BOND FUND OF AMERICA INC, 497, 2000-01-07

BOND FUND OF AMERICA INC
497, 2000-01-07

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PROSPECTUS SUPPLEMENT
January 10, 2000
for the following funds with prospectuses dated February 1, 1999 - December 1,
1999

<TABLE>
<CAPTION>
<S> <C>
AMCAP Fund, Inc. Limited Term Tax-Exempt Bond
American Balanced Fund, Inc. Fund of America
American High-Income Municipal The New Economy Fund
Bond Fund, Inc. New Perspective Fund, Inc.
American High-Income Trust SMALLCAP World Fund, Inc.
The Bond Fund of America, Inc. The Tax-Exempt Bond Fund of
Capital World Bond Fund, Inc. America, Inc.
Capital World Growth and The Tax-Exempt Fund of
Income Fund, Inc. California
The Cash Management Trust of The Tax-Exempt Fund of
America Maryland
EuroPacific Growth Fund The Tax-Exempt Fund of
Fundamental Investors, Inc. Virginia
The Growth Fund of America, The Tax-Exempt Money Fund
Inc. of America
The Income Fund of America, U.S. Government Securities
Inc. Fund
Intermediate Bond Fund of The U.S. Treasury Money Fund
America of America
The Investment Company of Washington Mutual Investors
America Fund, Inc.
</TABLE>

The initial investment minimum for all funds in The American Funds Group(r),
except the money market funds and the state tax-exempt funds, is now $250. The
initial investment minimum for the money market funds (The Cash Management
Trust of America, The Tax-Exempt Money Fund of America and The U.S. Treasury
Money Fund of America) and the state tax-exempt funds (The Tax-Exempt Fund of
California, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of
Virginia) is $1,000.

In addition, effective January 10, 2000, the sales charges applied to purchases
of the equity and fixed-income funds in The American Funds Group are as
follows:

<TABLE>
<CAPTION>
EQUITY FUNDS FIXED-INCOME FUNDS

Sales Charge Dealer Sales Charge Dealer
as % of Concession as % of Concession
as a % of as a % of
Offering Offering
Price Price

AMOUNT OF SALE Offering Net Offering Net
Price Amount Price Amount
Invested Invested

<S> <C> <C> <C> <C> <C> <C>
Less than $25,000 5.75% 6.10% 5.00%

$25,000 but less than 5.00 5.26 4.25 3.75% 3.90% 3.00%
$50,000

$50,000 but less than 4.50 4.71 3.75
$100,000

$100,000 but less than 3.50 3.63 2.75 3.50 3.63 2.75
$250,000

$250,000 but less than 2.50 2.56 2.00 2.50 2.56 2.00
$500,000

$500,000 but less than 2.00 2.04 1.60 2.00 2.04 1.60
$750,000

$750,000 but less than 1.50 1.52 1.20 1.50 1.52 1.20
$1 million

$1 million and above none none see none none see
prospectus prospectus

</TABLE>

THE FUND PROVIDES SPANISH TRANSLATIONS IN CONNECTION WITH THE
PUBLIC OFFERING AND SALE OF ITS SHARES. THE FOLLOWING IS A FAIR
AND ACCURATE ENGLISH TRANSLATION OF A SPANISH LANGUAGE PROSPECTUS
FOR THE FUND.

/s/ Julie F. Williams
Julie F. Williams
Secretary

PROSPECTUS SUPPLEMENT
January 10, 2000
for the following funds with prospectuses dated February 1, 1999 - December 1,
1999

In addition, effective January 10, 2000, the sales charges applied to purchases
of the equity and fixed-income funds in The American Funds Group are as
follows:

<TABLE>
<CAPTION>
EQUITY FUNDS FIXED-INCOME FUNDS

Sales Charge Dealer Sales Charge Dealer
as % of Concession as % of Concession
as a % of as a % of
Offering Offering
Price Price

AMOUNT OF SALE Offering Net Offering Net
Price Amount Price Amount
Invested Invested

<S> <C> <C> <C> <C> <C> <C>
Less than $25,000 5.75% 6.10% 5.00%

$25,000 but less than 5.00 5.26 4.25 3.75% 3.90% 3.00%
$50,000

$50,000 but less than 4.50 4.71 3.75
$100,000

$100,000 but less than 3.50 3.63 2.75 3.50 3.63 2.75
$250,000

$250,000 but less than 2.50 2.56 2.00 2.50 2.56 2.00
$500,000

$500,000 but less than 2.00 2.04 1.60 2.00 2.04 1.60
$750,000

$750,000 but less than 1.50 1.52 1.20 1.50 1.52 1.20
$1 million

$1 million and above none none see none none see
prospectus prospectus

</TABLE>

THE BOND FUND OF AMERICA, INC.
PART B
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999
as amended January 10, 2000

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, 1999. 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>
Certain Investment Limitations and Guidelines 2
Description of Certain Securities and Investment Techniques 2
Investment Restrictions 10
Fund Organization 11
Fund Officers and Directors 12
Management 16
Dividends, Distributions and Federal Taxes 19
Purchase of Shares 22
Selling Shares 28
Shareholder Account Services and Privileges 30
Execution of Portfolio Transactions 32
General Information 33
Investment Results and Related Statistics 34
Description of Bond Ratings 40
Financial Statements Attached
</TABLE>

CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES

The following limitations and guidelines are considered at the time of
purchase, under normal market conditions, and are based on a percentage of the
fund's net assets unless otherwise noted. This summary is not intended to
reflect all of the fund's investment limitations.
0 The fund will invest at least 65% of its assets in bonds (any debt
securities, including convertible securities and non-voting, non-convertible
preferred securities having initial maturities in excess of one year).

- - The fund will invest at least 60% of its assets in debt securities rated A
or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation
or in unrated securities which are determined to be of comparable quality at
time of purchase, including U.S. Government securities, and cash or money
market instruments.

- - The fund may invest up to 40% of its assets in debt securities rated below A
or in unrated securities that are determined to be of comparable quality.

- - The fund may invest up to 35% of its assets in debt securities rated Ba and
BB or below in unrated securities determined to be of comparable quality.

- - The fund may invest up to 10% of its assets in preferred stocks.

- - The fund may invest up to 25% of its assets in securities of issuers
domiciled outside the U.S.

DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

The descriptions below are intended to supplement the material in the
Prospectus under "Investment Objective, Strategies and Risks."

DEBT SECURITIES - Bonds and other debt securities are used by issuers to borrow
money. Issuers pay investors interest and generally must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
The prices of debt securities fluctuate depending on such factors as interest
rates, credit quality, and maturity. In general their prices decline when
interest rates rise and vice versa.

The fund may invest up to 35% of its assets in debt securities rated Ba and BB
or below by Moody's Investors Service, Inc. or Standard & Poor's Corporation or
in unrated securities that are determined to be of equivalent quality. The
fund's high-yield, high-risk securities may be rated as low as Ca or CC which
are described by the rating agencies as "speculative in a high degree; often in
default or [having] other marked shortcomings."

Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis as well
as by monitoring broad economic trends and corporate and legislative
developments.

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.

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.

OTHER SECURITIES - The fund may also invest in securities that have a
combination of equity and debt characteristics such as non-convertible
preferred stocks and convertible securities. These securities may at times
resemble equity more than debt and vice versa. Non-convertible preferred stocks
are similar to debt in that they have a stated dividend rate akin to the coupon
of a bond or note even though they are often classified as equity securities.
The prices and yields of non- convertible preferred stocks generally move with
changes in interest rates and the issuer's credit quality, similar to the
factors affecting debt securities. The fund may invest up to 10% of its assets
in preferred stocks.

Bonds, preferred stocks, and other securities may sometimes be converted into
shares of common stock or other securities at a stated exchange ratio. These
securities prior to conversion pay a fixed rate of interest or a dividend.
Because convertible securities have both debt and equity characteristics their
value varies in response to many factors, including the value of the underlying
equity, general market and economic conditions, convertible market valuations,
as well as changes in interest rates, credit spreads, and the credit quality of
the issuer.

While the fund may not make direct purchases of common stocks or warrants or
rights to acquire common stocks, the fund may invest in debt securities that
are issued together with common stock or other equity interests, or have equity
conversion, exchange, or purchase rights. The fund may continue to hold up to
5% of its assets in common stock, warrants and rights so acquired after sales
of the corresponding debt securities.

U.S. GOVERNMENT SECURITIES - Securities guaranteed by the U.S. Government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury.

Certain securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the
Treasury. However, they generally involve federal sponsorship in one way or
another; some are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations of the
issuer; and others are supported only by the credit of the issuing government
agency or instrumentality.

PASS-THROUGH SECURITIES - The fund may invest in various debt obligations
backed by a pool of mortgages or other assets including loans on single family
residences, home equity loans, mortgages on commercial buildings, credit card
receivables, and leases on airplanes or other equipment. Principal and interest
payments made on the underlying asset pools backing these obligations are
typically passed through to investors. Pass-through securities may have either
fixed or adjustable coupons. These securities include those discussed below.

"Mortgage-backed securities" are issued both by U.S. government agencies,
including the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and by private entities. The payment of interest and
principal on securities issued by U.S. government agencies is guaranteed by the
full faith and credit of the U.S. government (in the case of GNMA securities)
or the issuer (in the case of FNMA and FHLMC securities). However, the
guarantees do not apply to the market prices and yields of these securities,
which vary with changes in interest rates.

Mortgage-backed securities issued by private entities are structured similarly
to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. These securities
and the underlying mortgages are not guaranteed by government agencies. In
addition, these securities generally are structured with one or more types of
credit enhancement. Mortgage-backed securities generally permit borrowers to
prepay their underlying mortgages. Prepayments can alter the effective maturity
of these instruments.

"Collateralized mortgage obligations" (CMOs) are also backed by a pool of
mortgages, mortgage-backed securities or mortgage loans, which are divided into
two or more separate bond issues. CMOs issued by U.S. government agencies are
backed by agency mortgages, while privately issued CMOs may be backed by either
government agency mortgages or private mortgages. Payments of principal and
interest are passed-through to each bond at varying schedules resulting in
bonds with different coupons, effective maturities, and sensitivities to
interest rates. In fact, some CMOs may be structured in a way that when
interest rates change the impact of changing prepayment rates on these
securities' effective maturities is magnified.

"Commercial mortgage-backed securities" are backed by commercial property, such
as hotels, office buildings, retail stores, hospitals, and other commercial
buildings. These securities may have a lower prepayment risk than other
mortgage-related securities because commercial mortgage loans generally
prohibit or impose penalties on prepayments of principal. In addition,
commercial mortgage-related securities often are structured with some form of
credit enhancement to protect against potential losses on the underlying
mortgage loans. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans, including the effects of local and other economic
conditions on real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.

"Asset-backed securities" are backed by other assets such as credit card,
automobile or consumer loan receivables, retail installment loans, or
participations in pools of leases. Credit support for these securities may be
based on the underlying assets and/or provided through credit enhancements by a
third party. The values of these securities are sensitive to changes in the
credit quality of the underlying collateral, the credit strength of the credit
enhancement, changes in interest rates, and at times the financial condition of
the issuer. Some asset-backed securities also may receive prepayments which can
change the securities' effective maturities.

"IOs and POs" 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.

INVESTING IN VARIOUS COUNTRIES - The fund has the flexibility to invest up to
25% of its assets in securities of issuers domiciled outside the U.S. Investing
outside the U.S. involves special risks caused by, among other things:
fluctuating currency values; different accounting, auditing, and financial
reporting regulations and practices in some countries; changing local and
regional economic, political, and social conditions; expropriation or
confiscatory taxation; greater market volatility; differing securities market
structures; and various administrative difficulties such as delays in clearing
and settling portfolio transactions or in receiving payment of dividends.
However, in the opinion of Capital Research and Management Company, investing
outside the U.S. also can reduce certain portfolio risks due to greater
diversification opportunities.

The risks described above are potentially heightened in connection with
investments in developing countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a low per capita
gross national product. For example, political and/or economic structures in
these countries may be in their infancy and developing rapidly. Historically,
the markets of developing countries have been more volatile than the markets of
developed countries. The fund may only invest in securities of issuers in
developing countries to a limited extent.

Additional costs could be incurred in connection with the fund's investment
activities outside the U.S. Brokerage commissions may be higher outside the
U.S., and the fund will bear certain expenses in connection with its currency
transactions. Furthermore, increased custodian costs may be associated with the
maintenance of assets in certain jurisdictions.

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 mortgage-backed securities 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.

REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements, under
which it buys a security and obtains a simultaneous commitment from the seller
to repurchase the security at a specified time and price. The seller must
maintain with the fund's custodian collateral equal to at least 100% of the
repurchase price including accrued interest as monitored daily by Capital
Research and Management Company. The fund only enters into repurchase
agreements involving securities in which it could otherwise invest and with
selected banks and securities dealers whose financial condition is monitored by
Capital Research and Management Company. If the seller under the repurchase
agreements defaults, the fund may incur a loss if the value of the collateral
securing the repurchase agreement has declined and may incur disposition costs
in connection with liquidating the collateral. If bankruptcy proceedings are
commenced with respect to the seller, liquidation of the collateral by the fund
may be delayed or limited.

RESTRICTED SECURITIES AND LIQUIDITY - The fund may purchase securities subject
to restrictions on resale. All such securities whose principal trading market
is in the U.S. will be considered illiquid unless they have been specifically
determined to be liquid under procedures adopted by the fund's board of
directors, taking into account factors such as the frequency and volume of
trading, the commitment of dealers to make markets and the availability of
qualified investors, all of which can change from time to time. The fund may
incur certain additional costs in disposing of illiquid securities.

MATURITY - There are no restrictions on the maturity composition of the
portfolio, although it is anticipated that the fund normally will be invested
substantially in securities with maturities in excess of three years. Under
normal market conditions, longer term securities yield more than shorter term
securities, but are subject to greater price fluctuations.

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 (notes issued by corporations or governmental bodies);
(certificates of deposit, 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 ; (4) securities of
the U.S. Government, its agencies or instrumentalities; and (5) corporate bonds
and notes.

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 - The fund may invest, subject to an
overall 10% limit on loans, in loan participations or 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. Investments in loan participations and assignments present
the possibility that the fund could be held liable as a co-lender under
emerging legal theories of lender liability. In addition, if the loan is
foreclosed, the fund could be part owner of any collateral and could bear the
costs and liabilities of owning and disposing of the collateral. 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.
In addition, loan participation and assignments are generally not rated by
major rating agencies and may not be protected by the securities laws.

