group, Capital Research and
Blvd. Management Company
Brea, CA 92821
Kimberly S. Verdick 33 Assistant Secretary Assistant Vice President - Fund
333 South Hope Street Business Management Group, Capital
Los Angeles, CA 90071 Research and Management Company
Todd L. Miller 39 Assistant Treasurer Assistant Vice President - Fund
135 South State College Business Management Group, Capital
Blvd. Research and Management Company
Brea, CA 92821
</TABLE>
The fund pays annual fees of $7,500 to Directors who are not affiliated with
the Investment Adviser, plus $200 for each Board of Directors meeting attended,
plus $200 for each meeting attended as a member of a committee of the Board of
Directors. The Directors may elect, on a voluntary basis, to defer all or a
portion of these fees through a deferred compensation plan in effect for the
fund. The fund also reimburses certain expenses of the Directors who are not
affiliated with the Investment Adviser. As of February 1, 1998, the officers
and Directors and their families, as a group, owned beneficially or of record
less than 1% of the outstanding shares of the fund.
MANAGEMENT
INVESTMENT ADVISER - The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington, D.C., London, Geneva, Singapore, Hong Kong and Tokyo), with a
staff of professionals, many of whom have a number of years of investment
experience. The Investment Adviser is located at 333 South Hope Street, Los
Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821.
The Investment Adviser's research professionals travel several million miles a
year, making more than 5,000 research visits in more than 50 countries around
the world. The Investment Adviser believes that it is able to attract and
retain quality personnel. The Investment Adviser is a wholly owned subsidiary
of The Capital Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $175 billion of stocks,
bonds and money market instruments and serve over eight million investors of
all types throughout the world. These investors include privately owned
businesses and large corporations, as well as schools, colleges, foundations
and other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and
Service Agreement (the "Agreement") between the fund and the Investment Adviser
will continue until October 31, 1998 unless sooner terminated and may be
renewed from year to year thereafter, provided that any such renewal has been
specifically approved at least annually by (i) the Board of Directors, or by
the vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities, and (ii) the vote of a majority of directors who are not parties to
the Agreement or interested persons (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The Agreement provides that the Investment Adviser has no liability
to the fund for its acts or omissions in the performance of its obligations to
the fund not involving willful misconduct, bad faith, gross negligence or
reckless disregard of its obligations under the Agreement. The Agreement also
provides that either party has the right to terminate it, without penalty, upon
60 days' written notice to the other party and that the Agreement automatically
terminates in the event of its assignment (as defined in the 1940 Act).
The Investment Adviser has agreed to reduce the fee payable to it under the
agreement, (a) by the amount by which the ordinary operating expenses of the
fund for any fiscal year of the fund, excluding interest, taxes and
extraordinary expenses such as litigation, shall exceed the greater of (i) one
percent (1%) of the average month-end net assets of the fund for such fiscal
year, or (ii) ten percent (10%) of the fund's gross investment income, and (b)
by any additional amount necessary to assure that such ordinary operating
expenses of the fund in any year after such reduction do not exceed the lesser
of (i) one and one-half percent (1 1/2%) of the first $30 million of average
month-end net assets of the fund, plus one percent (1%) of the average
month-end net assets in excess thereof or (ii) twenty-five percent (25%) of the
fund's gross investment income.
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, administrative, clerical and bookkeeping functions of
the fund, provides suitable office space and utilities, necessary small office
equipment and general purpose accounting forms, supplies, and postage used at
the offices of the fund. The fund pays all expenses not assumed by the
Investment Adviser, including, but not limited to, custodian, stock transfer
and dividend disbursing fees and expenses; costs of the designing, printing and
mailing of reports, prospectuses, proxy statements, and notices to its
shareholders; taxes; expenses of the issuance and redemption of shares
(including stock certificates, registration and qualification fees and
expenses); legal and auditing expenses; compensation, fees, and expenses paid
to directors unaffiliated with the Investment Adviser; association dues; costs
of stationery and forms prepared exclusively for the fund; and costs of
assembling and storing shareholder account data.
The management fee is based upon the net assets of the fund and monthly gross
investment income. Gross investment income means gross income, computed
without taking account of gains or losses from sales of capital assets, but
including original issue discount as defined for federal income tax purposes.
The Code in general defines original issue discount to mean the difference
between the issue price and the stated redemption price at maturity of certain
debt obligations. The holder of such indebtedness is in general required to
treat as ordinary income the proportionate part of the original issue discount
attributable to the period during which the holder held the indebtedness. The
management fee is based upon the annual rates of 0.30% of the first $60 million
of the fund's average net assets, 0.21% on average net assets in excess of $60
million but not exceeding $1 billion, 0.18% on average net assets in excess of
$1 billion but not exceeding $3 billion, plus 0.16% on average net assets in
excess of $3 billion but not exceeding $6 billion, plus 0.15% on average net
assets over $6 billion, plus 3% of the first $5.4 million of annual gross
investment income, plus 2.25% of annual gross investment income in excess of
$5.4 million but not exceeding $100 million, plus 2% of annual gross investment
income in excess of $100 million. Assuming net assets of $8 billion and gross
investment income levels of 5%, 6%, 7%, 8% and 9%, management fees would be
.27%, .29%, .31%, .33% and .35%, respectively.
During the fiscal years ended December 31, 1997, 1996, and 1995, the
Investment Adviser's total fees amounted to $24,460,000, $22,728,000, and
$20,858,000, $respectively.
PRINCIPAL UNDERWRITER - American Funds Distributors, Inc. (the "Principal
Underwriter") is the Principal Underwriter of the fund's shares. The Principal
Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071, 135
South State College Boulevard, Brea, CA 92821, 8000 IH-10 West, San Antonio, TX
78230, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240, and 5300
Robin Hood Road, Norfolk, VA 23513. The fund has adopted a Plan of
Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act. The
Principal Underwriter receives amounts payable pursuant to the Plan (see below)
and commissions consisting of that portion of the sales charge remaining after
the discounts which it allows to investment dealers. Commissions retained by
the Principal Underwriter on sales of fund shares during the fiscal year ended
December 31, 1997 amounted to $5,397,000 after allowance of $22,564,000 to
dealers. During the fiscal years ended December 31, 1996 and 1995 the
Principal Underwriter retained $5,534,000 and $4,814,000, respectively.
As required by rule 12b-1, the Plan (together with the Principal Underwriting
Agreement) has been approved by the full Board of Directors and separately by a
majority of the Directors who are not "interested persons" of the fund and who
have no direct or indirect financial interest in the operation of the Plan or
the Principal Underwriting Agreement, and the Plan has been approved by the
vote of a majority of the outstanding voting securities of the fund. The
officers and directors who are "interested persons" of the fund due to present
or past affiliations with the investment adviser and related companies may be
considered to have a direct or indirect financial interest in the operation of
the Plan. Potential benefits of the plan to the fund include improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Directors who
are not "interested persons" of the fund is committed to the discretion of the
Directors who are not "interested persons" during the existence of the Plan.
Plan expenditures are reviewed quarterly and must be renewed annually by the
Board of Directors.
Under the Plan the fund may expend up to 0.25% of its average net assets
annually to finance any activity which is primarily intended to result in the
sale of fund shares, provided the fund's Board of Directors has approved the
category of expenses for which payment is being made. These include service
fees for qualified dealers and dealer commissions and wholesaler compensation
on sales of shares exceeding $1 million (including purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees). Since these fees are paid
out of the fund's assets on an ongoing basis, over time these fees will
increase the cost of an investment and may cost the investor more than paying
other types of sales loads. During the fiscal year ended December 31, 1997,
the fund paid $18,641,000 under the Plan as compensation to dealers. As of
December 31, 1997 accrued and unpaid distribution expenses were $1,279,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit commercial banks from engaging in the business of
underwriting, selling or distributing securities, but permit banks to make
shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries of affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer with adverse financial consequences as a result of
any of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The fund intends to meet all the requirements and has elected the tax status
of a "regulated investment company" under the provisions of Subchapter M of the
Code . Under Subchapter M, if the fund distributes within specified times at
least 90% of the sum of its investment company taxable investment income (net
investment income and the excess of net short-term capital gains over net
long-term capital losses) and its tax-exempt interest, if any, it will be taxed
only on that portion (if any) of the investment company taxable income and net
capital gain that it retains.
To qualify, the fund must (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities, currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies;and (b) diversify its holdings so that at the end of each fiscal
quarter, (i) at least 50% of the market value of the fund's assets is
represented by cash, U.S. Government securities and other securities which must
be limited, in respect of any one issuer, to an amount not greater than 5% of
the fund's assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or in two or more issuers
which the fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(iii) the sum of any untaxed, undistributed net investment income and net
capital gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the fund from its current year's ordinary income and net capital
gain and (ii) any amount on which the fund pays income tax during the periods
described above. The fund intends to distribute net investment income and net
capital gains so as to minimize or avoid the excise tax liability.
The fund also intends to distribute to shareholders all of the excess of net
long-term capital gain over net short-term capital loss on sales of
securities. If the net asset value of shares of the fund should, by reason of
a distribution of realized capital gains, be reduced below a shareholder's
cost, such distribution would in effect be a return of capital to that
shareholder even though taxable to the shareholder, and a sale of shares by a
shareholder at net asset value at that time would establish a capital loss for
federal tax purposes. In particular, investors should consider the tax
implications of purchasing shares just prior to a dividend or distribution
record date. Those investors purchasing shares just prior to such a date will
then receive a partial return of capital upon the dividend or distribution,
which will nevertheless be taxable to them as an ordinary or capital gains
dividend.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends and distributions declared in October, November and December
and made payable to shareholders of record in such a month are treated as paid
and are thereby taxable as of December 31, provided that the fund pays the
dividend no later than the end of January of the following year.
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of
shares of a fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
Under the Code, distributions of net investment income by the fund to a
shareholder who, as to the U.S., is a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, non-U.S. corporation, or non-U.S.
partnership (a "non-U.S. shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or lower treaty rate). Withholding will not apply if a
dividend paid by the fund to a non-U.S. shareholder is "effectively connected"
with a U.S. trade or business, in which case the reporting and withholding
requirements applicable to U.S. citizens, U.S. residents or domestic
corporations will apply. However, if the distribution is effectively connected
with the conduct of the non-U.S. shareholder's trade or business within the
U.S., the distribution would be included in the net income of the shareholder
and subject to U.S. income tax at the applicable marginal rate. Distributions
of capital gains not effectively connected with a U.S. trade or business are
not subject to the withholding, but if the non-U.S. shareholder was an
individual who was physically present in the U.S. during the tax year for more
than 182 days and such shareholder is nonetheless treated as a nonresident
alien, the distributions would be subject to a 30% tax.
The fund may be required to pay withholding and other taxes imposed by
countries outside the United States which would reduce the fund's investment
income, generally at rates from 10% to 40%. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. If more
than 50% in value of the fund's total assets at the close of its taxable year
consist of securities of non-U.S. corporations, the fund will be eligible to
file elections with the Internal Revenue Service pursuant to which shareholders
of the fund will be required to include their respective pro rata portions of
such withholding taxes in their federal income tax returns as gross income,
treat such amounts as foreign taxes paid by them, and deduct such amounts in
computing their taxable incomes or, alternatively, use them as foreign tax
credits against their federal income taxes. The fund does not currently expect
to meet the eligibility requirement for filing this election as its investments
in securities of non-U.S. issuers are limited.
Sales of forward currency contracts which are intended to hedge against a
change in the value of securities or currencies held by the fund may affect the
holding period of such securities or currencies and, consequently, the nature
of the gain or loss on such securities or currencies upon disposition.
The amount of any realized gain or loss on closing out a forward currency
contract such as a forward commitment for the purchase or sale of non-U.S.
currency will generally result in a realized capital gain or loss for tax
purposes. Under Code Section 1256, forward currency contracts held by the fund
at the end of each fiscal year will be required to be "marked to market" for
federal income tax purposes, that is, deemed to have been sold at market value.
Except for transactions in forward currency contracts which are classified as
part of a "mixed straddle," any gain or loss recognized with respect to forward
currency contracts is considered to be 60% long-term capital gain or loss, and
40% short-term capital gain or loss, without regard to the holding period of
the contract. In the case of a transaction classified as a "mixed straddle,"
the recognition of losses may be deferred to a later taxable year. Code
Section 988 may also apply to forward currency contracts. Under Section 988,
each non-U.S. currency gain or loss is generally computed separately and
treated as ordinary income or loss. In the case of overlap between Sections
1256 and 988, special provisions determine the character and timing of any
income, gain or loss. The fund will attempt to monitor Section 988
transactions to avoid an adverse tax impact.
Under the Code, a fund's taxable income for each year will be computed without
regard to any net non-U.S. currency loss attributable to transactions after
October 31, and any such net non-U.S. currency loss will be treated as arising
on the first day of the following taxable year.
As of the date of this statement of additional information, the maximum
federal individual stated tax rate applicable to ordinary income is 39.6%
(effective tax rates may be higher for some individuals due to phase out of
exemptions and elimination of deductions); the maximum individual tax rate
applicable to net capital gains on assets held more than 18 months is 20%, and
on assets held more than one year and not more than 18 months is 28%; and the
maximum corporate tax applicable to ordinary income and net capital gain is
35%. However, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 for a
taxable year will be required to pay an additional amount of income tax of up
to $11,750 and corporations which have taxable income in excess of $15,000,000
for a taxable year will be required to pay an additional amount of income tax
of up to $100,000. Naturally, the amount of tax payable by an individual will
be affected by a combination of tax law rules covering, E.G., deductions,
credits, deferrals, exemptions, sources of income and other matters. Under the
Code, an individual is entitled to establish and contribute to an Individual
Retirement Account ("IRA") each year (prior to the tax return filing deadline
for that year) whereby earnings on investments are tax-deferred. In addition,
in some cases, the IRA contribution itself may be deductible.
The foregoing is limited to a summary discussion of federal taxation and
should not be viewed as a comprehensive discussion of all provisions of the
Code relevant to investors. Dividends and distributions may also be subject to
state or local taxes. Investors should consult their own tax advisers for
additional details as to their particular tax status.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
<S> <C> <C>
See "Investment Minimums and $50 minimum (except where a lower
Fund Numbers" for initial minimum is noted under "Investment
investment minimums. Minimums and Fund Numbers").
