FEDERATED TAX-FREE TRUST
PROSPECTUS
The shares of Federated Tax-Free Trust (the "Trust") offered by this prospectus
represent interests in an open-end, management investment company (a mutual
fund). The Trust invests in short-term municipal securities to provide dividend
income exempt from federal regular income taxes while seeking relative stability
of principal.
THE 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 OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE
TRUST ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE
CAN BE NO ASSURANCE THAT THE TRUST WILL BE ABLE TO DO SO.
This prospectus contains the information you should read and know before you
invest in the Trust. Keep this prospectus for future reference.
The Trust has also filed a Statement of Additional Information dated January 31,
1998, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information, or make inquiries about the Trust, contact the Trust
at the address listed in the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Trust is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated January 31, 1998
TABLE OF CONTENTS
Summary of Trust Expenses 1 Financial Highlights 2 General Information 3
Investment Information 3 Investment Objective 3 Investment Policies 3 Municipal
Securities 4 Investment Risks 5 Investment Limitations 5 Trust Information 5
Management of the Trust 5 Distribution of Shares 6 Administration of the Trust
7 Net Asset Value 7 How to Purchase Shares 7 Purchasing Shares by Wire 7
Purchasing Shares by Check 7 Automatic Investments 7 How to Redeem Shares 8
Redeeming Shares by Telephone 8 Redeeming Shares by Mail 8 Account and Share
Information 8 Dividends 8 Capital Gains 8 Account Activity 8 Accounts with Low
Balances 8 Voting Rights 9 Tax Information 9 Federal Income Tax 9 State and
Local Taxes 9 Performance Information 9 Financial Statements 10 Independent
Auditors' Report 22
SUMMARY OF TRUST EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge 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) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
</TABLE>
ANNUAL TRUST OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(1) 0.29%
12b-1 Fee None
Total Other Expenses 0.16%
Shareholder Services Fee (after waiver)(2) 0.05%
Total Operating Expenses(3) 0.45%
</TABLE>
(1) The management fee has been reduced to reflect the waiver of a portion of
the management fee. The maximum management fee is 0.40%.
(2) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder service
provider can terminate this voluntary waiver at any time at its sole discretion.
The maximum shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.76% absent the waivers of
portions of the management fee and the shareholder services fee.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Trust will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Trust Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
EXAMPLE
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,
<TABLE>
<S> <C>
1 Year $ 5
3 Years $14
5 Years $25
10 Years $57
</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.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Independent Auditors' Report on page 22.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT
OPERATIONS
Net
investment
income 0.03 0.03 0.04 0.02 0.02 0.03 0.04 0.06 0.06 0.05
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.03) (0.03) (0.04) (0.02) (0.02) (0.03) (0.04) (0.06) (0.06) (0.05)
NET ASSET $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
VALUE, END OF
PERIOD
TOTAL RETURN(A) 3.31% 3.18% 3.57% 2.43% 2.18% 2.88% 4.49% 5.68% 6.03% 4.87%
RATIOS TO
AVERAGE NET
ASSETS
Expenses 0.45% 0.45% 0.45% 0.45% 0.46% 0.46% 0.46% 0.45% 0.45% 0.45%
Net
investment
income 3.25% 3.12% 3.51% 2.38% 2.16% 2.84% 4.40% 5.54% 5.86% 4.74%
SUPPLEMENTAL
DATA
Net assets,
end of period
(000 omitted) $635,519 $747,785 $807,369 $1,215,547 $1,346,791 $1,523,588 $1,720,730 $1,887,467 $2,140,368 $2,618,595
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated November 20, 1978. The Trust is designed for banks and other
institutions that hold assets for individuals, trusts, estates, or partnerships,
as a convenient means of accumulating an interest in a professionally managed
portfolio investing in short-term municipal securities. The Trust may not be a
suitable investment for retirement plans because it invests in municipal
securities. A minimum initial investment of $25,000 over a 90-day period is
required.
The Trust attempts to stabilize the value of a share at $1.00. Shares are
currently sold and redeemed at that price.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Trust is to provide for its shareholders
dividend income exempt from federal regular income taxes while seeking relative
stability of principal. This investment objective cannot be changed without
shareholder approval. While there is no assurance that the Trust will achieve
its investment objective, it endeavors to do so by complying with the
diversification and other requirements of Rule 2a-7 under the Investment Company
Act of 1940 which regulates money market mutual funds and by following the
investment policies described in this prospectus.
INVESTMENT POLICIES
The Trust pursues its investment objective by investing in a portfolio of
municipal securities maturing in one year or less. This investment policy is
fundamental and may not be changed without shareholder approval. However, as a
matter of operating policy, which may be changed without shareholder approval,
the Trust will limit the average maturity of its portfolio to 90 days or less in
order to meet regulatory requirements. Further, as a matter of fundamental
policy, at least 80% of the Trust's annual interest income will be exempt from
federal regular income tax except in extraordinary circumstances when management
feels that market conditions dictate a defensive posture in temporary
investments. (Federal regular income tax does not include the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.)
ACCEPTABLE INVESTMENTS
As a matter of fundamental policy, the Trust invests primarily in debt
obligations issued by or on behalf of states, territories, and possessions of
the United States, including the District of Columbia, and any political
subdivision or financing authority of any of these, the income from which is, in
the opinion of qualified legal counsel, exempt from federal regular income tax
("Municipal Securities"). Examples of Municipal Securities include, but are not
limited to:
* tax and revenue anticipation notes issued to finance working capital needs
in anticipation of receiving taxes or other revenues;
* bond anticipation notes that are intended to be refinanced through a
later issuance of longer-term bonds;
* municipal commercial paper and other short-term notes; * variable rate
demand notes; * municipal bonds (including bonds having serial maturities and
pre-refunded bonds) and leases; and
* participation, trust, and partnership interests in any of the foregoing
obligations.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Trust with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand notes
allow the Trust to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Trust to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features." The Trust treats variable rate demand notes as maturing on
the later of the date of the next interest rate adjustment or the date on which
the Trust may next tender the security for repurchase.
PARTICIPATION INTERESTS
The Trust may purchase interests in Municipal Securities from financial
institutions such as commercial and investment banks, savings associations, and
insurance companies. These interests may take the form of participations,
beneficial interests in a trust, partnership interests, or any other form of
indirect ownership that allows the Trust to treat the income from the investment
as exempt from federal income tax. The Trust invests in these participation
interests in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying Municipal
Securities.
MUNICIPAL LEASES
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. They may
take the form of a lease, an installment purchase contract, a conditional sales
contract, or a participation interest in any of the above. Lease obligations may
be subject to periodic appropriation. Municipal leases are subject to certain
specific risks in the event of default or failure of appropriation.
CREDIT ENHANCEMENT
Certain of the Trust's acceptable investments may be credit-enhanced by a
guaranty, letter of credit, or insurance. Any bankruptcy, receivership, default,
or change in the credit quality of the party providing the credit enhancement
will adversely affect the quality and marketability of the underlying security
and could cause losses to the Trust and affect its share price. The Trust may
have more than 25% of its total assets invested in securities credit-enhanced by
banks.
DEMAND FEATURES
The Trust may acquire securities that are subject to puts and standby
commitments ("demand features") to purchase the securities at their principal
amount (usually with accrued interest) within a fixed period (usually seven
days) following a demand by the Trust. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities, or by another
third party, and may not be transferred separately from the underlying security.
The Trust uses these arrangements to provide the Trust with liquidity and not to
protect against changes in the market value of the underlying securities. The
bankruptcy, receivership, or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
As a matter of fundamental policy, the Trust may purchase securities on a
when-issued or delayed delivery basis. These transactions are arrangements in
which the Trust purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Trust to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
TEMPORARY INVESTMENTS
From time to time, when the investment adviser determines that market conditions
call for a temporary defensive posture, the Trust may, as a matter of
fundamental policy, invest in tax-exempt or taxable securities, all of
comparable quality to other securities in which the Trust invests, such as:
obligations issued by or on behalf of municipal or corporate issuers;
obligations issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; instruments issued by a U.S. branch of a domestic bank or
other deposit institutions having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment; and repurchase agreements
(arrangements in which the organization selling the Trust a temporary investment
agrees at the time of sale to repurchase it at a mutually agreed-upon time and
price).