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
above under "Forward Commitments."

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 five 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. With respect to 75% of the fund's total assets, purchase the security
of any issuer (other than securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities), if as a result, (a)
more than 5% of the fund's total assets would be invested in securities
of that issuer, or (b) the fund would hold more than 10% of the outstanding
voting securities of that issuer.

Concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from time
to time.

2. Invest in companies for the purpose of exercising control or management;

3. 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;

4. 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;

5. Invest more than 15% of the value of its net assets in securities that are
illiquid;

6. 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;

7. 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;

8. 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;

9. Purchase securities at margin;

10. Borrow money except from banks for temporary or emergency purposes, not in
excess of 5% of the value of the fund's total assets;

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, (b) the fund will not
purchase partnership interests or invest in leases to develop, or explore for,
oil, gas or minerals; and (c) the fund may not invest in securities of other
investment companies, except as permitted by the Investment Company Act of
1940, as amended.

Notwithstanding Investment Restriction #8, 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 ORGANIZATION

The fund, an open-end, diversified management investment company, was organized
as a Maryland corporation on December 3, 1973.

All fund operations are supervised by the fund's board of directors which meets
periodically and performs duties required by applicable state and federal laws.
Members of the board who are not employed by Capital Research and Management
Company or its affiliates are paid certain fees for services rendered to the
fund as described in the statement of additional information. They may elect to
defer all or a portion of these fees through a deferred compensation plan in
effect for the fund.

FUND OFFICERS AND DIRECTORS
Directors and Director Compensation

<TABLE>
<CAPTION>
NAME, POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
ADDRESS AND WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
AGE REGISTRANT DURING (INCLUDING (INCLUDING OF FUND
PAST 5 YEARS VOLUNTARILY VOLUNTARILY BOARDS/2/ ON
DEFERRED DEFERRED WHICH
COMPENSATION/1/) COMPENSATION/1/) DIRECTOR
FROM THE FUND FROM ALL FUNDS SERVES
DURING FISCAL MANAGED BY
YEAR ENDED CAPITAL RESEARCH
DECEMBER 31, AND MANAGEMENT
1998 COMPANY OR ITS
AFFILIATES/2/ FOR
THE YEAR ENDED
DECEMBER 31,
1998

<S> <C> <C> <C> <C> <C>
H. Frederick Director Private $11,400/3/ $194,850 19
Christie Investor.
Age: 65 Former
P. O. Box President and
144 CEO, The
Palos Mission Group
Verdes, CA (non-utility
90274 holding
company,
subsidiary of
Southern
California
Edison
Company)

+Don R. Director President none/4/ none/4/ 12
Conlan (retired),
Age: 63 The Capital
1630 Milan Group
Avenue Companies,
South Inc.
Pasadena, CA
91030

Diane C. Director CEO and $10,150/3/ $46,900 12
Creel President,
Age: 50 The Earth
100 W. Technology
Broadway Corporation
Suite 5000
Long Beach,
CA 90802

Martin Director Managing $10,750/3/ $128,134 15
Fenton Director,
Age:63 Senior
4660 La Resource
Jolla Group, LLC
Village (development
Drive and management
Suite 725 of senior
San Diego, living
CA 92121-2116 communities)

Leonard R. Director President, $11,150/3/ $54,900 12
Fuller Fuller
Age: 52 Consulting
4333 (financial
Admiralty management
Way consulting
Suite 841 firm)
ETH
Marina del
Rey, CA
90292

+*Abner D. President, Senior Vice none/4/ none/4/ 12
Goldstine PEO and President and
Age: 69 Director Director,
Capital
Research and
Management
Company

+**Paul G. Chairman Executive Vice none/4/ none/4/ 14
Haaga, Jr. of the President and
Age: 50 Board Director,
Capital
Research and
Management
Company

Herbert Director Private $11,150 $73,334 13
Hoover III Investor
Age: 71
1520 Circle
Drive
San Marino,
CA 91108

Richard G. Director Chairman, $10,750/3/ $108,600 13
Newman President and
Age: 64 CEO,
3250 AECOM
Wilshire Technology
Boulevard Corporation
Los Angeles, (architectural
CA 90010-1599 engineering)

</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 29 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., New World 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 Endowments, whose shareholders are
limited to (i) any entity exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended ("501(c)(3) organization"); (ii) any
trust, the present or future beneficiary of which is a 501(c)(3) organization,
and (iii) any other entity formed for the primary purpose of benefiting a
501(c)(3) organization. An affiliate of Capital Research and Management
Company, Capital International, Inc., manages Emerging Markets Growth Fund,
Inc.

/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, 1998 for participating Directors is as follows:
H. Frederick Christie ($14,590), Diane C. Creel ($9,419), Martin Fenton
($27,054), Leonard R. Fuller ($25,356) and Richard G. Newman ($54,041).
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

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) PRINCIPAL OCCUPATION(S)
HELD WITH DURING PAST 5 YEARS
REGISTRANT

<S> <C> <C> <C>
David C. Barclay 41 Vice Senior Vice President
11100 Santa Monica President and Director, Capital
Blvd. Research Company
Los Angeles, CA
90025

Michael J. Downer 43 Vice Senior Vice President -
333 South Hope President Fund Business
Street Management Group,
Los Angeles, CA Capital Research and
90071 Management Company

John H. Smet 42 Vice Vice President, Capital
11100 Santa Monica President Research and Management
Blvd. Company
Los Angeles, CA
90025

Julie F. Williams 50 Secretary Vice President - Fund
333 South Hope Business Management
Street Group, Capital Research
Los Angeles, CA and Management Company
90071

Anthony W. Hynes, 35 Treasurer Vice President - Fund
Jr. Business Management
135 South State Group, Capital Research
College Blvd. and Management Company
Brea, CA 92821

Kimberly S. Verdick 33 Assistant Assistant Vice
333 South Hope Secretary President - Fund
Street Business Management
Los Angeles, CA Group, Capital Research
90071 and Management Company

Todd L. Miller 39 Assistant Assistant Vice
135 South State Treasurer President - Fund
College Blvd. Business Management
Brea, CA 92821 Group, Capital Research
and Management Company

</TABLE>

All of the officers listed also are officers or employees of the Investment
Adviser or affiliated companies. No compensation is paid by the fund to any
officer or director who is a director, officer or employee of the Investment
Adviser or affiliated companies. The fund pays annual fees of $10,000 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. No pension or retirement
benefits are accrued as part of fund expenses. 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, 1999, 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 managing more than $200 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 dated
as of April 1, 1996, was amended by the Board of Directors, effective November
1, 1998. The Agreement will continue until October 31, 1999 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.

As compensation for its services, the Investment Adviser receives a monthly fee
which is based on prior month-end net assets 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 but not exceeding $10 billion, plus 0.14% on average net
assets in excess of $10 billion, plus 2.25% of the first $8,333,333 of the
fund's monthly gross investment income for the preceding month, plus 2% of such
income in excess of $8,333,333 of the fund's gross investment income for the
preceding month. Assuming net assets of $9 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, 1998, 1997, and 1996, the Investment
Adviser's total fees amounted to $28,879,000 , $24,460,000, and $22,728,000,
respectively.

The fund pays all expenses not specifically assumed by the Investment Adviser,
including, but not limited to, registration and filing fees with federal and
state agencies, blue sky expenses, expenses of shareholders meetings, the
expense of reports to existing shareholders, expenses of printing proxies and
prospectuses, insurance premiums, legal and auditing fees, dividend
disbursement expenses, the expense of the issuance, transfer and redemption of
its shares, expenses pursuant to the fund's Plan of Distribution, custodian
fees, costs of printing and preparation of registration statements, taxes and
compensation and expenses of Directors who are not affiliated with the
Investment Adviser.

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, 3500 Wiseman Boulevard, 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, 1998 amounted to $7,117,000 after
allowance of $36,612,000 to dealers. During the fiscal years ended December
31, 1997 and 1996 the Principal Underwriter retained $5,397,000 and $5,534,000,
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 or a community foundation).

Commissions 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 any
"401(k)" plan with 100 or more eligible employees) in excess of the Plan
limitation not reimbursed during the most recent fiscal quarter are recoverable
for five quarters, provided that such commissions do not exceed the annual
expense limit. After five quarters, commissions are not recoverable. During
the fiscal year ended December 31, 1998, the fund paid $22,380,000 under the
Plan as compensation to dealers. As of December 31, 1998 accrued and unpaid
distribution expenses were $1,714,000.

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
Internal Revenue Code of 1986, as amended (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 total 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 total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
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.

Distributions of investment company taxable income, including short-term
capital gains, generally are taxable to the shareholder as ordinary income,
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the fund. A capital gain distribution, whether paid in
cash or reinvested in shares, is taxable to shareholders as long-term capital
gains, regardless of the length of time a shareholder has held the shares or
whether such gain was realized by the fund before the shareholder acquired such
shares and was reflected in the price paid for the shares.

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, foreign
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 are not subject
to tax withholding, but in the case of a non-U.S. shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at the rate of 30% if the individual is physically present in
the U.S. during the tax year for more than 182 days.

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 generally 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 one year is 20%, 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. The maximum
amount that an individual may contribute to all IRAs (deductible, nondeductible
and Roth IRAs) per year is the lesser of $2,000 or the individual's
compensation for the year. 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 $50 minimum (except where
and Fund Numbers" for a lower minimum is noted
initial investment under "Investment Minimums
minimums. and Fund Numbers").

By Visit any investment Mail directly to your
contacting dealer who is registered investment dealer's
your in the state where the address printed on your
investment purchase is made and who account statement.
dealer has a sales agreement
with American Funds
Distributors.

By mail Make your check payable Fill out the account
to the fund and mail to additions form at the
the address indicated on bottom of a recent account
the account application. statement, make your check
Please indicate an payable to the fund, write
investment dealer on the your account number on
account application. your check, and mail the
check and form in the
envelope provided with
your account statement.

By Please contact your Complete the "Investments
telephone investment dealer to by Phone" section on the
open account, then account application or
follow the procedures American FundsLink
for additional Authorization Form. Once
investments. 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 Complete the American
investment dealer to FundsLink Authorization
open account, then Form. Once you establish
follow the procedures the privilege, you, your
for additional financial advisor or any
investments. person with your account
information may access
American FundsLine
OnLine(R) 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 Your bank should wire your
obtain your account additional investments in
number(s), if necessary. the same manner as
Please indicate an 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>
MINIMUM
INITIAL FUND
FUND INVESTMENT NUMBER
---- ---------- ------
<S> <C> <C>
STOCK AND STOCK/BOND FUNDS
AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250 02
American Balanced Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 11
American Mutual Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 03
Capital Income Builder/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 12
Capital World Growth and Income Fund/SM/ . . . . . . . . . . . . . . . . 250 33
EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 16
Fundamental Investors/SM/ . . . . . . . . . . . . . . . . . . . . . . . 250 10
The Growth Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 05
The Income Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 06
The Investment Company of America/(R)/ . . . . . . . . . . . . . . . . . 250 04
The New Economy Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 14
New Perspective Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 07
New World Fund/SM/ . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 36
SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . 250 35
Washington Mutual Investors Fund/SM/ . . . . . . . . . . . . . . . . . . 250 01
BOND FUNDS
American High-Income Municipal Bond Fund/(R)/ . . . . . . . . . . . . . 250 40
American High-Income Trust/SM/ . . . . . . . . . . . . . . . . . . . . . 250 21
The Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . . . . . . 250 08
Capital World Bond Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 31
Intermediate Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . 250 23
Limited Term Tax-Exempt Bond Fund of America/SM/ . . . . . . . . . . . . 250 43
The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . . . . . . . . . . 250 19
The Tax-Exempt Fund of California/(R)/* . . . . . . . . . . . . . . . . 1,000 20
The Tax-Exempt Fund of Maryland/(R)/* . . . . . . . . . . . . . . . . . 1,000 24
The Tax-Exempt Fund of Virginia/(R)/* . . . . . . . . . . . . . . . . . 1,000 25
U.S. Government Securities Fund/SM/ . . . . . . . . . . . . . . . . . . 250 22
MONEY MARKET FUNDS
The Cash Management Trust of America/(R)/ . . . . . . . . . . . . . . . 1,000 09
The Tax-Exempt Money Fund of America/SM/ . . . . . . . . . . . . . . . . 1,000 39
The U.S. Treasury Money Fund of America/SM/ . . . . . . . . . . . . . . 1,000 49
___________
*Available only in certain states.
</TABLE>

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).

SALES CHARGES - 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 AMOUNT OFFERING
INVESTED PRICE

STOCK AND STOCK/BOND FUNDS

Less than $25,000 6.10% 5.75% 5.00%

$25,000 but less than $50,000 5.26 5.00 4.25

$50,000 but less than $100,000 4.71 4.50 3.75

BOND FUNDS

Less than $100,000 3.90 3.75 3.00

STOCK, STOCK/BOND, AND BOND
FUNDS

$100,000 but less than 3.63 3.50 2.75
$250,000

$250,000 but less than 2.56 2.50 2.00
$500,000

$500,000 but less than 2.04 2.00 1.60
$750,000

$750,000 but less than 1.52 1.50 1.20
$1,000,000

$1,000,000 or more none none (see below)

</TABLE>

PURCHASES NOT SUBJECT TO SALES CHARGES -- Investments of $1 million or more and
investments made by employer-sponsored defined contribution-type plans with 100
or more eligible employees are sold with no initial sales charge. A contingent
deferred sales charge may be imposed on certain redemptions by these accounts
made within one year of purchase. Investments by retirement plans, foundations
or endowments with $50 million or more in assets, and employer-sponsored
defined contribution-type plans with 100 or more eligible employees may be made
with no sales charge and are not subject to a contingent deferred sales charge.

In addition, 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 Capital Research and Management Company, 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
American Funds Distributors (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.

DEALER COMMISSIONS - 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 $50 million or more: 1.00% on amounts of $1 million
to $4 million, 0.50% on amounts over $4 million to $10 million, and 0.25% on
amounts over $10 million.

OTHER COMPENSATION TO DEALERS - 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 principally 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.

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.

REDUCING YOUR SALES CHARGE -- You and your immediate family may combine
investments to reduce your costs. You must let your investment dealer or
American Funds Service Company know if you qualify for a reduction in your
sales charge using one or any combination of the methods described below.

STATEMENT OF INTENTION - You may enter into a non-binding commitment to
purchase shares of a fund(s) over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. This includes purchases
made during the previous 90 days, but does not include appreciation of your
investment or reinvested distributions. The reduced sales charges and offering
prices set forth in the Prospectus apply to purchases of $25,000 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 use 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 pay
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 by the
close of the period, 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) and any individual
investments in American Legacy products (American Legacy, American Legacy II
and American Legacy III variable annuities, American Legacy Life, American
Legacy Variable Life, and American Legacy Estate Builder) 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.