By contacting Visit any investment dealer who Mail directly to your investment
your is registered in the state dealer's address printed on your
investment where the purchase is made and account statement.
dealer who has a sales agreement with
American Funds Distributors.
By mail Make your check payable to the Fill out the account additions form
fund and mail to the address at the bottom of a recent account
indicated on the account statement, make your check payable
application. Please indicate to the fund, write your account
an investment dealer on the number on your check, and mail the
account application. check and form in the envelope
provided with your account
statement.
By telephone Please contact your investment Complete the "Investments by Phone"
dealer to open account, then section on the account application
follow the procedures for or American FundsLink Authorization
additional investments. Form. Once you establish the
privilege, you, your financial
advisor or any person with your
account information can call
American FundsLine(r) and make
investments by telephone (subject
to conditions noted in "Telephone
and Computer Sales and Exchanges"
below).
By computer Please contact your investment Complete the American FundsLink
dealer to open account, then Authorization Form. Once you
follow the procedures for establish the privilege, you, your
additional investments. financial advisor or any person
with your account information may
access American FundsLine
OnLine(sm) on the Internet and make
investments by computer (subject to
conditions noted in "Telephone and
Computer Purchases, Redemptions and
Exchanges" below).
By wire Call 800/421-0180 to obtain Your bank should wire your
your account number(s), if additional investments in the same
necessary. Please indicate an manner as described under "Initial
investment dealer on the Investment."
account. Instruct your bank to
wire funds to:
Wells Fargo Bank
155 Fifth Street
Sixth Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS - Here are the minimum initial
investments required by the funds in The American Funds Group along with fund
numbers for use with our automated phone line, American FundsLine(r) (see
description below):
<TABLE>
<CAPTION>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
<S> <C> <C>
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(r) 02
$1,000
American Balanced Fund(r) 11
500
American Mutual Fund(r) 03
250
Capital Income Builder(r) 12
1,000
Capital World Growth and Income Fund(sm) 33
1,000
EuroPacific Growth Fund(r) 16
250
Fundamental Investors(sm) 10
250
The Growth Fund of America(r) 05
1,000
The Income Fund of America(r) 06
1,000
The Investment Company of America(r) 04
250
The New Economy Fund(r) 14
1,000
New Perspective Fund(r) 07
250
SMALLCAP World Fund(r) 35
1,000
Washington Mutual Investors Fund(sm) 01
250
BOND FUNDS
American High-Income Municipal Bond Fund(r) 40
1,000
American High-Income Trust(sm) 21
1,000
The Bond Fund of America(sm) 08
1,000
Capital World Bond Fund(r) 31
1,000
Intermediate Bond Fund of America(sm) 23
1,000
Limited Term Tax-Exempt Bond Fund of America(sm) 43
1,000
The Tax-Exempt Bond Fund of America(r) 19
1,000
The Tax-Exempt Fund of California(r)* 20
1,000
The Tax-Exempt Fund of Maryland(r)* 24
1,000
The Tax-Exempt Fund of Virginia(r)* 25
1,000
U.S. Government Securities Fund(sm) 22
1,000
MONEY MARKET FUNDS
The Cash Management Trust of America(r) 09
2,500
The Tax-Exempt Money Fund of America(sm) 39
2,500
The U.S. Treasury Money Fund of America(sm) 49
2,500
___________
*Available only in certain states.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for IRAs. Minimums are reduced to $50
for purchases through "Automatic Investment Plans" (except for the money market
funds) or to $25 for purchases by retirement plans through payroll deductions
and may be reduced or waived for shareholders of other funds in The American
Funds Group. TAX-EXEMPT FUNDS SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS.
The minimum is $50 for additional investments (except as noted above).
DEALER COMMISSIONS - The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amount of Purchase SALES CHARGE AS DEALER
at the Offering Price PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET OFFERING
AMOUNT PRICE
INVESTED
STOCK AND STOCK/BOND
FUNDS
Less than $50,000 5.75% 5.00%
6.10%
$50,000 but less than $100,000 4.50 3.75
4.71
BOND FUNDS
Less than $25,000 4.75 4.00
4.99
$25,000 but less than $50,000 4.50 3.75
4.71
$50,000 but less than $100,000 4.00 3.25
4.17
STOCK, STOCK/BOND, AND BOND
FUNDS
$100,000 but less than 3.50 2.75
$250,000 3.63
$250,000 but less than 2.50 2.00
$500,000 2.56
$500,000 but less than 2.00 1.60
$1,000,000 2.04
$1,000,000 or more none (see below)
none
</TABLE>
Commissions of up to 1% will be paid to dealers who initiate and are
responsible for purchases of $1 million or more, for purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees, and for purchases made at
net asset value by certain retirement plans of organizations with collective
retirement plan assets of $100 million or more: 1.00% on amounts of $1 million
to $2 million, 0.80% on amounts over $2 million to $3 million, 0.50% on amounts
over $3 million to $50 million, 0.25% on amounts over $50 million to $100
million, and 0.15% on amounts over $100 million. The level of dealer
commissions will be determined based on sales made over a 12-month period
commencing from the date of the first sale at net asset value.
American Funds Distributors, at its expense (from a designated percentage of
its income), currently provides additional compensation to dealers. Currently
these payments are limited to the top one hundred dealers who have sold shares
of the fund or other funds in The American Funds Group. These payments will be
based on a pro rata share of a qualifying dealer's sales. American Funds
Distributors will, on an annual basis, determine the advisability of continuing
these payments.
Any employer-sponsored 403(b) plan or defined contribution plan qualified
under Section 401(a) of the Code including a "401(k)" plan with 100 or more
eligible employees or any other purchaser investing at least $1 million in
shares of the fund (or in combination with shares of other funds in The
American Funds Group other than the money market funds) may purchase shares at
net asset value; however, a contingent deferred sales charge of 1% is imposed
on certain redemptions made within twelve months of the purchase. Investments
by retirement plans, foundations or endowments with $50 million or more in
assets may be made with no sales charge and are not subject to a contingent
deferred sales charge. (See "Redeeming Shares--Contingent Deferred Sales
Charge.") Investments by retirement plans, foundations or endowments with $50
million or more in assets may be made with no sales charge and are not subject
to a contingent deferred sales charge.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
NET ASSET VALUE PURCHASES - The stock, stock/bond and bond funds may sell
shares at net asset value to: (1) current or retired directors, trustees,
officers and advisory board members of the funds managed by the Investment
Adviser, employees of Washington Management Corporation, employees and partners
of The Capital Group Companies, Inc. and its affiliated companies, certain
family members of the above persons, and trusts or plans primarily for such
persons; (2) current registered representatives, retired registered
representatives with respect to accounts established while active, or full-time
employees (and their spouses, parents, and children) of dealers who have sales
agreements with the Principal Underwriter (or who clear transactions through
such dealers) and plans for such persons or the dealers; (3) companies
exchanging securities with the fund through a merger, acquisition or exchange
offer; (4) trustees or other fiduciaries purchasing shares for certain
retirement plans of foundations or endowments with assets of $50 million or
more; (5) insurance company separate accounts; (6) accounts managed by
subsidiaries of The Capital Group Companies, Inc.; and (7) The Capital Group
Companies, Inc., its affiliated companies and Washington Management
Corporation. Shares are offered at net asset value to these persons and
organizations due to anticipated economies in sales effort and expense.
STATEMENT OF INTENTION - The reduced sales charges and offering prices set
forth in the Prospectus apply to purchases of $50,000 or more made within a
13-month period subject to the following statement of intention (the
"Statement") terms . The Statement is not a binding obligation to purchase the
indicated amount. When a shareholder elects to utilize the Statement in order
to qualify for a reduced sales charge, shares equal to 5% of the dollar amount
specified in the Statement will be held in escrow in the shareholder's account
out of the initial purchase (or subsequent purchases, if necessary) by American
Funds Service Company (the "Transfer Agent"). All dividends and capital gain
distributions on shares held in escrow will be credited to the shareholder's
account in shares (or paid in cash, if requested). If the intended investment
is not completed within the specified 13-month period, the purchaser will remit
to the Principal Underwriter the difference between the sales charge actually
paid and the sales charge which would have been paid if the total of such
purchases had been made at a single time. If the difference is not paid within
45 days after written request by the Principal Underwriter or the securities
dealer, the appropriate number of shares held in escrow will be redeemed to pay
such difference. If the proceeds from this redemption are inadequate, the
purchaser will be liable to the Principal Underwriter for the balance still
outstanding. The Statement may be revised upward at any time during the
13-month period, and such a revision will be treated as a new Statement, except
that the 13-month period during which the purchase must be made will remain
unchanged and there will be no retroactive reduction of the sales charges paid
on prior purchases. Existing holdings eligible for rights of accumulation (see
the prospectus and account application) may be credited toward satisfying the
Statement. During the Statement period reinvested dividends and capital gain
distributions, investments in money market funds, and investments made under a
right of reinstatement will not be credited toward satisfying the Statement.
In the case of purchase orders by the trustees of certain retirement plans by
payroll deduction, the sales charge for the investments made during the
13-month period will be handled as follows: The regular monthly payroll
deduction investment will be multiplied by 13 and then multiplied by 1.5. The
current value of existing American Funds investments (other than money market
fund investments) and any rollovers or transfers reasonably anticipated to be
invested in non-money market American Funds during the 13-month period are
added to the figure determined above. The sum is the Statement amount and
applicable breakpoint level. On the first investment and all other investments
made pursuant to the statement of intention, a sales charge will be assessed
according to the sales charge breakpoint thus determined. There will be no
retroactive adjustments in sales charges on investments previously made during
the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION - Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
PRICE OF SHARES - Purchases of shares are made at the offering price next
determined after the purchase order is received by the fund or the Transfer
Agent; this offering price is effective for orders received prior to the time
of determination of the net asset value and, in the case of orders placed with
dealers, accepted by the Principal Underwriter prior to its close of business.
In case of orders sent directly to the fund or the Transfer Agent, an
investment dealer MUST be indicated. The dealer is responsible for promptly
transmitting purchase orders to the Principal Underwriter. Orders received by
the investment dealer, the Transfer Agent, or the fund after the time of the
determination of the net asset value will be entered at the next calculated
offering price. Prices which appear in the newspaper are not always indicative
of prices at which you will be purchasing and redeeming shares of the fund,
since such prices generally reflect the previous day's closing price whereas
purchases and redemptions are made at the next calculated price.
The price you pay for shares, the offering price, is based on the net asset
value per share which is calculated once daily at 4:00 p.m., New York time each
day the New York Stock Exchange is open. For example, if the Exchange closes
at 1:00 p.m. on one day and at 4:00 p.m. on the next, the fund's share price
would be determined as of 4:00 p.m. New York time on both days. The New York
Stock Exchange is currently closed on weekends and on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. The
net asset value per share is determined as follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates at the end of the
reporting period. Purchase and sale of securities and income and expenses are
translated into U.S. dollars at the prevailing market rates on the dates of
such transactions. The effects of changes in foreign currency exchange rates
on investment securities are included with the net realized and unrealized gain
or loss on investment securities.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets.
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets.
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
fund. The fund will not knowingly sell shares (other than for the reinvestment
of dividends or capital gain distributions) directly or indirectly or through a
unit investment trust to any other investment company, person or entity, where,
after the sale, such investment company, person, or entity would own
beneficially directly, indirectly, or through a unit investment trust more than
3% of the outstanding shares of the fund without the consent of a majority of
the Board of Directors.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
REDEEMING SHARES
<TABLE>
<CAPTION>
<S> <C>
By writing to the Transfer Agent Send a letter of instruction specifying the name of the
(at the appropriate address fund, the number of shares or dollar amount to be sold,
indicated under "Principal your name and account number. You should also enclose
Underwriter and Transfer any share certificates you wish to redeem. For
Agent" in the Prospectus) redemptions over $50,000 and for certain redemptions of
$50,000 or less (see below), your signature must be
guaranteed by a bank, savings association, credit union,
or member firm of a domestic stock exchange or the
National Association of Securities Dealers, Inc. that is
an eligible guarantor institution. You should verify
with the institution that it is an eligible guarantor
prior to signing. Additional documentation may be
required for redemption of shares held in corporate,
partnership or fiduciary accounts. Notarization by a
Notary Public is not an acceptable signature guarantee.
By contacting your investment If you redeem shares through your investment dealer, you
dealer may be charged for this service. SHARES HELD FOR YOU IN
YOUR INVESTMENT DEALER'S STREET NAME MUST BE REDEEMED
THROUGH THE DEALER.
You may have a redemption You may use this option, provided the account is
check sent to you by using registered in the name of an individual(s), a UGMA/UTMA
American FundsLine(r) or custodian, or a non-retirement plan trust. These
American FundsLine OnLine(sm) or redemptions may not exceed $50,000 per shareholder each
by telephoning, faxing, or day and the check must be made payable to the
telegraphing American Funds shareholder(s) of record and be sent to the address of
Service Company (subject to the record provided the address has been used with the
conditions noted in this section account for at least 10 days. See "Fund Organization
and in "Telephone and Computer and Management -Principal Underwriter and Transfer Agent"
Purchases, Sales and Exchanges" in the Prospectus and "Exchange Privilege" below for the
below) appropriate telephone or fax number.
In the case of the money Upon request (use the account application for the money
market funds, you may have market funds) you may establish telephone redemption
redemptions wired to your privileges (which will enable you to have a redemption
bank by telephoning the Transfer sent to your bank account) and/or check writing
Agent ($1,000 or more) or by privileges. If you request check writing privileges, you
writing a check ($250 or more) will be provided with checks that you may use to draw
against your account. These checks may be made payable
to anyone you designate and must be signed by the
authorized number of registered shareholders exactly as
indicated on your checking account signature card.
</TABLE>
A SIGNATURE GUARANTEE IS NOT CURRENTLY REQUIRED FOR ANY REDEMPTION OF $50,000
OR LESS PROVIDED THE REDEMPTION CHECK IS MADE PAYABLE TO THE REGISTERED
SHAREHOLDER(S) AND IS MAILED TO THE ADDRESS OF RECORD, PROVIDED THE ADDRESS HAS
BEEN USED WITH THE ACCOUNT FOR AT LEAST 10 DAYS.
