LIBERTY HIGH INCOME BOND FUND INC, 497, 1994-07-27

LIBERTY HIGH INCOME BOND FUND INC
497, 1994-07-27

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LIBERTY HIGH INCOME BOND FUND, INC.
CLASS A SHARES
PROSPECTUS

The Class A Shares of Liberty High Income Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) investing in a professionally managed, diversified portfolio limited
primarily to fixed income securities which seek to achieve high current income.

THE CLASS A SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE CLASS A SHARES INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in Class A Shares of the Fund. Keep this prospectus for future reference.

SPECIAL RISKS

THE FUND'S PORTFOLIO CONSISTS PRIMARILY OF LOWER-RATED CORPORATE DEBT
OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO AS "JUNK BONDS". THESE LOWER-RATED
BONDS MAY BE MORE SUSCEPTIBLE TO REAL OR PERCEIVED ADVERSE ECONOMIC CONDITIONS
THAN INVESTMENT GRADE BONDS. THESE LOWER-RATED BONDS ARE REGARDED AS
PREDOMINANTLY SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING ABILITY TO
MAKE PRINCIPAL AND INTEREST PAYMENTS. IN ADDITION, THE SECONDARY TRADING MARKET
FOR LOWER-RATED BONDS MAY BE LESS LIQUID THAN THE MARKET FOR INVESTMENT GRADE
BONDS. THE FUND'S INVESTMENT ADVISER WILL ENDEAVOR TO LIMIT THESE RISKS THROUGH
DIVERSIFYING THE PORTFOLIO AND THROUGH CAREFUL CREDIT ANALYSIS OF INDIVIDUAL
ISSUERS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THIS FUND. (SEE THE SECTIONS IN THIS PROSPECTUS ENTITLED
"INVESTMENT RISKS" AND "REDUCING RISKS OF LOWER-RATED SECURITIES").

The Fund has also filed a Combined Statement of Additional Information for Class
A Shares and Class C Shares dated July 31, 1994, with the Securities and
Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge by calling 1-800-235-4669. To obtain other information or to make
inquiries about the Fund, contact your financial institution.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Prospectus dated July 31, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--CLASS A SHARES 2

- ------------------------------------------------------

GENERAL INFORMATION 3
- ------------------------------------------------------

LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------

Liberty Family Retirement Program 4

INVESTMENT INFORMATION 5
- ------------------------------------------------------

Investment Objective 5
Investment Policies 5
Acceptable Investments 5
Temporary Investments 6
Lending of Portfolio Securities 6
Portfolio Turnover 6
Investment Risks 6
Reducing Risks of Lower-Rated Securities 8
Credit Research 8
Diversification 8
Economic Analysis 8
Investment Limitations 8

NET ASSET VALUE 9
- ------------------------------------------------------

INVESTING IN CLASS A SHARES 9
- ------------------------------------------------------

Share Purchases 9
Through a Financial Institution 9
Directly from the Distributor 10
Minimum Investment Required 10
What Shares Cost 10
Dealer Concession 11

Reducing the Sales Load 11

Quantity Discounts and Accumulated
Purchases 11
Letter of Intent 12
Reinvestment Privilege 12
Purchases with Proceeds from
Redemptions of Unaffiliated
Investment Companies 12
Concurrent Purchases 12
Systematic Investment Program 13
Certificates and Confirmations 13
Dividends and Distributions 13
Retirement Plans 13
EXCHANGE PRIVILEGE 13
- ------------------------------------------------------

Reduced Sales Load 14

Requirements for Exchange 14
Tax Consequences 14
Making an Exchange 14
Telephone Instructions 14

REDEEMING CLASS A SHARES 15
- ------------------------------------------------------

Through a Financial Institution 15
Directly from the Fund 15
By Telephone 15
By Mail 15
Signatures 16

Contingent Deferred Sales Charge 16

Systematic Withdrawal Program 17
Accounts with Low Balances 17

FUND INFORMATION 17
- ------------------------------------------------------

Management of the Fund 17
Board of Directors 17
Officers and Directors 17
Investment Adviser 20
Advisory Fees 21
Adviser's Background 21
Distribution of Class A Shares 21
Administration of the Fund 21
Administrative Services 21
Shareholder Services Plan 22
Other Payments to Financial Institutions 22
Custodian 23
Transfer Agent and Dividend
Disbursing Agent 23
Legal Counsel 23
Independent Public Accountants 23

Brokerage Transactions 23

SHAREHOLDER INFORMATION 23

- ------------------------------------------------------

Voting Rights 23

TAX INFORMATION 24
- ------------------------------------------------------

Federal Income Tax 24
Pennsylvania Corporate and
Personal Property Taxes 24

PERFORMANCE INFORMATION 24
- ------------------------------------------------------

OTHER CLASSES OF SHARES 25
- ------------------------------------------------------

Financial Highlights--Class C Shares 26

APPENDIX 27
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................. 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)............................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)...................................... None
Exchange Fee............................................................................................ None
<CAPTION>
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver) (2)....................................................................... 0.71%
12b-1 Fee............................................................................................... None
Total Other Expenses.................................................................................... 0.49%
Shareholder Services Fee (3)...................................................................0.18%
Total Class A Shares Operating Expenses (4).................................................... 1.20%
</TABLE>

(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of a mutual fund sold with a sales load and not distributed by
Federated Securities Corp., prior to June 1, 1994, will be charged a
contingent deferred sales charge by the Fund's distributor of 0.50% for
redemptions made within one year of purchase. See "Contingent Deferred Sales
Charge".

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.

(3) The maximum Shareholder Services Fee is 0.25%.

(4) The Total Class A Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1995. The Total
Class A Shares Operating Expenses were 1.18% for the fiscal year ended March
31, 1994, and were 1.23% absent the voluntary waiver of a portion of the
management fee.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The information set forth in the foregoing table and example relates only to
Class A Shares of the Fund. The Fund also offers another class of shares called
Class C Shares. Class A Shares and Class C Shares are subject to certain of the
same expenses; however, Class C Shares are subject to a 12b-1 fee of 0.75% and a
contingent deferred sales charge of 1.00%, but are not subject to a sales load.
See "Other Classes of Shares".

LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES

- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Arthur Andersen & Co., the Fund's
independent public accountants. Their report, dated May 13, 1994, on the Fund's
Financial Statements for the year ended March 31, 1994, and on the following
table for each of the periods presented, is included in the Annual Report, which
is incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, AUGUST 31,
1994 1993 1992 1991 1990 1989 1988 1987** 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17 $ 11.35
- ------------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income 1.05 1.13 1.23 1.21 1.33 1.40 1.42 0.85 1.53 1.56
- ------------------
Net realized and
unrealized gain
(loss) on
investments (0.19) 0.41 1.99 (0.14) (1.98) (0.20) (1.31) -- 0.37 0.81
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
Total from
investment
operations 0.86 1.54 3.22 1.07 (0.65) 1.20 0.11 0.85 1.90 2.37
- ------------------
LESS DISTRIBUTIONS
- ------------------
Dividends to
shareholders
from net invest-
ment income (1.06) (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54) (1.55)
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 10.99 $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
TOTAL RETURN* 7.82% 15.39% 38.83% 14.20% (6.82)% 11.34% 1.30% 7.09% 16.51% 22.42%
- ------------------
RATIOS TO AVERAGE
NET ASSETS
- ------------------
Expenses 1.18% 1.08% 1.02% 1.03% 1.02% 1.00% 1.05% 1.02%(a) 1.06% 1.14%
- ------------------
Net investment
income 9.27% 10.44% 12.40% 14.62% 13.01% 12.55% 12.37% 11.72%(a) 12.41% 13.27%
- ------------------
Expense waiver/
reimbursement(b) 0.05% 0.08% -- -- -- -- -- -- -- --
- ------------------
SUPPLEMENTAL DATA
- ------------------
Net assets, end
of period
(000 omitted) $439,149 $417,015 $351,087 $252,147 $282,149 $379,876 $360,409 $390,160 $352,641 $212,932
- ------------------
Portfolio
turnover rate 76% 49% 37% 32% 40% 43% 52% 25% 27% 26%
- ------------------

<CAPTION>
1984
<S> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 11.97
- ------------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income 1.54
- ------------------
Net realized and
unrealized gain
(loss) on
investments (0.63)
- ------------------ ---------
Total from
investment
operations 0.91
- ------------------
LESS DISTRIBUTIONS
- ------------------
Dividends to
shareholders
from net invest-
ment income (1.53)
- ------------------ ---------
NET ASSET VALUE,
END OF PERIOD $ 11.35
- ------------------ ---------
TOTAL RETURN* 8.12%
- ------------------
RATIOS TO AVERAGE
NET ASSETS
- ------------------
Expenses 1.11%
- ------------------
Net investment
income 13.26%
- ------------------
Expense waiver/
reimbursement(b)
--
- ------------------
SUPPLEMENTAL DATA
- ------------------
Net assets, end
of period
(000 omitted) $156,168
- ------------------
Portfolio
turnover rate 21%
- ------------------
</TABLE>

* Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

** Reflects operations for the seven month period ended March 31, 1987.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated March 31, 1994, which can be obtained free of charge.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Fund was incorporated under the laws of the State of Maryland on October 14,
1977. The Fund's address is Liberty Center, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. The Articles of Incorporation permit the
Fund to offer separate series of shares representing interests in separate
portfolios of securities. The shares in any one portfolio may be offered in
separate classes. With respect to this Fund, as of the date of this prospectus,
the Board of Directors ("Directors") have established two classes of shares,
known as Class A Shares and Class C Shares. This prospectus relates only to
Class A Shares ("Shares") of the Fund.

Shares of the Fund are designed primarily for customers of financial
institutions as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of fixed income securities. A
minimum initial investment of $500 is required, unless the investment is in a
retirement account, in which case the minimum investment is $50.

Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on certain shares. For a more complete description, see "Redeeming Class
A Shares."

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Liberty Family Funds."

LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------

The Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:

American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;

Capital Growth Fund, providing appreciation of capital primarily through
equity securities;

Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;

International Equity Fund, providing long-term capital growth and income
through international securities;

International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated in foreign currencies;

Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income-producing equity securities;

Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;

Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;

Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas and communication utilities;

Limited Term Fund providing a high level of current income consistent with
minimum fluctuation in principal value through investment grade
securities;

Limited Term Municipal Fund providing a high level of current income
exempt from federal regular income tax consistent with the preservation of
principal, primarily limited to municipal securities;

Michigan Intermediate Municipal Trust providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
state of Michigan and Michigan municipalities, primarily through Michigan
municipal securities;

Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;

Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;

Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and

World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries.