When the trustees of certain retirement plans purchase shares 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)
any rollovers or transfers reasonably anticipated to be invested in non-money
market American Funds during the 13-month period, and any individual
investments in American Legacy products 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.

CONCURRENT PURCHASES -- You may combine purchases of two or more funds in The
American Funds Group, except direct purchases of the money market funds.
Shares of money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge do qualify.

RIGHT OF ACCUMULATION -- You may take into account the current value of your
existing holdings in The American Funds Group, as well as your holdings in
Endowments (shares of which may be owned only by tax-exempt organizations), to
determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity. When determining
your sales charge, you may also take into account the value of your individual
holdings, as of the end of the week prior to your investment, in various
American Legacy products (American Legacy, American Legacy II and American
Legacy III variable annuities, American Legacy Life, American Legacy Variable
Life, and American Legacy Estate Builder). Direct purchases of the money market
funds are excluded.

PRICE OF SHARES - Shares are purchased at the offering price next determined
after the purchase order is received and accepted 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 do not always indicate
the 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 the normal close of trading
(currently 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.

All portfolio securities of funds managed by Capital Research and Management
Company, other than the money market funds, are valued, and 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.

SELLING SHARES

Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. You may sell
(redeem) shares in your account in any of the following ways:

THROUGH YOUR DEALER (certain charges may apply)
0 Shares held for you in your dealer's street name must be sold through the
dealer.

WRITING TO AMERICAN FUNDS SERVICE COMPANY
- - Requests must be signed by the registered shareholder(s)
- - A signature guarantee is required if the redemption is:
-- Over $50,000;
-- Made payable to someone other than the registered shareholder(s); or
-- Sent to an address other than the address of record, or an address of
record which has been changed within the last 10 days.

Your signature may be guaranteed by a domestic stock exchange or the National
Association of Securities Dealers, Inc., bank, savings association or credit
union that is an eligible guarantor institution.
- - Additional documentation may be required for sales of shares held in
corporate, partnership or fiduciary accounts.
- - You must include any shares you wish to sell that are in certificate form.

TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
FUNDSLINE(R) OR AMERICAN FUNDSLINE ONLINE(R)

- - Redemptions by telephone or fax (including American FundsLine and American
FundsLine OnLine) are limited to $50,000 per shareholder each day.
- - Checks must be made payable to the registered shareholder(s).
- - Checks must be mailed to an address of record that has been used with the
account for at least 10 days.

MONEY MARKET FUNDS

- - You may have redemptions of $1,000 or more wired to your bank by writing
American Funds Service Company.
- - You may establish check writing privileges (use the money market funds
application)
-- If you request check writing privileges, you 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 or
registered shareholders exactly as indicated on your checking account signature
card.

Redemption proceeds will not be mailed until sufficient time has passed to
provide reasonable assurance that checks or drafts (including certified or
cashier's checks) for shares purchased have cleared (which may take up to 15
calendar days from the purchase date). Except for delays relating to clearance
of checks for share purchases or in extraordinary circumstances (and as
permissible under the Investment Company Act of 1940), sale proceeds will be
paid on or before the seventh day following receipt and acceptance of an order.
Interest will not accrue or be paid on amounts that represent uncashed
distribution or redemption checks.

The fund may, with 60 days' written notice, close your account if due to a sale
of shares the account has a value of less than the minimum required initial
ivnestment.

You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge (any contingent deferred sales charge paid
will be credited to your account) in any fund in The American Funds Group
within 90 days after the date of the redemption or distribution. Redemption
proceeds of shares representing direct purchases in the money market funds are
excluded. Proceeds will be reinvested at the next calculated net asset value
after your request is received and accepted by American Funds Service Company.

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(other than redemptions by employer-sponsored
retirement plans). 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 403(b) plans
or IRAs due to death, disability or attainment of age 591/2; for tax-free
returns of excess contributions to IRAs; and for redemptions through certain
automatic withdrawals not exceeding 10% of the amount that would otherwise be
subject to the charge.

REDEMPTION OF SHARES - The fund's Articles of Incorporation permit the fund to
direct the Transfer Agent to redeem your shares if, through redemptions, or
otherwise, they 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. We
will give you prior notice of at least 60 days before the involuntary
redemption provision is made effective with respect to your account. You 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.

SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES

AUTOMATIC INVESTMENT PLAN - An automatic investment plan enables you to make
regular monthly or quarterly investments into The American Funds through
automatic debits from your bank account. To set up a plan you must fill out
an account application and specify the amount you would like to invest ($50
minimum) and the date on which you would like your investments to occur. The
plan will begin within 30 days after you r account application is received.
Your bank accounts will be debited on the day or a few days before your
investment is made, depending on the bank's capabilities. American Funds
Service Company will then invest your money into the fund you specified on or
around the date you specified. If your bank account cannot be debited 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 cross-reinvest
dividends or dividends and capital gain distributions into any other fund in
The American Funds Group subject to the following conditions:

(a) the aggregate value of your account(s) in the fund(s) paying distributions
equals or exceeds $5,000 (this is waived if the value of the account in the
fund receiving the distributions equals or exceeds that fund's minimum initial
investment requirement),

(b) If the value of the account of the fund receiving distributions is below
the minimum initial investment requirement, dividends and capital gain
distributions must be automatically reinvested, and

(c) If you discontinue the cross-reinvestment of distributions,, the value of
the account in the fund receiving distribution must equal or exceed the
minimum initial investment requirement. If you do not meet this requirement
within 90 days of notification, the fund has the right to automatically redeem
the account.

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 and
American FundsLine OnLine (see "American FundsLine and American FundsLine
OnLine" below), or by telephoning 800/421-0180 toll-free, faxing (see
"Shareholder Information -- American Funds Service Company Service Areas" 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 American
Funds Service Company. Dividend and capital gain reinvestments and purchases
through automatic investment plans and certain retirement plans will be
confirmed at least quarterly.

AMERICAN FUNDSLINE AND AMERICAN FUNDSLINE ONLINE - 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 and American FundsLine OnLine. 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 and American FundsLine OnLine 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 and American FundsLine
OnLine), 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.

SHARE CERTIFICATES -- Shares are credited to your account and certificates are
not issued unless you request them by writing to American Funds Service
Company.

EXECUTION OF PORTFOLIO TRANSACTIONS

The Investment Adviser places orders for the fund's portfolio securities
transactions . 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 have an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.

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, 1998,
1997, and 1996, amounted to $11,959,000, $58,367,000, and $9,568,000,
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 $5,411,000 for the fiscal year ended December 31, 1998.
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.

REPORTS TO SHAREHOLDERS - The fund's fiscal year ends on December 31. The fund
provides shareholders 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.

YEAR 2000 - The fund and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The fund understands that
these service providers are taking steps to address the "Year 2000 problem."
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the fund's investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the fund invests could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings
of individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.

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.

SHAREHOLDER VOTING RIGHTS - 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.

The fund does not hold annual meetings of shareholders. However, significant
matters that require shareholder approval, such as certain elections of board
members or a change in a fundamental investment policy, will be presented to
shareholders at a meeting called for such purpose. Shareholders have one vote
per share owned. At the request of the holders of at least 10% of the shares,
the fund will hold a meeting at which any member of the board could be removed
by a majority vote.

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, REDEMPTIONS PRICE AND
MAXIMUM OFFERING PRICE PER SHARE - DECEMBER 31, 1998

<S> <C>
Net asset value and redemption price per share $13.61
(Net assets divided by shares outstanding)

Maximum offering price per share $14.29
(100/95.25 of net asset value per share, which takes
into account the fund's current maximum sales
charge)

</TABLE>

INVESTMENT RESULTS AND RELATED STATISTICS

The fund's yield was 6.64% based on a 30-day (or one month) period ended
December 31, 1998, 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,
1998, were 0.16%, 5.58%, and 8.66%, respectively. The fund's total return at
net asset value over the past 12 months and average annual total return for
the 5-and 10-year periods ending on December 31, 1998 was 5.17%%, 6.61%, and
9.19%, 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.

In calculating average annual total return, the fund assumes: (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.

EXPERIENCE OF INVESTMENT ADVISER -- The Investment Adviser manages nine growth
and growth-income funds that are at least 10 years old. In the rolling 10-year
periods since January 1, 1968 (138 in all), those funds have had better total
returns than their comparable Lipper Indexes in 128 of the 138 periods.

Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company.

The fund may include, in advertisements or in reports furnished to present or
prospective shareholders, information on its investment results and/or
comparisons of its investment results to various unmanaged indices or results
of other mutual funds or investment or savings vehicles. The fund may also
combine its results with those of other funds in The American Funds Group for
purposes of illustrating investment strategies involving multiple funds.

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)
<S> <C> <C> <C> <C>

1989 - 1998 + 129% + 143% + 156% + 60%

1988 - 1997 + 141 + 142 + 158 + 63

1987 - 1996 + 125 + 126 + 140 + 65

1986 - 1995 + 143 + 152 + 171 + 70

1985 - 1994 + 160 + 160 + 175 + 76

1984 - 1993 + 207 + 208 + 233 + 87

1983 - 1992 + 194 + 203 + 225 + 98

1982 - 1991 + 252 + 271 + 316 + 111

1981 - 1990 + 210 + 240 + 261 + 121

1980 - 1989 + 210 + 221 + 236 + 124

1979 - 1988 + 191 n/a + 189 + 124

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>
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:

<S> <C>

5 Years 10 Years
(1/1/94-12/31/98) (1/1/89-12/31/98)

$11,912 $31,041

</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, 1998

| Period |

Number of Years 1/1-12/31 Value

<S> <C> <C>
1 1998 $10,016

2 1997 - 1998 10,940

3 1996 - 1998 11,679

4 1995 -1998 13,811

5 1994 -1998 13,116

6 1993 -1998 14,967

7 1992 -1998 16,671

8 1991 -1998 20,171

9 1990 -1998 20,833

10 1989 -1998 22,944

11 1988 -1998 25,391

12 1987 -1998 25,895

13 1986 -1998 29,823

14 1985 -1998 37,749

15 1984 -1998 42,268

16 1983 -1998 46,279

17 1982 -1998 61,515

18 1981 -1998 65,556

19 1980 -1998 67,882

20 1979 -1998 70,030

21 1978 -1998 71,453

22 1977 -1998 75,132

23 1976 -1998 88,774

24 1975 -1998 100,010

25 1974*-1998 103,771

</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, 1998 (the fund's lifetime), the fund ranked second among the
seventeen similar bond funds that were in existence for that period.

The fund may include information on its investment results and/or comparisons
of its investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles in advertisements or in reports
furnished to present to prospective shareholders. The fund may also, from time
to time, combine its results with those of other funds in The American Funds
Group for purposes of illustrating investment strategies involving multiple
funds. For educational purposes, fund literature may contain discussions
and/or illustrations of volatility, risk tolerance, asset allocation and
investment strategies.

The fund may also refer to results and surveys compiled by organizations such
as CDA Investment Technologies, Ibbottson Associates, Lipper Analytical
Services ("Lipper"), Morningstar, Inc., Wiesenberger Investment Companies
Services and the U.S. Department of Commerce. Additionally, the Fund may 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 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, 1998)

<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

1998 6,933 88,195 98,195 9,445 4,321 90,005 103,771

</TABLE>

The dollar amount of capital gain distributions during the period was $4,524.