CONTINGENT DEFERRED SALES CHARGE - A contingent deferred sales charge of 1%
applies to certain redemptions made within twelve months of purchase on
investments of $1 million or more and on any investment made with no initial
sales charge by any employer-sponsored 403(b) plan or defined contribution plan
qualified under Section 401(a) of the Code including a "401(k)" plan with 100
or more eligible employees. The charge is 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares. Shares held for the longest
period are assumed to be redeemed first for purposes of calculating this
charge. The charge is waived for exchanges (except if shares acquired by
exchange were then redeemed within 12 months of the initial purchase); for
distributions from qualified retirement plans and other employee benefit plans;
for redemptions resulting from participant-directed switches among investment
options within a participant-directed employer-sponsored retirement plan; for
distributions from 403(b) plans or IRAs due to death, disability or attainment
of age 591/2; for tax-free returns of excess contributions to IRAs; for
redemptions through certain automatic withdrawals not exceeding 10% of the
amount that would otherwise be subject to the charge; and for redemptions in
connection with loans made by qualified retirement plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN - The automatic investment plan enables you to make
regular monthly or quarterly investments in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. Bank accounts will be
charged on the day or a few days before investments are credited, depending on
the bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of the account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing the
Transfer Agent.
AUTOMATIC REINVESTMENT - Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, the
Transfer Agent or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the "paying fund") into any other fund in The American Funds Group
(the "receiving fund") subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds to you. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE - You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to the Transfer Agent (see "Redeeming
Shares"), by contacting your investment dealer, by using American FundsLine(r)
and American FundsLine OnLine(sm) (see "American FundsLine(r) and American
FundsLine OnLine(sm)" below), or by telephoning 800/421-0180 toll-free, faxing
(see "Principal Underwriter and Transfer Agent" in the Prospectus for the
appropriate fax numbers) or telegraphing the Transfer Agent. (See "Telephone
and Computer Redemptions and Exchanges" below.) Shares held in corporate-type
retirement plans for which Capital Guardian Trust Company serves as trustee may
not be exchanged by telephone, computer, fax or telegraph. Exchange
redemptions and purchases are processed simultaneously at the share prices next
determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES - You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS - Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS - Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments , will be reflected on regular confirmation statements from the
Transfer Agent. Dividend and capital gain reinvestments and purchases through
automatic investment plans and certain retirement plans will be confirmed at
least quarterly.
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(sm) - You may check your
share balance, the price of your shares, or your most recent account
transaction, redeem shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(r) and American
FundsLine OnLine(sm). To use these services, call 800/325-3590 from a
TouchTonet telephone or access the American Funds Web site on the Internet at
www.americanfunds.com. Redemptions and exchanges through American FundsLine(r)
and American FundsLine OnLine(sm) are subject to the conditions noted above and
in "Redeeming Shares--Telephone and Computer Redemptions and Exchanges" below.
You will need your fund number (see the list of funds in The American Funds
Group under "Purchase of Shares--Investment Minimums and Fund Numbers"),
personal identification number (the last four digits of your Social Security
number or other tax identification number associated with your account) and
account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES - By using the
telephone or computer (including American FundsLine(r) and American FundsLine
OnLine(sm)), fax or telegraph redemption and/or exchange options, you agree to
hold the fund, the Transfer Agent, any of its affiliates or mutual funds
managed by such affiliates, and each of their respective directors, trustees,
officers, employees and agents harmless from any losses, expenses, costs or
liability (including attorney fees) which may be incurred in connection with
the exercise of these privileges. Generally, all shareholders are automatically
eligible to use these options. However, you may elect to opt out of these
options by writing the Transfer Agent (you may also reinstate them at any time
by writing the Transfer Agent). If the Transfer Agent does not employ
reasonable procedures to confirm that the instructions received from any person
with appropriate account information are genuine, the fund may be liable for
losses due to unauthorized or fraudulent instructions. In the event that
shareholders are unable to reach the fund by telephone because of technical
difficulties, market conditions, or a natural disaster, redemption and exchange
requests may be made in writing only.
REDEMPTION OF SHARES - The fund's Articles of Incorporation permit the fund to
direct the Transfer Agent to redeem the shares of any shareholder if the shares
owned by such shareholder through redemptions, market decline or otherwise,
have a value of less than $150 (determined, for this purpose only as the
greater of the shareholder's cost or the current net asset value of the shares,
including any shares acquired through reinvestment of income dividends and
capital gain distributions), or are fewer than ten shares. Prior notice of at
least 60 days will be given to a shareholder before the involuntary redemption
provision is made effective with respect to the shareholder's account. The
shareholder will have not less than 30 days from the date of such notice within
which to bring the account up to the minimum determined as set forth above.
While payment of redemptions normally will be in cash, the fund's Articles of
Incorporation permit payment of the redemption price wholly or partly in
securities or other property included in the assets belonging to the fund when
in the opinion of the fund's Board of Directors, which shall be conclusive,
conditions exist which make payment wholly in cash unwise or undesirable.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through its
correspondent clearing agent) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not consider that it has
an obligation to obtain the lowest available commission rate to the exclusion
of price, service and qualitative considerations.
There are occasions on which portfolio transactions for the fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the fund, they are effected only when the
Investment Adviser believes that to do so is in the interest of the fund. When
such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner. The fund does not intend to pay a mark-up
in exchange for research in connection with principal transactions.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal years ended December 31, 1997,
1996, and 1995, amounted to $58,367,000, $9,568,000, and $7,096,214,
respectively.
GENERAL INFORMATION
CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds
from the sale of shares of the fund and of securities in the fund's portfolio,
are held by The Chase Manhattan Bank , One Chase Manhattan Plaza, New York, NY
10081, as Custodian. Non-U.S. securities may be held by the Custodian pursuant
to sub-custodial agreements in non-U.S. banks or non-U.S. branches of U.S.
banks.
TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee
of $4,685,000 for the fiscal year ended December 31, 1997.
When fund shares are purchased by an insurance company separate account to
serve as the underlying investment vehicle for variable insurance contracts,
the fund may pay a fee to the insurance company or another party for performing
certain transfer agent services with respect to contract owners having
interests in the fund. The fund has entered into such an agreement with
Nationwide Life Insurance Company.
INDEPENDENT AUDITORS - Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, has served as the fund's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements, included in this Statement of Additional
Information from the attached Annual Report, have been so included in reliance
on the independent auditors' report given on the authority of said firm as
experts in accounting and auditing. The selection of the fund's independent
auditor is reviewed and determined annually by the Board of Directors.
REMOVAL OF DIRECTORS BY SHAREHOLDERS - At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any director or directors from office and may elect a successor
or successors to fill any resulting vacancies for the unexpired terms of
removed directors. The fund has made an undertaking, at the request of the
staff of the Securities and Exchange Commission, to apply the provisions of
section 16(c) of the 1940 Act with respect to the removal of directors, as
though the fund were a common-law trust. Accordingly, the Directors of the
fund shall promptly call a meeting of shareholders for the purpose of voting
upon the question of removal of any Director when requested in writing to do so
by the record holders of not less than 10% of the outstanding shares.
REPORTS TO SHAREHOLDERS - The fund's fiscal year ends on December 31.
Shareholders are provided at least semi-annually with reports showing the
investment portfolio, financial statements and other information. The fund's
financial statements are audited annually by the fund's independent auditors,
Deloitte & Touche LLP, whose selection is determined by the Board of
Directors. In an effort to reduce the volume of mail shareholders receive from
the fund when a household owns more than one account, the Transfer Agent has
taken steps to eliminate duplicate mailings of shareholder reports. To receive
additional copies of a report, shareholders should contact the Transfer Agent.
PERSONAL INVESTING POLICY - The Investment Adviser and its affiliated companies
have adopted a personal investing policy consistent with Investment Company
Institute guidelines. This policy includes: a ban on acquisitions of
securities pursuant to an initial public offering; restrictions on acquisitions
of private placement securities; pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with codes of ethics; blackout periods on personal investing for
certain investment personnel; a ban on short-term trading profits for
investment personnel; limitations on service as a director of publicly traded
companies; and disclosure of personal securities transactions. You may obtain
a summary of the personal investing policy by contacting the Secretary of the
fund.
The financial statements including the investment portfolio and the report of
Independent Auditors contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
<TABLE>
<CAPTION>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE - DECEMBER 31, 1997
<S> <C>
Net asset value and redemption price per share $14.00
(Net assets divided by shares outstanding)
Maximum offering price per share $14.70
(100/95.25 of net asset value per share, which takes
into account the fund's current maximum sales
charge)
</TABLE>
INVESTMENT RESULTS
The fund's yield was 6.24% based on a 30-day (or one month) period ended
December 31, 1997, computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[( a-b/cd + 1)/6/ -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The fund may also calculate a distribution rate on a taxable and tax
equivalent basis. The distribution rate is computed by annualizing the current
month's dividend and dividing by the average net asset value or maximum
offering price for the month. The distribution rate may differ from the yield.
The fund's total annual return over the past twelve months and average annual
total returns over the past 5-year and 10-year periods ending on December 31,
1997, were 4.02%, 7.31%, and 9.21%, respectively. The average total return
("T") is computed by equating the value at the end of the period ("ERV") with a
hypothetical initial investment of $1,000 ("P") over a period of years ("n")
according to the following formula as required by the Securities and Exchange
Commission: P(1+T)/n/ = ERV.
The following assumptions will be reflected in computations made in accordance
with the formula stated above: (1) deduction of the maximum sales charge of
4.75% from the $1,000 initial investment; (2) reinvestment of dividends and
distributions at net asset value on the reinvestment date determined by the
Board; and (3) a complete redemption at the end of any period illustrated.
The investment results for the fund (also referred to as "BFA") set forth
below were calculated as described in the fund's prospectus. Data contained in
Salomon Brothers' Market Performance and Lehman Brother's The Bond Market
Report are used to calculate cumulative total return from their base period
(12/31/79 and 12/31/72, respectively) for each index. The percentage increases
shown in the table below or used in published reports of the fund are obtained
by subtracting the index results at the beginning of the period from the index
results at the end of the period and dividing the difference by the index
results at the beginning of the period.
THE FUND VS. VARIOUS UNMANAGED INDICES
<TABLE>
<CAPTION>
Period The Fund Salomon Lehman Average
1/1 - 12/31 Brothers (1) Brothers (2) Savings
Deposit (3)
1988 - 1997 + 141% + 142% + 158% + 55%
<S> <C> <C> <C> <C>
1987 - 1996 + 125 + 126 + 140 + 57
1986 - 1995 + 143 + 152 + 171 + 62
1985 - 1994 + 160 + 160 + 175 + 69
1984 - 1993 + 207 + 208 + 233 + 81
1983 - 1992 + 194 + 203 + 225 + 92
1982 - 1991 + 252 + 271 + 316 + 105
1981 - 1990 + 210 + 240 + 261 + 116
1980 - 1989 + 210 + 221 + 236 + 121
1979 - 1988 + 191 n/a + 189 + 122
1978 - 1987 + 168 n/a + 165 + 124
1977 - 1986 + 176 n/a + 167 + 125
1976 - 1985 + 184 n/a + 173 + 123
1975 - 1984 + 152 n/a + 157 + 119
1974*- 1983 + 134 n/a + 118 + 109
</TABLE>
* From May 28.
(1) The Salomon Brothers Broad Investment Grade Bond Index spans the available
market for U.S. Treasury/Agency securities, investment grade corporate bonds
which have a rating of BBB or better by Standard and Poor's Corporation, and
mortgage pass-through securities. This index's inception date is 12/31/79.
(2) The Lehman Brothers Corporate Bond Index is comprised of a large universe
of bonds issued by industrial, utility and financial companies which have a
minimum rating of Baa by Moody's Investors Service, BBB by Standard and Poor's
Corporation or, in the case of bank bonds not rated by either of the previously
mentioned services, BBB by Fitch Investors Service.
(3) Based on figures supplied by the U.S. League of Savings Institutions and
the Federal Reserve Board which reflect all kinds of savings deposits,
including longer-term certificates. Savings accounts offer a guaranteed return
of principal, but no opportunity for capital growth. During a portion of the
period, the maximum rates paid on some savings deposits were fixed by law.
IF YOU ARE CONSIDERING THE FUND FOR AN INDIVIDUAL RETIREMENT ACCOUNT . . .
<TABLE>
<CAPTION>
<S> <C>
Here's how much you would have if you had invested $2,000
on January 1 of each year in the Fund over the past 5 and
10 years:
5 Years 10 Years
(1/1/93-12/31/97) (1/1/88-12/31/97)
$12,268 $32,440
</TABLE>
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
If you had invested ...and taken all
$10,000 in the Fund distributions in shares,
this many years your investment would
ago... have been worth this
much at
Dec. 31, 1997
Period
Number of Years 1/1-12/31 Value
<S> <C> <C>
1 1997 $10,402
2 1996 - 1997 11,105
3 1995 -1997 13,132
4 1994 -1997 12,471
5 1993 -1997 14,232
6 1992 -1997 15,852
7 1991 -1997 19,180
8 1990 -1997 19,809
9 1989 -1997 21,817
10 1988 -1997 24,143
11 1987 -1997 24,622
12 1986 -1997 28,357
13 1985 -1997 35,893
14 1984 -1997 40,191
15 1983 -1997 44,005
16 1982 -1997 58,491
17 1981 -1997 62,334
18 1980 -1997 64,545
19 1979 -1997 66,588
20 1978 -1997 67,941
21 1977 -1997 71,439
22 1976 -1997 84,411
23 1975 -1997 95,094
24 1974*-1997 98,670
</TABLE>
* From May 28, 1974, the fund's inception date
FUND COMPARISONS
According to Lipper Analytical Services, during the period May 31, 1974
through December 31, 1997 (the fund's lifetime), the fund ranked first among
the thirteen similar bond funds that were in existence for that period.
The fund may also refer to results compiled by organizations such as CDA
Investment Technologies, Ibbottson Associates, Lipper Analytical Services and
Wiesenberger Investment Companies Services. Additionally, the Fund may, from
time to time, refer to results published in various periodicals, including
Barrons, Forbes, Institutional Investor, Kiplinger's Personal Finance Magazine,
Money, U.S. News and World Report and The Wall Street Journal.