Although the Trust is permitted to make taxable, temporary investments, there is
no current intention to do so. However, the interest from certain Municipal
Securities is subject to the federal alternative minimum tax.
MUNICIPAL SECURITIES
Municipal Securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities.
Municipal Securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS
Yields on Municipal Securities depend on a variety of factors, including: the
general conditions of the short-term municipal note market and of the municipal
bond market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. The ability of the Trust to achieve
its investment objective also depends on the continuing ability of the issuers
of Municipal Securities and participation interests, or the credit enhancers of
either, to meet their obligations for the payment of interest and principal when
due. In addition, from time to time, the supply of Municipal Securities
acceptable for purchase by the Trust could become limited.
The Trust may invest in Municipal Securities which are repayable out of revenue
streams generated from economically related projects or facilities and/or whose
issuers are located in the same state. Sizable investments in these Municipal
Securities could involve an increased risk to the Trust should any of these
related projects or facilities experience financial difficulties.
Obligations of issuers of Municipal Securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
laws enacted in the future by Congress, state legislators, or referenda
extending the time for payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the ability of states
or municipalities to levy taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any issuer to pay,
when due, the principal of and interest on its municipal securities may be
materially affected. The Trust's concentration in Municipal Securities may
entail a greater level of risk than other types of money market funds.
INVESTMENT LIMITATIONS
The Trust:
* will not borrow money or pledge securities except, under certain
circumstances, the Trust may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of such assets to secure such
borrowings; and
* may not invest more than 10% of its total assets in restricted securities.
Restricted securities are any securities in which the Trust may invest pursuant
to its investment objective and policies but which are subject to restrictions
on resale under federal securities law.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations may be changed by the Board of Trustees
without shareholder approval.
The Trust will limit investments in illiquid securities to 10% of its net
assets.
TRUST INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust is managed by a Board of Trustees. The Trustees are responsible for
managing the Trust's business affairs and for exercising all the Trust's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Trustees handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Trust are made by Federated Research, the Trust's
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Trust and is
responsible for the purchase and sale of portfolio instruments.
ADVISORY FEES
The adviser receives an annual investment advisory fee equal to 0.40% of the
Trust's average daily net assets. Under the investment advisory contract, the
adviser will waive the amount, limited to the amount of the advisory fee, by
which the Trust's aggregate annual operating expenses, including the
investment advisory fee but excluding interest, taxes, brokerage commissions,
expenses of registering and qualifying the Trust and its shares under federal
and state laws and regulations, expenses of withholding taxes, and
extraordinary expenses exceed 0.45% of its average daily net assets.
ADVISER'S BACKGROUND
Federated Research, 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 Research 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. With over $120 billion invested across more than 300
funds under management and/or administration by its subsidiaries, as of
December 31, 1997, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in
1955. Federated funds are presently at work in and through approximately
4,000 financial institutions nationwide.
Both the Trust and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Trust and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Trust's
shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Trust; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Trustees, and could
result in severe penalties.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the
Trust. 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.
SHAREHOLDER SERVICES
The Trust has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Trust
may make payments up to 0.25% of the average daily net asset value of its
shares, computed at an annual rate, to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, 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 Trust and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. 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
Trust. 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 Trust's investment adviser or
its affiliates.
ADMINISTRATION OF THE TRUST
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Trust at an annual rate which
relates to the average aggregate daily net assets of all funds advised by
affiliates of Federated Investors specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
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 Services Company may choose voluntarily to waive a portion of its fee.
NET ASSET VALUE
The Trust attempts to stabilize the net asset value of its shares at $1.00 by
valuing the portfolio securities using the amortized cost method. The net asset
value per share is determined by subtracting total liabilities from total assets
and dividing the remainder by the number of shares outstanding. The Trust cannot
guarantee that its net asset value will always remain at $1.00 per share.
The net asset value is determined at 12:00 noon, 3:00 p.m. (Eastern time), and
as of the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
HOW TO PURCHASE SHARES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received, on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or by
check. The Trust reserves the right to reject any purchase request.
To make a purchase, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken by telephone. The
minimum initial investment is $25,000. However, an account may be opened with a
smaller amount as long as the minimum is reached within 90 days. Minimum
investments will be calculated by combining all accounts maintained with the
Trust. Financial institutions may impose different minimum investment
requirements on their customers.
PURCHASING SHARES BY WIRE
Shares may be purchased by Federal Reserve wire by calling the Trust before 3:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) in order to begin earning dividends that same day. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit to: Federated
Tax-Free Trust; Fund Number (this number can be found on the account statement
or by contacting the Trust); Group Number or Order Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire
on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement.
PURCHASING SHARES BY CHECK
Shares may be purchased by sending a check to Federated Shareholder Services
Company, P.O. Box 8600, Boston, MA 02266-8600. The check should be made payable
to: Federated Tax-Free Trust. Please include an account number on the check.
Orders by mail are considered received when payment by check is converted into
federal funds (normally the business day after the check is received), and
shares begin earning dividends the next day.
AUTOMATIC INVESTMENTS
Investors may establish accounts with their financial institutions to have cash
accumulations automatically invested in the Trust. The investments may be made
on predetermined dates or when the investor's account reaches a certain level.
Participating financial institutions are responsible for prompt transmission of
orders relating to the program, and they may charge for their services.
Investors should read this prospectus along with the financial institution's
agreement or literature describing these services and fees.
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value next determined after Federated
Shareholder Services Company receives the redemption request. Redemptions will
be made on days on which the Trust computes its net asset value. Redemption
requests must be received in proper form and can be made as described below.
REDEEMING SHARES BY TELEPHONE
Redemptions may be made by calling the Trust provided the Trust has a properly
completed authorization form. These forms can be obtained from Federated
Securities Corp. Proceeds from redemption requests received before 12:00 noon
(Eastern time) will be wired the same day to the shareholder's account at a
domestic commercial bank which is a member of the Federal Reserve System, but
will not include that day's dividend. Proceeds from redemption requests received
after that time include that day's dividend but will be wired the following
business day. Proceeds from redemption requests on holidays when wire transfers
are restricted will be wired the following business day. Questions about
telephone redemptions on days when wire transfers are restricted should be
directed to your shareholder services representative at the telephone number
listed on your account statement.
Telephone instructions may be recorded and if reasonable procedures are not
followed by the Trust, 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 this occurs, "Redeeming Shares by Mail"
should be considered. If at any time the Trust determines it necessary to
terminate or modify the telephone redemption privilege, shareholders will be
promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: the Trust name; the account name as registered
with the Trust; the account number; and the number of shares to be redeemed or
the dollar amount requested. All owners of the account must sign the request
exactly as the shares are registered. Normally, a check for the proceeds is
mailed within one business day, but in no event more than seven days, after the
receipt of a proper written redemption request. Dividends are paid up to and
including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Trust or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company, or savings association whose deposits are
insured by an organization which is administered by the Federal Deposit
Insurance Corporation; a member firm of a domestic stock exchange; or any other
"eligible guarantor institution," as defined in the Securities Exchange Act of
1934. The Trust does not accept signatures guaranteed by a notary public.
ACCOUNT AND SHARE INFORMATION
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are automatically
reinvested on payment dates in additional shares of the Trust unless cash
payments are requested by writing to the Trust. Shares purchased by wire before
3:00 p.m. (Eastern time) begin earning dividends that day. Shares purchased by
check begin earning dividends the day after the check is converted into federal
funds.
CAPITAL GAINS
The Trust does not expect to realize any capital gains or losses. If capital
gains or losses were to occur, they could result in an increase or decrease in
dividends. The Trust will distribute in cash or additional shares any realized
net long-term capital gains at least once every 12 months.
ACCOUNT ACTIVITY
Shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Trust will not issue share certificates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Trust may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. 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.
VOTING RIGHTS
Each share of the Trust owned by a shareholder gives that shareholder one vote
in Trustee elections and other matters submitted to shareholders for vote. The
Trust is not required to hold annual shareholder meetings. Shareholder approval
will be sought only for certain changes in the Trust's operation and for
election of Trustees under certain circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the outstanding shares of the Trust.