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."
<TABLE>
The Bond Fund of America Principal
INVESTMENT PORTFOLIO DECEMBER 31, 1998 Amount Market Percent of
or Shares Value Net Assets
BONDS, NOTES & PREFERRED STOCKS (000) (000)
<S> <C> <C> <C>
INDUSTRIALS, SERVICES & UTILITIES
TELECOMMUNICATIONS
NEXTEL Communications, Inc.: 1.48%
0%/9.75% 2004 (1) $20,750 $20,128
0%/10.125% 2004 (1) 12,750 12,495
0%/9.75% 2007 (1) 64,500 39,345
0%/10.65% 2007 (1) 11,750 7,549
0%/9.95% 2008 (1) 19,750 11,850
12.00% 2008 (2) 5,000 5,450
Series D, 13.00% exchangeable preferred, redeemable 2009 (3 15,762 SHARES 16,345
Series E, 11.25% exchangeable preferred, redeemable 2010 (3) 23,533 21,180
NEXTEL International, Inc. 0%/12.125% 2008 (1) $15,500 6,936
Omnipoint Corp.: .89
Units 12.00% 2000 (2) (4) (5) (6) 12,500 14,350
14.00% 2003 (2) (3) (5) 32,250 31,766
11.625% 2006 31,200 21,840
11.625% 2006 8,250 5,775
Loan Agreement, Tranche A, 8.66% 2006 (2) (6) 9,295 8,179
7.00% convertible preferred 120,000 SHARES 2,850
Bell Atlantic Financial Services, Inc.: (2) .70
5.75% convertible debentures 2003 $30,000 30,975
4.25% convertible debentures 2005 35,000 35,875
Centennial Cellular Corp.: .41
8.875% 2001 15,500 16,895
10.125% 2005 5,000 6,200
10.75% 2008 (2) 16,000 16,040
Clearnet Communications Inc.: (1) .39
0%/11.75% 2007 C$45,825 18,309
0%/10.40% 2008 53,500 18,758
Viatel, Inc.: .37
11.25% 2008 $15,000 15,000
0%/12.40% 2008 (1) DM4,500 1,538
0%/12.50% 2008 (1) $20,750 11,828
11.15% 2008 DM9,500 5,667
10.00% convertible subordinated debentures 2011 (2) (3) 742 507
Series A, 10.00% convertible preferred (3) 16,264 SHARES 1,073
Crown Castle International Corp.: .37
0%/10.625% 2007 (1) $17,000 11,815
12.75% preferred (2) (3) 23,500 SHARES 23,735
Comcast Cellular Corp., Series B, 9.50% 2007 $30,600 32,512 .34
COLT Telecom Group PLC: .33
Units 0%/12.00% 2006 (1) (4) 5,250 6,484
8.875% 2007 DM9,500 5,974
7.625% 2008 31,800 18,779
Cable & Wireless Communications PLC: .31
6.75% 2008 $17,500 17,802
6.75% 2008 12,000 12,222
QWest Communications International Inc.: .27
0%/9.47% 2007 (1) 26,000 20,215
0%/8.29% 2008 (1) 7,500 5,625
Loral Orion Network Systems, Inc. (formerly Orion Network ( 26,060 25,501 .26
Systems, Inc.) Units 11.25% 2007
U S WEST Capital Funding, Inc.: .25
6.25% 2005 3,250 3,361
6.50% 2018 20,000 20,466
PageMart Wireless, Inc.: .24
0%/15.00% 2005 (1) 8,000 7,040
0%/11.25% 2008 (1) 34,250 15,413
American Cellular Corp. 10.50% 2008 (2) 21,500 20,855 .22
Global TeleSystems Group, Inc. 8.75% convertible debentures 7,500 20,775 .22
McCaw International, Ltd. (owned by NEXTEL (1) (4) 37,850 20,704 .22
Communications, Inc.) 0%/13.00% 2007
Time Warner Telecom Inc. 9.75% 2008 18,050 18,862 .20
US Xchange LLC 15.00% 2008 16,125 16,931 .18
Esat Telecom Group PLC: .16
0%/12.50% 2007 (1) 4,000 2,640
Units 0%/12.50% 2007 (1) (4) 4,500 3,282
11.875% 2008 (2) 9,750 9,848
Comuncacion Celular SA Units 0%/14.125% 2005 (1) (2) (4) 17,550 14,128 .15
NEXTLINK Communications, Inc.: .15
12.50% 2006 3,000 3,225
9.625% 2007 3,000 2,895
9.00% 2008 8,250 7,714
MCI Worldcom, Inc. (formerly WorldCom, Inc.): .14
6.40% 2005 8,250 8,574
8.875% 2006 4,796 5,242
CCPR Services, Inc. 10.00% 2007 13,750 13,750 .14
Sprint Capital Corp. 6.875% 2028 10,000 10,514 .11
MobileTelecommunication Technologies Corp. 13.50% 2002 8,530 9,554 .10
PTC International Finance BV 0%/10.75% 2007 (1) 9,450 6,710 .07
CEI Citicorp Holdings SA 11.25% 2007 (2) ARP9,500 6,181 .06
PanAmSat Corp.: .06
6.125% 2005 $2,500 2,426
6.375% 2008 3,000 2,929
SpectraSite Holdings, Inc. 0%/12.00% 2008 (1) (2) 9,500 4,940 .05
Dobson/Sygnet Communications Co. 12.25% 2008 (2) 4,500 4,528 .05
Price Communications Cellular Holdings, Inc. 11.25% 2008 (3) 4,000 3,820 .04
Globalstar LP Units 11.375% 2004 (4) 4,500 3,645 .04
Hermes Euro Railtel BV 11.50% 2007 3,000 3,225 .03
Conecel Holdings Ltd. Units, Series A, 16.00% 2000 (2)(4)(5) 5,900 2,707 .03
Telesystem International Wireless Inc. 0%/13.25% 2007 (1) 6,000 2,550 .03
Dobson Communications Corp. 12.25% exchangeable preferred, 2,578 SHARES 2,364 .02
redeemable 2008
IMPSAT Corp. 12.375% 2008 $2,500 2,025 .02
Level 3 Communications, Inc. 9.125% 2008 1,000 99 .01
870,181 9.11

TRANSPORTATION
Continental Airlines, Inc., pass-through certificates:(7) 1.68
Series 1998-3, Class C-1, 7.08% 2004 3,000 2,995
Series 1998-3, Class C-2, 7.25% 2005 12,000 12,072
Series 1997-1, Class C, 7.78% 2007(6) 2,454 2,478
Series 1998-3, Class A-2, 6.32% 2008 15,000 15,100
Series 1997-1, Class B, 7.461% 2014 989 1,017
Series 1996-2, Class B, 8.56% 2014 1,898 2,087
Series 1996, Class A, 6.94% 2015 3,816 3,928
Series 1996, Class B, 7.82% 2015 12,881 13,570
Series 1996, Class C, 9.50% 2015 4,771 5,382
Series 1997-1, Class A, 7.461% 2016 19,743 20,470
Series 1996-2, Class D, 11.50% 2016 4,361 4,726
Series 1997-4, Class A, 6.90% 2018 35,390 35,531
Series 1998-1, Class A, 6.648% 2019 41,500 40,841
Jet Equipment Trust:(2) .59
Series 1994-A, Class B1, 10.91% 2006 6,446 7,509
Series 1994-A, Class C1, 11.79% 2013 4,000 5,442
Series 1995-B, Class B2, 10.91% 2014 5,000 6,184
Series 1995-D, Class D, 11.44% 2014 10,000 12,849
Series 1995-B, Class A, 7.63% 2015 4,159 4,459
Series 1995-B, Class C, 9.71% 2015 5,500 6,458
Series 1995-A, Class C, 10.69% 2015 10,500 12,915
Airplanes Pass Through Trust, pass-through certificates, (7 41,164 42,245 .44
Series 1, Class C, 8.15% 2019
Atlas Air, Inc., Pass-Through Trusts, Series 1998-1, (7) 41,000 41,711 .44
Class A, 7.38% 2018
USAir, Inc.: .36
9.625% 2001 3,996 4,149
1990 Equipment Trust Certificates:
Series A, 10.28% 2001 754 799
Series B, 10.28% 2001 754 799
Series C, 10.28% 2001 530 562
Enhanced Equipment Notes:
Class B, 7.50% 2009 9,057 8,813
Class C, 8.93% 2009 8,314 8,734
pass-through trust:
Series 1993-A2, 9.625% 2003 (7) 2,500 2,700
Series 1993-A3, 10.375% 2013 (7) 7,250 8,011
Delta Air Lines, Inc.: .34
pass-through certificates, Series 1992-A2, 9.20% 2014 (7) 11,500 12,746
1990 Equipment trust certificates: (2)
Series I, 10.00% 2014 5,000 5,893
Series J, 10.00% 2014 10,000 11,787
Series F, 10.79% 2014 1,700 2,114
United Air Lines, Inc., pass-through certificates: (7) .22
Series 1995-A1, 9.02% 2012 10,393 11,635
Series 1995-A2, 9.56% 2018 8,000 9,050
Alaska Airlines: .15
Series A, 9.50% 2010 2,168 2,578
Series B, 9.50% 2010 2,780 3,296
Series C, 9.50% 2010 2,659 3,198
Series D, 9.50% 2012 4,524 5,459
American Airlines, Inc., pass-through certificates, (7) 6,000 7,202 .08
Series 1991-C2, 9.73% 2014
Teekay Shipping Corp. 8.32% 2008 6,000 5,940 .06
Union Pacific Capital Trust 6.25% TIDES convertible preferre 111,100 SHARES 5,083 .05
Southwest Airlines, pass-through certificates, $2,408 2,979 .03
Series 1994-A, 9.15% 2016 (7)
Canadian National Railway Company 6.45% 2036 (6) 2,750 2,828 .03
426,324 4.47

DIVERSIFIED MEDIA & CABLE TELEVISION
Fox/Liberty Networks, LLC, FLN Finance, Inc.: .50
0%/9.75% 2007 (1) 33,325 22,661
8.875% 2007 24,250 24,735
NTL Inc.: .48
0%/12.75% 2005 (1) 17,750 16,153
Series B, 10.00% 2007 10,000 10,200
0%/9.75% 2008 (1)(2) 12,500 7,750
11.50% 2008 (2) 11,000 11,990
Falcon Holding Group, LP, Falcon Funding Corp.: .34
0%/9.285% 2010 (1) 25,300 17,394
8.375% 2010 14,750 14,824
TCI Communications, Inc.: .31
8.00% 2005 10,000 11,258
8.75% 2015 7,500 9,317
Tele-Communications, Inc. 8.75% 2023 8,000 8,921
News America Holdings Inc.: .26
8.625% 2014 A$3,250 2,166
8.00% 2016 $1,000 1,102
7.43% 2026 20,500 21,332
Lenfest Communications, Inc.: .23
8.375% 2005 11,000 11,880
7.625% 2008 6,750 7,020
8.25% 2008 3,250 3,356
Comcast UK Cable Partners Ltd. 0%/11.20% 2007 (1) 22,000 18,480 .19
Comcast Cable Communications, Inc.: .19
8.375% 2007 5,000 5,801
8.875% 2017 10,000 12,345
Time Warner Companies, Inc.: .18
9.125% 2013 7,000 8,862
7.25% 2017 7,000 7,610
6.95% 2028 1,000 1,059
Cox Communications, Inc. 6.40% 2008 15,000 15,709 .16
Cablevision Industries Corp.: .16
8.125% 2009 9,250 9,912
9.875% 2013 5,000 5,575
Telemundo Holdings, Inc. 0%/11.50% 2008(1)(2) 25,375 14,591 .15
Comcast Corp. 10.25% 2001 13,000 14,129 .15
Adelphia Communications Corp.: .13
8.125% 2003 5,000 5,100
8.375% 2008 7,500 7,687
TVN Entertainment Corp. 14.00% 2008(2) 13,250 12,190 .13
V2 Music (Holdings) PLC Units: (1)(2)(4) .13
0%/14.00% 2008 9,250 4,995
0%/14.00% 2008 POUNDS7,875 7,054
TeleWest PLC: .12
9.625% 2006 $4,700 4,794
0%/11.00% 2007(1) 8,000 6,660
Century Communications Corp.: .12
8.75% 2007 6,200 6,820
0% 2008 8,900 4,561
Globo Comunicacoes E Partcipacoes Ltd.: .08
10.50% 2006(2) 9,480 6,115
10.50% 2006 2,000 1,290
Coaxial Communications of Central Ohio, Inc. 10.00% 2006(2) 6,750 6,817 .07
Multicanal Participacoes SA, Series B, 12.625% 2004 7,250 6,308 .07
Clear Channel Communications, Inc. 7.25% 2027 4,000 4,003 .04
Fox Family Worldwide, Inc.: .04
0%/10.25% 2007(1) 2,500 1,575
9.25% 2007 2,000 1,980
FrontierVision 11.00% 2006 2,500 2,775 .03
Avalon Cable Holdings LLC 0% 2008(1)(2) 3,125 1,750 .02
TV Azteca, SA de CV, Series B, 10.50% 2007 1,000 82 .01
409,431 4.29

LEISURE & TOURISM
Joseph E. Seagram & Sons, Inc.: .57
6.625% 2005 26,500 26,351
6.80% 2008 10,000 9,964
7.50% 2018 17,500 17,603
AMF Bowling Worldwide, Inc.: .22
0%/12.25% 2006 (formerly AMF Group Inc.)(1) 11,050 6,354
10.875% 2006 (formerly AMF Group Inc.) 13,839 11,279
0% convertible debentures 2018(2) 23,100 3,061
Mirage Resorts, Inc.: .21
6.625% 2005 7,500 7,281
6.75% 2007 6,500 6,295
6.75% 2008 6,750 6,507
Boyd Gaming Corp.: .21
9.25% 2003 13,725 14,308
9.50% 2007 5,500 5,500
Friendly Ice Cream Corp. 10.50% 2007 18,875 19,630 .21
William Hill Finance 10.625% 2008 POUNDS10,593 18,055 .19
FelCor Suites LP 7.375% 2004 $18,400 17,097 .18
Capstar Hotel Co. 8.75% 2007 12,020 11,780 .12
Punch Taverns 7.567% 2026 POUNDS5,000 8,667 .09
Premier Parks Inc.: .09
9.25% 2006 $5,000 5,213
0%/10.00% 2008(1) 4,500 3,060
Harrah's Operating Company, Inc. 7.875% 2005 6,000 6,000 .06
Royal Caribbean Cruises Ltd.: .06
7.25% 2018 2,000 1,926
7.50% 2027 4,000 3,939
Regal Cinemas, Inc. 9.50% 2008 (2) 5,000 5,200 .05
Six Flags Entertainment Corp. 8.875% 2006 5,000 5,181 .05
KSL Recreation Group, Inc. 10.25% 2007 5,000 5,000 .05
Sun International Hotels, Ltd., Sun International North 3,000 3,120 .03
America, Inc. 9.00% 2007
228,371 2.39

HEALTH & PERSONAL CARE
Columbia/HCA Healthcare Corp.: .90
6.50% 1999 9,500 9,489
6.125% 2000 8,500 8,392
6.41% 2000 1,000 986
7.60% 2001 1,750 1,763
7.15% 2004 1,500 1,463
6.91% 2005 11,410 11,055
7.00% 2007 12,750 12,163
8.85% 2007 24,105 25,369
8.70% 2010 4,250 4,450
9.00% 2014 5,650 5,993
7.69% 2025 5,000 4,635
Integrated Health Services, Inc.: .54
5.75% convertible debentures 2001 6,500 5,647
10.25% 2006 (6) 9,350 9,257
Series A, 9.50% 2007 11,175 10,616
Series A, 9.25% 2008 27,500 25,850
Paracelsus Healthcare Corp. 10.00% 2006 20,575 18,518 .20
Tenet Healthcare Corp.: .10
8.00% 2005 6,000 6,090
8.125% 2008 (2) 3,000 3,075
Nationwide Health Properties Inc., Series A, 7.677% 100,000 SHARES 8,015 .09
preferred cumulative step-up premium rate
McKesson Corp.: .08
6.30% 2005 $1,750 1,783
6.40% 2008 5,500 5,661
Mariner Health Group, Inc. 9.50% 2006 6,500 6,403 .07
Unison HealthCare Corp. 13.00% 2006 (2)(5)(8) 5,000 1,000 .01
187,673 1.99

BROADCASTING & PUBLISHING
Chancellor Media Corp. of Los Angeles: .59
Chancellor Media Corp. of Los Angeles (formerly Chancellor
Radio Broadcasting Co.):
9.375% 2004 (formerly Chancellor Radio Broadcasting Co.) $12,500 13,125
8.125% 2007 (formerly Chancellor Radio Broadcasting Co.) 21,000 21,000
Series B, 8.75% 2007 15,125 15,503
9.00% 2008(2) 7,000 7,367
Hearst-Argyle Television, Inc.: .25
7.00% 2018 18,500 18,419
7.50% 2027 5,500 5,696
Young Broadcasting Inc.: .19
10.125% 2005 3,500 3,666
Series B, 8.75% 2007 14,250 14,321
Cox Radio, Inc.: .17
6.25% 2003 2,000 2,016
6.375% 2005 14,000 14,194
American Radio Systems Corp. 9.00% 2006 $10,080 10,962 .11
Ziff-Davis Inc. 8.50% 2008 9,500 9,263 .10
Antenna TV SA 9.00% 2007 9,750 8,873 .09
TransWestern Publishing Co. LLC: .08
9.625% 2007(2) 6,250 6,563
9.625% 2007 1,000 1,050
RBS Participacoes SA 11.00% 2007(2) 10,000 6,100 .06
Sun Media Corp.: .06
9.50% 2007 3,834 4,237
9.50% 2007 1,305 1,442
STC Broadcasting, Inc. 11.00% 2007 3,250 3,437 .04
Newsquest Capital PLC 11.00% 2006 2,850 3,164 .03
EZ Communications, Inc. 9.75% 2005 1,250 1,359 .01
171,757 1.78