In addition, the fund may also, from time to time, illustrate the benefits of
tax deferral by comparing taxable investments to investments made through
tax-deferred retirement plans.
Past results are not an indication of future investment results.ILLUSTRATION
OF A $10,000 INVESTMENT IN THE FUND WITH
DIVIDENDS REINVESTED AND CAPITAL GAIN DISTRIBUTIONS TAKEN IN SHARES
(For the lifetime of the Fund May 28, 1974 through December 31, 1997)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Fiscal Annual Dividends Total From From From Total
Year End Dividends (cumulative) Investment Initial Capital Dividends Value
Dec. 31 Cost Investment Gains Reinvested
Reinvested
<S> <C> <C> <C> <C> <C> <C> <C>
1974 $ 413 $ 413 $10,413 $ 9,473 $ 0 $ 411 $ 9,884
1975 897 1,310 11,310 9,799 0 1,338 11,137
1976 1,010 2,320 12,320 10,555 126 2,473 13,154
1977 1,114 3,434 13,434 10,125 240 3,466 13,831
1978 1,198 4,632 14,632 9,438 278 4,396 14,112
1979 1,387 6,019 16,019 8,848 260 5,448 14,556
1980 1,706 7,725 17,725 8,147 240 6,685 15,072
1981 2,096 9,821 19,821 7,564 222 8,287 16,073
1982 2,408 12,229 22,229 8,799 259 12,303 21,361
1983 2,529 14,758 24,758 8,612 253 14,517 23,382
1984 2,838 17,596 27,596 8,563 252 17,360 26,175
1985 3,193 20,789 30,789 9,722 286 23,132 33,140
1986 3,566 24,355 34,355 9,861 1,325 26,980 38,166
1987 3,746 28,101 38,101 9,119 1,225 28,571 38,915
1988 3,912 32,013 42,013 9,188 1,235 32,657 43,080
1989 4,425 36,438 46,438 9,181 1,234 37,028 47,443
1990 4,650 41,088 51,088 8,598 1,155 39,240 48,993
1991 4,859 45,947 55,947 9,507 1,277 48,519 59,303
1992 5,221 51,168 61,168 9,709 1,491 54,828 66,028
1993 5,269 56,437 66,437 10,028 3,501 61,833 75,362
1994 5,673 62,110 72,110 8,806 3,075 59,701 71,582
1995 6,112 68,222 78,222 9,632 3,363 71,650 84,645
1996 6,405 74,627 84,627 9,542 3,332 77,449 90,323
1997 6,635 81,262 91,262 9,715 3,392 85,563 98,670
</TABLE>
The dollar amount of capital gain distributions during the period was $3,490
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. rates the long-term debt securities issued by
various entities from "Aaa" to "C," according to quality as described below:
"AAA -- Best quality. These securities carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large, or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues."
"AA -- High quality by all standards. They are rated lower than the best bond
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat greater."
"A -- Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future."
"BAA -- Medium grade obligations. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well."
"BA -- Have speculative elements; future cannot be considered as well assured.
The protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Bonds in this class are characterized by uncertainty of position."
"B -- Generally lack characteristics of the desirable investment; assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small."
"CAA -- Of poor standing. Issues may be in default or there may be present
elements of danger with respect to principal or interest."
"CA -- Speculative in a high degree; often in default or have other marked
shortcomings."
"C -- Lowest rated class of bonds; can be regarded as having extremely poor
prospects of ever attaining any real investment standing."
STANDARD & POOR'S CORPORATION rates the long-term securities debt of various
entities in categories ranging from "AAA" to "D" according to quality as
described below:
"AAA -- Highest rating. Capacity to pay interest and repay principal is
extremely strong."
"AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree."
"A -- Have a strong capacity to pay interest and repay principal, although they
are somewhat more susceptible to the adverse effects of change in circumstances
and economic conditions, than debt in higher rated categories."
"BBB -- Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal than for debt in
higher rated categories."
"BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions."
"C1 -- Reserved for income bonds on which no interest is being paid."
"D -- In default and payment of interest and/or repayment of principal is in
arrears."
<PAGE>
THE BOND FUND OF AMERICA
INVESTMENT PORTFOLIO
Corporate Bonds 35.1%
Mortgage- and Asset-Backed Securities 22.3%
U.S. Treasury Securities 20.9%
Non-US Government Bonds and Governmental Authorities 8.5%
Federal Agency Notes & Bonds* 3.2%
Cash & Equivalents 10.0%
*Not including mortgage-backed securities issued by federal agencies.
<TABLE>
<S> <C> <C> <C>
Principal Market Percent of
Amount Value Net Assets
(000) (000)
ELECTRICAL & GAS UTILITIES
Utilities: Electrical & Gas
Big Rivers Electric Corp. 10.70% 2017 $17,000 $17,948 .22%
Columbia Gas System, Inc.:
Series A, 6.39% 2000 10,000 10,086 .14
Series C, 6.80% 2005 1,000 1,019
Tennessee Gas Pipeline Co. 7.625% 2037 5,000 5,397 .07
-------------------
34,450 .43
-------------------
INDUSTRIAL & SERVICE
Appliances & Household Goods
Friendly Ice Cream Corp. 10.50% 2007 13,000 13,097 .16
Gruma, SA de CV 7.625% 2007 (1) 2,000 1,970 .02
Lifestyle Furnishings International Ltd. 10.875% 2006 7,000 7,805 .10
Samsung Electronics Co., Ltd. 7.45% 2002 (1) 13,500 11,340 .14
-------------------
34,212 .42
-------------------
Beverages & Tobacco
Canandaigua Wine Co., Inc.:
8.75% 2003 3,000 3,060 .10
Series C, 8.75% 2003 5,000 5,100
Delta Beverage Group, Inc., 9.75% 2003 2,000 2,100 .02
Sparkling Spring Water Group Ltd 11.50% 2007 (1) 2,250 2,301 .03
Standard Commercial Tobacco Co., Inc. 8.875% 2005 (1) 7,000 7,140 .09
-------------------
19,701 .24
-------------------
Broadcasting & Publishing
Adelphia Communications Corp. 9.25% 2002 6,000 6,120 .07
American Media Operations, Inc. 11.625% 2004 6,000 6,510 .08
American Radio Systems Corp. 9.00% 2006 10,080 10,685 .13
Century Communications Corp. 8.75% 2007 4,000 4,080 .05
Chancellor Media Corp. of Los Angeles:
9.375% 2004 12,500 13,000 .65
8.125% 2007 (1) 21,000 20,475
8.75% 2007 15,125 15,390
Chancellor Radio Broadcasting Co., 12.00% exchangable preferred 200935,000 shares 3,955
EZ Communications, Inc. 9.75% 2005 1,250 1,381 .02
Fox Kids Worldwide, Inc.:
9.25% 2007 (1) 1,750 1,697 .03
0%/10.25% 2007 (1),(2) 1,250 741
Fox/Liberty Networks, LLC:
8.875% 2007 (1) 10,250 10,224 .20
0%/9.75% 2007 (1),(2) 9,500 6,080
Grupo Televisa, SA:
11.375% 2003 1,250 1,369 .07
0%/13.25% 2008 (2) 5,500 4,111
ITT Promedia BV 9.125% 2007 (1) DM3,250 1,896 .02
Lenfest Communications, Inc. 8.375% 2005 8,000 8,220 .10
Newsquest Capital PLC 11.00% 2006 2,850 3,206 .04
RBS Participacoes SA 11.00% 2007 (1) 10,000 9,350 .12
STC Broadcasting, Inc. 11.00% 2007 3,250 3,534 .04
Sun Media Corp.:
9.50% 2007 3,000 3,240 .09
9.50% 2007 4,000 4,300
Young Broadcasting Inc. 10.125% 2005 2,500 2,625 .03
-------------------
142,189 1.74
-------------------
Construction & Housing
Geberit International SA 10.125% 2007 DM2,750 1,656 .02
-------------------
Data Processing & Reproductions
First International Computer Corp. 1.00% convertible debentures 2004(1) 3,000 3,240 .04
Maxtor Corp. 5.75% convertible debentures 2012 3,000 2,100 .03
Unisys Corp. 11.75% 2004 4,000 4,580 .05
-------------------
9,920 .12
-------------------
Diversified Media & Cable Television
Bell Cablemedia PLC 0%/11.95% 2004 (2) 23,000 21,633 .26
Cablevision Industries Corp.:
8.125% 2009 17,250 17,854 .29
9.875% 2013 5,000 5,512
Comcast Cable Communications, Inc. 8.375% 2007 5,000 5,564 .07
Comcast Corp.:
10.25% 2001 13,000 14,377 .38
1.125% convertible debentures 2007 25,000 16,125
Comcast UK Cable Partners Ltd. 0%/11.20% 2007 (2) 21,000 17,062 .21
FrontierVision 11.00% 2006 2,500 2,778 .03
Globo Comunicacoes E Partcipacoes Ltd.:
10.50% 2006 (1) 13,100 12,609 .17
10.50% 2006 2,000 1,925
Heartland Wireless Communications, Inc. 13.00% 2003 4,500 1,350 .02
Hermes Euro Railtel BV 11.50% 2007 (1) 5,000 5,550 .07
Intermedia Communications Inc. 0%/11.25% 2007 (2) 6,000 4,365 .05
Multicanal Participacoes SA, 12.625% 2004 9,250 9,528 .12
News America Holdings Inc.:
8.625% 2014 A$3,250 2,221 .30
7.43% 2026 $20,500 21,846
NTL Inc.:
Series B, 10.00% 2007 10,000 10,550 .42
0%/10.875% 2003 (2)(formerly International CableTel Inc.) 9,500 9,096
0%/12.75% 2005 (2) (formerly International CableTel Inc.) 17,750 14,910
Rogers Communications Inc. 0% convertible debentures 2013 30,000 12,863 .16
TCI Communications, Inc.:
8.00% 2005 10,000 10,716 .83
6.875% 2006 5,000 5,018
8.75% 2015 7,500 8,692
Tele-Communications, Inc.:
9.25% 2002 5,000 5,488
8.25% 2003 2,000 2,136
7.25% 2005 3,500 3,608
9.80% 2012 10,000 12,432
8.75% 2023 8,000 8,485
9.25% 2023 10,000 11,079
Tele West PLC:
9.625% 2006 4,700 4,959 .30
0%/11.00% 2007 (2) 25,000 19,438
Time Warner Inc.:
6.10% 2001 (1),(3) 24,000 23,516 1.11
10.15% 2012 7,500 9,593
9.125% 2013 15,000 17,862
7.25% 2017 6,000 6,109
0% convertible debentures 2013 67,500 33,919
TKR Cable I, Inc. 10.50% 2007 36,500 41,146 .50
Vanguard Cellular Systems, Inc. 9.375% 2006 6,000 6,240 .08
Viacom International Inc.:
9.125% 1999 5,000 5,070 .14
10.25% 2001 6,100 6,716
Videotron Holdings PLC 0%/11.125% 2004 (2) 8,500 8,096 .10
-------------------
458,036 5.61
-------------------
Electrical & Electronics
Hyundai Semiconductor America, Inc.:
8.25% 2004 (1) 7,705 5,784 .25
8.625% 2007 (1) 20,700 15,075
Micron Technology, Inc. 7.00% convertible debentures 2004 24,000 22,080 .27