TAX INFORMATION
FEDERAL INCOME TAX
The Trust will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Trust that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on certain "private activity" bonds issued
after August 7, 1986, may be included in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for corporations.
The Trust may purchase, within the limits of its investment policies, all types
of municipal bonds, including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Trust representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly & Meck, counsel to the Trust, Trust shares
may be subject to personal property taxes imposed by counties, municipalities,
and school districts in Pennsylvania to the extent that the portfolio securities
in the Trust would be subject to such taxes if owned directly by residents of
those jurisdictions.
Because interest received by the Trust may not be exempt from all state and
local income taxes, shareholders may be required to pay state and local taxes on
dividends received from the Trust. 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 Trust advertises its yield, effective yield,
tax-equivalent yield, and total return.
Yield represents the annualized rate of income earned on an investment over a
seven-day period. It is the annualized dividends earned during the period on an
investment shown as a percentage of the investment. The effective yield is
calculated similarly to the yield, but when annualized, the income earned by an
investment is assumed to be reinvested daily. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment. The tax-equivalent yield is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that would have to be earned to equal
the Trust's tax-exempt yield, assuming a specific tax rate.
Total return represents the change, over a specified period of time, in the
value of an investment in the Trust after reinvesting all income distributions.
It is calculated by dividing that change by the initial investment and is
expressed as a percentage.
From time to time, advertisements for the Trust may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Trust's performance to certain indices.
PORTFOLIO OF INVESTMENTS
FEDERATED TAX-FREE TRUST
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--100.8%
ALABAMA--2.9%
$ 715,000 Anniston, AL, IDB, (Series 1989-A) Weekly VRDNs (Union $ 715,000
Foundry Co.)/(Amsouth Bank N.A., Birmingham LOC)
2,325,000 Birmingham, AL, IDA, Revenue Refunding Bonds Weekly VRDNs 2,325,000
(S.P. Hotel Company)/ (Amsouth Bank N.A., Birmingham LOC)
6,500,000 Jefferson County, AL, GO Warrants (Series 1996) Weekly VRDNs 6,500,000
(Bayerische Landesbank Girozentrale LOC)
9,085,000 Jefferson County, AL, PA-196 Weekly VRDNs (FGIC INS)/(Merrill 9,085,000
Lynch Capital Services, Inc. LIQ)
&NBSP;&NBSP;&NBSP;&NBSP;TOTAL 18,625,000
ALASKA--0.9%
5,700,000 Alaska State Housing Finance Corp., General Mortgage Revenue 5,700,000
Bonds (Series 1997A) Weekly VRDNs (Bank of America NT and SA,
San Francisco LIQ)
ARIZONA--2.7%
6,000,000 Apache County, AZ Weekly VRDNs (Tucson Electric Power 6,000,000
Co.)/(Chase Manhattan Bank N.A., New York LOC)
5,780,000 Glendale, AZ IDA, Variable Rate Senior Living Facilities 5,780,000
Revenue Bonds Weekly VRDNs (Friendship Retirement
Corporation)/(Norwest Bank Minnesota, Minneapolis LOC)
3,500,000 Maricopa County, AZ School District No. 6, (Series 1997A), 3,510,276
4.40% TANs, 6/30/1998
2,000,000 Tempe, AZ School District No. 213, (Series 1997A), 4.40% 2,005,872
TANs, 6/30/1998
&NBSP;&NBSP;&NBSP;&NBSP;TOTAL 17,296,148
CALIFORNIA--2.3%
10,000,000 Los Angeles County, CA, 4.50% TRANs, 6/30/1998 10,036,171
2,500,000 Placer, CA Union High School District, (Series 1997), 4.45% 2,510,243
TRANs, 9/10/1998
2,200,000 Western Placer, CA Unified School District, 4.45% TRANs, 2,209,014
9/10/1998
&NBSP;&NBSP;&NBSP;&NBSP;TOTAL 14,755,428
COLORADO--0.4%
2,730,000 Loveland, CO, IDR (Series 1993S), 3.90% TOBs (Safeway, 2,730,000
Inc.)/(Bankers Trust Co., New York LOC), Mandatory Tender
12/1/1997
CONNECTICUT--3.5%
2,000,000 Connecticut State HEFA, (Series T) Weekly VRDNs (Yale 2,000,000
University)
20,000,000 Connecticut State, (1997 Series B) Weekly VRDNs (Bayerische 20,000,000
Landesbank Girozentrale LIQ)
TOTAL 22,000,000
</TABLE>
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--CONTINUED
DISTRICT OF COLUMBIA--2.8%
$ 5,000,000 District of Columbia, (Series 1998C), 5.00% TRANs (Union Bank $ 5,046,160
of Switzerland, Zurich LOC), 9/30/1998
5,000,000 District of Columbia, (Series B), 4.50% TRANs (Morgan 5,025,139
Guaranty Trust Co., New York and Union Bank of Switzerland,
Zurich LOCs), 9/30/1998
7,500,000 District of Columbia, Variable Rate Demand/Fixed Rate Revenue 7,500,000
Bonds (Series 1997) Weekly VRDNs (Children's Defense
Fund)/(First National Bank of Maryland, Baltimore LOC)
TOTAL 17,571,299
FLORIDA--10.7%
8,000,000 Capital Projects Finance Authority, FL, Revenue Bonds (Series 8,000,000
1997) Weekly VRDNs (FSA INS)/(Credit Suisse First Boston,
Inc. LIQ)
4,200,000 Dade County, FL HFA, Hospital Revenue Bonds (Series 1995) 4,200,000
Weekly VRDNs (Miami Children's Hospital Project)/(AMBAC
INS)/(SunTrust Bank, Atlanta LIQ)
8,570,000 Gulf Breeze, FL, Floating Rate Demand Revenue Bonds (Series 8,570,000
1985 B) Weekly VRDNs (FGIC INS)/(Credit Local de France LIQ)
10,000,000 Highlands County, FL Health Facilities, (Series 1996A 10,000,000
Accounts Receivable) Weekly VRDNs (Adventist Health
System)/(Capital Markets Assurance Corp. INS)/(First National
Bank of Chicago LIQ)
5,500,000 Highlands County, FL Health Facilities, (Series 1996B 5,500,000
Accounts Receivable) Weekly VRDNs (Adventist Health
System)/(Capital Markets Assurance Corp. INS)/(Canadian
Imperial Bank of Commerce, Toronto LIQ)
5,900,000 Highlands County, FL Health Facilities, Variable Rate Demand 5,900,000
Revenue Bonds (Series 1996A) Weekly VRDNs (Adventist Health
System)/(SunTrust Bank, Central Florida LOC)
3,000,000 Miami, FL Health Facilities Authority, Health Facilities 3,000,000
Revenue Bonds (Series 1996) Weekly VRDNs (Miami Jewish Home
and Hospital for the Aged, Inc.)/(SunTrust Bank, Central
Florida LOC)
6,500,000 Orange County, FL HFA, Multi-family Housing Refunding Revenue 6,500,000
Bonds (1992 Series A) Weekly VRDNs (Smokewood/Sun Key
Apartments Project (FL))/(Citibank NA, New York LOC)
1,900,000 Orange County, FL HFA, Multifamily Housing Revenue Bonds 1,900,000
Weekly VRDNs (Sutton Place Ltd. Project)/(Nationsbank, N.A.,
Charlotte LOC)
2,500,000 Orange County, FL HFA, Variable Rate Certificates (Series 2,500,000