ENERGY & RELATED COMPANIES
McDermott Inc. 9.375% 2002 13,250 13,787 .25
J. Ray McDermott, SA 9.375% 2006 9,500 10,070
Petrozuata Finance, Inc., Series A, 7.63% 2009(2) 21,280 16,598 .17
Pioneer Natural Resources Co. 7.20% 2028 20,000 13,930 .15
CalEnergy Co., Inc. (formerly California Energy 11,000 12,318 .13
Co., Inc.) 9.875% 2003
PDVSA Finance Ltd.:(2) .12
7.40% 2016 10,000 8,427
7.50% 2028 4,000 3,255
Oil Co. Ltd. 8.90% 2000 10,652 10,801 .11
YPF SA 7.75% 2007 10,000 8,900 .09
OXYMAR 7.50% 2016(2) 8,500 8,094 .08
Ocean Energy, Inc. 8.875% 2007 8,000 7,760 .08
Kelley Oil & Gas Corp. 10.375% 2006 8,750 6,388 .07
Benton Oil and Gas Co.: .05
11.625% 2003 6,000 4,020
9.375% 2007 1,750 1,137
Cross Timbers Oil Co. 8.75% 2009 2,000 1,780 .02
Clark Refining & Marketing, Inc. 8.375% 2007 1,500 1,414 .01
Pogo Producing Co. 8.75% 2007 1,500 1,388 .01
130,067 1.34

METALS
BHP Finance Ltd.: .37
6.69% 2006 5,000 5,004
8.50% 2012 20,000 22,405
6.75% 2013 5,000 4,731
7.25% 2016 3,500 3,439
Freeport-McMoRan Copper & Gold Inc.: .35
7.50% 2006 34,000 21,590
7.20% 2026 18,000 11,700
Inco Ltd.: .27
9.875% 2019 7,500 7,842
9.60% 2022 16,000 17,854
Doe Run Resources Corp.: .16
11.696% 2003 (6) 3,000 2,400
11.25% 2005 16,000 12,960
AK Steel Corp. 9.125% 2006 5,000 5,237 .05
Pohang Iron & Steel Co., Ltd. 6.625% 2003 4,695 4,164 .04
Kaiser Aluminum and Chemical Corp. 12.75% 2003 2,000 1,960 .02
121,286 1.26

MULTI-INDUSTRY
Swire Pacific Capital Ltd. 8.84% cumulative guaranteed (2) 1,500,000 SHARE 27,000 .36
perpetual capital securities
Swire Pacific Offshore Financing Ltd. 9.33% cumulative (2) 400,000 7,600
guaranteed perpetual capital securities
Wharf International Finance Ltd., Series A, 7.625% 2007 $25,000 20,056 .21
Hutchison Whampoa Finance Ltd.: (2) .20
7.45% 2017 3,000 2,598
Series D, 6.988% 2037 18,000 16,536
Reliance Industries Ltd.: (2) .18
8.25% 2027 10,000 8,525
10.50% 2046 250 198
10.25% 2097 10,750 8,063
Pan Pacific Industrial Investments PLC 0% 2007 (2) 33,500 13,199 .14
Federal-Mogul Corp. 7.75% 2006 10,000 10,154 .11
Tenneco Inc. 8.075% 2002 3,000 3,128 .03
117,057 1.23

FOREST PRODUCTS & PAPER
Container Corp. of America: .34
10.75% 2002 4,800 4,992
9.75% 2003 18,815 19,191
Series A, 11.25% 2004 8,000 8,320
Scotia Pacific Company LLC: (2) .19
Timber Collateralized Notes, Class A-1, 6.55% 2028 1,500 1,473
Class A-2, 7.11% 2028 18,000 17,096
Norampac Inc.: .14
9.375% 2008 C$5,000 3,343
9.50% 2008 $10,250 10,353
Fort James Corp.: .12
6.625% 2004 5,000 5,092
6.875% 2007 6,000 6,207
Copamex Industrias, SA de CV, Series B, 11.375% 2004 11,880 11,227 .12
Grupo Industrial Durango, SA de CV: .10
12.00% 2001 3,000 2,790
12.625% 2003 7,625 6,863
P.T. Indah Kiat Pulp & Paper Corp. 8.875% 2000 300 20 .08
Indah Kiat:
Finance Mauritius Ltd. 11.875% 2002 600 423
International Finance Co. B.V. 12.50% 2006 150 100
Finance Mauritius Ltd. 10.00% 2007 13,400 7,303
Pindo Deli Finance Mauritius Ltd.: .06
10.25% 2002 6,000 3,360
10.75% 2007 4,375 2,363
Paperboard Industries International Inc. 8.375% 2007 5,000 4,800 .05
James River Corp. 9.25% 2021 1,000 1,221 .01
APP International Finance Co. B.V. 11.75% 2005 525 34 .00
117,073 1.21

ELECTRICAL & GAS UTILITIES
The Israel Electric Corp. Ltd.: (2) .74
7.125% 2005 12,500 12,563
7.25% 2006 7,165 7,279
7.70% 2018 8,500 8,297
7.875% 2026 8,000 7,862
7.75% 2027 25,000 24,216
8.10% 2096 10,405 9,997
Williams Holdings of Delaware, Inc.: .08
6.125% 2003 2,000 1,983
6.25% 2006 5,000 4,950
6.50% 2008 1,000 987
United Utilities 6.875% 2028 7,500 7,390 .08
Energen Corp., Series B, 7.125% 2028 6,000 5,951 .06
Tennessee Gas Pipeline Co. 7.625% 2037 5,000 5,392 .06
Transener SA 9.25% 2008 (2) 4,250 3,698 .04
100,565 1.06

GENERAL RETAILING & MERCHANDISING
Sears Roebuck Acceptance Corp. 6.875% 2017 15,000 15,527 .16
Kmart Corp. 9.78% 2020 12,250 13,397 .14
Venator Group Inc.(formerly Woolworth Corp.): .13
6.98% 2001 9,000 8,510
Series A, 7.00% 2002 4,000 3,700
Federated Department Stores, Inc.: .10
8.125% 2002 5,000 5,390
7.45% 2017 2,000 2,153
7.00% 2028 2,000 2,027
DR Securitized Lease Trust Pass-Through Certificates, 8,000 8,640 .09
Series 1994 K-2, 9.35% 2019
Sunglass Hut International Ltd. 5.25% convertible debentures 11,150 7,694 .08
Carr-Gottstein Foods Co. 12.00% 2005 3,500 3,990 .04
Randall's Food Markets, Inc. 9.375% 2007 3,500 3,763 .04
Boyds Collection 9.00% 2008 (2) 2,960 3,019 .03
Dillard's, Inc. 7.13% 2018 2,750 2,775 .03
Fred Meyer, Inc.: .02
7.375% 2005 1,000 1,058
7.45% 2008 1,000 1,079
82,722 .86

ELECTRICAL & ELECTRONICS
Micron Technology, Inc. 7.00% convertible subordinated notes 24,000 25,710 .27
Hyundai Semiconductor America, Inc.: (2) .22
8.25% 2004 7,705 6,087
8.625% 2007 20,700 15,318
Zilog, Inc. 9.50% 2005 12,250 9,923 .10
Samsung Electronics Co., Ltd. 7.45% 2002 (2) 11,000 9,790 .10
Advanced Micro Devices, Inc. 11.00% 2003 8,000 8,480 .09
Maxtor Corp. 5.75% convertible debentures 2012 3,000 1,800 .02
77,108 .80

MISCELLANEOUS MATERIALS & COMMODITIES
Printpack, Inc.: .13
Series B, 9.875% 2004 2,775 2,775
10.625% 2006 9,465 9,465
Impress Metal Packaging Holdings BV 9.875% 2007 DM14,000 9,233 .10
Consumers International Inc. 10.25% 2005 (6) $8,125 8,491 .09
Anchor Glass Container Corp.: .09
11.25% 2005 7,000 7,315
9.875% 2008 1,000 945
Graham Packaging Co.: .08
8.75% 2008 3,625 3,661
0%/10.75% 2009 (1) 5,975 4,153
CellNet Data Systems, Inc. Units 0%/14.00% 2007 (1)(4) 26,561 5,168 .05
Ball Corp. 7.75% 2006 (2) 3,500 3,675 .04
Teletrac Holdings, Inc. Units 14.00% 2007 (4)(5) 6,850 2,436 .03
MC-Cuernavaca Trust 9.25% 2001 (1)(2) 3,109 2,176 .02
Key Plastics, Inc. 10.25% 2007 1,000 93 .01
60,428 .64

INDUSTRIAL COMPONENTS
BREED Technologies Inc. 9.25% 2008 (2) 28,750 25,300 .27
Hayes Wheels International Inc. 9.125% 2007 11,000 11,495 .12
Tekni-Plex, Inc. 9.25% 2008 7,500 7,875 .08
Hayes Lemmerz International, Inc. 8.25% 2008 (2) 5,000 5,000 .05
49,670 .52

FOOD & FOOD PRODUCTS
Nabisco, Inc.: .23
7.05% 2007 8,500 8,720
7.55% 2015 13,000 13,270
Fage Dairy Industry SA 9.00% 2007 10,000 8,700 .09
Gruma, SA de CV 7.625% 2007 8,000 7,040 .07
Home Products International, Inc. 9.625% 2008 6,000 5,910 .06
Favorite Brands International, Inc. 10.75% 2006 (2) 1,750 1,435 .02
45,075 .47

AUTOMOTIVE
Ford Motor Credit Co. 5.25% 2008 DM32,000 19,870 .21
General Motors Corp. 9.45% 2011 $12,000 15,729 .16
35,599 .37

BEVERAGES & TOBACCO
Canandaigua Wine Co., Inc.: .15
Series C, 8.75% 2003 7,500 7,725
8.75% 2003 6,000 6,150
Standard Commercial Tobacco Co., Inc. 8.875% 2005 11,750 11,280 .12
Delta Beverage Group, Inc. 9.75% 2003 $4,750 5,011 .05
Sparkling Spring Water Group Ltd. 11.50% 2007 3,750 3,338 .04
33,504 .36

MACHINERY & ENGINEERING
John Deere Capital Corp. 8.625% 2019 16,850 19,144 .20
United Defense 8.75% 2007 2,790 2,825 .03
21,969 .23

PROTECTION SERVICES
Protection One Alarm Monitoring, Inc.: .19
6.75% convertible debentures 2003 5,000 5,800
13.625% 2005 11,074 12,569
18,369 .19

APPLIANCES & HOUSEHOLD GOODS
Lifestyle Furnishings International Ltd. 10.875% 2006 9,250 10,152 .11
Salton/Maxim Housewares, Inc. 10.75% 2005 (2) 8,000 8,000 .08
18,152 .19

TEXTILES & APPAREL
Tultex Corp.: .10
10.625% 2005 11,500 5,175
9.625% 2007 11,500 4,830
WestPoint Stevens Inc. 7.875% 2005 1,000 1,015 .01
11,020 .11

DATA PROCESSING & REPRODUCTION
First International Computer Corp. 1.00% 3,000 3,450 .04
convertible debentures 2004 (2)

OTHER
Cendant Corp. 7.75% 2003 25,500 25,772 .27
EarthWatch Inc. Units 12.50% 2001 (2)(4)(5)(8) 12,000 9,600 .10
Allied Waste North America, Inc.: (2) .06
7.375% 2004 4,000 4,020
7.625% 2006 2,000 2,015
Safety-Kleen Services, Inc. 9.25% 2008 250 25 .00
41,665 .43

FINANCE
BANKS & THRIFTS
Capital One Bank: .72
6.97% 2002 5,000 5,001
6.375% 2003 15,000 14,700
6.40% 2003 5,600 5,509
6.78% 2005 10,000 9,828
7.15% 2006 11,000 11,057
6.70% 2008 10,000 9,670
Capital One Capital I 6.769% 2027 (2)(6) 10,000 8,454
Capital One Financial Corp. 7.25% 2003 5,000 4,952
Tokai Preferred Capital Co. LLC, Series A, 75,500 64,175 .67
9.98% noncumulative preferred (2)
BNP U.S. Funding LLC, Series A, 7.738% 64,000 61,460 .65
noncumulative preferred (2)
SocGen Real Estate Co. LLC, Series A, 62,500 57,569 .60
7.64%/8.406% 2049 (1) (2)
MBNA Corp., MBNA: .59
6.75% 2008 2,500 2,475
Capital A, Series A, 8.278% 2026 28,000 28,727
Capital B, Series B, 6.019% 2027(6) 30,000 24,924
Fuji JGB Investment LLC, Series A, 9.87% 56,000 40,055 .42
noncumulative preferred (2)
Bankers Trust New York Corp.:
8.25% 2005 10,000 11,042 .41
6.70% 2007 20,000 20,665
7.90% 2027 5,000 5,245
BT Preferred Capital Trust II 7.875% 2027 1,500 1,565
NB Capital: .36
Trust IV 8.25% 2027 3,000 3,401
Corp. 8.35% exchangeable depositary shares 1,200,000 SHARE 31,200
Skandinaviska Enskilda Banken: .33
6.875% 2009 $8,250 8,663
7.50% (undated) (6) 24,000 23,047
IBJ Preferred Capital Co. LLC, Series A, 35,450 31,095 .33
8.79% noncumulative preferred (2)
Advanta Corp.: .30
Series D, 6.54% 2000 10,600 10,070
Series D, 6.60% 2000 6,000 5,719
Series B, 7.00% 2001 4,000 3,709
Series D, 6.925% 2002 2,500 2,172
6.925% 2002 2,000 1,738
Advanta Capital Trust I 8.99% 2026 10,000 5,000
Washington Mutual Capital I Subordinated 22,000 24,130 .27
Capital Income Securities 8.375% 2027
Great Western Financial Trust II, Series A, 8.206% 2027 2,055 2,318
Paribas, New York Branch 6.95% 2013 25,000 24,442 .26
Barnett Capital I 8.06% 2026 20,000 22,470 .24
HSBC America Capital 8.38% 2027 (2) 19,375 19,557 .21
Royal Bank of Scotland 8.375% 2007 POUNDS9,400 17,832 .19
Imperial Capital Trust I, Imperial Bancorp 9.98% 2026 $15,000 16,309 .17
Riggs Capital TrustII 8.625% 2026 (2) 1,500 1,525 .17
Riggs National Corp.:
8.625% 2026 3,900 3,964
8.875% 2027 (2) 10,000 10,519
Bayerische Vereinsbank 5.50% 2008 DM24,000 15,724 .16
Chevy Chase Bank, FSB 9.25% 2005 $2,000 2,000 .15
Chevy Chase Preferred Capital Corp. 10.375% 242,900 SHARES 12,692
Dime Capital Trust I, Dime Bancorp, Inc., Series A, 9.33% 20 $12,500 13,501 .14
Abbey National PLC 6.70% (undated) (6) 12,500 12,270 .13
Chase Capital I, Capital Securities, Series A, 7.67% 2026 6,000 6,457 .13
Chase Capital II, Global Floating Rate Capital Securities, ( 6,000 5,672
Series B, 5.719% 2027
Fleet Financial Group, Inc. 6.375% 2008 1,000 1,045 .13
Fleet Capital Trust II 7.92% 2026 1,000 1,111
Fleet Capital Trust V 6.226% 2028 (6) 10,000 9,901
Bankunited Capital Trust, Bankunited Financial Corp., 10.25% 10,000 10,225 .11
J.P. Morgan & Co. Inc., Series A, 5.861% 2012 (6) 10,000 8,714 .09
Korea Development Bank: .07
7.125% 2001 1,000 948
6.625% 2003 750 670
7.375% 2004 6,000 5,475
Fuji International Finance (Bermuda) Trust, 10,000 6,600 .07
Fuji Bank, Ltd. 7.30% (undated) (6)
Den Danske Bank 7.40%/7.961% 2010 (1)(2) 6,000 6,366 .07
SB Treasury Co. LLC, Series A, 9.40% noncumulative preferred 6,000 5,700 .06
Bay View Capital 9.125% 2007 5,500 5,280 .06
MBI Finance 0% convertible debentures 2001 6,000 4,020 .04
PNC Institutional Capital B, PNC Financial Corp. 8.315% 2027 3,000 3,354 .04
Svenska Handelsbanken 8.125% 2007 1,000 1,134 .01
Kansallis-Osake-Pankki 10.00% 2002 1,000 1,124 .01
Banco General, SA 7.70% 2002 (2) 500 47 .00
796,408 8.36