Pan Pacific Industrial Investments PLC 0% 2007 (1) 33,500 10,254 .13
-------------------
53,193 .65
-------------------
Energy & Related Companies
Benton Oil and Gas Co.:
11.625% 2003 7,750 8,544 .17
9.375% 2007 (1) 5,250 5,381
BP America Inc. 10.00% 2018 4,000 4,252 .05
California Energy Co., Inc.:
9.875% 2003 14,000 15,184 .42
10.25% 2004 17,500 19,082
Clark Refining & Marketing, Inc. 8.375% 2007 (1) 1,500 1,519 .02
Falcon Drilling Co., Inc. 9.75% 2001 1,000 1,046 .01
Forcenergy Inc.:
9.50% 2006 2,500 2,625 .09
8.50% 2007 5,000 5,050
Gulf Canada Resources Ltd. 9.25% 2004 5,000 5,273 .06
Kelley Oil & Gas 10.375% 2006 8,750 9,341 .11
Lukinter Finance BV 3.50% convertible debentures 2002 (1) 6,400 9,088 .11
Mariner Energy, Inc. 10.50% 2006 3,500 3,658 .04
McDermott Inc.:
9.375% 2002 14,250 15,279 .32
9.375% 2006 9,500 10,213
Ocean Energy 8.875% 2007 11,000 11,688 .14
Oil Co. Ltd. 8.90% 2000 (1) 17,019 17,278 .21
OXYMAR 7.50% 2016 (1) 8,500 8,722 .11
Petrozuata Finance Inc. 7.63% 2009 (1) 11,280 11,921 .15
Pogo Producing Co. 8.75% 2007 2,250 2,306 .03
Williams Companies Inc. 6.25% 2006 5,000 4,943 .06
YPF SA:
8.00% 2004 2,350 2,427 .07
7.75% 2007 3,000 3,035
-------------------
177,855 2.17
-------------------
Food Retailing
Bruno's Inc. 10.50% 2005 7,800 2,652 .03
Carr-Gottstein Co. 12.00% 2005 7,500 8,325 .10
Quality Food Centers, Inc. 8.70% 2007 7,500 8,044 .10
Randall's Food Markets, Inc. 9.375% 2007 (1) 3,500 3,623 .05
Stater Bros. Holdings Inc. 11.00% 2001 1,500 1,650 .02
-------------------
24,294 .30
-------------------
Forest Products & Paper
Container Corp. of America:
10.75% 2002 4,800 5,256 .51
9.75% 2003 25,000 26,875
11.25% 2004 8,000 8,720
Copamex Industrias, SA de CV 11.375% 2004 11,880 13,157 .16
Domtar Inc.:
8.75% 2006 3,000 3,090 .06
9.50% 2016 2,000 2,158
Fort James Corp. 6.625% 2004 11,000 11,035 .13
Grupo Industrial Durango, SA de CV:
12.00% 2001 3,000 3,234 .15
12.625% 2003 7,625 8,521
Pacific Lumber Co. 10.50% 2003 500 518 .01
Paperboard Industries International Inc. 8.375% 2007 (1) 4,750 4,833 .06
Pindo Deli Finance Mauritius Ltd.:(1)
10.25% 2002 6,000 5,160 .11
10.75% 2007 4,925 4,236
U.S. Timberlands Klamath Falls, LLC and U.S. Timberlands
Finance Corp. 9.625% 2007 4,500 4,669 .06
-------------------
101,462 1.25
-------------------
General Retailing & Merchandising
Barnes & Noble, Inc. 11.875% 2003 1,000 1,060 .01
Federated Department Stores, Inc.:
8.125% 2002 5,000 5,334 .10
7.45% 2017 2,000 2,091
Loehmann's Inc. 11.875% 2003 4,250 4,378 .05
Woolworth Corp.:
6.98% 2001 9,000 9,150 .17
7.00% 2002 4,000 4,080
8.50% 2022 1,000 1,126
-------------------
27,219 .33
-------------------
Health & Personal Care
Columbia HCA Healthcare Corp.:
6.50% 1999 7,000 6,960
6.125% 2000 8,500 8,306
6.41% 2000 1,000 985 .20
Integrated Health Services, Inc.:
5.75% conventible debentures 2001 3,500 3,697 .51
10.25% 2006 9,350 9,817
9.50% 2007 (1) 8,675 8,935
9.25% 2008 (1) 18,500 18,870
Mariner Health Group, Inc. 9.50% 2006 6,500 6,711 .08
Nationwide Health Properties Inc., preferred, 7.677% step-up 100,000 share 9,638 .12
Paracelsus Healthcare Corp. 10.00% 2006 22,575 23,027 .28
Sun Healthcare Group, Inc. 9.50% 2007 (1) 6,500 6,646 .08
Tenet Healthcare Corp. 8.00% 2005 2,500 2,544 .03
Unison Health 13.00% 2006 (1) 5,000 4,450 .05
Universal Health Services, Inc. 8.75% 2005 1,500 1,583 .02
Vencor 8.625% 2007 7,750 7,750 .09
-------------------
119,919 1.46
-------------------
Leisure & Tourism
AMF Group Inc.:
10.875% 2006 4,750 5,154 .11
0%/12.25% 2006 (2) 5,750 4,485
Boyd Gaming Corp.:
9.25% 2003 10,000 10,475 .20
9.50% 2007 (1) 5,500 5,761
Capstar Hotel Co. 8.75% 2007 7,000 7,262 .09
CLN Holdings Inc., 0% 2001 10,750 7,149 .09
Discovery Zone 0% convertible debentures 2013 28,500 71 .00
Foodmaker, Inc. 9.25% 1999 1,428 1,449 .02
Rio Hotel & Casino, Inc. 9.50% 2007 10,500 11,130 .14
Station Casinos, Inc.:
Series A, 9.625% 2003 10,750 11,153 .16
Series B, 9.625% 2003 1,325 1,368
Sun International Hotels Ltd., Sun International
North America, Inc. 9.00% 2007 5,250 5,421 .06
Wyndham Hotel Corp. 10.50% 2006 4,000 4,640 .05
-------------------
75,518 .92
-------------------
Machinery & Engineering
John Deere Capital Corp. 8.625% 2019 16,850 18,462 .23
Newport News Shipping Inc. 9.25% 2006 2,500 2,644 .03
United Defense 8.75% 2007 1,750 1,768 .02
Westinghouse Air Brake Co. 9.375% 2005 3,750 3,909 .05
-------------------
26,783 .33
-------------------
Metals
AK Steel Corp.:
10.75% 2004 4,750 5,059 .18
9.125% 2006 9,500 9,714
Altos Hornos De Mexico:
Series A, 11.375% 2002 1,000 1,035 .04
Series B, 11.875% 2004 2,000 2,075
Impress Metal Packaging Holdings BV 9.875% 2007 4,000 2,314 .03
Inco Ltd.:
9.875% 2019 7,500 8,033 .32
9.60% 2022 16,000 18,315
Kaiser Aluminum and Chemical Corp.:
9.875% 2002 6,500 6,727 .15
12.75% 2003 2,000 2,128
Series C, 10.875% 2006 3,000 3,247
LTV Corporation 8.20% 2007 (1) 5,000 4,850 .06
Pohang Iron & Steel Co., Ltd. 6.625% 2003 4,695 3,625 .04
UCAR Global Enterprises Inc. 12.00% 2005 3,430 3,842 .05
-------------------
70,964 .87
-------------------
Miscellaneous Materials & Commodities
Anchor Glass Container Corp. 11.25% 2005 (1) 7,000 7,560 .09
Consumers International Inc. 10.25% 2005 (1) 4,000 4,380 .05
Freeport-McMoRan Copper & Gold Inc.:
7.50% 2006 30,000 25,818 .54
7.20% 2026 18,000 17,736
Hutchison Whampoa Finance Ltd. Series D, 6.988% 2037 (1) 15,000 14,297 .18
Key Plastics, Inc. 10.25% 2007 1,000 1,060 .01
Printpack Inc.:
Series B, 9.875% 2004 2,775 2,935 .10
10.625% 2006 4,500 4,815
Texas Petrochemicals Corp. 11.125% 2006 11,500 12,420 .15
-------------------
91,021 1.12
-------------------
Multi-Industry
Antenna TV SA 9.00% 2007 (1) 5,250 5,237 .06
New Tenneco Inc. 8.075% 2002 3,000 3,209 .04
Perez Companc SA 9.00% 2004 2,000 2,030 .02
Reliance Industries Ltd.: (1)
8.25% 2027 10,000 9,371 .24
10.25% 2097 10,750 10,895
Royal Caribbean Cruises Ltd. 7.50% 2027 2,000 2,037 .03
Wharf International Finance Ltd., Series A, 7.625% 2007 15,000 12,891 .16
-------------------
45,670 .55
-------------------
Other
Allied Waste North America, Inc. 10.25% 2006 9,750 10,701 .13
Chrysler Corp. 7.40% 2097 1,500 1,573 .02
EarthWatch Inc. Units, 12.50% 2001 (1),(4) 12,000 12,000 .14
Fage Dairy Industry SA 9.00% 2007 10,000 9,700 .12
Verio Inc. Units, 13.50% 2004 (1) 11,500 13,685 .17
Waste Management Inc. 7.10% 2026 10,000 10,342 .13
-------------------
58,001 .71
-------------------
Protection Services
Borg-Warner Security Corp. 9.625% 2007 2,250 2,351 .03
Protection One Alarm Monitoring, Inc.:
6.75% convertible debentures 2003 5,000 6,000 .30
0%/13.625% 2005 (2) 17,000 18,530
-------------------
26,881 .33
-------------------
Telecommunications
Brooks Fiber Properties, Inc.:
0/10.875% 2006 (2) 3,500 2,905 .10
10.00% 2007 4,000 4,580
CCPR Services, Inc. 10.00% 2007 13,750 13,200 .16
CEI Citicorp Holdings 11.25% 2007 (1) 10,500 8,402 .10
CellNet Data Systems, Inc. Units, 0%/14.00% 2007 (1),(2) 75,711 38,991 .48
Cellular Communications International, Inc.:
0% 2000 1,000 802 .16
Units 0% 2000 15,071 12,094
Cellular, Inc. 0%/11.75% 2003 (2) 1,000 991 .01
Centennial Cellular Corp.:
8.875% 2001 19,000 19,332 .31
10.125% 2005 5,000 5,425
Clearnet Communications Inc. 0%/11.75% 2007 (2) C$20,125 8,969 .11
COLT Telecom Group PLC:
Units, 0%/12.0% 2006 (2) $5,250 4,121 .20
8.875% 2007 DM9,500 5,424
10.125% 2007 L4,000 6,733
Comcast Cellular 9.50% 2007 $21,000 21,840 .27
Comunicacion Celular SA Units, 0%/13.125% 2003 (2),(5) 17,550 14,501 .18
Conecel Holdings Ltd., Series A, Units 14.00% 2000 (1) 5,900 5,959 .07
Crown Castle International Corp. 0%/10.625% 2007 (1),(2) 11,000 6,930 .08
Esat Holdings Ltd. Units 0%/12.50% 2007 (1),(2),(5) 4,000 3,030 .04
Esat Telecom Group PLC 0%/12.5% 2007 (2) 4,500 3,251 .04
Geotek Communications, Inc. 0%/15.00% 2005 (2) 7,750 3,875 .05
Globalstar LP Units 11.375% 2004 (5) 4,500 5,046 .06
Global Telesystems Group 8.75% convertible debentures
2000 (1) 7,500 7,350 .09
McCaw International, Ltd., Units, 0%/13.00% 2007 (2),(5) 36,000 20,949 .26
MobileMedia Communications, Inc.(10):
0%/10.50% 2003 (2) 6,600 726 .02
9.375% 2007 5,300 610
Mobile Telecomm 13.50% 2002 8,530 9,895 .12
NEXTEL Communications, Inc.:
0%/9.75% 2004 (2) 14,000 12,460 1.28
0%/10.125% 2004 (2) (formerly CenCall Communications Corp.) 32,000 28,800
0%/12.25% 2004 (2) (formerly Dial Call Communications, Inc.) 8,000 7,640
0%/9.75% 2007 (1),(2) 66,000 40,508
Series D, 13.00% exchangeable preferred, redeemable 2009(1) 13,872 share 15,848
Nextlink Capital, Inc.:
12.50% 2006 3,000 3,420 .09
9.625% 2007 4,000 4,130
Northern Telecom Ltd. 8.75% 2001 3,500 3,762 .05
Omnipoint Corp.:
Units 12.00% 2000 (4),(5) 12,500 17,671 .52
11.625% 2006 21,200 22,552
11.625% 2006 1,250 1,330
Orion Network Systems, Inc., Units, 11.25% 2007 29,500 33,908 .41
Powertel, Inc. 11.125% 2007 2,250 2,453 .03
PriCellular Wireless Corp.:
14.00% 2001 9,000 9,900 .43
12.25% 2003 17,750 18,016
10.75% 2004 6,700 7,345
PTC International Finance BV 0%/10.75% 2007 (1),(2) 4,200 2,762 .03
Qwest Communications International:
10.875% 2007 8,500 9,669
0%/9.47% 2007 (1),(2) 26,000 17,745 .34
RCN Corporation:
10.00% 2007 (1) 750 778 .03
0%/11.125% 2007 (1),(2) 2,750 1,726
Rogers Cantel Communications Inc. 9.375% 2008 3,000 3,165 .04
Sprint Spectrum LP, Sprint Spectrum Finance Corp.