1997G) Weekly VRDNs (Bank of America NT and SA, San Francisco
LIQ)
11,090,000 Orange County, FL, Health Facilities Authority Weekly VRDNs 11,090,000
(Mayflower Retirement Community)/(Rabobank Nederland, Utrecht
LOC)
1,000,000 Pasco County, FL School Board, Variable Rate Certificates 1,000,000
Weekly VRDNs (AMBAC INS)/ (Landesbank Hessen-Thueringen,
Frankfurt LIQ)
TOTAL 68,160,000
GEORGIA--2.0%
10,000,000 Burke County, GA Development Authority, (Series 1997B), 3.80% 10,000,000
Bonds (Oglethorpe Power Corp. Vogtle Project)/(AMBAC INS),
5/28/1998
</TABLE>
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--CONTINUED
GEORGIA--CONTINUED
$ 3,000,000 Marietta, GA Housing Authority, Multifamily Housing Revenue $ 3,000,000
Refunding Bonds (Series 1996) Weekly VRDNs (Winterset
Apartments Project)/(Wachovia Bank of Georgia NA, Atlanta
LOC)
TOTAL 13,000,000
ILLINOIS--5.5%
10,000,000 Chicago, IL, GO Tender Notes (Series 1997), 3.65% TOBs 10,000,000
(Morgan Guaranty Trust Co., New York LOC), Mandatory Tender
2/5/1998
1,000,000 Illinois Development Finance Authority Weekly VRDNs (Lyric 1,000,000
Opera of Chicago)/(Credit Agricole U.S.A., Inc., Harris Trust
& Savings Bank, Chicago, NBD Bank, Michigan and Northern
Trust Co., Chicago, IL LOCs)
17,900,000 Illinois Health Facilities Authority Weekly VRDNs (OSF Health 17,900,000
Care Systems)
6,000,000 Illinois Housing Development Authority, (1997 Subseries B-1), 6,000,000
4.10% TOBs, Mandatory Tender 7/7/1998
TOTAL 34,900,000
INDIANA--2.3%
8,500,000 Indiana Bond Bank, Series A-2, 4.25% TANs (Norwest Bank 8,506,311
Minnesota, Minneapolis LOC), 1/21/1998
6,000,000 Indianapolis, IN Local Public Improvement Bond Bank,
(Series 6,003,763 1997A), 4.375% TANs, 1/8/1998
TOTAL 14,510,074
MARYLAND--6.7%
800,000 Baltimore County, MD, (Series 1992) Weekly VRDNs (Sheppard & 800,000
Enoch Pratt Hospital Facility)/(Societe Generale, Paris LOC)
1,700,000 Baltimore, MD PCR Weekly VRDNs (SCM Plants,
Inc.)/(Barclays 1,700,000 Bank PLC, London LOC)
3,940,000 Maryland EDC, Variable Rate Demand/Fixed Rate Refunding 3,940,000
Revenue Bonds (1997 Issue) Weekly VRDNs (Jenkins Memorial
Nursing Home, Inc. Facility)/(First National Bank of
Maryland, Baltimore LOC)
2,764,000 Maryland Health & Higher Educational Facilities Authority, 2,764,000
Pooled Loan Program Revenue Notes, 3.80% CP (John Hopkins
University)/(Sanwa Bank Ltd., Osaka LIQ), Mandatory Tender
12/17/1997
13,320,000 Maryland Health & Higher Educational Facilities Authority, 13,320,000
Revenue Bonds (Series 1994) Weekly VRDNs (University
Physicians, Inc.)/(First National Bank of Maryland, Baltimore
LOC)
9,300,000 Maryland Health & Higher Educational Facilities Authority, 9,300,000
Series 1997 Weekly VRDNs (Augsburg Lutheran Home of MD.,
Inc.)/(First National Bank of Maryland, Baltimore LOC)
5,000,000 Montgomery County, MD, EDR Weekly VRDNs (Howard Hughes 5,000,000
Medical Center)
2,755,000 Queen Annes County, MD Economic Development Revenue, (Series 2,755,000
1994), 3.90% TOBs (Safeway, Inc.)/(Bankers Trust Co., New
York LOC), Mandatory Tender 12/1/1997
2,900,000 Washington Suburban Sanitation District, MD, (1996 Series) 2,900,000
Weekly VRDNs (Westdeutsche Landesbank Girozentrale LIQ)
TOTAL 42,479,000
</TABLE>
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--CONTINUED
MASSACHUSETTS--0.8%
$ 4,973,000 North Andover, MA, 4.00% BANs, 1/22/1998 $ 4,975,046
MICHIGAN--1.6%
2,000,000 Kalamazoo, MI Economic Development Corp., 1995 Limited 2,000,000
Obligation Revenue Refunding Bonds Weekly VRDNs (Wyndham
Project, MI)/(First of America Bank - Illinois LOC)
8,000,000 Michigan State Hospital Finance Authority, (Series A) Weekly 8,000,000
VRDNs (OSF Health Care Systems)
TOTAL 10,000,000
MINNESOTA--8.4%
10,000,000 Minneapolis, MN, (Series 1993) Weekly VRDNs (Market Square 10,000,000
Real Estate, Inc.)/(Norwest Bank Minnesota, Minneapolis LOC)
8,700,000 Minneapolis, MN, Various Purpose Bonds (Series 1996) Weekly 8,700,000
VRDNs (Bayerische Vereinsbank AG, Munich LIQ)
13,500,000 Rochester, MN Health Care Facility Authority Weekly VRDNs 13,500,000
(Mayo Foundation)
18,000,000 Rochester, MN Health Care Facility Authority Weekly VRDNs 18,000,000
(Mayo Foundation)
3,000,000 Rosemount, MN, PCR (Series 1984) Weekly VRDNs (Koch Refining 3,000,000
Co.)
TOTAL 53,200,000
MISSOURI--3.1%
5,000,000 Missouri State Environmental Improvement & Energy Authority, 5,000,000
Pollution Control Revenue Bonds Series 1985B, 3.75% CP (Union
Electric Co.)/(Westdeutsche Landesbank Girozentrale LOC),
Mandatory Tender 2/26/1998
14,420,000 Missouri State HEFA, Health Facilities Revenue Bonds (Series 14,420,000
1996A) Weekly VRDNs (Deaconess Long Term Care of
Missouri)/(Bank One, Texas N.A. LOC)
TOTAL 19,420,000
NEW YORK--0.6%
4,000,000 New York State Energy Research & Development Authority, 4,000,000
(Series 1985A), 3.60% TOBs (Long Island Lighting
Co.)/(Deutsche Bank, AG LOC), Optional Tender 3/1/1998
NORTH CAROLINA--5.2%
20,000,000 Martin County, NC IFA, (Series 1993) Weekly VRDNs 20,000,000
(Weyerhaeuser Co.)
12,910,000 NCNB Pooled Tax-Exempt Trust, (Series 1990A) Weekly VRDNs 12,910,000
(NCNB Tax Exempt Trust 1990a)/(Nationsbank, N.A., Charlotte
LOC)
TOTAL 32,910,000
OHIO--7.6%
2,200,000 Clermont County, OH, Adjustable Rate Hospital Facilities 2,200,000
Revenue Bonds (Series 1996) Weekly VRDNs (Mercy Health
Systems)/(Credit Suisse First Boston LIQ)
18,500,000 Cuyahoga County, OH Hospital Authority, (Series 1997D) Weekly 18,500,000
VRDNs (Cleveland Clinic)/ (Bank of America NT and SA, San
Francisco LIQ)
13,782,040 Equity Trust I, (1996 Series) Weekly VRDNs (Bayerische 13,782,040
Hypotheken-Und Wechsel-Bank Ag LOC)
</TABLE>
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--CONTINUED
OHIO--CONTINUED
$ 3,059,035 LaSalle National Bank Leasetops Trust, Series 1995A Leasetops $ 3,059,035
Certificates Weekly VRDNs (LaSalle National Bank, Chicago
LIQ)/(LaSalle National Bank, Chicago LOC)
1,260,000 Marion County, OH Hospital Authority, (Series 1991) Weekly 1,260,000
VRDNs (Marion County, OH Pooled Hospital Program)/(Bank One,
Ohio, N.A. LOC)
6,250,000 Montgomery County, OH Health Facilities Authority, (Series 6,250,000
1995) Weekly VRDNs (Sisters of Charity Health Care
System)/(Toronto-Dominion Bank LIQ)
1,000,000 Ohio State Air Quality Development Authority Weekly VRDNs 1,000,000
(Timken Co.)/(Credit Suisse First Boston LOC)
2,000,000 Ohio State Water Development Authority, Pollution Control 2,000,000
Revenue Refunding Bonds (Series 1997) Weekly VRDNs (Philip
Morris Cos., Inc.)