REAL ESTATE
CarrAmerica Realty Corp.: .42
6.875% 2008 16,000 15,243
Series C, 8.55% cumulative redeemable preferred 400,000 SHARES 8,925
Series B, 8.57% cumulative redeemable preferred 700,000 15,750
Land Securities PLC 9.00% 2000 POUNDS12,000 28,569 .30
ProLogis Trust (formerly Secruity Capital Industrial Trust): .29
7.25% 2002 $1,000 995
7.05% 2006 5,000 4,879
7.875% 2009 7,500 7,498
Series D, 7.92% preferred 380,000 SHARES 9,358
Archstone Communities Trust (formerly Security .13
Capital Pacific Trust):
7.20% 2013 $13,500 12,380
Series C, 8.625% convertible preferred 200,000 SHARES 5,100
EOP Operating LP: .17
6.75% 2008 $11,500 11,308
7.25% 2018 5,000 4,723
Irvine Co. 7.46% 2006(5) 17,000 15,846 .17
ERP Operating LP: .13
7.57% 2026 8,000 8,228
7.95% 2002 3,750 3,890
Shopping Center Associates 6.75% 2004 (2) 12,000 11,858 .12
Irvine Apartment Communities, LP 7.00% 2007 9,500 8,632 .09
Beverly Finance Corp. 8.36% 2004 (2) 7,500 8,201 .09
IAC Capital Trust, Series A, 8.25% TOPRS preferred 300,000 SHARES 7,313 .08
Simon DeBartolo Group, Inc., Series C, 7.89% preferred 150,000 6,903 .07
cumulative step-up premium rate
Duke Realty Investments, Inc., Series B, 7.99% preferred 150,000 6,825 .07
cumulative step-up premium rate
New Plan Realty Trust, Series A, 7.80% preferred 112,500 5,259 .06
cumulative step-up premium rate
Wellsford Residential Property Trust: .02
7.25% 2000 $1,000 1,009
7.75% 2005 1,000 1,043
209,735 2.21

FINANCIAL SERVICES
AT&T Capital Corp. 6.60% 2005 30,000 28,742 .30
Newcourt Credit Group Inc., Series A, 7.125% 2003 (2) 10,000 9,951 .10
Household Finance Corp.: .36
5.519% 2005 (6) 8,000 7,783
6.40% 2008 25,750 26,588
Nykredit 6.00% 2029 DKr107,685 16,585 .17
Wilshire Financial Services Group, Inc.: .17
13.00% 2004 $4,000 1,080
13.00% 2004 11,500 3,105
Series A, 13.00% 2004 (5) 20,000 12,000
AB Spintab: .12
6.00% 2009 SKr23,000 3,068
7.50% (Undated) (2)(6) $8,500 8,617
Halifax Building Society 8.75% 2006 POUNDS5,500 10,733 .11
Ocwen Financial Corp. 12.00% 2005 $6,000 5,460 .11
Ocwen Capital Trust I 10.875% 2027 6,500 5,005
Associates Corp. of North America 5.85% 2001 10,000 10,087 .11
Providian Financial Corp. 9.525% 2027(2) 7,000 7,091 .07
Wharf Capital International, Ltd. 8.875% 2004 7,457 6,794 .07
Amresco, Inc. 9.875% 2005 8,950 6,444 .07
Green Tree Financial Corp. 6.50% 2002 4,000 3,778 .04
Lend Lease (US) Finance Inc. 6.75% 2005 1,500 1,561 .02
174,472 1.82

INSURANCE
C$ C$16,000 10,275 .11
Jefferson Pilot Corp. 8.14% 2046(2) $6,000 6,544 .07
16,819 .18

COLLATERALIZED MORTGAGE/ASSET - BACKED OBLIGATIONS
(Excluding Those Issued by Federal Agencies)(7)
Morgan Stanley Capital I Inc.: 1.18
Series 1998-1, Class A-5, 6.75% 2013 17,449 17,449
Series 1995-GA1, Class A-1, 7.00% 2002(2) 5,441 5,502
Series 1998-HF1, Class A-1, 6.19% 2007(6) 34,447 35,039
Series 1996-WF1, Class A-1, 7.00% 2028(2)(6) 9,548 9,641
Series 1998-WF2, Class A-1, 6.34% 2030(6) 9,699 9,930
Series 1998-HF2, Class A-2, 6.48% 2030 34,000 35,295
Chase Commercial Mortgage Securities Corp.: .89
Series 1996-1, Class A1, 7.60% 2005 4,667 4,967
Series 1997-I, Class A1, 7.27% 2029 6,856 7,138
Series 1998-1, Class A1, 6.34% 2030 30,829 31,474
Series 1998-2, Class A-2, 6.39% 2030 32,000 32,954
Series 1998-2, Class E, 6.39% 2030 10,000 8,671
DLJ Mortgage Acceptance Corp.: .87
Series 1997-CF1, Class A1A, 7.40% 2006(2) 6,333 6,642
Series 1996-CF2, Class A1B, 7.29% 2021(2) 11,200 11,797
Series 1995-CF2, Class A1B, 6.85% 2027(2) 30,845 31,829
Series 1996-CF1, Class A1A, 7.28% 2028 9,428 9,755
Series 1998-CF1, Class A-1A, 6.14% 2006(6) 22,797 23,037
Green Tree Financial Corp, pass-through certificates: .75
Series 1994-A, Class NIM, 6.90% 2004 4,121 4,131
Series 1995-A, Class NIM, 7.25% 2005 8,845 8,885
Series 1993-2, Class B, 8.00% 2018 2,250 2,123
Series 1997-A, Class HI-M1, 7.47% 2023 1,000 1,027
Series 1995-8, Class B2, 7.65% 2026 4,000 3,430
Series 1995-6, Class B2, 8.00% 2026 2,450 2,239
Series 1995-9, Class A-5, 6.80% 2027 8,000 8,100
Series 1996-7, Class A6, 7.65% 2027 2,100 2,212
Series 1996-6, Class B2, 8.35% 2027 10,611 9,932
Series 1997-1, Class A-5, 6.86% 2028 1,500 1,538
Series 1996-10, Class A-6, 7.30% 2028 8,500 8,851
Series 1998-4, Class B2, 8.11% 2028 13,350 11,648
Series 1997-6, Class A6, 6.90% 2029 7,500 7,699
GMAC Commercial Mortgage Securities, Inc.: .66
Series 1997-C1, Class A1, 6.83% 2003 23,979 24,578
Series 1997-C1, Class A3, 6.869% 2007 35,000 37,079
Series 1996-C1, Class A2A, 6.79% 2028 866 885
CSFB Finance Co. Ltd., Series 1995-A, 7.142% 2005(2)(6) 36,775 34,510 .63
CSFB, Series 98-FL1, Class E, 6.397% 2013(2)(6) 10,000 9,739
CS First Boston Mortgage Securities Corp., Series 1998-C1, 16,295 16,629
Class A-1A, 6.26% 2040
Norwest Asset Securities Corp.: .46
Series 1998-8, Class A-1, 6.50% 2013 34,156 34,262
Series 1998-31, Class A-1, 6.25% 2014 9,775 9,761
Asset Securitization Corp.: .42
Series 1996-D3, Class A-1B, 7.21% 2026 3,000 3,147
Series 1997-D4, Class A-1A, 7.35% 2029 9,476 9,782
Series 1997-D5, Class A-PS1, interest only, 1.385% 2043(6) 277,376 26,905
Merrill Lynch Mortgage Investors, Inc., .41
Mortgage Pass-Through Certificates:(6)
Series 1995-C2, Class A-1, 7.189% 2021 5,770 5,866
Series 1995-C2, Class D, 7.959% 2021 579 593
Series 1995-C3, Class A-1, 6.762% 2025 2,283 2,332
Series 1995-C3, Clas A-3, 7.062% 2025 15,855 16,524
Series 1996-C2, Class A-1, 6.69% 2028 13,397 13,801
The Money Store Trust: .41
Series 1996-D, Class A-12, 6.37% 2011 20,000 20,012
Series 1997-1, Class A-2, 6.81% 2011 15,000 15,037
Series 1996-D, Class A-14, 6.985% 2016 4,000 4,062
Structured Asset Securities Corp., pass-through certificates: .37
Series 1998-RF2, Class A, 8.572% 2027(2)(6) 23,810 25,567
Series 1998-RF1, Class A, 8.696% 2027(2)(6) 3,992 4,303
Series 1996-CFL, Class A1C, 5.944% 2028(6) 1,942 1,938
Series 1996-CFL, Class D, 7.034% 2028 2,950 2,941
Series 1996-CFL, Class A2A, 7.75% 2028(6) 728 728
ComEd Transitional Funding Trust, Transitional .35
Funding Trust Note:
Series 1998, Class A-4, 5.39%, 2005 6,000 5,965
Series 1998, Class A-5, 5.44% 2007 21,500 21,334
Series 1998, Class A-6, 5.63% 2009 6,000 5,956
First USA Credit Card Master Trust, Class A .31
Floating Rate (2)(6)
Asset Backed Certificates:
Series 1998-7, 6.151% 2004 4,000 3,912
Series 1998-4, 6.051% 2008 15,000 14,511
Series 1998-8, 6.451% 2008 4,400 4,298
Series 1997-4, 6.274% 2010 6,630 6,543
Sears Credit Account Master Trust II, Series 25,300 24,786 .26
1998-2, Class A, 5.25% 2008
Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1, 19,592 19,735 .21
Class A-1, 6.22% 2031
DLJ Commercial Mortage Corp., Commercial Mortgage .21
Pass-Through Certificates:
Series 1998-CF2, Class A-1B, 6.24% 2031 10,000 10,188
Series 1998-CF2, Class B-1, 7.066% 2031(6) 9,538 9,520
Structured Asset Notes Transaction, Ltd., Series 1996-A, (2) 17,891 18,156 .19
Class A1, 7.156% 2003
Commercial Mortgage Acceptance Corp.: .18
Series 1998-C2, Class A-1, 5.80% 2006 4,925 4,970
Series 1998-C1, Class A-1, 6.23% 2007 12,206 12,443
Resolution Trust Corp.: .18
Series 1991-M5, Class B, 9.00% 2017 1,683 1,683
Series 1993-C1, Class D, 9.45% 2024 9,352 9,352
Series 1993-C1, Class E, 9.50% 2024 155 155
Series 1993-C2, Class C, 8.00% 2025 3,000 2,999
Series 1993-C2, Class D, 8.50% 2025 2,732 2,724
Ocwen Residential MBS Corp., Series 1998-R1, 16,699 16,731 .18
Class AWAC, 1.083% 2027(2)(6)
Nomura Asset Securities Corp., Series 1998-D6, 15,905 16,068 .17
ClassA-A1, 6.28% 2030(6)
EquiCredit Funding Asset Backed Certificates, Series 1996-A, 15,790 15,873 .17
Class A2, 6.95% 2012
G E Capital Mortgage Services, Series 1994-15, 16,376 15,731 .17
Class A10, 6.00% 2009
IMC Home Equity Loan Trust, Series 1996-4, 15,585 15,588 .16
Class A3, 6.81% 2011
Chase Manhattan Credit Card Master Trust, Series 15,000 15,061 .16
1996-4, Class A, 6.73% 2003
FIRSTPLUS Home Loan Owner Trust: .16
Series 1997-1, Class A-7, 7.16% 2018 10,000 10,173
Series 1997-3, Class B-1, 7.79% 2023 5,000 4,764
Asset-Backed Securities Investment Trust, 10,534 10,547 .11
Series 1997-D, 6.79% 2003(2)
Grupo Financiero Banamex Accival, SA de CV 0% 2002 11,856 10,496 .11
LB Commerical Mortgage Trust, Series 1998-C1, 9,994 10,153 .11
Class A1, 6.33% 2030
Metris Master Trust, Series 1998-1A, Class C, 10,000 9,719 .10
6.412% 2005(2)(6)
Prudential Home Mortgage Securities Co., Inc.: .10
Series 1993-34, Class A-1, 7.00% 2023 5,216 5,206
Series 1993-48, Class A-6, 6.25% 2008 4,466 4,416
Residental Asset Securitization Trust, Series 1997-A3, 9,267 9,365 .10
Class B1, 7.75% 2027
PNC Mortgage Securities Corp., Series 1998-10, 9,597 9,336 .10
Class 1-B1, 6.50% 2028(2)
Ditech Home Loan Owner Trust, Series 1998-1, Class B1, 9.50% 10,500 9,092 .10
Bear Stearns Commercial Mortgage Securities Inc., 8,767 9,032 .10
Series 1998-C1, Class A-1, 6.34% 2007
Mortgage Capital Funding, Inc., Series 1998-MC1, 8,158 8,393 .09
Class A-1, 6.417% 2030
Bear Asset Trust Securities, Series 1997-1, 7,853 7,858 .08
Class A, 6.686% 2006(2)
Green Tree Recreational, Equipment and Consumer Trust, 8,500 7,732 .08
Series 1997-D, Class CTFS, 7.25% 2029
Collateralized Mortgage Obligation Trust, 6,546 6,850 .07
Series 63, Class Z, 9.00% 2020
Residential Funding Mortgage Securities I, Inc.: .07
Series 1998-S17, Class M-1, 6.75% 2028 3,988 3,935
Series 1992-S6, Class A-10, 13.164% 2022(6)(9) 2,742 2,793
Travelers Mortgage Securities Corp., Series 1, 5,676 6,337 .07
Class Z2, 12.00% 2014
Capstead Securities Corp. IV, Series 1992-4, 5,945 5,959 .06
Class J, 19.277% 2022(6)(9)
Ryland Acceptance Corp. Four, Series 88, Class E, 5,455 5,595 .06
7.95% 2019
Chase Manhattan Bank, NA, Series 1993-I, 5,362 5,375 .06
Class 2A5, 7.25% 2024
Standard Credit Card Master Trust I, 5,000 5,406 .06
Series 1994-2, Class A, 7.25% 2008
Chase Credit Card Master Trust, Series 1996-4, 5,000 4,959 .05
Class A, 5.665% 2006(6)
MBNA Master Credit Card Trust, Series 1998-E, 5,000 4,958 .05
Class C, 6.60% 2010(2)
GE Capital Mortgage Services, Inc., 4,628 4,483 .05
Series 1994-9, Class A9, 6.50% 2024
Bear Stearns Structured Securities Inc., Series 1997-2, (2)( 3,859 3,854 .04
Class AWAC, 4.028% 2036
J.P. Morgan Commercial Mortgage Finance Corp.: .04
Series 1995-C1, Class A-2, 7.395% 2010(6) 1,000 1,021
Series 1996-C3, Class A-1, 7.33% 2028 1,550 1,621
Series 1997-C4, Class A-1, 6.939% 2028 1,137 1,152
Nationsbanc Montgomery Funding Corp., Series 1998-5, 3,000 2,978 .03
Class A-1, 6.00% 2013
Aames Mortgage Trust, Series 1996-D, Class A-1B, 6.34% 2012 2,623 2,620 .03
Financial Asset Securitization, Inc., Series 1997-NAM1, 2,564 2,620 .03
Class B1, 7.75% 2027
UCFC Acceptance Corp., Series 1996-D1, Class A-4, 6.776% 201 2,400 2,411 .03
Bombardier Capital Mortgage Securitization Corp., 2,000 1,990 .02
Series 1998-A, Class A-3, 6.23% 2008
GS Mortgage Securities Corp., Series 1998-2, 1,187 1,230 .01
Class M, 7.75% 2027 (2)
Blackrock Capital Finance LP, Series 1996-C2, 1,000 1,000 .01
Class C, 7.888% 2026
GCC Home Equity Trust, Series 1990-1, Class A, 10.00% 2005 927 92 .01
1,154,553 12.14