Prospectuses for these funds are available by writing to Federated Securities
Corp.

Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.

The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of a proven, professional investment adviser.

Shareholders of Class A Shares participating in The Liberty Account, are
designated as Liberty Life Members. Liberty Life Members are exempt from sales
loads on future purchases in and exchanges between the Class A Shares of any
funds in the Liberty Family of Funds, as long as they maintain a $500 balance in
one of the Liberty Family of Funds.

LIBERTY FAMILY RETIREMENT PROGRAM

The Fund is also a member of the Liberty Family Retirement Program (the
"Program"), an integrated program of investment options, plan recordkeeping, and
consultation services for 401(k) and other participant-directed benefit and
savings plans. Under the Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Program for
recordkeeping and administrative services. Additional fees are charged to
participating plans for these services. As part of the Program, exchanges may
readily be made between investment options selected by the employer or a plan
trustee.

No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to seek high current income by investing
primarily in a diversified portfolio of professionally managed fixed income
securities. The fixed income securities in which the Fund intends to invest are
lower-rated corporate debt obligations. Some of these fixed income securities
may involve equity features. Capital growth will be considered, but only when
consistent with the investment objective of high current income. While there is
no assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus. The
investment objective and the policies and limitations described below cannot be
changed without approval of shareholders.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund invests 65% of its assets in lower-rated fixed
income bonds. Under normal circumstances, the Fund will not invest more than 10%
of the value of its total assets in equity securities. The fixed income
securities in which the Fund invests include, but are not limited to:

preferred stocks;

bonds;

debentures;

notes;

equipment lease certificates; and

equipment trust certificates.

The Fund may purchase fixed income securities on a when-issued or delayed
delivery basis. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.

The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Corporation ("Standard & Poor's") or Baa or lower by Moody's
Investors Service, Inc. ("Moody's"), or are not rated but are determined by the
Fund's investment adviser to be of comparable quality. Securities which are
rated BBB or lower by Standard & Poor's or Baa or lower by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. A description of the rating
categories is contained in the Appendix to this prospectus. There is no lower
limit with respect to rating categories for securities in which the Fund may
invest. See "Investment Risks" below.

TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations during times of unusual market conditions for defensive purposes.
Short-term obligations may include:

certificates of deposit;

commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or Prime-2
by Moody's, or F-1 or F-2 by Fitch Investors Service and variable rate
demand master notes;

short-term notes;

obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and

repurchase agreements (arrangements in which the organization selling the
Fund a fixed income security agrees at the time of sale to repurchase it
at a mutually agreed upon time and price).

As a matter of investment practice, which can be changed without shareholder
approval, the Fund will not invest more than 15% of its net assets in securities
which are illiquid.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Fund
will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the investment adviser has determined are creditworthy under
guidelines established by the Board of Directors and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.

PORTFOLIO TURNOVER. Securities in the Fund's portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The adviser to the Fund does not
anticipate that portfolio turnover will result in adverse tax consequences. Any
such trading will increase the Fund's portfolio turnover rate and transaction
costs.

INVESTMENT RISKS

The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the recognized rating agencies (AAA, AA, or A
for Standard & Poor's and Aaa, Aa or A for Moody's) but are in the lower rating
categories or are unrated but are of comparable quality and have speculative
characteristics. Lower-rated or unrated bonds are commonly referred to as "junk
bonds". There is no minimal acceptable rating for a security to be purchased or
held in the Fund's portfolio, and the Fund may, from time to time, purchase or
hold securities rated in the lowest rating category. A description of the rating
categories is contained in the Appendix to this prospectus.

Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time.

As a result of these factors, lower-rated securities tend to have more price
volatility and carry more risk to principal and income than higher-rated
securities.

An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.

In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.

The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The reduction of the number of
institutions empowered to purchase and hold lower-rated bonds could have an
adverse impact on the overall liquidity of the market. Adverse publicity and the
perception of investors relating to issuers, underwriters, dealers or underlying
business conditions, whether or not warranted by fundamental analysis, may also
affect the price or liquidity of lower-rated bonds. On occasion, therefore, it
may become difficult to price or dispose of a particular security in the
portfolio.

The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
paid-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.

Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.

The table below shows the weighted average of the ratings of the bonds in the
Fund's portfolio during the Fund's fiscal year ended March 31, 1994. The credit
ratings categories are those provided by Moody's and Standard and Poor's, which
are both nationally recognized statistical rating organizations. A description
of these ratings can be found in the Appendix to this prospectus. The
percentages in the column titled "Rated" reflect the percentage of bonds in the
portfolio which received a rating from at least one of these organizations. The
percentages in the column titled "Not Rated" reflect the percentage of bonds in
the portfolio which are not rated but which the Fund's investment adviser has
judged to be comparable in quality to the corresponding rated bonds.

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
CORPORATE BOND INVESTMENTS
CREDIT NOT
RATING CATEGORY* RATED RATED TOTAL
<S> <C> <C> <C>
BB................................................................. 14.60% 0.00% 14.60%
B.................................................................. 78.52 1.80 80.32
CCC................................................................ 4.03 0.01 4.04
CC................................................................. 1.04 0.00 1.04
----------- ----------- ---------
98.19% 1.81% 100.00%
=========== =========== =========
</TABLE>

* May include all degrees of risk within the rating category.

REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser
believes that the risks of investing in lower-rated securities can be reduced.
The professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:

CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.

DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.

ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.

INVESTMENT LIMITATIONS

The Fund will not:

invest more than 10% of its net assets in securities subject to
restrictions on resale under federal securities law;

borrow money or pledge securities except, under certain circumstances, the
Fund may borrow up to one-third of the value of its total assets and
pledge up to 10% of the value of those assets to secure such borrowings;

invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations);

make loans, except that it may invest up to 5% of the value of its total
assets in repurchase agreements which mature in more than seven days from
the time they are entered into, and it may lend portfolio securities where
the borrower of the securities provides 100% collateral;

sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions;

invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or

invest more than 5% of its total assets in foreign securities which are
not publicly traded in the United States.

The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, can be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.

The Fund will not:

invest more than 15% of its net assets in illiquid securities, including
restricted securities which the Fund's adviser believes cannot be sold
within seven days.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of Class A Shares and the market value of
all securities and other assets of the Fund, subtracting the interest of Class A
Shares in the liabilities of the Fund and those attributable to Class A Shares,
and dividing the remainder by the total number of Class A Shares outstanding.
The net asset value for Class A Shares may differ from that of Class C Shares
due to the variance in daily net income realized by each class. Such variance
will reflect only accrued net income to which the shareholders of a particular
class are entitled.

INVESTING IN CLASS A SHARES
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.

Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.

THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders placed through a financial institution are considered received when the
Fund is notified of the purchase order or when converted into federal funds.
Purchase orders through a registered broker/dealer must be received by the
broker before 4:00 P.M. (Eastern time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Eastern time) in order for Shares to be purchased at
that day's price. Purchase orders through other financial institutions must be
received by the financial institution and transmitted to the Fund before 4:00
P.M. (Eastern time) in order for Shares to be purchased at that day's price. It
is the financial institution's responsibility to transmit orders promptly.

DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from Federated Securities Corp. once an account has been
established. To do so:

complete and sign the new account form available from the Fund;

enclose a check made payable to Liberty High Income Bond Fund, Inc.--Class
A Shares; and

mail both to Federated Services Company, P.O. Box 8604, Boston, MA
02266-8604.

Orders by mail are considered received after payment by check is converted by
the transfer agent's bank, State Street Bank and Trust Company ("State Street
Bank"), into federal funds. This is generally the next business day after State
Street Bank receives the check.

To purchase Shares directly from the distributor by wire, once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Liberty High Income
Bond Fund, Inc.--Class A Shares; Title or Name of Account; Wire Order Number
and/or Account Number. Shares cannot be purchased by wire on Columbus Day,
Veterans' Day, or Martin Luther King Day.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares of the Fund is $500 unless the
investment is in a retirement account, in which case the minimum initial
investment is $50. Subsequent investments must be in amounts of at least $100,
except for retirement accounts which must be in amounts of at least $50. (Other
minimum investment requirements may apply to investments through the Liberty
Family Retirement Program.)

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received, plus a sale load as follows:

<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
Less than $100,000 % 4.50 % 4.71
$100,000 but less than $250,000 % 3.75 % 3.90
$250,000 but less than $500,000 % 2.50 % 2.56
$500,000 but less than $750,000 % 2.00 % 2.04
$750,000 but less than $1 million % 1.00 % 1.01
$1 million or more % 0.00 % 0.00
</TABLE>

The net asset value is determined at 4:00 P.M. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of the Fund's portfolio securities that its
net asset value might be materially affected; (ii) days during which no Shares
are tendered for redemption and no orders to purchase Shares are received; or
(iii) the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Shareholders designated as Liberty Life Members are exempt from sales loads.

No sales load is imposed for Shares purchased through bank trust departments,
investment advisers registered under the Investment Advisers Act of 1940, as
amended, or retirement plans where the third party administrator has entered
into certain arrangements with Federated Securities Corp. or its affiliates.
However, investors who purchase Shares through a trust department, investment
adviser, or retirement plan may be charged an additional service fee by that
institution.

No sales load is imposed on purchases made by qualified retirement plans with
over $1 million invested in funds available in the Liberty Family Retirement
Program.

DEALER CONCESSION. For sales of Shares, a dealer will normally receive up to
90% of the applicable sales load. Any portion of the sales load which is not
paid to the dealer will be retained by the distributor. However, the distributor
may offer to pay dealers up to 100% of the sales load retained by it. Such
payments may take the form of cash or promotional incentives, such as
reimbursement of certain expenses of qualified employees and their spouses to
attend informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load, however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.

The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.

REDUCING THE SALES LOAD

The sales load can be reduced on the purchase of Shares through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege;

purchases with proceeds from redemptions of unaffiliated mutual fund
shares; or

concurrent purchases.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales load paid. The Fund will combine purchases of
Shares made on the same day by the investor, the investor's spouse, and the
investor's children under age 21 when it calculates the sales load. In addition,
the sales load, if applicable, is reduced for purchases made at one time by a
trustee or fiduciary for a single trust estate or a single fiduciary account.

If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $90,000 and he
purchases $10,000 more at the current public offering price, the sales load on
the additional purchase according to the schedule now in effect would be 3.75%,
not 4.50%.

To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales load after it confirms the purchases.

LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of
shares in the funds in the Liberty Family of Funds over the next 13 months, the
sales load may be reduced by signing a letter of intent to that effect. This
letter of intent includes a provision for a sales load adjustment depending on
the amount actually purchased within the 13-month period and a provision for the
custodian to hold 4.5% of the total amount intended to be purchased in escrow
(in shares) until such purchase is completed.

The 4.5% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent is
not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales load.

This letter of intent will not obligate the shareholder to purchase Shares, but
if he does, each purchase during the period will be at the sales load applicable
to the total amount intended to be purchased. This letter may be dated as of a
prior date to include any purchases made within the past 90 days towards the
dollar fulfillment of the letter of intent. Prior trade prices will not be
adjusted.

REINVESTMENT PRIVILEGE. If Shares in the Fund have been redeemed, the
shareholder has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales load.
Federated Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to eliminate a sales
load. If the shareholder redeems his Shares in the Fund, there may be tax
consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES.
Investors may purchase Shares at net asset value, without a sales load, with
the proceeds from the redemption of shares of an investment company which were
sold with a sales load or commission and were not distributed by Federated
Securities Corp. (This does not include shares of a mutual fund which were or
would be subject to a contingent deferred sales charge upon redemption.) The
purchase must be made within 60 days of the redemption, and Federated Securities
Corp. must be notified by the investor in writing, or by his financial
institution, at the time the purchase is made.

CONCURRENT PURCHASES. For purposes of qualifying for a sales load reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
funds in the Liberty Family of Funds, the purchase price of which includes a
sales load. For example, if a shareholder concurrently invested $30,000 in one
of the other Liberty Funds with a sales load, and $70,000 in this Fund, the
sales load would be reduced.

To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund, plus the applicable sales load. A shareholder may apply
for participation in this program through his financial institution or directly
through the Fund.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales load, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent. All shareholders on the record date are entitled to the dividend. The
record date is the ninth or preceding business day of each month. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that month's dividend.

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, contact
the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Shareholders
of Class A Shares may also exchange into certain funds which are advised by
subsidiaries or affiliates of Federated Investors ("Federated Funds") and which
are sold with a sales load different from that of the Fund's or with no sales
load. These exchanges are made at net asset value plus the difference between
the Fund's sales load already paid and any sales load of the Federated Fund into
which the Shares are to be exchanged, if higher. Neither the Fund nor any of the
funds in the Liberty Family of Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange their shares in the
Federated Funds for Class A Shares. Participants in a plan under the Liberty
Family Retirement Program may exchange all or some of their Shares for Class A
Shares of other funds offered under the plan at net asset value.

REDUCED SALES LOAD

If a shareholder making such an exchange qualifies for a reduction of the sales
load, Federated Securities Corp. must be notified in writing by the shareholder
or by his financial institution.

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.

This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund. The exchange privilege may be
modified or terminated at any time. Shareholders will be notified of the
modification or termination of the exchange privilege.

Further information on the exchange privilege and prospectuses for The Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family of Funds or certain Federated
Funds may be given in writing or by telephone. Written instructions may require
a signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions during
times of drastic economic or market changes. If a shareholder cannot contact his
broker or financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail to Federated Services
Company, P.O. Box 8604, Boston, Massachusetts 02266-8604.

Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.

TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. Telephone instructions may be recorded. If the
instructions are given by a broker, a telephone authorization form completed by
the broker must be on file with the Fund. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company--P.O. Box 8604, Boston, Massachusetts
02266-8604 and deposited to the shareholder's account before being exchanged.
Such instructions will be processed as of 4:00 P.M. (Eastern time) and must be
received by the Fund before that time for Shares to be exchanged the same
day. Shareholders exchanging into a Fund will not receive any dividend that is
payable to shareholders of record on that date. This privilege may be modified
or terminated at any time.

REDEEMING CLASS A SHARES
- --------------------------------------------------------------------------------

The Fund redeems Shares at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemptions can be made through a financial institution or directly
from the Fund. Redemption requests must be received in proper form. Redemptions
of Shares held through the Liberty Family Retirement Program will be governed by
the requirements of the respective plans.

THROUGH A FINANCIAL INSTITUTION

A shareholder may redeem Shares of the Fund by calling his financial institution
(such as a bank or an investment dealer) to request the redemption. Shares will
be redeemed at the net asset value, less any applicable contingent deferred
sales charge, next determined after the Fund receives the redemption request
from the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 P.M. (Eastern time) and
must be transmitted by the broker to the Fund before 5:00 P.M. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. Redemption
requests through other financial institutions must be received by the financial
institution and transmitted to the Fund before 4:00 P.M. (Eastern time) in order
for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions to the Fund. The financial
institution may charge customary fees and commissions for this service.

DIRECTLY FROM THE FUND

BY TELEPHONE. Shareholders who have not purchased Shares through a financial
institution may redeem their Shares by telephoning the Fund. Telephone
redemption instructions may be recorded. The proceeds will be mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event longer than seven days after
the request. The minimum amount for a wire transfer is $1,000. If at any time
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption should be considered.

BY MAIL. Any shareholder may redeem Shares by sending a written request to
Federated Services Company, P.O. Box 8604, Boston, Massachusetts 02266-8604. The
written request should include the shareholder's name, the Fund name and class
designation, the account number, and the Share or dollar amount requested, and
should be signed exactly as the Shares are registered.

If Share certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written request.
Shareholders should call the Fund for assistance in redeeming by mail.

SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:

a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;

a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or

any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.

CONTINGENT DEFERRED SALES CHARGE

Shareholders who purchased Shares with the proceeds of a redemption of shares of
a mutual fund sold with a sales load and not distributed by Federated Securities
Corp. prior to June 1, 1994, will be charged a contingent deferred sales charge
by the Fund's distributor of .50 of 1% for redemptions made within one year of
purchase. Purchases under the program made after that date will not be subject
to any type of contingent deferred sales charge. The contingent deferred sales
charge will be calculated based upon the lesser of the original purchase price
of the Shares or the net asset value of the Shares when redeemed.

The contingent deferred sales charge will not be imposed on Shares acquired
through reinvestment of dividends or distributions of short-term or long-term
capital gains. Redemptions are deemed to have occurred in the following order:
1) Shares acquired through the reinvestment of dividends and long-term capital
gains, 2) purchases of Shares occurring more than one year before the date of
redemption, 3) purchases of Shares within the previous year without the use of
redemption proceeds as described above, and 4) purchases of Shares within the
previous year through the use of redemption proceeds as described above.

The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified retirement plan, other than an IRA, Keogh
Plan, or a custodial account, following retirement; (ii) a total or partial
distribution from an IRA, Keogh Plan, or a custodial account, after the
beneficial owner attains age 59-1/2; or (iii) from the death or permanent and
total disability of the beneficial owner. The exemption from the contingent
deferred sales charge for qualified plans, an IRA, Keogh Plan, or a custodial
account does not extend to account transfers, rollovers, and other redemptions
made for purposes of reinvestment.

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or Liberty
Family Retirement Program funds, or in connection with redemptions by the Fund
of accounts with low balances. No contingent deferred sales charge will be
charged for redemptions from the Liberty Family Retirement Program.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to Shares, and the fluctuation of the net asset value of Shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000. A shareholder may
apply for participation in this program through his financial institution. Due
to the fact that Shares are sold with a sales load, it is not advisable for
shareholders to be purchasing Shares while participating in this program.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$500. This requirement does not apply, however, if the balance falls below $500
because of changes in the Fund's net asset value. Before Shares are redeemed to
close an account, the shareholder is notified in writing and allowed 30 days to
purchase additional Shares to meet the minimum requirement.

FUND INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Fund's business affairs and for exercising all
the Fund's powers except those reserved for the shareholders. An Executive
Committee of the Board of Directors handles the Board's responsibilities between
meetings of the Board.

OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated
Securities Corp., Federated Services Company, Federated Administrative Services,
and the Funds (as defined in the Combined Statement of Additional Information).

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
John F. Donahue\* Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President and
Director of the Fund.

John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior
Wood/IPC Commercial Vice-President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing General
Realtors Partner of the Funds; formerly, President Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL

William J. Copeland Director Director and Member of the Executive Committee, Michael
One PNC Plaza Baker, Inc.; Director, Trustee, or Managing General Partner
23rd Floor of the Funds; formerly, Vice Chairman and Director, PNC
Pittsburgh, PA Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes,
Inc.

J. Christopher Donahue* Vice President and President and Trustee, Federated Investors; Trustee and
Federated Investors Tower Director President, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director and President, Federated
Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services
Company, and Federated Shareholder Services; President or
Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son
of John F. Donahue, Chairman and Director of the Fund.

</TABLE>

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds;
Concord, MA formerly, Director, Blue Cross of Massachusetts, Inc.

Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.

Edward L. Flaherty, Jr.\ Director Attorney-at-law; Partner, Meyer and Flaherty; Director,
5916 Penn Mall Eat'N Park Restaurants, Inc., and Statewide Settlement
Pittsburgh, PA Agency, Inc.; Director, Trustee, or Managing General Partner
of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.

Peter E. Madden Director Consultant; State Representative, Commonwealth of
225 Franklin Street Massachusetts; Director, Trustee, or Managing General
Boston, MA Partner of the Funds; formerly, President, State Street Bank
and Trust Company and State Street Boston Corporation and
Trustee, Lahey Clinic Foundation, Inc.

Gregor F. Meyer Director Attorney-at-law; Partner, Meyer and Flaherty; Chairman,
5916 Penn Mall Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
formerly, Vice Chairman, Horizon Financial, F.A.

Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral Trustee, Carnegie Endowment for International Peace, RAND
of Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management Center;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly
Chairman, National Advisory Council for Environmental Policy
and Technology.

</TABLE>

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or
4905 Bayard Street Managing General Partner of the Funds.
Pittsburgh, PA

Richard B. Fisher President Executive Vice President and Trustee, Federated Investors;
Federated Investors Tower Chairman and Director, Federated Securities Corp.; President
Pittsburgh, PA or Vice President of the Funds; Director or Trustee of some
of the Funds.

Edward C. Gonzales Vice President and Vice President, Treasurer, and Trustee, Federated In-
Federated Investors Tower Treasurer vestors; Vice President and Treasurer, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice
President, Treasurer, and Director, Federated Securities
Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee, Federated Services
Company; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.