11.00% 2006 6,000 6,735 .08
Telecom Argentina STET - France Telecom SA
12.00% 2002 2,500 2,900 .03
Teleport Communications 9.875% 2006 6,500 7,337 .09
Teletrac Inc., Teletrac Holdings, Inc. Units, 14.00% 2007 (1),(3) 4,500 4,590 .05
WorldCom, Inc.:
9.375% 2004 25,058 26,531 .56
8.875% 2006 4,796 5,160
7.75% 2007 14,000 15,034
-------------------
569,806 6.97
-------------------
Textiles & Apparel
Tultex Corp.:
10.625% 2005 2,750 2,860 .15
9.625% 2007 9,500 9,453
WestPoint Stevens Inc. 8.75% 2001 2,500 2,606 .03
-------------------
14,919 .18
-------------------
Transportation
Airplanes Pass Through Trust, pass-through certificates (3):
Series 1, Class B, 7.08% 2019 (6) 6,954 6,968 .62
Series 1, Class C, 8.15% 2019 42,000 44,247
Alaska Airlines:(3)
Series A, 9.50% 2010 2,252 2,548 .17
Series B, 9.50% 2010 2,869 3,243
Series C, 9.50% 2010 2,757 3,142
Series D, 9.50% 2012 4,657 5,335
American Airlines, Inc., Series 1991-C2, pass-through certificates,
9.73% 2014 (3) 6,000 7,450 .09
Continental Airlines, Inc.,
pass-through certificates (3):
Series 1997-1C, 7.42% 2007 2,500 2,593 .80
Series 1997-1B, 7.46% 2014 1,000 1,070
Series 1996-2B, 8.56% 2014 1,944 2,174
Series 1996-A, 6.94% 2015 3,922 4,034
Series 1996-B, 7.82% 2015 13,235 14,155
Series 1996-C, 9.50% 2015 4,902 5,695
Series 1996-2D, 11.50% 2016 4,408 4,860
Series 1997-4A, 6.90% 2018 30,000 30,750
Delta Air Lines, Inc.:
9.875% 2000 2,000 2,155 .60
10.375% 2022 1,700 2,310
1990 Equipment trust certificates (1):
Series I, 10.00% 2014 5,000 6,295
Series J, 10.00% 2014 10,000 12,590
Series F, 10.79% 2014 1,700 2,260
pass-through certificates (3):
Series 1992-B1, 9.375% 2007 8,379 9,417
Series 1992-A2, 9.20% 2014 11,500 13,640
Jet Equipment Trust (1):
Series B1, 10.91% 2006 (3) 6,535 7,736 .70
Series C1, 11.79% 2013 4,000 5,377
Series 1995B-2, 10.91% 2014 5,000 6,459
Series 1995-D, 11.44% 2014 10,000 13,372
Series CL-A, 7.63% 2015 (3) 4,270 4,589
Series CL-C, 9.71% 2015 (3) 5,500 6,697
Series 1995-C, 10.69% 2015 (3) 10,500 13,804
Kitty Hawk, Inc. 9.95% 2004 (1) 4,000 4,120 .05
MC-Cuernavaca Trust 9.25% 2001 (1) 3,975 3,836 .05
Teekay Shipping Corp. 8.32% 2008 6,000 6,120 .07
United Air Lines, Inc., pass-through certificates (3):
Series 1995-A1, 9.02% 2012 10,638 12,144 .27
Series 1995-A2, 9.56% 2018 8,000 9,975
USAir, Inc.:
9.625% 2001 3,996 4,116 .89
10.00% 2003 19,000 19,570
Enhanced Equipment Notes:
Class B, 7.50% 2009 9,265 9,650
Class C, 8.93% 2009 8,505 9,523
1990 Equipment Trust Certificates:
Series A, 10.28% 2001 754 805
Series B, 10.28% 2001 754 805
Series C, 10.28% 2001 530 566
Series 1993-A1, pass-through certificate, 8.625% 1998(3) 5,000 5,050
Series 1993-A2, pass-through trust, 9.625% 2003 (3) 8,125 8,714
Series 1989-A1, pass-through trust, 9.33% 2006 (3) 4,609 4,759
Series 1993-A3, pass-through trust, 10.375% 2013 (3) 7,250 8,114
-------------------
352,832 4.31
-------------------
FINANCE
Banking & Thrifts
Banco General, SA 7.70% 2002 (1) 4,500 4,185 .05
Banco Nacional de Mexico 11.00% convertible debentures
2003(1) 4,425 4,668 .06
BankAmerica Capital III, BankAmerica Corp., Series 3,
6.328% 2027(6) 22,500 21,904 .27
Barnett Capital I 8.06% 2026 20,000 21,298 .26
Bay View Capital 9.125% 2007 5,500 5,665 .07
BNP U.S. Funding LLC, Series A 7.738% 2049 (1) 12,500 12,623 .15
BT Capital Trust I 6.656% 2026 (6) 17,500 17,211 .21
Central Fidelity Capital Trust I, Central Fidelity Banks,
Inc. 6.758% 2027 (6) 14,500 14,715 .18
Chase Capital II, Global Floating Rate Capital
Securities, Series B, 6.25% 2027 (6) 15,000 14,362 .18
Chevy Chase Bank, FSB 9.25% 2008 2,000 2,060 .03
Den Danske Bank 7.40% 2010 (1),(6) 6,000 6,216 .08
Dime Capital Trust I, Dime Bancorp, Inc., Series A, 9.33% 2027 10,000 11,312 .14
First Nationwide Holdings Inc.:
12.25% 2001 9,000 9,945 .49
9.125% 2003 6,000 6,240
10.625% 2003 12,750 14,248
12.50% 2003 9,000 10,215
Imperial Capital Trust I, Imperial Bancorp 9.98% 2026 15,000 17,120 .21
Kansallis-Osake-Pankki:
9.75% 1998 5,000 5,154 .07
10.00% 2002 1,000 1,136
The Korea Development Bank:
6.25% 2000 5,500 4,782 .14
7.125% 2001 1,000 856
7.375% 2004 7,250 5,801
MBNA Corp.:
MBNA Capital A, Series A, 8.278% 2026 22,000 23,013 .61
MBNA Capital B, Series B, 6.55% 2027 (6) 30,000 27,276
Merita Bank Ltd., Undated 7.15% (1) 5,500 5,587 .07
Midland American Capital 12.75% 2003 12,150 12,795 .16
NB Capital Corp., Series A, 8.35% noncumulative exchangeable
preferred (1) 10,000 share 10,503 .13
PNC Institutional Capital B, PNC Financial Corp. 8.315% 2027 (1) 1,000 1,084 .01
Riggs National Corp.:
8.625% 2026 (1) 1,500 1,592 .06
8.875% 2027 (1) 2,000 2,201
8.875% 2027 500 546
Skandinaviska Enskilda Banken 6.875% 2009 8,250 8,301 .10
-------------------
304,614 3.73
-------------------
Financial Services
Advanta Capital Trust I 8.99% 2026 10,000 10,013 .31
Advanta Corp.:
Series D, 6.54% 2000 5,500 5,282
6.60% 2000 6,000 5,770
Advanta National Bank 6.45% 2000 5,000 4,985
Bankunited Capital Trust, Bankunited Financial Corp. 10.25% 2026 3,000 3,135 .04
Beneficial Corp. 12.875% 2013 3,800 4,130 .05
Capital One Bank:
8.125% 2000 6,500 6,737 .42
6.97% 2002 5,000 5,072
7.15% 2006 12,500 12,679
7.30% 2027 (1),(6) 10,000 9,660
Ford Motor Credit Co. 9.50% 2000 7,350 7,858 .10
General Motors Acceptance Corp. 7.00% 2000 5,000 5,078 .06
Indah Kiat Finance Mauritius Ltd.:
10.00% 2007 2,000 1,660 .18
10.00% 2007 (1) 15,750 13,072
Ocwen Capital Trust I 10.875% 2027 6,500 7,036 .17
Ocwen Federal Bank FSB 12.00% 2005 6,000 6,645
SocGen Real Estate Co. LLC, Series A, 7.64% 2049 (1) 12,500 12,810 .16
Swire Pacific Capital Ltd. 8.84% preferred (1) 780,000 share 19,835 .30
Swire Pacific Offshore Financing Ltd. 9.33% preferred (1) 180,000 share 4,523
Wharf Capital International, Ltd. 8.875% 2004 2,080 1,987 .03
Wilshire Financial Services Group 13.00% 2004 (1) 5,000 5,150 .06
-------------------
153,117 1.88
-------------------
Insurance
Aetna Servies, Inc. 6.97% 2036 7,500 7,742 .09
Fidelity National Financial 0% convertible debentures 2009 12,500 9,984 .12
Terra Nova Insurance (UK) Holdings PLC:
10.75% 2005 3,000 3,342 .17
7.20% 2007 10,000 10,233
-------------------
31,301 .38
-------------------
Real Estate
Beverly Finance Corp. 8.36% 2004 (1) 10,000 10,795 .13
B.F. Saul REIT 11.625% 2002 14,000 14,910 .18
CarrAmerica Realty Corp.:
Series B, 8.57% cumulative redeemable preferred 700,000 share 17,587 .35
Series C, 8.55% cumulative redeemable preferred 400,000 share 10,084
Corporate Property Investors (1):
9.00% 2002 2,000 2,174 .09
7.75% 2004 4,250 4,542
Duke Realty Investments, Inc., preferred, Series B, 7.99%
cumulative step-up premium rate 150,000 share 7,580 .09
ERP Operating LP:
7.95% 2002 3,750 3,934 .22
7.57% 2026 13,000 13,822
Irvine Apartment Communities, LP 7.00% 2007 11,000 11,003 .13
Irvine Co. 7.46% 2006 (1),(4) 17,000 17,220 .21
Land Securities PLC 9.00% 2020 9,000 18,031 .22
New Plan Realty Trust, Series A, preferred, 7.80%
cumulative step-up premium rate 112,500 share 5,775 .07
New World China Finance Ltd. 4.00% 1999 (1) 4,000 3,965 .05
Security Capital Atlantic preferred, Class A, 8.625% 200,000 share 4,987 .17
Security Capital Industrial Trust:
7.25% 2002 1,000 1,024
7.875% 2009 7,500 8,048
Shopping Center Associates (1):
6.75% 2004 12,000 12,111 .16
7.625% 2005 500 522
Simon DeBartolo Group, Inc., Series C, preferred, 7.89%
cumulative step-up premium rate 150,000 share 7,660 .09
Wellsford Residential Property Trust:
7.25% 2000 1,000 1,020 .02
7.75% 2005 1,000 1,065
-------------------
177,859 2.18
-------------------
COLLATERALIZED MORTGAGE/ASSET-BACKED OBLIGATIONS (3)
(Excluding Those Issued by Federal Agencies)
Aames Mortgage Trust 1996 Series D, Class A-1B, 6.34% 2012 22,000 21,969 .27
Asset-Backed Securities Investment Trust, Series 1997-D,
6.79% 2003 51,000 51,163 .63
Asset Securitization Corp.:
Series 1996-D3, Class A-1B, 7.21% 2026 3,000 3,133 .74
Series 1997-D4, Class A-1A, 7.35% 2029 10,994 11,318
Series 1997-D5, Class A-PS1, Interest Only, 1.367% 2043 280,657 30,395
Series 1997-D5, Class A-1A, 6.50% 2043 15,692 15,799
Bear Asset Trust 1997-1 6.686% 2006 20,000 20,082 .25
Bear Stearns Structured Securities Inc., Series 1997-2,
Class AWAC, 3.786% 2036 (1) 4,919 4,936 .06
Blackrock Capital Finance LP (1),(6):
Series 1996-C2, Class A, 7.522% 2026 2,930 2,936 .05
Series 1996-C2, Class C, 7.782% 2026 1,000 1,009
California Infrastructure and Economic Development
Bank Special Purpose Trust:
PG&E-1, Series 1997-1 Class A-6, 6.32% 2005 8,000 8,065 .93
PG&E-1, Series 1997-1, Class A-7, 6.42% 2008 19,050 19,223
PG&E-1, Series 1997-1, Class A-8, 6.48% 2009 15,000 15,156
SCE-1, Class A-6, 6.38% 2008 32,750 32,969
Capstead Securities Corp. IV, collateralized mortgage
obligations, Series 1992-4, Class J, 20.362% 2022 (7) 8,750 10,413 .13
Chase Commercial Mortgage Securities Corp.,
Series 1997-I, Class A1, 7.27% 2029 9,692 10,013 .12
Chase Manhattan Bank, N.A.:
Series 96-1, Class A1, 7.60% 2005 4,813 5,084 .18
Series 93-I, Class 2A5, 7.25% 2024 10,000 10,050
Chase Manhattan Credit Card Master Trust, Series 1996-4,
Class A, 6.73% 2003 15,000 15,150 .19
Collateralized Mortgage Obligation Trust, Series 63,
Class Z, 9.00% 2020 6,762 7,489 .09
ContiMortgage Home Equity Loan Trust, Series
1996-4A, Class A4, 6.37% 2011 1,500 1,497 .02
CSFB Finance Co. Ltd., Series 1995-A,
5.00%/10.00% 2005 (6) 20,500 19,987 .24
CS First Boston Mortgage Securities Corp., mortgage
pass-through certificates Series 1995-MBL1, 6.425% 2030 3,894 3,890 .05
DLJ Mortgage Acceptance Corp.:
Series 1997-CF1, Class A1A, 7.40% 2006 (1) 6,765 7,051 .67
Series 1996-CF2, Class A2, 7.28% 2021 (1) 5,000 5,189
Series 1996-CF2, Class A1, 7.29% 2021 (1) 1,200 1,253
Series 1995-CF2, Class A1, 6.85% 2027 (1) 30,000 30,552
Series 1996-CF1, Class A1A, 7.28% 2028 10,284 10,622
EquiCredit Funding Asset Backed Certificates Series
1996-A, Class A2, 6.95% 2012 21,000 21,189 .26
FIRSTPLUS Home Loan Owner Trust:
Series 1996-4, Class A3, 6.28% 2009 1,000 998 .19
Series 1997-1, Class A7, 7.16% 2018 10,000 10,150
Series 1997-3, Class B1, 7.79% 2023 5,000 5,057
GCC Home Equity Trust, asset-backed certificates,
Series 1990-1, 10.00% 2005 1,603 1,629 .02
G E Capital Mortgage Services:
Series 1994-15, Class A10, 6.00% 2009 16,376 15,608 .24
Series 1994-9, Class A9, 6.50% 2024 4,339 3,908
GMAC Commercial Mortgage Securities Inc.:
Series 1997-C1, Class A1, 6.83% 2003 28,906 29,438 .37
Series 1996-C1, Class A2A, 6.79% 2028 957 973
Green Tree Financial Corp., pass-through certificates:
Series 1994-A, Class NIM, 6.90% 2004 5,275 5,328 .57
Series 1995-A, Class NIM, 7.25% 2005 19,405 18,823
Series 1993-2, Class B, 8.00% 2018 2,250 2,296
Series 1997-A, Class HI-M1, 7.47% 2023 1,000 1,021
Series 1995-9, Class A-5, 6.80% 2027 8,000 8,095
Series 1997-1, Class A5, 6.86% 2028 1,500 1,518
Series 1996-10, Class A-6, 7.30% 2028 8,500 8,667
Grupo Financiero Banamex Accival, SA de CV 0.00% 2002 (1) 15,017 12,625 .15
IMC Home Equity Loan Trust:
Series 1996-4, Class A1, 6.59% 2011 1,625 1,619 .34
Series 1996-2, Class A2, 6.78% 2011 8,136 8,122
Series 1996-4, Class A3, 6.81% 2011 17,972 18,021
J.P. Morgan & Co. Inc., Series A, 5.994% 2012 (6) 10,000 9,245 .11
J.P. Morgan Commercial Mortgage Finance Corp.,pass-
through certificates:
Series 1995-C1, Class A-2, 7.403% 2010 (6) 1,000 1,050 .04
Series 1997-C4, Class A-1, 6.939% 2028 1,340 1,359
Series 1996-C3, Class A-1, 7.33% 2028 953 991
Merrill Lynch Mortgage Investors, Inc.:
Series 1995-C2, Class A-1, 7.344% 2021 (6) 2,058 2,098 .24
Series 1995-C2, Class D, 8.114% 2021 (6) 735 753
Series 1995-C3, Class A1, 6.788% 2025 (6) 2,685 2,722
Series 1996-C2, Class A1, 6.69% 2028 13,740 13,926
Money Store Trust:
Series 1996-D, Class A-12, 6.37% 2011 20,000 19,975 .56
Series 1997-1, Class A-2, 6.81% 2011 17,000 17,150
Series 1996-B, Class A-5, 7.18% 2014 2,000 2,017
Series 1996-D, Class A-14, 6.985% 2016 4,000 4,055
Series 1996-C, Class A-3, 7.07% 2016 3,000 3,024
Morgan Stanley Capital Inc., Series 1995-GA1,
Class A-1, 7.00% 2002 (1) 9,728 9,827 .12
Morgan Stanley Capital I Inc.:
Series 1996-WF1, Class A-1, 6.588% 2002 (1),(6) 12,840 12,930 .30
Series 1996-WF1, Class D, 6.588% 2028 (6) 2,000 1,941
Series 1997-WF1, Class A-1, 6.83% 2029 (1) 9,818 9,991
Prudential-Bache CMO Trust, Series 3, Class F,
9.44% 2018 1,000 1,038 .01
Prudential Home Mortgage Securities Co., Inc.:
Series 1993-48, Class A-6, 6.25% 2008 4,466 4,314 .27
Series 1992-37, Class A-6, 7.00% 2022 520 518
Series 1993-34, Class A-1, 7.00% 2023 11,776 11,809
Series 1993-7, Class A-5, 8.00% 2023 5,588 5,592
Residential Funding Mortgage Securities I, Inc.,
Series 1992-S6, Class A-10, 12.579% 2022 (7) 8,138 8,352 .10
Resolution Trust Corp.:
Series 1991-M5, Class B, 9.00% 2017 2,238 2,241 .26
Series 1992-6, Class A-2B, 8.40% 2024 2,124 2,117
Series 1993-C1, Class D, 9.45% 2024 9,352 9,476
Series 1993-C1, Class E, 9.50% 2024 313 317
Series 1993-C2, Class C, 8.00% 2025 3,000 3,008
Series 1993-C2, Class D, 8.50% 2025 3,243 3,255
Standard Credit Card Master Trust I, credit card
participation certificates, Series 1994-2A, 7.25% 2008 5,000 5,289 .06
Standard Credit Card Trust, credit card participation
certificates, Series 1991-3A, 8.875% 1999 5,500 5,577 .07
Structured Asset Notes Transaction, Ltd.