GOVERNMENTAL
U.S. TREASURY OBLIGATIONS
9.125% May 1999 7,750 7,872 .08
6.875% July 1999 6,000 6,074 .06
6.00% August 2000 5,000 5,103 .05
7.75% February 2001 27,500 29,197 .31
13.125% May 2001 21,500 25,531 .27
3.625% July 2002(10) 51,197 50,845 .53
11.625% November 2002 92,000 113,965 1.20
6.25% February 2003 1,250 1,322 .01
10.75% May 2003 7,500 9,255 .10
11.875% November 2003 10,000 13,052 .14
7.25% May 2004 185,820 208,263 2.18
11.625% November 2004 106,175 143,004 1.50
7.50% February 2005 27,730 31,751 .33
6.50% May 2005 9,000 9,863 .10
7.00% July 2006 465 52 .01
6.50% October 2006 27,000 29,949 .31
3.375% January 2007(10) 46,577 45,005 .47
6.125% August 2007 8,515 9,300 .10
5.625% May 2008 40,000 42,681 .45
8.75% November 2008 7,500 8,745 .09
9.125% May 2009 18,000 21,569 .23
10.375% November 2009 12,500 15,965 .17
10.00% May 2010 7,500 9,573 .10
10.375% November 2012 15,000 20,695 .22
12.00% August 2013 10,000 15,267 .16
7.50% November 2016 32,000 39,750 .42
8.875% August 2017 194,350 273,759 2.87
8.750% May 2020 4,270 6,064 .06
7.875% February 2021 19,250 25,317 .27
8.125% May 2021 98,000 132,208 1.39
6.375% August 2027 20,750 23,849 .25
1,375,322 14.43

FEDERAL AGENCY OBLIGATIONS
Mortgage Pass-Throughs(7)
Government National Mortgage Assn.: 5.31
6.00% 2028 1,968 1,951
6.50% 2008-2028 31,879 32,240
6.63% 2022-2023(6) 10,297 10,450
6.88% 2022-2024(6) 82,636 83,660
7.00% 2008-2026(6) 194,238 198,480
7.50% 2007-2028 82,094 84,683
8.00% 2017-2026 26,535 27,648
8.50% 2020-2028 22,285 23,696
9.00% 2009-2022 17,907 19,269
9.50% 2009-2021 14,756 12,746
10.00% 2017-2019 6,384 6,931
10.50% 2015-2019 291 319
11.00% 2013-2016 729 815
12.00% 2014-2015 3,027 3,405
12.50% 2010-2015 582 663
13.25% 2014 77 88
Fannie Mae: 2.27
6.00% 2013-2014 40,435 40,536
6.16% 2033(6) 28,243 28,411
6.50% 2013-2028 29,356 29,762
7.00% 2009-2028 46,845 47,799
7.50% 2009-2028 8,062 8,289
7.69% 2026(6) 9,562 9,794
8.00% 2023 1,889 1,965
8.28% 2002(6) 6,992 7,245
8.50% 2009-2027 6,663 6,979
9.00% 2018-2025 3,247 3,450
9.50% 2009-2025 2,895 3,096
10.00% 2018-2025 9,101 9,803
10.50% 2012-2019 2,893 3,161
11.00% 2015-2020 1,875 2,070
11.25% 2014 31 34
11.50% 2010-2014 147 165
12.00% 2015-2028 985 1,126
12.50% 2015 1,178 1,362
13.00% 2015-2028 9,432 11,215
15.00% 2013 45 54
Freddie Mac: .68
6.00% 2013 13,959 14,007
7.50% 2012 15,919 16,367
8.00% 2003-2010 2,776 2,836
8.25% 2007 1,753 1,818
8.50% 2002-2020 18,411 19,222
8.75% 2008 2,176 2,283
9.00% 2021 574 612
10.00% 2011-2019 147 158
10.50% 2020 1,839 2,038
10.75% 2010 66 72
11.50% 2000 18 20
12.00% 2016-2017 2,189 2,493
12.50% 2015-2019 1,985 2,288
12.75% 2019 359 414
13.00% 2014 30 35
13.50% 2018 10 12
13.75% 2014 12 14
788,049 8.26

Collateralized Mortgage Obligations (7)
Fannie Mae: .43
Series 1991-146, Class Z, 8.00% 2006 4,771 4,923
Series 1990-93, Class G, 5.50% 2020 887 871
Series 1991-2, Class Z, 6.50% 2021 15,584 15,662
Series 1993-247, Class Z, 7.00% 2023 4,230 4,281
Series 1994-4, Class ZA, 6.50% 2024 3,782 3,726
Series 1997-28, Class C, 7.00% 2027 7,000 7,168
Series 1998-W5, Class B3, 6.50% 2028(2) 4,900 4,318
Freddie Mac: .36
Series 1849, Class Z, 6.00% 2008 5,836 5,794
Series 1716, Class A, 6.50% 2009 4,750 4,772
Series 41, Class F, 10.00% 2020 3,168 3,440
Series 178, Class Z, 9.25% 2021 2,704 2,854
Series 1657, Class SA, 6.988% 2023(6)(9) 7,520 6,535
Series 1673, Class SA, 5.245% 2024(6)(9) 7,879 6,224
Series 1948, Class PJ, 6.65% 2027 3,000 3,019
Series 2030, Class F, 6.035% 2028(6) 2,152 2,161
75,748 .79

Other
Fannie Mae:
7.70% 2004 12,500 12,688 .29
Medium-Term Note, 6.75% 2028 15,000 15,005
Federal Home Loan Bank Bonds:
6.27% 2004 5,000 4,987 .16
7.013% 2007 10,000 10,080
42,760 .45

GOVERNMENT & GOVERNMENTAL BODIES (EXCLUDING U.S. GOVERNMENT)
Hellenic Republic: 1.22
8.90% 2004 GRD4,900,000 18,759
2.90% 2007 YEN1,270,000 11,439
8.80% 2007 GRD6,500,000 25,835
6.95% 2008 $4,500 4,830
8.60% 2008 GRD13,320,000 52,966
7.50% 2013 620,000 2,344
Canadian Government: 1.06
9.00% 2004 C$20,000 15,806
4.25% 2021(10) 23,229 15,426
4.25% 2026(10) 105,154 69,936
Deutschland Republic: .87
8.00% 2002 DM34,050 23,541
5.25% 2008 90,000 59,595
Bundesrepublik: .78
7.125% 2003 22,250 15,201
7.50% 2004 32,000 22,997
Treuhandanstalt:
7.125% 2002 24,000 16,377
6.00% 2007 29,000 19,990
Japanese Government 1.50% 2008 YEN7,300,000 61,359 .64
Spanish Government 6.00% 2008 Pta6,000,000 48,665 .51
United Kingdom: .49
8.50% 2005 POUNDS17,000 35,013
8.00% 2015 $5,000 11,782
Polish Government: .38
12.00% 2001 PLZ20,000 5,792
13.00% 2001 25,000 7,340
12.00% 2002 8,375 2,443
12.00% 2003 70,000 20,870
Norwegian Government 6.75% 2007 NOK155,000 22,240 .23
Italian Government BTPS 6.00% 2007 Lr31,375,000 21,691 .23
Netherland Government 5.50% 2028 NLG34,000 20,035 .21
Kingdom of Denmark 6.00% 2009 DKr90,000 16,149 .17
Ontario (Province of): .15
7.75% 2002 $3,500 3,773
5.50% 2008 10,750 10,791
New Zealand Government 4.50% 2016(10) NZ$27,210 14,187 .15
United Mexican States Government Eurobonds: .13
Global, 11.375% 2016 $9,015 9,493
Series A, 6.25% 2019 1,000 778
Global, 11.50% 2026 2,125 2,274
Argentina (Republic of): .12
Eurobonds, Series L, 6.188% 2005(6) 235 199
Units 11.00% 2005(4) 5,000 5,011
11.00% 2006 1,500 1,485
11.75% 2007 ARP2,650 2,255
11.375% 2017 $1,500 1,504
9.75% 2027 1,050 937
Swedish Government 6.50% 2008 SKr60,000 8,689 .09
Quebec (Province of): .09
8.625% 2005 $2,250 2,587
13.25% 2014 5,500 6,035
Hungarian Government 13.00% 2003 HUF1,800,000 8,463 .09
Panama (Republic of):(6) .07
Interest Reduction Bond 4.00% 2014(2) $6,500 4,908
Past Due Interest Bond, 6.688% 2016(2) 1,582 1,186
Past Due Interest Eurobond 6.688% 2016 264 198
Venezuela (Republic of):(6) .03
Front Loaded Interest Reduction Bonds:
Series A, 6.125% 2007 810 514
Series B, 6.125% 2007 202 129
Eurobond 5.9375% 2007 4,071 2,606
Mendoza (Province of) 10.00% 2007(2) 4,150 2,947 .03
Philippines (Republic of): .03
8.875% 2008 1,750 1,748
8.75% 2016 1,000 991
Manitoba (Province of) 9.625% 1999 2,000 2,017 .02
Poland (Republic of) Past Due Interest 2,000 1,875 .02
Registered Bond 5.00% 2014
Peru (Republic of) Past Due Interest Eurobond 4.00% 2017(6) 750 47 .00
Ecuador (Republic of) Past Due Interest:(6) .00
Registered Bond 6.625% 2015 283 115
Bearer Bond 6.625% 2015 424 173
Discount Bond 6.625% 2025 250 130
Brazil (Federal Republic of), Debt Conversion 500 26 .00
Bond, Series L, 6.188% 2012(6)
747,153 7.81

FLOATING RATE EURODOLLAR NOTES (UNDATED)(6)
Bank of Scotland 7.00% (2) 30,000 29,944 .31
National Westminster Bank PLC 7.75% 23,000 24,268 .26
Canadian Imperial Bank of Commerce 5.813% 25,000 19,187 .20
Standard Chartered Bank:
5.275% 5,000 3,063 .13
5.625% 15,000 9,050
Bank of Nova Scotia 5.813% 10,000 7,700 .08
BCI U.S. Funding Trust I 8.01% (2) 8,000 7,683 .08
Hongkong and Shanghai Banking Corp. 6.06% 10,000 7,351 .08
Lloyds Bank (#2) 5.438% 8,000 6,560 .07
Allied Irish Banks Ltd. 5.75% 7,000 5,985 .06
Merita Bank Ltd. 7.15% (2) 4,000 3,870 .04
Midland Bank 5.375% 5,000 3,847 .04
Bergen Bank 5.813% 5,000 3,586 .04
National Bank of Canada 5.047% 5,000 3,550 .04
Christiana Bank Og Kreditkasse 5.625% 4,000 2,920 .03
138,564 1.46