John W. McGonigle Vice President Vice President, Secretary, General Counsel, and Trustee,
Federated Investors Tower and Secretary Federated Investors; Vice President, Secretary, and Trustee,
Pittsburgh, PA Federated Advisers, Federated Management, and Federated
Research; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Trustee, Federated
Services Company; Director and Executive Vice President,
Federated Securities Corp.; Vice President and Secretary of
the Funds.

</TABLE>

*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940, as amended.

\Members of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilites of the Board of Directors between
meetings of the Board.

Officers and Directors own less than 1% of the Fund's outstanding Shares.

INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Advisers (the "Adviser"), the Fund's investment adviser, subject to direction by
the Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .75 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser will
reimburse the Fund the amount, limited to the amount of the advisory fee.
The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Fund for certain operating expenses. The Adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.

The fee paid by the Fund, while higher than the advisory fee paid by other
mutual funds in general, is comparable to fees paid by many mutual funds
with similar objectives and policies.

ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.

Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. Total assets under management or
administration by these and other subsidiaries of Federated Investors are
approximately $70 billion. Federated Investors, which was founded in 1956
as Federated Investors, Inc., develops and manages mutual funds primarily
for the financial industry. Federated Investors' track record of
competitive performance and its disciplined, risk averse investment
philosophy serve approximately 3,500 client institutions nationwide.
Through these same client institutions, individual shareholders also have
access to this same level of investment expertise.

Mark E. Durbiano has been the Fund's portfolio manager since August of
1989. Mr. Durbiano joined Federated Investors in 1982 and has been a Vice
President of the Fund's investment adviser since 1988. Mr. Durbiano is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Pittsburgh.

DISTRIBUTION OF CLASS A SHARES

Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all Federated Funds as specified
below:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.

SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of Class A Shares to obtain certain personal
services for shareholders and the maintenance of shareholder accounts
("shareholder services"). The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon shares
owned by their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp. will pay
financial institutions, at the time of purchase, an amount equal to .50 of 1% of
the net asset value of Shares purchased by their clients or customers under the
Liberty Family Retirement Program or by certain qualified plans as approved by
Federated Securities Corp. (Such payments are subject to a reclaim from the
financial institution should the assets leave the program within 12 months after
purchase.) In addition to periodic payments to financial institutions under the
Shareholder Services Plan, certain financial institutions may be compensated by
the Adviser or its affiliates for the continuing investment of customers' assets
in certain funds, including the Fund, advised by those entities. These payments
will be made directly by the distributor or Adviser from their assets, and will
not be made from the assets of the Fund or by the assessment of a sales load on
Shares. Furthermore, the distributor may offer to pay a fee from its own assets
to financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.
Any payments made by the distributor may
be reimbursed by the Fund's investment adviser or its affiliates.

CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8604, Boston, Massachusetts 02266-8604, is custodian for the securities and cash
of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the Shares of
the Fund, and dividend disbursing agent for the Fund.

LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly, 2510
Centre City Tower, Pittsburgh, Pennsylvania 15222, and Dickstein, Shapiro &
Morin, L.L.P., 2101 L Street, N.W., Washington, D.C. 20037.

INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen & Co., 2100 One PPG Place, Pittsburgh, Pennsylvania 15222.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Board of Directors.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholders for vote. All shares of each portfolio or
class in the Fund have equal voting rights, except that only matters affecting a
particular portfolio or class, only shares of that particular portfolio or class
are entitled to vote.

As a Maryland Corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.

Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.

PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Fund:

the Fund is subject to the Pennsylvania corporate franchise tax; and

Shares are exempt from Pennsylvania personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund advertises its total return and yield for Class A
Shares.

Total return represents the change, over a specific period of time, in the value
of an investment in Class A Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of Class A Shares is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by Class
A Shares over a thirty-day period by the maximum offering price per Class A
Share on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by Class A Shares, and therefore, may not correlate to the dividends or
other distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges, such
as the maximum sales load, which, if excluded, would increase the total return
and yield.

Total return and yield will be calculated separately for Class A Shares and
Class C Shares. Because Class C Shares are subject to a Rule 12b-1 fees and
Shareholder Services fees, the total return and yield for Class A Shares, for
the same period, may exceed that of Class C Shares.

From time to time, the Fund may advertise the performance of Class A Shares
using certain financial publications and/or compare the performance of Class A
Shares to certain indices.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Fund does not presently offer Class B shares. Class C Shares, the other
class of shares offered by the Fund, are sold primarily to customers of
financial institutions at net asset value with no initial sales load. Class C
Shares are distributed pursuant to a Rule 12b-1 Plan adopted by the Fund whereby
the distributor is paid a fee of up to .75 of 1%, in addition to a Shareholder
Services fee of .25 of 1% of the Class C Shares' average daily net assets.
Investments in Class C Shares are subject to a minimum initial investment of
$1,500, unless the investment is in a retirement account, in which case the
minimum investment is $50.

The amount of dividends payable to Class A Shares will generally exceed that of
Class C Shares by the difference between class expenses and distribution and
shareholder service expenses borne by shares of each respective class.

The stated advisory fee is the same for both classes of shares.

LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES

- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Arthur Andersen & Co., the Fund's
independent public accountants. Their report, dated May 13, 1994, on the Fund's
Financial Statements for the year ended March 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994**
<S> <C>
- -------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.18
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income 0.92
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.23)
- -------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.69
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.88)
- -------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.99
- -------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 6.23%
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.99%(a)
- --------------------------------------------------------------------------------------------------
Net investment income 8.54%(a)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.05%(a)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 24,360
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate 76%
- --------------------------------------------------------------------------------------------------
</TABLE>

* Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

** Reflects operations for the period from April 30, 1993 (date of initial
public offering) to March 31, 1994.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
March 31, 1994, which can be obtained free of charge.

APPENDIX
- --------------------------------------------------------------------------------

STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS DEFINITIONS

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.

B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or
BB-_rating.

CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B-_rating.

CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.

C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC-_debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.

D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS

Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." 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--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. 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--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). 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--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often 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. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated 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--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.

FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.

LIBERTY HIGH INCOME
BOND FUND, INC.
CLASS A SHARES
PROSPECTUS

An Open-End, Diversified
Management Investment Company

July 31, 1994

[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

530565100
8062805A-A (7/94)

LIBERTY HIGH INCOME BOND FUND, INC.
CLASS C SHARES
PROSPECTUS

The Class C Shares of Liberty High Income Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) investing in a professionally managed, diversified portfolio limited
primarily to fixed income securities which seek to achieve high current income.

THE CLASS C SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENT IN THESE CLASS C SHARES INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in Class C Shares of the Fund. Keep this prospectus for future reference.

SPECIAL RISKS

Prospectus dated July 31, 1994

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--CLASS C SHARES 2

- ------------------------------------------------------

GENERAL INFORMATION 3
- ------------------------------------------------------

LIBERTY FAMILY OF FUNDS 3
- ------------------------------------------------------

Liberty Family Retirement Program 4

INVESTMENT INFORMATION 5
- ------------------------------------------------------

Investment Objective 5
Investment Policies 5
Acceptable Investments 5
Temporary Investments 5
Lending of Portfolio Securities 6
Portfolio Turnover 6
Investment Risks 6
Reducing Risks of Lower-Rated
Securities 8
Credit Research 8
Diversification 8
Economic Analysis 8
Investment Limitations 8

NET ASSET VALUE 9
- ------------------------------------------------------

INVESTING IN CLASS C SHARES 9
- ------------------------------------------------------

Share Purchases 9
Through a Financial Institution 9
Directly From the Distributor 10
Minimum Investment Required 10
What Shares Cost 10
Systematic Investment Program 11
Certificates and Confirmations 11
Dividends and Distributions 11
Retirement Plans 11

EXCHANGE PRIVILEGE 11
- ------------------------------------------------------

Requirements for Exchange 12
Tax Consequences 12
Making an Exchange 12
Telephone Instructions 12

REDEEMING CLASS C SHARES 13
- ------------------------------------------------------

Through a Financial Institution 13
Directly from the Fund 13
By Telephone 13
By Mail 13
Signatures 14

Contingent Deferred Sales Charge 14

Systematic Withdrawal Program 15

Accounts with Low Balances 15

FUND INFORMATION 15

- ------------------------------------------------------

Management of the Fund 15

Board of Directors 15

Officers and Directors 15

Investment Adviser 18

Advisory Fees 18

Adviser's Background 19

Distribution of Class C Shares 19

Distribution and Shareholder

Services Plans 19

Other Payments to Financial Institutions 20

Administration of the Fund 20
Administrative Services 20

Custodian 21

Transfer Agent and Dividend

Disbursing Agent 21

Legal Counsel 21
Independent Public Accountants 21

Brokerage Transactions 21

SHAREHOLDER INFORMATION 21
- ------------------------------------------------------

Voting Rights 21

TAX INFORMATION 22
- ------------------------------------------------------

Federal Income Tax 22
Pennsylvania Corporate and Personal
Property Taxes 22

PERFORMANCE INFORMATION 22
- ------------------------------------------------------

OTHER CLASSES OF SHARES 23
- ------------------------------------------------------

Financial Highlights--Class A Shares 24

APPENDIX 25
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES

- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)..................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) (1)................................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................ None
Exchange Fee.............................................................................................. None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)......................................................................... 0.71%
12b-1 Fee................................................................................................. 0.75%
Total Other Expenses...................................................................................... 0.56%
Shareholder Services Fee................................................................... 0.25%
Total Class C Shares Operating Expenses (3)...................................................... 2.02%
</TABLE>

(1) The contingent deferred sales charge is 1.00% of the lesser of original
purchase price or net asset value of Shares redeemed within one year of
their purchase date. For a more complete description, see "Redeeming Class C
Shares."

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time, at its sole discretion. The maximum management fee is
0.75%.

(3) The Total Class C Shares Operating Expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1995. The Total
Class C Shares Operating Expenses were 1.99% for the fiscal year ended March
31, 1994, and were 2.04% absent the voluntary waiver of a portion of the
management fee.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS C SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $ 31 $ 63 $ 109 $ 230
You would pay the following expenses on the same investment, assuming no
redemption............................................................... $ 21 $ 63 $ 109 $ 230
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The information set forth in the foregoing table and example relates only to
Class C Shares of the Fund. The Fund also offers another class of shares called
Class A Shares. Class C Shares and Class A Shares are subject to certain of the
same expenses; however, Class A Shares are subject to a maximum sales load of
4.50% and may be subject to a certain contingent deferred sales charge, but are
not subject to a 12b-1 fee. See "Other Classes of Shares."

LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS C SHARES

- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Arthur Andersen & Co., the Fund's
independent public accountants. Their report, dated May 13, 1994, on the Fund's
Financial Statements for the year ended March 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994**
<S> <C>
- -------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.18
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------
Net investment income 0.92
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.23)
- -------------------------------------------------------------------------------------------------- ---------------
Total from investment operations 0.69
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.88)
- -------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.99
- -------------------------------------------------------------------------------------------------- ---------------
TOTAL RETURN* 6.23%
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------------
Expenses 1.99%(a)
- --------------------------------------------------------------------------------------------------
Net investment income 8.54%(a)
- --------------------------------------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.05%(a)
- --------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 24,360
- --------------------------------------------------------------------------------------------------
Portfolio turnover rate %76
- --------------------------------------------------------------------------------------------------
</TABLE>

* Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

** Reflects operations for the period from April 30, 1993 (date of initial
public offering) to March 31, 1994.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated March 31, 1994, which can be obtained free of charge.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

Shares of the Fund are designed primarily for customers of financial
institutions as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of fixed income securities. A
minimum initial investment of $1,500 is required, unless the investment is in a
retirement account, in which case the minimum investment is $50.

Shares are sold at net asset value. A contingent deferred sales charge of 1.00%
will be charged on assets redeemed within the first 12 months following
purchase.

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Liberty Family Funds."

LIBERTY FAMILY OF FUNDS
- --------------------------------------------------------------------------------

The Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:

American Leaders Fund, Inc., providing growth of capital and income
through high-quality stocks;

Capital Growth Fund, providing appreciation of capital primarily through
equity securities;

Fund for U.S. Government Securities, Inc., providing current income
through long-term U.S. government securities;

International Equity Fund, providing long-term capital growth and income
through international securities;

International Income Fund, providing a high level of current income
consistent with prudent investment risk through high-quality debt
securities denominated primarily in foreign currencies;

Liberty Equity Income Fund, Inc., providing above-average income and
capital appreciation through income-producing equity securities;

Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;

Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S.
government securities;

Liberty Utility Fund, Inc., providing current income and long-term growth
of income, primarily through electric, gas and communication utilities;

Limited Term Fund, providing a high level of current income consistent
with minimum fluctuation in principal value through investment grade
securities;

Limited Term Municipal Fund, providing a high level of current income
exempt from federal regular income tax consistent with the preservation
of principal, primarily limited to municipal securities;

Michigan Intermediate Municipal Trust, providing current income exempt
from federal regular income tax and the personal income taxes imposed by
the state of Michigan and Michigan municipalities, primarily through
Michigan municipal securities;

Strategic Income Fund, providing a high level of current income,
primarily through domestic and foreign corporate debt obligations;

Tax-Free Instruments Trust, providing current income consistent with
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and

World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries.

Prospectuses for these funds are available by writing to Federated Securities
Corp.

Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.

LIBERTY FAMILY RETIREMENT PROGRAM

The other funds participating in the Liberty Family Retirement Program are:
American Leaders Fund, Inc., Capital Growth Fund, Fund for U.S. Government
Securities, Inc., International Equity Fund, International Income Fund, Liberty
Equity Income Fund, Inc., Liberty Utility Fund, Inc., Prime Cash Series and
Stock and Bond Fund, Inc. Plans with over $1 million invested in funds available
in the Liberty Family Retirement Program may purchase Class A Shares without a
sales load.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

preferred stocks;

bonds;

debentures;

notes;

equipment lease certificates; and

equipment trust certificates.

The Fund may purchase fixed income securities on a when-issued or delayed
delivery basis. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.

The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Corporation ("Standard & Poor's") or Baa or lower by Moody's
Investors Service, Inc. ("Moody's"), or are not rated but are determined by the
Fund's investment adviser to be of comparable quality. Securities which are
rated BBB or lower by Standard & Poor's or Baa or lower by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than highly rated bonds. A description of the rating
categories is contained in the Appendix to this prospectus. There is no lower
limit with respect to rating categories for securities in which the Fund may
invest. See "Investment Risks" below.

TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations during times of unusual market conditions for defensive purposes.
Short-term obligations may include:

certificates of deposit;

commercial paper rated A-1 or A-2 by Standard & Poor's, Prime-1 or Prime-2
by Moody's, or
F-1 or F-2 by Fitch Investors Service and variable rate demand master
notes;

short-term notes;

obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and

repurchase agreements (arrangements in which the organization selling the
Fund a fixed income security agrees at the time of sale to repurchase it
at a mutually agreed upon time and price).

As a matter of investment practice, which can be changed without shareholder
approval, the Fund will not invest more than 15% of its net assets in securities
which are illiquid.

INVESTMENT RISKS

As a result of these factors, lower-rated securities tend to have more price
volatility and carry more risk to principal and income than higher-rated
securities.

In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.

<TABLE>
<CAPTION>
CREDIT AS A PERCENTAGE OF TOTAL
RATING CORPORATE BOND INVESTMENTS
CATEGORY* RATED NOT RATED TOTAL
<S> <C> <C> <C>
BB 14.60% 0.00% 14.60%
B 78.52 1.80 80.32
CCC 4.03 0.01 4.04
CC 1.04 0.00 1.04
----------- --------------- ---------
98.19% 1.81% 100.00%
----------- --------------- ---------
</TABLE>

*May include all degrees of risk within the rating category.

DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.

INVESTMENT LIMITATIONS

The Fund will not:

invest more than 10% of its net assets in securities subject to
restrictions on resale under federal securities law;

invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations);

invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or

invest more than 5% of its total assets in foreign securities which are
not publicly traded in the United States.

The Fund will not:

invest more than 15% of its net assets in illiquid securities, including
restricted securities which the Fund's adviser believes cannot be sold
within seven days.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of Class C Shares in the market value of
all securities and other assets of the Fund, subtracting the interest of Class C
Shares and the liabilities of the Fund and those attributable to Class C Shares,
and dividing the remainder by the number of Class C Shares outstanding. The net
asset value for Class A Shares may differ from that of Class C Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.

INVESTING IN CLASS C SHARES
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution which has a sales agreement with
the distributor, or directly from the distributor, Federated Securities Corp.,
once an account has been established. In connection with the sale of Shares,
Federated Securities Corp. may, from time to time, offer certain items of
nominal value to any shareholder or investor. The Fund reserves the right to
reject any purchase request.

Participants in plans under the Liberty Family Retirement Program shall purchase
Shares in accordance with the requirements of their respective plans.

THROUGH A FINANCIAL INSTITUTION. An investor may call his financial institution
(such as a bank or an investment dealer) to place an order to purchase Shares.
Orders placed through a financial institution are considered received when the
Fund is notified of the purchase order or when converted into federal funds.
Purchase orders through a registered broker/dealer must be received by the
broker before 4:00 P.M. (Eastern time) and must be transmitted by the broker to
the Fund before 5:00 P.M. (Eastern time) in order for Shares to be purchased at
that day's price. Purchase orders through other
financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 P.M. (Eastern time) in order for Shares to
be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.

The financial institution which maintains investor accounts with the Fund must
do so on a fully disclosed basis unless it accounts for share ownership periods
used in calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to financial
institutions may be subject to reclaim by the distributor for accounts
transferred to financial institutions which do not maintain investor accounts on
a fully disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").

DIRECTLY FROM THE DISTRIBUTOR. An investor may place an order to purchase
Shares directly from Federated Securities Corp. once an account has been
established. To do so:

complete and sign the new account form available from the Fund;

enclose a check made payable to Liberty High Income Bond Fund, Inc.--Class
C Shares; and

mail both to Federated Services Company, P.O. Box 8604, Boston, MA
02266-8604.

To purchase Shares directly from the distributor by wire once an account has
been established, call the Fund. All information needed will be taken over the
telephone, and the order is considered received when State Street Bank receives
payment by wire. Federal funds should be wired as follows: Federated Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts 02105;
Attention: Mutual Fund Servicing Division; For Credit to: Liberty High Income
Bond Fund, Inc.--Class C Shares; Title or Name of Account; Wire Order Number
and/or Account Number. Shares cannot be purchased by wire on Columbus Day,
Veterans' Day, or Martin Luther King Day.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Class C Shares is $1,500 unless the investment
is in a retirement plan, in which case the minimum initial investment is $50.
Subsequent investments must be in amounts of at least $100, except for
retirement plans, which must be in amounts of at least $50. (Other minimum
investment requirements may apply to investments through the Liberty Family
Retirement Program.)

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. The net asset value is determined at 4:00 P.M. (Eastern time), Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by the Fund. A shareholder may apply for participation in this program
through his financial institution or directly through the Fund.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.

DIVIDENDS AND DISTRIBUTIONS

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, including prototype retirement plans, contact
the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------

In order to provide greater flexibility to Fund shareholders whose investment
objectives have changed, Class C shareholders may exchange all or some of their
Shares for Class C Shares of other funds in the Liberty Family of Funds at net
asset value without a contingent deferred sales charge. Participants in a plan
under the Liberty Family Retirement Program may exchange some or all of their
Shares for Class C Shares of other funds offered under their plan at net asset
value without a contingent deferred sales charge. Any contingent deferred sales
charge charged at the time exchanged-for shares are redeemed is calculated as if
the shareholder had held the shares from the date on which he or she became a
shareholder of the exchanged-from Shares. For more information, see "Contingent
Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE

This privilege is available to shareholders resident in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
the proceeds invested in Class C Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.

Further information on the exchange privilege and prospectuses for The Liberty
Family of Funds or certain Federated Funds are available by contacting the Fund.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family Retirement Program should be
given to the plan administrator.

TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor is
on file with the Fund. Telephone exchange instructions may be recorded. If the
instructions are given by a broker, a telephone authorization form completed by
the broker must be on file with the Fund. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8604, Boston, Massachusetts
02266-8604 and deposited to the shareholder's account before being exchanged.
Such instructions will be processed as of 4:00 P.M. (Eastern time) and must be
received by the Fund before that time for Shares to be exchanged the same day.
Shareholders exchanging into a Fund will not receive any dividend that is
payable to shareholders of record on that date. This privilege may be modified
or terminated at any time.

REDEEMING CLASS C SHARES
- --------------------------------------------------------------------------------

THROUGH A FINANCIAL INSTITUTION

DIRECTLY FROM THE FUND

In the event of drastic economic or market changes, a shareholder may experience
difficulty redeeming by telephone. If such a case should occur, another method
of redemption should be considered.

a trust company or commercial bank whose deposits are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC");

a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;

a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered
by the FDIC; or

any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Fund does not accept signatures guaranteed by a notary public.

Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.

CONTINGENT DEFERRED SALES CHARGE

Shareholders who purchased Shares will be charged a contingent deferred sales
charge by Federated Securities Corp. of 1.00% for redemptions of those Shares
made within one year from date of purchase. To the extent that a shareholder
exchanges between or among Class C Shares in other funds in the Liberty Family
of Funds, the time for which the exchanged-for shares were held will be added,
or "tacked," to the time for which the exchanged-from shares were held for
purposes of satisfying the one-year holding period. The contingent deferred
sales charge will be calculated based upon the lesser of the original purchase
price of the Shares or the net asset value of the Shares when redeemed. For more
information, see "Other Payments to Financial Institutions."

The contingent deferred sales charge will not be imposed on Shares acquired
through reinvestment of dividends or distribution of short-term or long-term
capital gains. Redemptions are deemed to have occurred in the following order:
1) Shares acquired through the reinvestment of dividends and long-term capital
gains, 2) purchases of Shares occurring more than one year before the date of
redemption, and 3) purchases of Shares within the previous year.

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class C Shares in other Liberty Family Funds or Liberty
Family Retirement Program funds or in connection with redemptions by the Fund of
accounts with low balances. No contingent deferred sales charge will be imposed
on Shares purchased through a bank trust department, an investment adviser or a
retirement plan where the third party administrator has entered into certain
arrangements with Federated Securities Corp. to the extent that no advance
payments were made on Shares purchased through such entities. No contingent
deferred sales charge will be charged for redemptions from the Liberty Family
Retirement Program. For additional information, see "Other Payments to Financial
Institutions."

SYSTEMATIC WITHDRAWAL PROGRAM

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$1,500. This requirement does not apply, however, if the balance falls below
$1,500 because of changes in the Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing and allowed
30 days to purchase additional Shares to meet the minimum requirement.

FUND INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF THE FUND

OFFICERS AND DIRECTORS. Officers and Directors are listed with their addresses,
principal occupations, and present positions, including any affiliation with
Federated Advisers, Federated Investors, Federated Securities Corp., Federated
Services Company, Federated Administrative Services, and the Funds (as defined
in the Combined Statement of Additional Information).

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>

John F. Donahue*\ Chairman and Chairman and Trustee, Federated Investors; Chairman and
Federated Investors Tower Director Trustee, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director, Aetna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds; formerly, Director,
The Standard Fire Insurance Company. Mr. Donahue is the
father of J. Christopher Donahue, Vice President and
Director of the Fund.

John T. Conroy, Jr. Director President, Investment Properties Corporation; Senior
Wood/IPC Commercial Vice-President, John R. Wood and Associates, Inc., Realtors;
Department President, Northgate Village Development Corporation;
John R. Wood and General Partner or Trustee in private real estate ventures
Associates, Inc., in Southwest Florida; Director, Trustee, or Managing General
Realtors Partner of the Funds; formerly, President, Naples Property
3255 Tamiami Trail North Management, Inc.
Naples, FL

J. Christopher Donahue* Vice President President and Trustee, Federated Investors; Trustee and
Federated Investors Tower and Director President, Federated Advisers, Federated Management, and
Pittsburgh, PA Federated Research; Director and President, Federated
Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services; Federated Services
Company, and Federated Shareholder Services; President or
Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son
of John F. Donahue, Chairman and Director of the Fund.

James E. Dowd Director Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
571 Hayward Mill Road Director, Trustee, or Managing General Partner of the Funds;
Concord, MA formerly, Director, Blue Cross of Massachusetts, Inc.
</TABLE>

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
Lawrence D. Ellis, M.D. Director Hematologist, Oncologist, and Internist, Presbyterian and
3471 Fifth Avenue Montefiore Hospitals; Clinical Professor of Medicine and
Suite 1111 Trustee, University of Pittsburgh; Director, Trustee, or
Pittsburgh, PA Managing General Partner of the Funds.

Wesley W. Posvar Director Professor, Foreign Policy and Management Consultant;
1202 Cathedral of Trustee, Carnegie Endowment for International Peace, RAND
Learning Corporation, Online Computer Library Center, Inc., and U.S.
University of Pittsburgh Space Foundation; Chairman, Czecho Slovak Management Center;
Pittsburgh, PA Director, Trustee, or Managing General Partner of the Funds;
President Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental Policy
and Technology.

Marjorie P. Smuts Director Public relations/marketing consultant; Director, Trustee, or
4905 Bayard Street Managing General Partner of the Funds.
Pittsburgh, PA
</TABLE>

<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST FIVE YEARS
<S> <C> <C>
Richard B. Fisher President Executive Vice President and Trustee, Federated Investors;
Federated Investors Tower Chairman and Director, Federated Securities Corp.; President
Pittsburgh, PA or Vice President of the Funds; Director or Trustee of some
of the Funds.

Edward C. Gonzales Vice President Vice President, Treasurer, and Trustee, Federated In-
Federated Investors Tower and Treasurer vestors; Vice President and Treasurer, Federated Advisers,
Pittsburgh, PA Federated Management, and Federated Research; Executive Vice
President, Treasurer, and Director, Federated Securities
Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee, Federated Services
Company; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.

*This Director is deemed to be an "interested person" of the Fund as
defined in the Investment Company Act of 1940, as amended.

\Members of the Fund's Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors between
meetings of the Board.

Officers and Directors own less than 1% of the Fund's outstanding Shares.

ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to .75 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser will reimburse the Fund the
amount, limited to the amount of the advisory fee. The Adviser may
voluntarily choose to waive a portion of its fee or reimburse the Fund for
certain operating expenses. The Adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by
certain states.

The fee paid by the Fund, while higher than the advisory fee paid by other
mutual funds in general, is comparable to fees paid by many mutual funds
with similar objectives and policies.

DISTRIBUTION OF CLASS C SHARES

The distributor will pay financial institutions an amount equal to 1% of the net
asset value of Shares purchased by their clients or customers at the time of
purchase (except for participants in the Liberty Family Retirement Program).
Financial institutions may elect to waive the initial payment described above;
such waiver will result in the waiver by the Fund of the otherwise applicable
contingent deferred sales charge.

DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Class C Shares will pay to the distributor an amount computed at an annual
rate of 0.75 of 1% of the average daily net assets of the Class C Shares to
finance any activity which is principally intended to result in the sale of
shares subject to the Distribution Plan. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales support services as agents for
their clients or customers.

The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.

In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net assets of the Class C Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.

The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Distribution Plan.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may offer to pay a
fee from its own assets to financial institutions as financial assistance for
providing substantial marketing and sales support. The support may include
participating in sales, educational and training seminars at recreational-type
facilities, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Fund's investment adviser or its affiliates.

ADMINISTRATION OF THE FUND

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>

CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), P.O. Box
8604, Boston, Massachusetts 02266-8604, is custodian for the securities and cash
of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company, P.O.
Box 8604, Boston, Massachusetts 02266-8604, is transfer agent for the Shares of
the Fund and dividend disbursing agent for the Fund.

INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen & Co., 2100 One PPG Place, Pittsburgh, Pennsylvania 15222.

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each Share gives the shareholder one vote in Director elections and other
matters submitted to shareholder vote. All shares of each portfolio or class in
the Fund have equal voting rights, except that in matters affecting only a
particular portfolio or class, only shares of that portfolio or class are
entitled to vote.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL INCOME TAX

PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Fund:

the Fund is subject to the Pennsylvania corporate franchise tax; and

Shares are exempt from Pennsylvania personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund advertises its total return and yield for Class C
Shares.

Total return represents the change, over a specific period of time, in the value
of an investment in Class C Shares after reinvesting all income and capital
gains distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of Class C Shares is calculated by dividing the net investment income
per Share (as defined by the Securities and Exchange Commission) earned by Class
C Shares over a thirty-day period by the maximum offering price per share of
Class C Shares on the last day of the period. This number is then annualized
using semi-annual compounding. The yield does not necessarily reflect income
actually earned by Class C Shares, and therefore, may not correlate to the
dividends or other distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges, such
as the contingent deferred sales charge, which, if excluded, would increase the
total return and yield.

Total return and yield will be calculated separately for Class C Shares and
Class A Shares. Because Class C Shares are subject to a Rule 12b-1 fee and
Shareholder Services fee, the total return and yield for Class A Shares, for the
same period, may exceed that of Class C Shares.

From time to time, the Fund may advertise the performance of Class C Shares
using certain financial publications and/or compare the performance of Class C
Shares to certain indices.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Fund does not presently offer Class B Shares. Class A Shares, the other
class of shares offered by the Fund, are sold primarily to customers of
financial institutions subject to a front-end sales load of up to 4.50% and
certain contingent deferred sales charges. The Fund has also adopted a
Shareholder Services fee of up to 0.25 of 1% of the Class A Shares' average
daily net assets with respect to Class A Shares. Class A Shares are subject to a
minimum initial investment of $500, unless the investment is in a retirement
account, in which case the minimum investment is $50. Class A Shares are not
distributed pursuant to a Rule 12b-1 plan and, therefore, are not subject to a
distribution services fee.

The amount of dividends payable to Class A Shares may exceed that of Class C
Shares by the difference between class expenses and distribution and shareholder
service expenses borne by shares of each respective class.

The stated advisory fee is the same for both classes of shares.

LIBERTY HIGH INCOME BOND FUND, INC.
FINANCIAL HIGHLIGHTS--CLASS A SHARES

- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, AUGUST 31,
1994 1993 1992 1991 1990 1989 1988 1987** 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17 $ 11.35
- ------------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income 1.05 1.13 1.23 1.21 1.33 1.40 1.42 0.85 1.53 1.56
- ------------------
Net realized and
unrealized gain
(loss) on
investments (0.19) 0.41 1.99 (0.14) (1.98) (0.20) (1.31) -- 0.37 0.81
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
Total from
investment
operations 0.86 1.54 3.22 1.07 (0.65) 1.20 0.11 0.85 1.90 2.37
- ------------------
LESS DISTRIBUTIONS
- ------------------
Dividends to
shareholders
from net invest-
ment income (1.06) (1.15) (1.21) (1.24) (1.38) (1.41) (1.44) (0.85) (1.54) (1.55)
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
NET ASSET VALUE,
END OF PERIOD $ 10.99 $ 11.19 $ 10.80 $ 8.79 $ 8.96 $ 10.99 $ 11.20 $ 12.53 $ 12.53 $ 12.17
- ------------------ --------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
TOTAL RETURN* 7.82% 15.39% 38.83% 14.20% (6.82)% 11.34% 1.30% 7.09% 16.51% 22.42%
- ------------------
RATIOS TO AVERAGE
NET ASSETS
- ------------------
Expenses 1.18% 1.08% 1.02% 1.03% 1.02% 1.00% 1.05% 1.02%(a) 1.06% 1.14%
- ------------------
Net investment
income 9.27% 10.44% 12.40% 14.62% 13.01% 12.55% 12.37% 11.72%(a) 12.41% 13.27%
- ------------------
Expense waiver/
reimbursement(b)
0.05% 0.08% -- -- -- -- -- -- -- --
- ------------------
SUPPLEMENTAL DATA
- ------------------
Net assets, end
of period
(000 omitted) $439,149 $417,015 $351,087 $252,147 $282,149 $379,876 $360,409 $390,160 $352,641 $212,932
- ------------------
Portfolio
turnover rate 76% 49% 37% 32% 40% 43% 52% 25% 27% 26%
- ------------------

* Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

** Reflects operations for the seven month period ended March 31, 1987.

(a) Computed on an annualized basis.