TOTAL 48,051,075
OKLAHOMA--5.8%
2,540,000 Muskogee, OK Industrial Trust, (Series 1985) Weekly VRDNs 2,540,000
(Muskogee Mall Limited Partnership)/(Boatmen's National Bank
of St. Louis LOC)
3,610,000 Muskogee, OK Industrial Trust, (Series 1985) Weekly VRDNs 3,610,000
(Warmack Muskogee Limited Partnership)/(Boatmen's National
Bank of St. Louis LOC)
20,000,000 Oklahoma State Industrial Authority, Health System Revenue 20,000,000
Bonds (Series 1995A) Weekly VRDNs (Baptist Medical Center,
OK)/(Credit Suisse First Boston and Morgan Guaranty Trust
Co., New York LIQs)
10,940,000 Tulsa, OK International Airport, Variable Rate Certificates 10,940,000
(Series 1997B-2) Weekly VRDNs (MBIA Insurance Corporation
INS)/(Bank of America NT and SA, San Francisco LIQ)
TOTAL 37,090,000
PENNSYLVANIA--7.1%
5,000,000 Dauphin County, PA General Authority, (Series A of 1997) 5,000,000
Weekly VRDNs (Allhealth Pooled Financing Program)/(FSA
INS)/(Credit Suisse First Boston LIQ)
25,500,000 Easton Area School District, PA, (Series 1997) Weekly VRDNs 25,500,000
(FGIC INS)/(FGIC Securities Purchase, Inc. LIQ)
14,500,000 Erie County, PA Hospital Authority Weekly VRDNs (St. Vincent 14,500,000
Health System)/(Mellon Bank NA, Pittsburgh LOC)
TOTAL 45,000,000
SOUTH DAKOTA--0.4%
2,685,000 South Dakota Housing Development Authority, (Series I), 3.90% 2,685,000
TOBs, Mandatory Tender 8/13/1998
TENNESSEE--3.0%
17,000,000 Chattanooga, TN HEFA Weekly VRDNs (McCallie School)/(SunTrust 17,000,000
Bank, Atlanta LOC)
2,185,000 Metropolitan Government Nashville & Davidson County, TN HEFA, 2,185,000
(Series 1985B), 3.95% TOBs (Vanderbilt University), Optional
Tender 5/1/1998
TOTAL 19,185,000
</TABLE>
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)SHORT-TERM MUNICIPALS--CONTINUED
TEXAS--8.8%
$ 3,660,000 Dallas, TX, (Series C), 3.95% TOBs, Optional Tender 6/15/1998 $ 3,660,000
6,950,000 Matagorda County, TX Navigation District Number One, CDC 6,950,000
(Series 1997D) Weekly VRDNs (Houston Light & Power Co.)/(FGIC
INS)/(CDC Municipal Products, Inc. LIQ)
17,000,000 Midland Independent School District, TX, Variable Rate 17,000,198
Unlimited Tax School Building Bonds (Series 1997), 3.91% TOBs
(Texas Permanent School Fund Guarantee Program GTD)/(Union
Bank of Switzerland, Zurich LIQ), Mandatory Tender 1/15/1998
10,000,000 Plano ISD, TX, Variable Rate Unlimited Tax School Building 10,000,584
Bonds, (Series 1997), 3.86% TOBs (Texas Permanent School Fund
Guarantee Program GTD)/(Union Bank of Switzerland, Zurich
LIQ), Mandatory Tender 2/5/1998
3,290,000 TX Pooled Tax Exempt Trust, Certificates of Participation 3,290,000
(Series 1996) Weekly VRDNs (Bank One, Texas N.A. LOC)
15,000,000 Texas State, (Series A), 4.75% TRANs, 8/31/1998 15,098,257
TOTAL 55,999,039
VERMONT--1.3%
8,000,000 Vermont IDA Weekly VRDNs (Wallace Computer,
Inc.)/(Wachovia 8,000,000 Bank of NC, NA, Winston-Salem
LOC)
WEST VIRGINIA--1.7%
3,425,000 Cabell County, WV Board of Education, Public School Refunding 3,431,783
Bonds (Series 1997), 4.50% Bonds, 5/1/1998
3,000,000 Oak Hill, WV, Variable Rate Industrial Development Refunding 3,024,246
Revenue Bonds (Series 1991A), 4.95% TOBs (Fayette
Plaza)/(ABN-AMRO Bank NV, New York LOC), Mandatory Tender
10/1/1998
4,355,000 West Virginia University Board of Regents, 3.80% TOBs (Morgan 4,355,000
Guaranty Trust Co., New York LOC), Optional Tender 2/1/1998
TOTAL 10,811,029
WISCONSIN--2.6%
8,600,000 Waukesha, WI School District, 4.10% TRANs, 8/21/1998 8,611,904
7,800,000 Wisconsin Health and Educational Facilities Authority, 7,800,000
Revenue Bonds (Series 1994) Weekly VRDNs (Felician Health
Care, Inc. Project)/(LaSalle National Bank, Chicago LOC)
TOTAL 16,411,904
WYOMING--0.1%
1,000,000 Wyoming Community Development Authority, (Series 1986C), 1,000,000
3.70% TOBs (First National Bank of Chicago LIQ), Optional
Tender 12/1/1997
TOTAL INVESTMENTS (AT AMORTIZED COST(B) $ 640,465,042
</TABLE>
(a) The Trust only invests in securities rated in the highest short-term rating
category by nationally recognized statistical rating organizations ("NRSROs") or
unrated securities of comparable quality. An NRSRO's highest rating category is
determined without regard for sub-categories and gradations. For example,
securities rated SP-1+ or SP-1 by Standard & Poor's, MIG-1 by Moody's Investors
Service, Inc., F-1+, and F-1 by Fitch Investors Service, L.P. are considered
rated in the highest short-term rating category.
Securities rated in the highest short-term rating category (and unrated
securities of comparable quality) are identified as First Tier securities.
Securities rated in the second highest short-term rating category (and unrated
securities of comparable quality) are identified as Second Tier securities. The
Trust follows application regulations in determining whether a security is rated
and whether a security rated by multiple NRSROs in different rating categories
should be identified as a First or Second Tier security.
At November 30, 1997, the portfolio securities were rated as follows:
Tier Rating Percentage Based on Total Market Value (Unaudited)
FIRST TIER SECOND TIER
100.0% 0%
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($635,519,277) at November 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC --American Municipal Bond Assurance Corporation BANs --Bond Anticipation
Notes CP --Commercial Paper EDC --Economic Development Commission EDR --Economic
Development Revenue FGIC --Financial Guaranty Insurance Company FSA --Financial
Security Assurance GO --General Obligation GTD --Guaranty HEFA --Health and
Education Facilities Authority HFA --Housing Finance Authority IDA --Industrial
Development Authority IDB --Industrial Development Bond IDR --Industrial
Development Revenue IFA --Industrial Finance Authority INS --Insured ISD
- --Independent School District LIQ --Liquidity Agreement LOCs --Letter(s) of
Credit LOC --Letter of Credit MBIA --Municipal Bond Investors Assurance PCR
- --Pollution Control Revenue PLC --Public Limited Company SA --Support Agreement
TANs --Tax Anticipation Notes TOBs --Tender Option Bonds TRANs --Tax and Revenue
Anticipation Notes VRDNs --Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED TAX-FREE TRUST
NOVEMBER 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at amortized cost and value $ 640,465,042
Cash 252,910
Income receivable 5,076,611
Receivable for shares sold 53,795
Total assets 645,848,358
LIABILITIES:
Payable for investments purchased $ 8,570,000
Income distribution payable 1,698,068
Accrued expenses 61,013
Total liabilities 10,329,081
Net Assets for 635,549,681 shares outstanding $ 635,519,277
NET ASSETS CONSIST OF:
Paid in capital $ 635,541,822
Accumulated net realized loss on investments (22,545)
Total Net Assets $ 635,519,277
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
$635,519,277 / 635,549,681 shares outstanding $1.00
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED TAX-FREE TRUST
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 26,900,405
EXPENSES:
Investment advisory fee $ 2,902,993
Administrative personnel and services fee 547,940
Custodian fees 41,218
Transfer and dividend disbursing agent fees and expenses 39,573
Trustees' fees 21,278
Auditing fees 16,644
Legal fees 10,225
Portfolio accounting fees 119,504
Shareholder services fee 1,814,370
Share registration costs 18,698
Printing and postage 9,972
Insurance premiums 6,330
Taxes 16,692
Miscellaneous 10,038
Total expenses 5,575,475
Waivers --
Waiver of investment advisory fee $ (823,445)
Waiver of shareholder services fee (1,451,496)
Total waivers (2,274,941)
Net expenses 3,300,534
Net investment income 23,599,871
Net realized loss on investments (14,032)
Change in net assets resulting from operations $ 23,585,839
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED TAX-FREE TRUST
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 23,599,871 $ 25,430,813
Net realized gain (loss) on investments ($14,032 and (14,032) (6,253)
$18,018 net losses, respectively, as computed for federal
tax purposes)
Change in net assets resulting from operations 23,585,839 25,424,560
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (23,599,871) (25,430,813)
SHARE TRANSACTIONS--
Proceeds from sale of shares 2,258,839,187 2,635,145,132
Net asset value of shares issued to shareholders in payment 1,764,863 2,446,492
of distributions declared
Cost of shares redeemed (2,372,855,710) (2,697,169,818)
Change in net assets resulting from share transactions (112,251,660) (59,578,194)
Change in net assets (112,265,692) (59,584,447)
NET ASSETS:
Beginning of period 747,784,969 807,369,416
End of period $ 635,519,277 $ 747,784,969
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED TAX-FREE TRUST
NOVEMBER 30, 1997
ORGANIZATION
Federated Tax-Free Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end management
investment company. The investment objective of the Trust is dividend income
exempt from federal regular income tax while seeking relative stability of
principal.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
The Trust uses the amortized cost method to value its portfolio securities in
accordance with Rule 2a-7 under the Act.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES
It is the Trust's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
At November 30, 1997, the Trust, for federal tax purposes, had a capital loss
carryforward of $45,231, which will reduce the Trust's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the Code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Trust of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $ 11,840
2003 $ 1,341
2004 $ 18,018
2005 $ 14,032
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may engage in when-issued or delayed delivery transactions. The Trust
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
November 30, 1997, capital paid-in aggregated $635,541,822.