OTHER SECURITIES & MISCELLANEOUS Shares

STOCKS AND WARRANTS
NEXTEL Communications, Inc., Class A(11) 122,392 2,892 .03
NEXTEL Communications, Inc. warrants, expire 1999 (5)(11) 38,750 5
Verio Inc., warrants, expire 2004 (11) 52,200 2,610 .03
Cellular Communications International, Inc. 15,071 1,206 .02
warrants, expire 2003 (11)
CellNet Data Systems, Inc. (11) 219,400 1,097 .01
NTL Inc., warrants, expire 2008 (2)(5)(11) 26,362 79 .01
Protection One Alarm Monitoring, Inc. warrants, expire 2005 54,400 40 .01
ICG Communications, Inc. (formerly IntelCom Group, 19,800 31 .00
Inc.), warrants, expire 2005 (2)(11)
Discovery Zone, Inc. (5)(8) 13,966 .00
9,397 .11

MISCELLANEOUS
Investment securities in initial period of acquisition 14,944 .17

TOTAL BONDS, NOTES AND EQUITY SECURITIES (cost: $8,993,173,000) 8,922,440 93.53

Principal Market
Amount Value Percent of
SHORT-TERM SECURITIES (000) (000) Net Assets

COMMERCIAL PAPER
Associates First Capital Corp.:
5.125 due 1/4/99 25,000 24,986 .67
5.31% due 1/14/99 38,700 38,620
A .I. Credit Corp.:
5.05% due 1/5/99 7,600 7,595 .53
5.02% due 1/6/99 10,000 9,991
5.13%-5.15% due 1/14/99 33,500 33,433
Johnson & Johnson 5.00% due 1/4/99(2) 50,000 49,972 .52
Commercial Credit Co. 5.16% due 1/21/99 37,500 37,387 .39
Ameritech Corp.:
5.00% due 1/11/99 (2) 25,000 24,962 .39
5.04% due 1/12/99 (2) 12,000 11,980
American General Finance Corp. 5.32% due 1/19/99 36,500 36,401 .38
Household Finance Corp. 5.03 due 1/22/99 36,000 35,887 .38
Xerox Capital (Europe) PLC 5.27% due 1/14/99 30,500 30,439 .32
Amoco Co. 5.12% due 2/8/99 30,000 29,836 .31
Eastman Kodak Co.:
5.26% due 5.26% 1/12/99 20,000 19,965 .30
5.45% due 1/28/99 9,000 8,962
Gillette Co. 5.10% due 1/4/99(2) 25,000 24,986 .26
Lucent Technologies Inc. 5.03% due 1/8/99 25,000 24,972 .26
St. Paul Companies Inc. 5.32% due 1/12/99(2) 25,000 24,956 .26
Arco British Ltd. 5.14% due 1/15/99(2) 21,000 20,955 .22
National Rural Utilities Cooperative Finance Corp.:
5.00% due 1/11/99 1,500 1,497 .22
5.00% due 2/11/99 19,400 19,285
Chevron Transport Corp. 5.20% due 1/21/99(2) 20,000 19,940 .21

TOTAL SHORT-TERM SECURITIES (COST $537,004,000) 537,007 5.62
TOTAL INVESTMENT SECURITIES (COST $9,530,177,000) 9,459,447 99.15
Excess of cash and receivables over payables 81,146 .85
NET ASSETS $ 9,540,593 100.00%

1 Step bond; coupon rate will increase at a later date.

2 Purchased in a private placement transaction; resale
may be limited to qualified institutional buyers;
resale to the public may require registration.
3 Payment in kind; the issuer has the option of
paying additional securities in lieu of cash.
4 Purchased as a unit; issue was separated but
reattached for reporting purposes.
5 Valued under procedures established by the Board of Directors.

6 Coupon rate may change periodically.

7 Pass-through security backed by a pool of mortgages or other
loans on which principal payments are periodically made.
Therefore, the effective maturities is shorter
than the stated maturity.
8 Company not making interest or dividend payments;
bankruptcy proceedings pending.
9 Inverse floater, which is a floating-rate note whose
interest rate moves in the opposite direction of
prevailing interest rates.
10 Index-linked bond whose principal amount moves
with a government retail price index.
11 Non-income-producing security.

See Notes to Financial Statements
</TABLE>

<TABLE>
The Bond Fund of America
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
at December 31,1998 (dollars in thousands)
<S> <C> <C>
Assets:
Investment securities at market
(cost: $9,530,177) $9,459,447
Cash 12,038
Receivables for--
Sales of investments $41,851
Sales of fund's shares 23,979
Dividends and accrued interest 138,030 203,860
------------ ---------------
9,676,206
Liabilities:
Payables for--
Purchases of investments 105,630
Repurchases of fund's shares 22,385
Forward currency contracts 3,243
Management services 2,641
Accrued expenses 1,714 135,613
------------ ---------------
Net Assets at at December 31,1998--
Equivalent to $13.61 per share on
701,079,276 shares of $1 par value
capital stock outstanding (authorized
capital stock - 1,000,000,000 shares) $9,540,593
===============
STATEMENT OF OPERATIONS
for the year ended at December 31,1998 (dollars in thousands)
Investment Income:
Income:
Interest $666,776
Dividends from investment in stocks 13,913 $680,689
------------
Expenses:
Management services fee 28,879
Distribution expenses 22,380
Transfer agent fee 5,411
Reports to shareholders 173
Registration statement and prospectus 452
Postage, stationery and supplies 770
Directors' fees 69
Auditing and legal fees 58
Custodian fee 522
Taxes other than federal income tax 60
Other expenses 62 58,836
------------ ---------------
Net investment income 621,853
---------------
Realized Gain and Unrealized
Depreciation on Investments:
Net realized gain 45,203
Net change in unrealized
appreciation (depreciation) on:
Investments (217,264)
Open forward currency contracts (8,303)
------------
Net unrealized depreciation (225,567)
---------------
Net realized gain and
unrealized depreciation
on investments (180,364)
---------------
Net Increase in Net Assets Resulting $441,489
from Operations ===============

STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands)

Year ended December 31
1998 1997

Operations:
Net investment income $621,853 $520,154
Net realized gain on investments 45,203 99,025
Net unrealized (depreciation) appreciation
on investments (225,567) 44,044
------------ ---------------
Net increase in net assets
resulting from operations 441,489 663,223
------------ ---------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net
investment income (612,126) (526,643)
Distributions from net realized gain
on investments (92,338) -
------------ ---------------
Total dividends and distributions (704,464) (526,643)
------------ ---------------
Capital Share Transactions:
Proceeds from shares sold:
219,927,964 and 159,869,358
shares, respectively 3,045,786 2,214,949
Proceeds from shares issued in
reinvestment of net investment
income dividends:
40,515,125 and 28,414,675 shares,
respectively 559,111 393,612
Cost of shares repurchased:
143,192,216 and 113,580,749
shares, respectively (1,977,460) (1,571,399)
------------ ---------------
Net increase in net assets
resulting from capital share
transactions 1,627,437 1,037,162
------------ ---------------
Total Increase in Net Assets 1,364,462 1,173,742

Net Assets:
Beginning of year 8,176,131 7,002,389
------------ ---------------
End of year (including
undistributed net investment
income: $(1,158) and $11,969
respectively) $9,540,593 $8,176,131
============ ===============

See Notes to Financial Statements
</TABLE>

Notes To Financial Statements

1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION - 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 as high a level of current income as is
consistent with preservation of capital through a diversified portfolio of
bonds and other fixed-income obligations.

SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:

SECURITY VALUATION - 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. Securities and
assets for which representative market quotations are not readily available are
valued at fair value as determined in good faith by a committee appointed by
the Board of Directors.

NON-U.S. CURRENCY TRANSLATION - Assets or liabilities initially expressed in
terms of non-U.S. 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 non-U.S. currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.

SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - 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 AND DISTRIBUTIONS TO SHAREHOLDERS - 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.

FORWARD CURRENCY CONTRACTS - The fund may enter into forward currency
contracts, which represent agreements to exchange currencies of different
countries at specified future dates at specified rates. 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 that
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.

FEDERAL INCOME TAXATION - 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, 1998, net unrealized depreciation on investments, excluding
forward currency contracts, for book and federal income tax purposes aggregated
$70,730,000, of which $284,851,000 related to appreciated securities and
$355,581,000 related to depreciated securities. During the year ended December
31, 1998, the fund realized, on a tax basis, a net capital gain of $60,804,000
on securities transactions. Net losses related to non-U.S. currency
transactions of $23,368,000 were treated as an adjustment to ordinary income
for federal income tax purposes. The cost of portfolio securities, excluding
forward currency contracts, for book and federal income tax purposes was
$9,530,177,000 at December 31, 1998.

2 FEES AND TRANSACTIONS WITH RELATED PARTIES -

INVESTMENT ADVISORY FEE - The fee of $28,879,000 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 but not
exceeding $10 billion; and 0.14% of such assets in excess of $10 billion; plus
2.25% on the first $8,333,333 of the fund's monthly gross investment income;
and 2.00% of such income in excess of $8,333,333. The Board of Directors
approved this amended agreement effective November 1, 1998, which reduced the
income-based fee from 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; and 2.00% of such income in excess of $8,333,333. In addition,
CRMC agreed, effective September 1, 1998, to waive any fees in excess of what
it would have received under the new fee schedule. Had such a waiver not taken
place, the fee for management services would have been $28,886,000.

DISTRIBUTION EXPENSES - 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, 1998, distribution expenses under the Plan were limited to
$22,380,000. Had no limitation been in effect, the fund would have paid
$23,472,000 in distribution expenses under the Plan. As of December 31, 1998,
accrued and unpaid distribution expenses were $1,714,000.

American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $7,117,000 (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.

TRANSFER AGENT FEE - American Funds Service Company (AFS), the transfer agent
for the fund, was paid a fee of $5,411,000.

DEFERRED DIRECTORS' FEES - 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, 1998, aggregate amounts deferred and earnings thereon
were $130,000.

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.

3. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES -

The fund made purchases and sales of investment securities, excluding
short-term securities, of $7,141,553,000 and $5,478,437,000, respectively,
during the year ended December 31, 1998.

As of December 31, 1998, there was no accumulated undistributed net realized
gain on investments and additional paid-in capital was $8,911,014,000. The
fund reclassified $15,601,000 of realized currency losses from accumulated net
realized losses to undistributed net investment income in the year ended
December 31, 1998. The fund also reclassified $9,242,000 and $7,253,000 from
accumulated net realized losses and undistributed net investment income,
respectively, to additional paid-in capital in the year ended December 31,
1998.

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 $522,000 includes $315,000 that was paid by these credits
rather than in cash.

Net realized currency losses on interest and sales of non-U.S. bonds and
notes, on a book basis, were $24,085,000 for the year ended December 31, 1998.

At December 31, 1998, the fund had outstanding forward currency contracts to
sell non-U.S. currencies as follows:

<TABLE>

Contract Amount
----------- ----------
<S> <C> <C> <C>

Non-U.S. Currency Sales Contracts Non-U.S. U.S.

Australian Dollars A$ 2,489,000 $1,557,000
expiring 1/27/1999
British Pounds expiring Pounds 50,459,000 84,120,000
1/15/1999 to 8/10/1999
German Deutsche Marks DM 91,333,000 54,885,000
expiring 1/28/1999 to 3/11/1999
Japanese Yen expiring 2/24/1999 Yen 1,000,000,000 8,403,000
New Zealand Dollars expiring NZ$ 25,798,000 13,557,000
1/15/1999 to 1/27/1999
----------

$162,522,000
=========

U.S. Valuations at 12/31/98
---------- ----------
Unrealized
Appreciation
Amount (Depreciation)

Non-U.S. Currency Sales Contracts $1,525,000 $32,000

Australian Dollars 83,596,000 524,000
expiring 1/27/1999
British Pounds expiring 54,865,000 20,000
1/15/1999 to 8/10/1999
German Deutsche Marks 8,861,000 (458,000)
expiring 1/28/1999 to 3/11/1999 13,580,000 (23,000)
Japanese Yen expiring 2/24/1999
New Zealand Dollars expiring ---------- ----------
1/15/1999 to 1/27/1999
$162,427,000 $95,000
========= =========
</TABLE>

<TABLE>
Per-Share Data and Ratios

Year ended December 31
1998 1997 1996 1995 1994
Net Asset Value, Beginning of Year $14.00 $13.75 $13.88 $12.69 $14.45
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from Investment Operations:
Net investment income 0.94 0.98 1.02 1.05 1.05
Net gains or losses on securities (both (0.24) 0.25 (0.13) 1.18 (1.76)
realized and unrealized) ------- ------- ------- ------- -------
Total from investment operations 0.70 1.23 0.89 2.23 (0.71)
------- ------- ------- ------- -------

Less Distributions:
Dividends (from net investment income) (0.95) (0.98) (1.02) (1.04) (1.05)
Distributions (from capital gains) (0.14) - - - -
------- ------- ------- ------- -------
Total distributions (1.09) (0.98) (1.02) (1.04) (1.05)
------- ------- ------- ------- -------
Net Asset Value, End of Year $13.61 $14.00 $13.75 $13.88 $12.69
======= ======= ======= ======= =======

Total Return* 5.17% 9.24% 6.71% 18.25% (5.02%)

Ratios/Supplemental Data:
Net assets, end of year (in millions) $9,541 $8,176 $7,002 $6,290 $4,941
Ratio of expenses to average net assets 0.66 0.68 .71% .74% .69%
Ratio of net income to average net assets 6.94% 6.95% 7.47% 7.87% 7.77%
Portfolio turnover rate 66.25% 51.96% 43.43% 43.80% 56.98%

*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 investment portfolio as
of December 31,1998, 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, 1998 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other 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. as of December 31, 1998, 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.

DELOITTE & TOUCHE LLP

Los Angeles, California

January 29, 1999
Tax Information (unaudited)

We are required to advise you within 60 days of the fund's fiscal year-end
regarding the federal tax status of distributions received by shareholders
during such fiscal year.

Corporate shareholders may exclude up to 70% of qualifying dividends received
during the year. For purposes of computing this exclusion, 2% of the dividends
paid by the fund from net investment income represent qualifying dividends.

Certain states may exempt from income taxation that portion of the dividends
paid from net investment income that was derived from direct U.S. Treasury
obligations. For purposes of computing this exclusion, 15% of the dividends
paid by the fund from net investment income were derived from interest on
direct U.S. Treasury obligations.

Dividends and distributions received by retirement plans such as IRAs,
Keogh-type plans and 403(b) plans need not be reported as taxable income.
However, many retirement plan trusts may need this information for their annual
information reporting.

The fund designates as a capital gain distribution a portion of earnings and
profits paid to shareholders in redemption of their shares.
Shareholders should consult their tax advisers.