Series 1996-A, Class A1, 7.156% 2003(1) 7,435 7,470 .09
Structured Asset Securities Corp.,
pass-through certificates:
Series 1995-C1, Class A1A, 7.375% 2024 230 230 .13
Series 1996-CFL, Class A1C, 5.944% 2028 5,955 5,922
Series 1996-CFL, Class D, 7.034% 2028 2,950 2,973
Series 1996-CFL, Class A2A, 7.75% 2028 1,434 1,447
Travelers Mortgage Securities Corp., Series 1, Class Z2, 12.00% 2 7,408 8,380 .10
UCFC Acceptance Corp. pass-through certificates:
Series 1996-B1, Class A2, 7.075% 2010 10,000 10,025 .15
Series 1996-D, Class A4, 6.776% 2016 2,400 2,415
-------------------
766,297 9.37
-------------------
GOVERNMENTAL
Governments (Excluding U.S. Government)
Argentina (Republic of):
8.75% 2002 (1) 5,000 4,351 .37
11.00% 2006 1,000 1,074
11.75% 2007 (1) ARP16,000 15,123
11.375% 2017 6,500 7,124
Eurobond 6.688% 2005 (6) $3,696 3,308
Australian Government:
8.75% 2001 A$11,000 7,809 .10
Brazil (Federal Republic of):
Debt Conversion Bond, Series L, 6.75% 2012 (6) $500 380 .00
Bearer, 8.00% 2014 285 224
British Columbia Hydro & Power Authority 12.50% 2013 4,000 4,317 .05
Bundesrepublik:
7.125% 2002 DM24,000 14,679 .64
6.00% 2007 65,000 37,984
Canadian Government:
9.00% 2004 C$36,000 30,001 1.65
4.25% 2021 (8) 22,935 16,276
4.25% 2026 (8) 106,924 75,696
8.00% 2027 13,500 12,040
Deutschland Republic 8.00% 2002 DM34050 21,389 .26
Ecuador (Republic of) Past Due Interest Bonds: (6)
Bearer, 6.688% 2015 $410 269 .00
Registered, 6.688% 2015 273 179
Discount, 6.438% 2025 250 189
Export-Import Bank of Japan 2.875% 2005 Y3,210,000 26,531 .32
Hydro-Quebec, Series HKF, 9.375% 2030 $3,250 4,271 .05
International Bank for Reconstruction and Development:
4.50% 2003 Y1,800,000 15,989 .20
Irish Government IEP:
8.00% 2000 IRL10,000 15,402 .33
8.00% 2006 6,700 11,146
Italian Government National 10.50% 2005 Lr15,000,000 11,066 .14
Manitoba (Province of) 9.625% 1999 2,000 2,082 .03
Mendoza (Province of) 10.00% 2007 (1) 4,250 4,069 .05
New Zealand Government:
8.00% 2004 NZ$13,500 8,133 .44
8.00% 2006 12,000 7,377
4.50% 2016 (8) 38,176 20,402
Ontario Hydro (Province of Ontario) 4.61% 1999 (6) C$3,000 2,099 .03
Ontario (Province of) 7.75% 2002 $3,500 3,720 .05
Panama (Republic of): (6)
Interest Reduction Bond, 3.75% 2014 (1) 6,500 4,981 .08
Past Due Interest Bond, 6.688% 2016 (1) 1,541 1,259
Past Due Interest Bond, 6.688% 2016 257 210
Peru (Republic of) Past Due Interest Bond 4.00% 2017 (6) 750 494 .01
Poland (Republic of) Past Due Interest Bond (6):
Bearer, 4.00% 2014 15,750 13,643 .29
Registered, 4.00% 2014 11,000 9,529
Poland (Republic of) Treasury Bill 1998 PLZ11,000 2,685 .03
Quebec (Province of):
8.625% 2005 $4,250 4,755 .14
13.25% 2014 5,500 6,350
South Africa (Republic of) 13.00% 2010 ZAR148,000 28,986 .35
Spain (Kingdom of):
6.75% 2000 Pta1,000,000 6,866 .52
8.40% 2001 3,225,000 23,488
3.10% 2006 Y1,515,000 12,710
Swedish Government 10.250% 2003 SKr58,000 8,811 .11
Treuhandanstalt:
7.125% 2003 DM22,250 13,614 .42
7.50% 2004 32,000 20,174
United Kingdom 8.50% 2005 L23,500 43,877 .54
United Mexican States Government Eurobonds:
Global, 11.375% 2016 $2,515 2,892 .06
Global, 11.50% 2026 825 980
Series A, 6.25% 2019 1,000 835
Series B, Units, 6.617% 2019 (6) 500 464
Series A, Units, 6.693% 2019 (6) 1,250 1,159
Venezuela (Republic of)
6.813% 2007 (6) 1,190 1,068 .02
Front Loaded Interest Reduction Bond:
Series A, 6.75% 2007 905 812
Series B, 6.75% 2007 226 203
-------------------
595,544 7.28
-------------------
Federal Agency Obligations - Mortgage Pass-Throughs (3)
Fannie Mae (formerly Federal National Mortgage Assn.)
6.137% 2033 (6) 33,527 33,517 1.24
6.50% 2025 1,179 1,164
7.00% 2009-2010 3,863 3,932
7.50% 2009-2024 7,905 8,119
8.00% 2023 2,834 2,961
8.310% 2002 (6) 6,385 6,622
8.50% 2009-2027 11,517 12,062
9.00% 2018-2025 4,656 4,971
9.50% 2009-2025 4,461 4,814
10.00% 2018-2025 14,462 15,895
10.50% 2012-2019 3,745 4,181
11.00% 2015-2020 2,556 2,872
11.25% 2014 44 50
11.50% 2010-2014 243 278
12.00% 2015-2019 73 84
12.50% 2015 191 227
13.00% 2014 53 63
15.00% 2013 62 75
Freddie Mac (formerly Federal Home Loan Mortgage Corp.)
8.00% 2003-2010 4,067 4,145 .57
8.25% 2007 2,286 2,371
8.50% 2002-2020 27,030 28,206
8.75% 2008 2,894 3,044
9.00% 2021 845 912
10.00% 2011-2019 261 280
10.50% 2020 2,383 2,665
10.75% 2010 94 104
11.50% 2000 30 32
12.00% 2010-2015 1,219 1,392
12.50% 2009-2019 2,869 3,369
12.75% 2015-2019 493 574
13.00% 2014 73 87
13.50% 2018 12 14
13.75% 2014 18 21
Government National Mortgage Assn.:
5.00% 2026 (6) 10,369 10,479 5.91
6.00% 2026 (6) 3,832 3,884
6.50% 2008-2027 40,203 39,906
6.875% 2022-2023 (6) 43,729 44,922
7.00% 2008-2027 64,664 65,389
7.00% 2022-2024 (6) 127,213 130,194
7.375% 2022-2024 (6) 14,555 14,975
7.50% 2007-2026 65,712 67,610
8.00% 2017-2025 17,199 18,018
8.50% 2020-2026 34,406 36,398
9.00% 2016-2022 17,794 19,352
9.50% 2009-2021 16,778 18,217
10.00% 2017-2019 9,004 10,051
10.50% 2015-2019 564 636
11.00% 2013-2016 1,177 1,353
11.50% 2015 38 44
12.00% 2014 120 141
12.50% 2010-2015 685 812
13.25% 2014 80 92
-------------------
631,576 7.72
-------------------
FEDERAL AGENCY OBLIGATION - OTHER
Fannie Mae Notes:
6.50% 2002 A$5,000 3,341 .58
7.70% 2004 $12,500 12,799
2.125% 2007 Y2,300,000 17,935
medium-term notes:
6.14% 2004 $13,000 12,766
Federal Home Loan Bank Bonds:
6.38% 2003 3,000 2,969 1.17
6.41% 2003 18,580 18,409
6.16% 2004 24,000 23,546
6.27% 2004 5,000 4,931
7.00% 2005 35,000 34,940
7.013% 2007 10,000 10,020
FNSM Callable Principal STRIPS 0%/8.25% 2022 (2) 4,500 4,266 .05
Freddie Mac Notes:
7.00% 2002 25,000 24,973 1.39
5.74% 2003 6,500 6,328
5.78% 2003 14,520 14,155
6.185% 2003 19,845 19,560
6.24% 2003 2,900 2,862
6.28% 2003 3,000 2,967
6.30% 2003 2,000 1,981
6.375% 2003 5,820 5,774
6.39% 2003 10,330 10,240
6.50% 2003 6,200 6,160
6.19% 2004 11,000 10,783
6.27% 2004 3,500 3,454
7.25% 2007 5,000 5,000
-------------------
260,159 3.19
-------------------
Collateralized Mortgage Obligations - Federal Agencies (3)
Fannie Mae:
Series 91-146, Class Z, 8.00% 2006 7,078 7,330 .38
Series 90-93, Class G, 5.50% 2020 1,350 1,298
Series 91-2, Class Z, 6.50% 2021 15,658 15,442
Series 93-247, Class Z, 7.00% 2023 3,945 3,941
Series 94-4, Class ZA, 6.50% 2024 3,545 3,343
Freddie Mac:
Series 1849, Class Z, 6.00% 2008 5,497 5,186 .49
Series 1716, Class A, 6.50% 2009 4,750 4,602
Series 178, Class Z, 9.25% 2021 3,754 4,029
Series 1657, Class SA, 6.44% 2023 (7) 7,520 5,889
Series 1673, Class SA, 4.834% 2024 (7) 7,879 5,650
Series 1983, Class FB, 6.625% 2026 (6) 11,336 11,358
Series 1948, Class PJ, 6.65% 2027 3,000 2,932
-------------------
71,000 .87
-------------------
U.S. Treasury Obligations
9.25% August 1998 117,200 119,746 1.46
9.125% May 1999 15,250 15,934 .19
6.875% July 1999 49,750 50,636 .62
8.875% May 2000 30,000 32,109 .39
6.00% August 2000 11,000 11,079 .14
8.750% August 2000 28,000 30,047 .37
8.50% November 2000 30,000 32,194 .39
7.75% February 2001 26,000 27,491 .34
8.00% May 2001 14,500 15,490 .19
13.125% May 2001 21,500 26,344 .32
6.25% October 2001 3,500 3,560 .04
14.25% February 2002 7,000 9,163 .11
3.625% July 2002 (8) 55,492 55,232 .68
11.625% November 2002 92,000 114,640 1.40
10.750% May 2003 12,500 15,342 .19
11.875% November 2003 10,000 13,008 .16
7.25% May 2004 212,000 228,795 2.80
7.25% August 2004 23,000 24,858 .30
7.875% November 2004 11,000 12,298 .15
11.625% November 2004 125,500 166,581 2.04
6.50% May 2005 19,000 19,807 .24
3.375% January 2007 (8) 40,796 39,738 .49
10.375% November 2009 12,500 15,629 .19
10.00% May 2010 7,500 9,320 .11
10.375% November 2012 15,000 19,931 .24
12.00% August 2013 10,000 14,734 .18
7.25% May 2016 15,000 17,086 .21
7.50% November 2016 85,000 99,211 1.21
8.875% August 2017 235,500 312,588 3.82
8.125% May 2021 98,000 123,496 1.51
7.125% February 2023 7,750 8,847 .11
6.375% August 2027 22,500 23,730 .29
-------------------
1,708,664 20.88
-------------------
FLOATING RATE EURODOLLAR NOTES (UNDATED) (6)
Allied Irish Banks Ltd. 6.313% 7,000 6,370 .08
Bank of Nova Scotia 6.00% 10,000 8,750 .11
Bergen Bank 5.75% 5,000 4,298 .05
Canadian Imperial Bank of Commerce 5.688% 25,000 22,062 .27
Christiana Bank Og Kreditkasse 6.063% 4,000 3,510 .04
Fuji International Finance (Bermuda) Trust, The Fuji Bank,
Ltd., 7.30% 19,500 18,020 .22
Hongkong and Shanghai Banking Corp. 6.125% 10,000 7,868 .10
Lloyds Bank (#2) 6.062% 8,000 7,186 .09
Midland Bank 6.188% 5,000 4,271 .05
National Bank of Canada 4.50% 5,000 4,125 .05
Skandinaviska Enskilda Banken 7.50% 1,000 1,019 .01
Standard Chartered Bank:
6.15% 5,000 3,550 .17
6.013% 15,000 10,500
-------------------
101,529 1.24
-------------------
OTHER SECURITIES & MISCELLANEOUS
Stocks and Warrants
CellNet Data Systems, Inc. (4), (9) 398,000 2,468 .03
Heartland Wireless Communications, Inc. warrants,
expire 2000 (1),(9) 24,000 0 .00
IntelCom Group Inc., warrants expire 8/8/05 (9) 19,800 208 .00
NEXTEL Communications, Inc. warrants expire 1999 (4), (9) 38,750 0
Protection One warrants (9) 54,400 571 .01
-------------------
3,247 .04
-------------------
Miscellaneous
Investment securities in the initial period
of acquisition 13,453 .16
-------------------
TOTAL BONDS, NOTES AND EQUITY-TYPE SECURITIES
(cost: $7,207,792,000) 7,354,861 89.95
----------
SHORT-TERM SECURITIES
Commercial Paper
A.I. Credit Corp.:
5.54% due 01/21/98 10,000 9,967 .49
5.76% due 01/23/98 30,000 29,899
American General Finance Corp. 5.69% due 02/12/98 25,000 24,829 .30
Avco Financial Services, Inc.:
5.57% due 01/30/98 15,000 14,928 .47
5.71% due 03/17/98 10,000 9,880
5.68% due 03/18/98 14,000 13,829
Bell Atlantic Financial Services, Inc.