(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
March 31, 1994, which can be obtained free of charge.

APPENDIX
- --------------------------------------------------------------------------------

STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS DEFINITIONS

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

CC--The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.

C--The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC-debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS

Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.

FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.

LIBERTY HIGH INCOME
BOND FUND, INC.
CLASS C SHARES
PROSPECTUS

An Open-End, Diversified
Management Investment Company

July 31, 1994

530565209
8062805A-A (7/94)

LIBERTY HIGH INCOME BOND FUND, INC.
CLASS A SHARES
CLASS C SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION

This Combined Statement of Additional Information should be read with
the respective prospectuses of Class A and Class C Shares of Liberty
High Income Bond Fund, Inc. (the "Fund") dated July 31, 1994. This
Combined Statement is not a prospectus itself. To receive a copy of
the prospectus for any class, write or call the Fund.

LIBERTY CENTER
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated July 31, 1994

[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------

INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------

Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Temporary Investments 2
Lending of Portfolio Securities 2
Portfolio Turnover 2
Investment Limitations 3

THE FUNDS 5
- ---------------------------------------------------------------

Fund Ownership 6

INVESTMENT ADVISORY SERVICES 6
- ---------------------------------------------------------------

Adviser to the Fund 6
Advisory Fees 6

ADMINISTRATIVE SERVICES 6

- ---------------------------------------------------------------

BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------

PURCHASING SHARES 7
- ---------------------------------------------------------------

Distribution of Shares 7

Distribution Plan
(Class C Shares Only) and
Shareholder Services Plan 7

Conversion to Federal Funds 7
Purchases by Sales Representatives,
Fund Directors, and Employees 8

DETERMINING NET ASSET VALUE 8
- ---------------------------------------------------------------

Determining Market Value of Securities 8

REDEEMING SHARES 8
- ---------------------------------------------------------------

TAX STATUS 8
- ---------------------------------------------------------------

The Fund's Tax Status 8
Shareholders' Tax Status 8

TOTAL RETURN 9
- ---------------------------------------------------------------

YIELD 9
- ---------------------------------------------------------------

PERFORMANCE COMPARISONS 9
- ---------------------------------------------------------------

FINANCIAL STATEMENTS 10
- ---------------------------------------------------------------

GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------

The Fund was incorporated under the laws of the State of Maryland on October 14,
1977. On April 29, 1993, the shareholders of the Fund voted to permit the Fund
to offer separate series and classes of shares.

Shares of the Fund are offered in two classes known as Class A and Class C
Shares (individually and collectively referred to as "Shares" as the context may
require). The Fund does not presently offer Class B Shares. This Combined
Statement of Additional Information relates to each of the classes of the above
mentioned Shares.

INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund's investment objective is to seek high current income by investing
primarily in a diversified portfolio of professionally managed fixed income
securities. Some of these fixed income securities may involve equity features.
Capital growth will be considered, but only when consistent with the investment
objective of high current income. The investment objective cannot be changed
without approval of shareholders.

TYPES OF INVESTMENTS

The Fund invests in lower-rated fixed income bonds which may include:

preferred stocks;

bonds;

debentures;

notes;

equipment lease certificates; and

equipment trust certificates.

CORPORATE DEBT SECURITIES

Corporate debt securities may bear fixed, fixed and contingent, or
variable rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common
stock of the same or a different issuer, participations based on
revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered
as a unit). Equipment lease or trust certificates are secured obligations
issued in serial form, usually sold by transportation companies such as
railroads or airlines, to finance equipment purchases. The certificate
holders own a share of the equipment, which can be resold if the issuer
of the certificate defaults. The Fund does not currently intend to invest
more than 5% of its assets in equipment lease certificates.

EQUITY SECURITIES

Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants, or
rights. The Fund's investment adviser may choose to exceed this 10%
limitation if unusual market conditions suggest such investments
represent a better opportunity to reach the Fund's investment objective.

RESTRICTED SECURITIES

The Fund expects that any restricted securities would be acquired either
from institutional investors who originally acquired the securities in
private placements or directly from the issuers of the securities in
private placements. Restricted securities are generally subject to legal
or contractual delays on resale.

Restricted securities and securities that are not readily marketable may
sell at a discount from the price they would bring if freely marketable.
The Fund may invest up to 10% of its net assets in these securities.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase fixed income securities on a when-issued or delayed
delivery basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. Settlement
dates may be a month or more after entering into these transactions, and the
market values of the securities purchas ed may vary from the purchase prices.

These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. The Fund engages in when-issued and delayed
delivery transactions only for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies, not for investment
leverage.

No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction. The seller's failure to deliver the securities may cause the Fund
to miss a price or yield considered to be advantageous.

TEMPORARY INVESTMENTS

The Fund may also invest in temporary investments from time to time for
defensive purposes.

CERTIFICATES OF DEPOSIT

The Fund may invest in certificates of deposit of domestic and foreign
banks and savings and loans if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the
instrument is insured by the Federal Deposit Insurance Corporation. These
instruments may include Eurodollar Certificates of Deposit issued by
foreign branches of U.S. or foreign banks, Eurodollar Time Deposits which
are U.S. dollar-denominated deposits in foreign branches of U.S. or
foreign banks, Canadian Time Deposits which are U.S. dollar-denominated
deposits issued by branches of major Canadian banks located in the United
States, and Yankee Certificates of Deposit which are U.S. dollar-
denominated certificates of deposit issued by U.S. branches of foreign
banks and held in the United States.

REPURCHASE AGREEMENTS

Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price. The
Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody
of the Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks or other recognized financial
institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy, pursuant to guidelines established by the
Board of Directors.

LENDING OF PORTFOLIO SECURITIES

The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or cash equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on loan, but
would terminate the loan and regain the right to vote if that were considered
important with respect to the investment.

PORTFOLIO TURNOVER

The Fund does not intend to engage in substantial short-term trading, it may
from time to time sell portfolio securities without regard to the time they have
been held (i) to take advantage or short-term differentials in yields or in
market value, (ii) to take advantage of new investment opportunities, (iii)
because of changes in creditworthiness or (iv) in an attempt to preserve gains
or limit losses. Similarly, efforts to minimize any perceived risk in an
individual portfolio security may result in greater portfolio turnover than
would otherwise be the case in a portfolio of high rated securities. A high
portfolio turnover will result in increased transaction costs to the Fund. The
Fund will not attempt to achieve or be limited by a predetermined rate of
portfolio turnover since turnover is incidental to transactions undertaken with
a view to achieving the Fund's investment objective. For the fiscal years ended
March 31, 1994 and 1993, the portfolio turnover rates were 76% and 49%,
respectively.

INVESTMENT LIMITATIONS

BUYING ON MARGIN

The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.

BORROWING MONEY

The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and only in
amounts not in excess of 5% of the value of its net assets, taken at the
lower of cost or market.

In addition, to meet redemption requests without immediately selling
portfolio securities, the Fund may borrow up to one-third of the value of
its total assets (including the amount borrowed) less its liabilities
(not including borrowings, but including the current fair market value of
any securities carried in open short positions). This practice is not for
investment leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.

If, due to market fluctuations or other reasons, the value of the Fund's
assets falls below 300% of its borrowings, it will reduce its borrowings
within three business days.

No more than 10% of the value of the Fund's total assets at the time of
providing such security may be used to secure borrowings.

INVESTING IN FOREIGN SECURITIES

The Fund may invest indirectly in the securities of foreign issuers,
which may include Eurodollar Certificates of Deposits issued by foreign
branches of U.S. or foreign banks, Eurodollar Time Deposits which are
U.S. dollar-denominated deposits in foreign branches of U.S. or foreign
banks, Canadian Time Deposits which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United States,
and Yankee Certificates of Deposit which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held
in the United States.

INVESTMENT RISKS

ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic, and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact
of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the
banks issuing these instruments, or their domestic or foreign branches,
are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.

DIVERSIFICATION OF INVESTMENTS

The Fund will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments,
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements).

INVESTING IN NEW ISSUERS

The Fund will not invest more than 5% of the value of its total assets in
securities of companies, including their predecessors, that have been in
operation for less than three years.

INVESTING IN FOREIGN SECURITIES

The Fund will not invest more than 5% of the value of its total assets in
foreign securities which are not publicly traded in the United States.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.

INVESTING IN REAL ESTATE

The Fund will not purchase or sell real estate, although it may invest in
marketable securities secured by real estate or interests in real estate,
and it may invest in the marketable securities of companies investing or
dealing in real estate.

INVESTING IN COMMODITIES OR MINERALS

The Fund will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral exploration or development programs. However,
it may invest in the marketable securities of companies investing in or
sponsoring such programs.

ISSUING SENIOR SECURITIES

The Fund will not issue senior securities.

MAKING LOANS

The Fund will not make loans, except through the purchase or holding of
securities in accordance with its investment objective, policies, and
limitations and through repurchase agreements.

The Fund may invest up to 5% of its total assets in repurchase agreements
which mature more than seven days from the time they are entered into.

The Fund may lend portfolio securities if the borrower provides 100% cash
collateral in the form of cash or U.S. government securities. This
collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral. The
Fund retains the right to any dividends, interest, or other distribution
paid on the securities and any increase in their market value. Loans will
be subject to termination at the option of the Fund or the borrower.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND

The Fund will not purchase or retain the securities of any issuer if the
officers and Directors of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities. This limitation does not apply
to the Fund's securities.