Transactions in shares were as follows:
<TABLE>
YEAR ENDED NOVEMBER 30,
1997 1996
<S> <C> <C>
Shares sold 2,258,839,187 2,635,145,132
Shares issued to shareholders in payment of distributions 1,764,863 2,446,492
declared
Shares redeemed (2,372,855,710) (2,697,169,818)
Net change resulting from share transactions (112,251,660) (59,578,194)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Research, the Trust's investment adviser (the "Adviser"), receives for
its services an annual investment advisory fee equal to 0.40% of the Trust's
average daily net assets. The Adviser will waive, to the extent of its advisory
fee, the amount, if any, by which the Trust's aggregate annual operating
expenses exceed 0.45% of average daily net assets of the Trust.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Trust with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net assets of
all funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Trust will pay FSS up to 0.25% of average daily net assets
of the Trust for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC"),
serves as transfer and dividend disbursing agent for the Trust. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Trust's accounting records for which it receives a fee. The
fee is based on the level of the Trust's average daily net assets for the
period, plus out-of-pocket expenses.
INTERFUND TRANSACTIONS
During the period ended November 30, 1997, the Trust engaged in purchase and
sale transactions with funds that have a common investment adviser (or
affiliated investment advisers), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions were made at current market value
pursuant to Rule 17a-7 under the Act amounting to $1,268,125,160 and
$1,061,865,000, respectively.
GENERAL
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of FEDERATED TAX-FREE TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Tax-Free Trust as of November 30,
1997, the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended November 30, 1997 and
1996, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 31, 1997, by correspondence with the custodian and brokers; where
replies were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Tax-Free
Trust as of November 30, 1997, the results of its operations, the changes in its
net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 16, 1998
FEDERATED TAX-FREE TRUST
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Research
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place
Pittsburgh, PA 15222-5401
[Graphic]
FEDERATED TAX-FREE TRUST
Federated Investors
Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com
PROSPECTUS
JANUARY 31, 1998
An Open-End, Management Investment Company
Cusip 314282104
8010414A (1/98)
[Graphic]
FEDERATED TAX-FREE TRUST
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus of
Federated Tax-Free Trust (the "Trust") dated January 31, 1998. This Statement is
not a prospectus. You may request a copy of a prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by calling
1-800-341-7400.
FEDERATED TAX-FREE TRUST
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PA 15237-7000
Statement dated January 31, 1998
[Graphic]
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314282104
8010414B (1/98)
[Graphic]
TABLE OF CONTENTS
INVESTMENT POLICIES 1
Acceptable Investments 1
Participation Interests 1
Municipal Leases 1
Ratings 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Credit Enhancement 2
INVESTMENT LIMITATIONS 2
Selling Short and Buying on Margin 2
Issuing Senior Securities and Borrowing Money 2
Pledging Assets 2
Lending Cash or Securities 3
Investing in Commodities and Minerals 3
Investing in Real Estate 3
Underwriting 3
Diversification of Investments 3
Investing in Restricted Securities 3
Investing in New Issuers 3
Investing in Issuers Whose Securities are Owned by Officers and
Trustees 3
Investing in Options 3
Investing in Securities of Other Investment Companies 3
Investing for Control 3
Concentration of Investments 4
Investing in Illiquid Securities 4
Regulatory Compliance 4
FEDERATED TAX-FREE TRUST MANAGEMENT 4
Share Ownership 8
Trustee Compensation 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
Investment Adviser 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 10
Trust Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 10
Shareholder Services 10
DETERMINING NET ASSET VALUE 11
REDEMPTION IN KIND 11
MASSACHUSETTS PARTNERSHIP LAW 11
THE TRUST'S TAX STATUS 12
PERFORMANCE INFORMATION 12
YIELD 12
Effective Yield 12
Tax-Equivalent Yield 12
Tax-Equivalency Table 13
Total Return 13
Performance Comparisons 14
Economic and Market Information 14
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 14
Institutional Clients 15
Bank Marketing 15
Broker/Dealers and Bank Broker/Dealer Subsidiaries 15
APPENDIX 16
INVESTMENT POLICIES
Unless indicated otherwise, the policies described below may be changed by the
Board of Trustees ("Trustees") without shareholder approval. Shareholders will
be notified before any material change in these policies becomes effective.
ACCEPTABLE INVESTMENTS
When determining whether a security presents minimal credit risks, the
investment adviser will consider the creditworthiness of: the issuer of the
security; the issuer of any demand feature applicable to the security; or any
guarantor of either the security or any demand feature.
PARTICIPATION INTERESTS
The financial institutions from which the Trust purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Trust the right to
demand payment of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days). The Municipal
Securities subject to the participation interests are not limited to the Trust's
maximum maturity requirements so long as the participation interests include the
right to demand payment from the issuers of those interests. By purchasing these
participation interests, the Trust is buying a security meeting the maturity and
quality requirements of the Trust and also is receiving the tax-free benefits of
the underlying securities.
MUNICIPAL LEASES
The Trust may purchase Municipal Securities in the form of participation
interests that represent an undivided proportional interest in lease payments by
a governmental or nonprofit entity. The lease payments and other rights under
the lease provide for and secure payments on the certificates. Lease obligations
may be limited by municipal charter or the nature of the appropriation for the
lease. Furthermore, a lease may provide that the participants cannot accelerate
lease obligations upon default. The participants would only be able to enforce
lease payments as they became due. In the event of a default or failure of
appropriation, unless the participation interests are credit enhanced, it is
unlikely that the participants would be able to obtain an acceptable substitute
source of payment.
In determining the liquidity of municipal lease securities, the investment
adviser, under the authority delegated by the Trustees, will base its
determination on the following factors: whether the lease can be terminated by
the lessee; the potential recovery, if any, from a sale of the leased property
upon termination of the lease; the lessee's general credit strength (e.g., its
debt, administrative, economic and financial characteristics, and prospects);
the likelihood that the lessee will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of non-appropriation"); and any
credit enhancement or legal recourse provided upon an event of non-appropriation
or other termination of the lease.