5.75% due 01/13/98 22,000 21,954 .64
5.70% due 01/15/98 30,000 29,929
Beneficial Corp.:
5.83% due 01/30/98 16,000 15,922 .37
5.58% due 02/02/98 15,000 14,922
Commercial Credit Co.
5.72% due 01/15/98 13,500 13,468 .71
5.57% due 01/16/98 25,000 24,937
5.73% due 02/05/98 20,000 19,886
Ford Motor Credit Co,:
5.54% due 01/13/98 40,500 40,417 1.17
5.68% due 01/26/98 21,000 20,914
5.68% due 01/30/98 20,000 19,904
5.74% due 02/06/98 14,000 13,917
Gannett Co., Inc. (1):
5.67% due 01/15/98 11,000 10,974 .49
5.65% due 01/20/98 29,000 28,908
General Electric Capital Corp.:
6.75% due 01/02/98 32,000 31,988 .70
5.70% due 01/27/98 25,000 24,893
IBM Credit Corp.:
5.70% due 01/14/98 40,000 39,911 .72
5.70% due 01/16/98 19,000 18,952
International Lease Finance Corp. 5.57% due 01/06/98 31,300 31,271 .38
Kimberly-Clark Corp. (1):
6.20% due 01/09/98 25,000 24,965 .36
5.65% due 01/30/98 4,000 3,981
J.C. Penney Funding Corp. 5.59% due 01/20/98 (1) 14,000 13,956 .17
Pitney Bowes Credit Corp.:
5.80% due 01/21/98 22,000 21,926 .49
5.53% due 02/09/98 17,900 17,786
Procter & Gamble Co.:
5.75% due 01/29/98 10,000 9,954 .49
5.70% due 02/12/98 10,600 10,528
5.55% due 02/19/98 20,000 19,841
SBC Communications (1):
5.74% due 01/07/98 10,000 9,989 .30
5.77% due 01/20/98 15,025 14,977
-------------------
674,302 8.25
-------------------
Certificates of Deposit
Morgan Guaranty Trust Co. of New York 5.60% 1/21/98 50,000 49,995 .61
-------------------
TOTAL SHORT-TERM SECURITIES (Cost $724,322,000) 724,297 8.86
-------------------
TOTAL INVESTMENT SECURITIES (cost $7,932,114,000) 8,079,158 98.81
Excess of cash and receivables over payables 96,973 1.19
-------------------
NET ASSETS 8,176,131 100.00
===================
1 Purchased in a private placement transaction; resale may be
limited to qualified institutional buyers; resale to the
public may require registration.
2 Step bond; coupon rate will increase at a later date.
5 Purchased as a unit; issue was separated but reattached for
reporting purposes.
4 Valued under procedures established by the Board of Directors.
3 Pass-through security backed by a pool of mortgages or other
loans on which principal payments are periodically made.
Therefore, the effective maturity is shorter than the stated
maturity.
6 Coupon rate changes periodically.
7 Inverse floater, which is a floating rate note whose interest
rate moves in the opposite direction of prevailing interest rates.
8 Index-linked bond whose principal amount moves with a government
retail price index.
9 Non-income-producing security.
10 Company filed for bankruptcy and is not making interest payments.
See Notes to Financial Statements
</TABLE>
<TABLE>
The Bond Fund of America
FINANCIAL STATEMENTS
<S> <C> <C>
Statement of Assets and Liabilities
at January 31, 1998 (dollars in thousands)
Assets:
Investment securities at market
(cost: $7,932,114) $8,079,158
Cash 2,080
Prepaid expense ....................
Receivables for--
Sales of investments $10,861
Forward currency contracts 7,801
Sales of fund's shares 31,327
Dividends and accrued interest 113,885 163,874
------------ ---------------
8,246,592
Liabilities:
Payables for--
Purchases of investments 54,765
Repurchases of fund's shares 11,492
0
Management services 2,211
Accrued expenses 1,993 70,461
87 $70,548
------------ ---------------
Net Assets at at December 31, 1997--
Equivalent to $14.00 per share
583,828,403 shares of $1 par value
capital stock outstanding (authorized
capital stock - 1,000,000,000 shares) $8,176,131
===============
Statement of Operations
for the year ended December 31, 1997 (dollars in thousands)
Investment Income:
Income:
Interest $567,710
Dividends from investment in stocks 3,373 $571,083
Expenses:
Management services fee $24,460
Distribution expenses 18,641
Transfer agent fee 4,685
Reports to shareholders 499
Registration statement and prospectus 639
Postage, stationery and supplies 1,267
Directors' fees 63
Auditing and legal fees 52
Custodian fee 373
Taxes other than federal income tax 87
Other expenses 163 50,929
------------ ---------------
Net investment income 520,154
===============
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 99,025
Net increase in unrealized
appreciation on:
Investments 34,919
Open forward currency contracts 9,125
------------
Net unrealized appreciation 44,044
---------------
Net realized gain and
unrealized appreciation
on investments 143,069
---------------
Net Increase in Net Assets Resulting $663,223
from Operations ===============
Statement of Changes in Net Assets (dollars in thousands)
Year ended December 31
1997 1996
Operations:
Net investment income $520,154 $491,209
Net realized gain (loss)on investments 99,025 (7,778)
Net unrealized appreciation
(depreciation) on investments 44,044 (45,326)
------------ ---------------
Net increase in net assets
resulting from operations 663,223 438,105
------------ ---------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net
investment income (526,643) (488,959)
------------ ---------------
Capital Share Transactions:
Proceeds from shares sold:
159,869,358 and 130,706,510
shares, respectively 2,214,949 1,780,596
Proceeds from shares issued in
reinvestment of net investment
income dividends: 28,414,675
and 26,267,382 shares,
respectively 393,612 357,426
Cost of shares repurchased:
113,580,749 and 101,063,959
shares, respectively (1,571,399) (1,374,955)
------------ ---------------
Net increase in net assets
resulting from capital share
transactions 1,037,162 763,067
------------ ---------------
Total Increase in Net Assets 1,173,742 712,213
Net Assets:
Beginning of year 7,002,389 6,290,176
------------ ---------------
End of year (including
undistributed net investment
income: $11,969 and $10,700
respectively) $8,176,131 $7,002,389
============ ===============
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. The Bond Fund of America, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks a high a level of current income as is
consistent with preservation of capital through a diversified portfolio of
bonds and other fixed-income obligations. The following paragraphs summarize
the significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the investment adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the investment adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of their representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies
are translated into U.S. dollars at the prevailing market rates at the end of
the reporting period. Purchases and sales of securities and income and
expenses are translated into U.S. dollars at the prevailing market rates on the
dates of such transactions. The effects of changes in foreign currency
exchange rates on investment securities are included with the net realized and
unrealized gain or loss on investment securities.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith by a
committe appointed by the Board of Directors.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed-delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions. Realized gains and losses from
securities transactions are reported on an identified cost basis. Interest and
dividend income is reported on the accrual basis. Discounts and premiums on
securities purchased are amortized. Dividends to shareholders are declared
daily after the determination of the fund's net investment income and are paid
to shareholders monthly. Distributions paid to shareholders are recorded on
the ex-dividend date.
The fund may enter into forward currency contracts, which represents
agreements to exchange currencies of different countries at a specified future
date at a specified rate. The fund enters into these contracts to reduce its
exposure to fluctuations in foreign exchange rates arising from investments
denominated in non-U.S. currencies. The fund's use of forward currency
contracts involves market risk in excess of the amount recognized in the
statement of assets and liabilities. The contracts are recorded in the
statement of assets and liabilities at their net unrealized value. The fund
records realized gains or losses at the time the forward contract is closed or
offset by a matching contract. The face or contract amount in U.S. dollars
reflects the total exposure the fund has in the particular contract. Risks may
arise upon entering these contracts from the potential inability of
counterparties to meet the terms of their contracts and from possible movements
in non-U.S. exchange rates and securities values underlying these instruments.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of December 31, 1997, net unrealized appreciation on investments,
excluding forward currency contracts, for book and federal income tax purposes
aggregated $147,044,000, of which $274,300,000 related to appreciated
securities and $127,256,000 related to depreciated securities. During the year
ended December 31, 1997, the fund realized, on a tax basis, a net capital gain
of $91,267,000 on securities transactions. Net gains related to non-U.S.
currency transactions of $7,758,000 were treated as ordinary income for federal
income tax purposes. During the year ended December 31, 1997, the fund
utilized the remaining capital loss carryforward totaling $50,492,000 to
offset, for tax purposes, capital gains realized during the year up to such
amount. The cost of portfolio securities, excluding foreign currency contracts,
for book and federal income tax purposes was $7,932,114,000 at December 31,
1997.
3. The fee of $24,460,0000 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million but not exceeding $1 billion;
0.18% of such assets in excess of $1 billion but not exceeding $3 billion;
0.16% of such assets in excess of $3 billion but not exceeding $6 billion;
0.15% of such assets in excess of $6 billion; plus 3.00% on the first $450,000
of the fund's monthly gross investment income; 2.25% of such income in excess
of $450,000 but not exceeding $8,333,333 million; and 2.00% of such income in
excess of $8,333,333.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Directors. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended December 31, 1997,
distribution expenses under the Plan were $18,641,000. As of December 31, 1997,
accrued and unpaid distribution expenses were $1,279,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $4,685,000. American Funds Distributors, Inc. (AFD), the
principal underwriter of the fund's shares, received $5,397,000 (after
allowances to dealers) as its portion of the sales charges paid by purchasers
of the fund's shares. Such sales charges are not an expense of the fund and,
hence, are not reflected in the accompanying statement of operations.
Directors who are unaffiliated with CRMC may elect to defer part or all of
the fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of December 31,
1997, aggregate amounts deferred and earnings thereon were $113,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Directors and officers of the fund
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund
4. As of December 31, 1997, accumulated undistributed net realized gain on
investments was $40,776,000 and additional paid-in capital was $7,384,333,000.
The fund reclassified $7,758,000 of realized currency gains from undistributed
net realized gain to undistributed net investment income for the year ended
December 31, 1997.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $4,473,244,000 and $3,409,281,000, respectively,
during the year ended December 31, 1997.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $373,000 includes $234,000 that was paid by these credits
rather than in cash.
Net realized currency gains on interest and sales of non-U.S. bonds and
notes, on a book basis, were $14,900,000 for the year ended December 31,1997.
At December 31, 1997 the fund had outstanding forward currency contracts
to sell non-U.S. currency as follows:
<TABLE>
<S> <C><C> <C>
Contract Amount
--------------- ------------
Non-U.S. Currency Sales Contracts Non-U.S. U.S.
Australian Dollars expiring 1/16/98 to 2/24/98 A$ 19,409,000 $13,595,919
British Pounds expiring 1/23/98 to 3/23/98 L 12,029,000 19,766,376
German Deutsche Marks expiring 1/23/98 to 4/2/98 DM 145,425,000 82,377,610
Irish Pounds expiring 1/20/98 to 6/4/98 IRL 10,150,000 15,028,428
Japanese Yen expiring 1/16/98 to 4/20/98 Y 9,136,919,000 75,874,007
New Zealand Dollars expiring 2/24/98 NZ$ 15,832,000 9,797,356
------------
$216,439,696
=============
U.S. Valuations at 12/31/97
--------------- --------------
Unrealized
Appreciation
Non-U.S. Currency Sales Contracts Amount (Depreciation)
Australian Dollars expiring 1/16/98 to 2/24/98 A$ $12,656,460 $939,459
British Pounds expiring 1/23/98 to 3/23/98 L 19,830,079 (63,703)
German Deutsche Marks expiring 1/23/98 to 4/2/98 DM 81,116,252 1,261,358
Irish Pounds expiring 1/20/98 to 6/4/98 IRL 14,492,794 535,634
Japanese Yen expiring 1/16/98 to 4/20/98 Y 70,798,886 5,075,121
New Zealand Dollars expiring 2/24/98 NZ$ 9,147,273 650,083
------------- -------------
$208,041,744 $8,397,952
============= =============
</TABLE>
<TABLE>
Per-Share Data and Ratios
<S> <C> <C> <C> <C> <C>
Year ended December 31
1997 1996 1995 1994 1993
Net Asset Value, Beginning of Year $13.75 $13.88 $12.69 $14.45 $13.99
----------------------------------------------
Income from Investment Operations:
Net investment income 0.98 1.02 1.05 1.05 1.09
Net realized and unrealized gain(loss) on inve 0.25 (0.13) 1.18 (1.76) 0.84
----------------------------------------------
Total income (loss) from investment operation 1.23 0.89 2.23 (0.71) 1.93
----------------------------------------------
Less Distributions:
Dividends from net investment income (0.98) (1.02) (1.04) (1.05) (1.08)
Distributions from net realized gains -- -- -- -- (0.39)
-- -- -- -- --
----------------------------------------------
Total distributions (0.98) (1.02) (1.04) (1.05) (1.47)
----------------------------------------------
Net Asset Value, End of Year $14.00 $13.75 $13.88 $12.69 $14.45
==============================================
Total Return* 9.24% 6.71% 18.25% (5.02%) 14.14%
Ratios/Supplemental data:
Net assets, end of year (in millions) $8,176.00$7,002.00$6,290.00$4,941.00$5,285.00
Ratio of expenses to average net assets 68.00% .71% .74% .69% .71%
Ratio of net income to average net assets 6.95% 7.47% 7.87% 7.77% 7.53%
Portfolio turnover rate 51.96% 43.43% 43.80% 56.98% 44.68%
*Excludes maximum sales charge of 4.75%.
</TABLE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
The Bond Fund of America, Inc.:
We have audited the accompanying statement of assets and liabilities of
The Bond Fund of America, Inc. (the "Fund"), including the schedule of
portfolio investments as of December 31,1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and per-share data and ratios
for each of the five years in the period then ended. These financial
statements and per-share data and ratios are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and per-share data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
per-share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at December 31, 1997 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The Bond Fund of America, Inc. at December 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and per-share data and ratios for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Los Angeles, California
January 29, 1998