PURCHASING RESTRICTED SECURITIES

The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under federal securities laws.

DEALING IN PUTS AND CALLS

The Fund will not write, purchase, or sell puts, calls, or any
combination thereof.

PURCHASING SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund will not purchase securities of other investment companies,
except purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of the value of its
total assets would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition.

SELLING SHORT

The Fund will not make short sales of securities or maintain short
positions, unless:

during the time the short position is open, it owns an equal amount of
the securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and

not more than 10% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any one time.

ACQUIRING SECURITIES

The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may invest in up to
10% of the voting securities of any one issuer and may exercise its
voting powers consistent with the best interests of the Fund. From time
to time, the Fund, together with other investment companies advised by
subsidiaries or affiliates of Federated Investors, may together buy
and hold substantial amounts of a company's voting stock. All such
stock may be voted together.

In some such cases, the Fund and the other investment companies might
collectively be considered to be in control of the company in which they
have invested.

In some cases, Directors, agents, employees, officers, or others
affiliated with or acting for the Fund, its adviser, or affiliated
companies might possibly become directors of companies in which the Fund
holds stock.

CONCENTRATION OF INVESTMENTS

The Fund will not invest more than 25% of the value of its total assets
in one industry. However, for temporary defensive purposes, the Fund may
at times invest more than that percentage in:

cash and cash items;

securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; or

instruments secured by these money market instruments, such as
repurchase agreements.

The above investment limitations cannot be changed without shareholders
approval. The following limitation, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in this limitation becomes effective.

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 15% of its net assets in illiquid
securities, including restricted securities which the adviser believes
cannot be sold within seven days.

Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.

The Fund did not make loans, borrow money, or sell securities short in excess of
5% of the value of its net assets during the last fiscal year and has no present
intent to do so in the current fiscal year.

In order to comply with certain state restrictions, the Fund will not invest in
warrants, nor will it invest in real estate limited partnerships or oil, gas or
other mineral leases.

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".

THE FUNDS
- --------------------------------------------------------------------------------

"The Funds" and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate Government
Trust; Federated Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-Free Trust; Federated U.S. Government Bond Fund; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insight Institutional Series, Inc.; Insurance Management
Series; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.;
Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty Term Trust, Inc.--1999; Liberty U.S. Government Money Market Trust;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Mark Twain
Funds; Money Market Management, Inc.; Money Market Obligations Trust; Money
Market Trust; Municipal Securities Income Trust; New York Municipal Cash Trust;
111 Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond
Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations and World Investment Series, Inc.

FUND OWNERSHIP

As of July 3, 1994, the following shareholder of record owned 5% or more of the
outstanding Class A Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (as
record owner holding Shares for its clients), Jacksonville, FL, owned
approximately 4,120,778 Shares (10.00%).

As of July 3, 1994, the following shareholder of record owned 5% or more of the
outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (as
record owner holding Shares for its clients), Jacksonville, FL, owned
approximately 913,088 Shares (37.01%).

INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

ADVISER TO THE FUND

The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a
subsidiary of Federated Investors. All the Class A (voting) shares of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. John F. Donahue is Chairman and
Trustee of Federated Advisers, Chairman and Trustee , Federated Investors, and
Chairman and Director of the Fund. J. Christopher Donahue, is President and
Trustee, Federated Advisers, President and Trustee, Federated Investors,
Trustee, Federated Administrative Services, Trustee, Federated Services Company,
and Vice President and Director of the Fund. John W. McGonigle is Vice
President, Secretary and Trustee of Federated Advisers, Trustee, Vice President,
Secretary and General Counsel, Federated Investors, Executive Vice President,
Secretary and Trustee, Federated Administrative Services, Executive Vice
President and Director, Federated Securities Corp., Trustee, Federated Services
Company, and Vice President and Secretary of the Fund.

The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding or sale of any security or for
anything done or omitted by it except acts or omissions involving willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
imposed upon it by its contract with the Fund.

ADVISORY FEES

For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended March 31,
1994, 1993, and 1992, the Adviser earned $3,435,904, $3,166,235, and $2,958,432,
respectively, which was reduced by $219,155, $307,320, and $1,084,523,
respectively, because of undertakings to limit the Fund's expenses.

STATE EXPENSE LIMITATIONS

The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.

If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.

This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.

ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------

Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated Administrative Services, Inc.,
also a subsidiary of Federated Investors, served as the Fund's administrator.
(For purposes of this Statement of Additional Information, Federated
Administrative Services and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as, the "Administrators".) For the
fiscal year ended March 31, 1994, the Administrators collectively earned
$489,385, none of which was waived. For the fiscal years ended March 31, 1993,
and 1992, Federated Administrative Services, Inc., earned $354,965, and
$383,010, respectively, none of which was waived.

BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the adviser
and may include:

advice as to the advisability of investing in securities;

security analysis and reports;

economic studies;

industry studies;

receipt of quotations for portfolio evaluations; and

similar services.

The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.

Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services for
which the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses.

For the fiscal years ended March 31, 1994, 1993, and 1992, the Fund paid total
brokerage commissions of $20,036, $27,625, and $28,482, respectively.

PURCHASING SHARES
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Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value (plus a sales load on Class A Shares only) on days the
New York Stock Exchange is open for business. The procedure for purchasing
Shares is explained in the respective prospectus under "Investing in Class A
Shares" and "Investing in Class C Shares."

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for Shares. For the
fiscal years ended March 31, 1994, 1993, and 1992, the distributor was paid
$1,541,594, $1,771,847, and $879,247, respectively. During the same periods, the
distributor retained $182,628, $271,723, and $179,626, respectively, after
dealer concessions.

DISTRIBUTION PLAN (CLASS C SHARES ONLY) AND SHAREHOLDER SERVICES PLAN

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances, answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.

By adopting the Distribution Plan, the Board of Directors expects that the Fund
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objective. By
identifying potential investors whose needs are served by the Fund's objective
and properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.

Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; and
(3) enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.

For the fiscal period ending March 31, 1994, payments in the amount of $85,860
were made pursuant to the Distribution Plan. In addition, for this period,
payments in the amounts of $792,058 were made pursuant to the Shareholder
Services Plan.

CONVERSION TO FEDERAL FUNDS

It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.

PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES

Directors, employees, and sales representatives of the Fund, Federated Advisers,
and Federated Securities Corp. or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy Class A Shares at net asset value without a sales
load. Shares may also be sold without a sales load to trusts or pension or
profit sharing plans for these persons.

These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.

DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund
are described in the prospectus.

DETERMINING MARKET VALUE OF SECURITIES

Market value of the Fund's portfolio securities are determined as follows:

according to the last sale price on a national securities exchange, if
available;

for most short-term obligations, according to the average of the last offer to
buy and the last offer to sell the security, as provided by independent pricing
services; or

for short-term obligations according to the prices as furnished by an
independent pricing service or at fair value as determined in good faith by the
Board of Directors.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality, coupon
rate, maturity, type of issue, trading characteristics, and other market data.

REDEEMING SHARES
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The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge after the Fund receives the
redemption request. Shareholder redemptions may be subject to a contingent
deferred sales charge. Redemption procedures are explained in the respective
prospectuses under "Redeeming Class A Shares" or "Redeeming Class C Shares."
Although the transfer agent does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost for the wire-transferred
redemptions of less than $5,000.

TAX STATUS
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THE FUND'S TAX STATUS

The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:

derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;

derive less than 30% of its gross income from the sale of securities held less
than three months;

invest in securities within certain statutory limits; and

distribute to its shareholders at least 90% of its net income earned during the
year.

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. The Fund's dividends, and any short-term
capital gains, are taxable as ordinary income.

CAPITAL GAINS

Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on securities held
to maturity. Sales would generally be made because of:

the availability of higher relative yields;

differentials in market values;

new investment opportunities;

changes in creditworthiness of an issuer; or

an attempt to preserve gains or limit losses.

Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares. Any loss by a shareholder on Shares
held for less than six months and sold after a capital gains distribution
will be treated as a long-term capital loss to the extent of the capital
gains distribution.

TOTAL RETURN
- --------------------------------------------------------------------------------

The Fund's average annual total returns for Class A Shares for the one-year,
five-year and ten-year periods ended March 31, 1994 were 2.94%, 11.90%, and
12.00%, respectively.

The Fund's cumulative total return for Class C Shares for the period from April
30, 1993 (date of initial public offering) to March 31, 1994 was 5.17%.

The average annual total return for both classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the offering price per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional shares, assuming a quarterly
reinvestment of all dividends and distributions.

Cumulative total return reflects the Class C Shares' total performance over a
specific period of time. This total return assumes and is reduced by the payment
of the maximum sales load, if applicable. The Class C Shares' total return is
representative of only eleven months of investment activity since the start of
performance.

YIELD
- --------------------------------------------------------------------------------

The Fund's yields for Class A Shares and Class C Shares were 8.66% and 8.31%,
respectively, for the thirty-day period ended March 31, 1994.

The yield for both classes of shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any class because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------

The Fund's performance for each of the classes of Shares depends upon such
variables as:

portfolio quality;

average portfolio maturity;

type of instruments in which the portfolio is invested;

changes in interest rates and market value of portfolio securities;

changes in the Fund's or any class of Shares' expenses; and

various other factors.

Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:

LIPPER ANALYTICAL SERVICES, INC.--ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the high current yield
funds category in advertising and sales literature.

MORNINGSTAR, INC.,--an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.

LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL)--index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi federal corporations; and publicly issued, fixed-rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers, Inc., the index calculates total returns for one
month, three month, twelve month, and ten year periods and year-to-date.

LEHMAN BROTHERS GOVERNMENT/CORPORATE (LONG-TERM)--index is composed of the same
types of issues as defined above. However, the average maturity of the bonds
included on this index approximates 22 years.

Advertisements and sales literature for any class of Shares may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on monthly reinvestment of dividends over a specified
period of time.

From time to time as it deems appropriate, the Fund may advertise the
performance of any class of Shares using charts, graphs and descriptions,
compared to federally insured bank products including certificates of deposit
and time deposits and to money market funds using the Lipper Analytical Services
money market instruments average.

Advertisements may quote performance information which does not reflect the
effect of the sales load on Class A Shares.

FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

The financial statements for the fiscal year ended March 31, 1994, are
incorporated herein by reference to the Annual Report of the Fund dated March
31, 1994 (File Nos. 2-60103 and 811-2782). A copy of the report may be obtained
without charge by contacting the Fund.

530565100
530565209

8062805B (7/94)