RATINGS
As a matter of fundamental investment policy, the securities in which the Trust
invests are rated in the highest short-term rating category by one or more
nationally recognized statistical rating organizations ("NRSROs") or be of
comparable quality to securities having such ratings. An NRSRO's highest rating
category is determined without regard for sub-categories and gradations. For
example, securities rated SP-1+ or SP-1 by Standard & Poor's ("S&P"), MIG-1 by
Moody's Investors Service, Inc. ("Moody's"), or F-1+ or F-1 by Fitch Investors
Service, Inc. ("Fitch") are all considered rated in the highest short-term
rating category. The Trust will follow applicable regulations in determining
whether a security rated by more than one NRSRO can be treated as being in the
highest short-term rating category; currently, such securities must be rated by
two NRSROs in their highest rating category. See "Regulatory Compliance."
Further, the Trust has the ability but no present intention of investing in:
securities that are rated SP-2 by S&P, or F-2 by Fitch; and securities that are
not rated but are determined by the Trustees to be of comparable quality.
Shareholders will be notified should the Trust decide to invest in these
securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Trust. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Trust in a dollar
amount sufficient to make payment for the securities to be purchased are:
segregated on the Trust's records at the trade date; marked to market daily; and
maintained until the transaction is settled. The Trust does not intend to engage
in when-issued and delayed delivery transactions to an extent that would cause
the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
Certain securities in which the Trust invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell securities to
the Trust and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Trust, the Trust could receive less than the repurchase
price on any sale of such securities. The Trust or its custodian will take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. In the event that a defaulting seller
filed for bankruptcy or became insolvent, disposition of such securities by the
Trust might be delayed pending court action. The Trust believes that under the
regular procedures normally in effect for custody of the Trust's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Trust and allow retention or disposition of such
securities. The Trust will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which are
deemed by the Trust's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Trust may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Trust
transfers possession of a portfolio instrument in return for a percentage of the
instrument's market value in cash and agrees that on a stipulated date in the
future the Trust will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Trust to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but does
not ensure this result. However, liquid assets of the Trust, in a dollar amount
sufficient to make payment for the securities to be purchased, are: segregated
on the Trust's records at the trade date; marked to market daily; and maintained
until the transaction is settled.
CREDIT ENHANCEMENT
The Trust typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement (the "credit enhancer"), rather than the issuer. However,
credit-enhanced securities will not be treated as having been issued by the
credit enhancer for diversification purposes, unless the Trust has invested more
than 10% of its assets in securities issued, guaranteed or otherwise credit
enhanced by the credit enhancer, in which case the securities will be treated as
having been issued by both the issuer and the credit enhancer.
The Trust may have more than 25% of its total assets invested in securities
credit enhanced by banks.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Trust will not make short sales of securities or purchase any securities on
margin, except for such credits as are necessary for the clearance of
transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Trust will not issue senior securities except that the Trust may borrow
money in amounts up to one-third of the value of its total assets, including the
amounts borrowed.
The Trust will not borrow money, except as a temporary measure for extraordinary
or emergency purposes and then only in amounts not in excess of 5% of the value
of its total assets or in an amount up to one-third of the value of its total
assets including the amount borrowed in order to meet redemption requests
without immediately selling any portfolio securities. This borrowing provision
is not for investment leverage but solely to facilitate management of the
portfolio by enabling the Trust to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. While any such borrowings are outstanding, no net purchases of
investment securities will be made by the Trust. If due to market fluctuations
or other reasons the value of the Trust's assets falls below 300% of its
borrowing, the Trust will reduce its borrowing within three business days.
PLEDGING ASSETS
The Trust will not pledge, mortgage, or hypothecate its assets except that, to
secure borrowings permitted, it may pledge securities having a market value at
the time of pledge not exceeding 10% of the value of the Trust's total assets.
LENDING CASH OR SECURITIES
The Trust will not make loans, except that the Trust may, in accordance with its
investment objective, policies, and limitations, acquire publicly or
non-publicly issued Municipal Securities or temporary investments or enter into
repurchase agreements.
INVESTING IN COMMODITIES AND MINERALS
The Trust will not purchase or sell commodities or commodity contracts or oil,
gas or other mineral exploration or development programs.
INVESTING IN REAL ESTATE
The Trust will not purchase or sell real estate, but this shall not prevent the
Trust from investing in Municipal Securities secured by real estate or interests
therein.
UNDERWRITING
The Trust 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.
DIVERSIFICATION OF INVESTMENTS
The Trust will not purchase the securities of any issuer (except cash and cash
instruments and securities issued or guaranteed by the United States government,
its agencies and instrumentalities) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer. For purposes of this
limitation, each governmental subdivision, i.e. state, territory, possession of
the United States or any political subdivision of any of the foregoing,
including agencies, authorities, instrumentalities, or similar entities, or of
the District of Columbia shall be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating it and the
security is backed only by the assets and revenues of a non-governmental user,
then such non-governmental user will be determined to be the sole issuer. If,
however, in the case of an industrial development bond, or governmental issued
security, a governmental or some other entity guarantees the security, such
guarantee would be considered a separate security issued by the guarantor as
well as the other issuer, subject to limited exclusions allowed by the
Investment Company Act of 1940. For purposes of this limitation, cash
instruments do not include securities issued by banks.
INVESTING IN RESTRICTED SECURITIES
The Trust will not invest more than 10% of the value of its total assets in
securities which are subject to legal or contractual restrictions on resale.
INVESTING IN NEW ISSUERS
The Trust will not invest more than 0.5% of the assets of the Trust in
securities of issuers (or in the alternative, guarantors, where applicable)
which have a record of less than three years of continuous operation, including
the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
The Trust will not purchase or retain the securities of any issuer other than
the securities of the Trust, if, to the Trust's knowledge, those officers and
Trustees of the Trust or the Adviser, who individually own beneficially more
than 0.5% of the outstanding securities of such issuer, together own
beneficially more than 0.5% of such outstanding securities.
INVESTING IN OPTIONS
The Trust will not purchase or sell puts, calls, straddles, or spreads or any
combination thereof, except that the Trust may purchase variable rate Municipal
Securities from a broker, dealer, or other person accompanied by the agreement
of such seller to purchase, at the Trust's option, the Municipal Security prior
to the maturity thereof.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Trust will not invest in securities issued by any other investment company
or investment trust.
INVESTING FOR CONTROL
The Trust will not acquire voting securities except as part of a merger,
consolidation, reorganization, or acquisition of assets.
CONCENTRATION OF INVESTMENTS
The Trust does not intend to purchase securities if, as a result of such
purchase, more than 25% of the value of its assets would be invested in any one
industry or in the securities of governmental subdivisions located in any one
state, territory, or possession of the United States. The Trust may invest more
than 25% of the value of its assets in short-term tax-exempt project notes which
are guaranteed by the U.S. government regardless of the location of the issuing
municipality. In addition, the Trust may, at times, invest more than 25% of the
value of its assets in cash or cash items (including bank time and demand
deposits such as certificates of deposit), U.S. Treasury bills or 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, for defensive purposes.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Trust will not invest more than 10% of the value of its net assets in
illiquid securities.
For purposes of the above limitations, the Trust considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." 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 limitation.
The Trust did not borrow money or pledge securities in excess of 5% of the value
of its net assets during the last fiscal year and has no present intent to do so
during the coming fiscal year.
REGULATORY COMPLIANCE
The Trust may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in the
prospectus and this Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of and regulations
under the Investment Company Act of 1940. In particular, the Trust will comply
with the various requirements of Rule 2a-7, which regulates money market mutual
funds. The Trust will determine the effective maturity of its investments, as
well as its ability to consider a security as having received the requisite
short-term ratings by NRSROs, according to Rule 2a-7. The Trust may change these
operational policies to reflect changes in the laws and regulations without the
approval of its shareholders.
FEDERATED TAX-FREE TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Tax-Free Trust, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public Relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As referred to in the list of Trustees and Officers, "Funds" includes the
following investment companies:
111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc.1999; Liberty U.S.
Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Obligations Trust II; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Virtus Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Wesmark Funds; WCT
Funds; and World Investment Series, Inc.
SHARE OWNERSHIP
Officers and Trustees as a group own less than 1% of the Trust.
As of January 7, 1998, the following shareholders of record owned 5% or more of
the outstanding shares of the Trust: Fiduciary Trust Company International, New
York, NY, owned 142,141,700 shares (23.39%).
TRUSTEE COMPENSATION
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +
John F. Donahue, $0 $0 for the Trust and
Chairman and Trustee 56 other investment companies in
the Fund Complex
Thomas G. Bigley, $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
John T. Conroy, Jr., $1,771 $122,362 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
William J. Copeland, $1,771 $122,362 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
James E. Dowd, $1,771 $122,362 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D., $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr., $1,771 $122,362 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
Peter E. Madden, $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
John E. Murray, $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
Wesley W. Posvar, $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
Marjorie P. Smuts, $1,610 $111,222 for the Trust and
Trustee 56 other investment companies in
the Fund Complex
* Information is furnished for the fiscal year ended November 30, 1997.
+ The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER
The Trust's investment adviser is Federated Research. It is a subsidiary of
Federated Investors. All the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife and
his son, J. Christopher Donahue.
The adviser shall not be liable to the Trust 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 Trust.
ADVISORY FEES
For its advisory services, Federated Research receives an annual investment
advisory fee as described in the prospectus. For the fiscal years ended November
30, 1997, 1996, and 1995, the adviser earned $2,902,993, $3,255,470, and
$4,138,814, respectively, of which $823,445, $960,485, and $1,198,154,
respectively, were waived.
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 use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Trust 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. Research services provided by brokers and
dealers may be used by the adviser or its affiliates in advising the Trust 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. 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. During the fiscal
year ended November 30, 1997, the Trust paid no brokerage commissions.
Although investment decisions for the Trust are made independently from those of
the other accounts managed by the adviser, investments of the type the Trust may
make may also be made by those other accounts. When the Trust and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Trust or the size of the position obtained or disposed of by the Trust. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Trust.
OTHER SERVICES
TRUST ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Trust for a fee as described in the
prospectus. From March 1, 1994 to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Trust's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
November 30, 1997, 1996, and 1995, the Administrators earned $547,940, $615,257,
and $783,271, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Trust. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Trust's
portfolio investments. The fee paid for this service is based upon the level of
the Trust's average net assets for the period plus out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the level of the
Trust's average net assets for the period plus out-of-pocket expenses.
INDEPENDENT AUDITORS
The independent auditors for the Trust are Deloitte & Touche LLP, Pittsburgh,
PA.
SHAREHOLDER SERVICES
This arrangement permits the payment of fees to Federated Shareholder Services
to cause services to be provided which are necessary for the maintenance of
shareholder accounts and to encourage personal services 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
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 Shareholder Services Agreement, the Trustees expect that the
Trust will benefit by: (1) providing personal services to shareholders; (2)
investing shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended November 30, 1997, the Trust earned shareholder
service fees in the amount of $1,814,370, $362,874 of which was paid to
financial institutions.
DETERMINING NET ASSET VALUE
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
Accordingly, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio. In
periods of declining interest rates, the indicated daily yield on shares of the
Trust computed by dividing the annualized daily income on the Trust's portfolio
by the net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates. In periods of rising interest rates, the opposite may be true.
The Trust's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per share, taking into account
current market conditions and the Trust's investment objective. The procedures
include monitoring the relationship between the amortized cost value per share
and the net asset value per share based upon available indications of market
value. The Trustees will decide what, if any, steps should be taken if there is
a difference of more than 0.5% between the two values. The Trustees will take
any steps they consider appropriate (such as redemption in kind or shortening
the average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of determining
net asset value.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Trust's net asset value, whichever is less, for any one shareholder within a
90-day period. Any redemption beyond this amount will also be in cash unless the
Trustees determine that further payments should be in kind. In such cases, the
Trust will pay all or a portion of the remainder of the redemption in portfolio
instruments valued in the same way as the Trust determines net asset value. The
portfolio instruments will be selected in a manner that the Trustees deem fair
and equitable. Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders who sell these securities could receive
less than the redemption value and could incur certain transaction costs.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
THE TRUST'S TAX STATUS
To qualify for the special tax treatment afforded to regulated investment
companies, the Trust must, among other requirements: derive at least 90% of its
gross income from dividends, interest, and gains from the sale of securities;
invest in securities within certain statutory limits; and distribute to its
shareholders at least 90% of its net income earned during the year.
PERFORMANCE INFORMATION
Performance depends upon such variables as: portfolio quality; average portfolio
maturity; type of instruments in which the portfolio is invested; changes in
interest rates; changes in expenses; and the relative amount of cash flow. To
the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in shares of
the Trust, the performance will be reduced for those shareholders paying those
fees.
YIELD
The yield is calculated based upon the seven days ending on the day of the
calculation, called the "base period." This yield is computed by: determining
the net change in the value of a hypothetical account with a balance of one
share at the beginning of the base period, with the net change excluding capital
changes but including the value of any additional shares purchased with
dividends earned from the original one share and all dividends declared on the
original and any purchased shares; dividing the net change in the account's
value by the value of the account at the beginning of the base period to
determine the base period return; and multiplying the base period return by
365/7.
The Trust's yield for the seven-day period ended November 30, 1997, was 3.51%.
EFFECTIVE YIELD
The effective yield is calculated by compounding the unannualized base period
return by: adding 1 to the base period return; raising the sum to the 365/7th
power; and subtracting 1 from the result. The Trust's effective yield for the
seven-day period ended November 30, 1997, was 3.58%.
TAX-EQUIVALENT YIELD
The tax-equivalent yield of the Trust is calculated similarly to the yield but
is adjusted to reflect the taxable yield that the Trust would have had to earn
to equal its actual yield, assuming 39.60% tax rate (the maximum effective
federal rate for individuals) and assuming that the income is 100% tax exempt.
The Trust's tax-equivalent yield for the seven-day period ended November 30,
1997, was 5.81%.
TAX-EQUIVALENCY TABLE
A tax-equivalency table may be used in advertising and sales literature. The
interest earned by the Municipal Securities in the Trust's portfolio generally
remains free from federal regular income tax,* and is often free from state and
local taxes as well. As the table below indicates, a "tax-free" investment can
be an attractive choice for investors, particularly in times of narrow spreads
between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1998
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME
TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $42,351- $102,301- $155,951- OVER
RETURN 42,350 102,300 155,950 278,450 $278,450
SINGLE $1- $25,351- $61,401- $128,101- OVER
RETURN 25,350 61,400 128,100 278,450 $278,450
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT 1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48% 2.00% 2.35% 2.78% 2.90% 3.13% 3.31% 2.50%
2.94% 3.47% 3.62% 3.91% 4.14% 3.00% 3.53% 4.17% 4.35% 4.69% 4.97% 3.50% 4.12%
4.86% 5.07% 5.47% 5.79% 4.00% 4.71% 5.56% 5.80% 6.25% 6.62% 4.50% 5.29% 6.25%
6.52% 7.03% 7.45% 5.00% 5.88% 6.94% 7.25% 7.81% 8.28% 5.50% 6.47% 7.64% 7.97%
8.59% 9.11% 6.00% 7.06% 8.33% 8.70% 9.38% 9.93% 6.50% 7.65% 9.03% 9.42% 10.16%
10.76% 7.00% 8.24% 9.72% 10.14% 10.94% 11.59% 7.50% 8.82% 10.42% 10.87% 11.72%
12.42% 8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
Note: The maximum marginal tax rate for each bracket was used
in calculating the taxable yield equivalent.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Trust.
* Some portion of the Trust's income may be subject to the federal alternative
minimum tax and state and local taxes.
TOTAL RETURN
Average annual total return 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 net asset value 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, adjusted over the period by any additional shares, assuming the
monthly reinvestment of all dividends and distributions.
The Trust's average annual total returns for the one-, five-, and ten-year
periods ended November 30, 1997, were 3.31%, 2.93%, and 3.85%, respectively.
PERFORMANCE COMPARISONS
Investors may use financial publications and/or indices to obtain a more
complete view of the Trust'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 Trust uses in advertising may include:
* LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
based on total return, which assumes the reinvestment of all income
dividends and capital gains distributions, if any.
* IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of money
market funds weekly. Donoghue's Money Market Insight publication reports
monthly and 12-month-to-date investment results for the same money funds.
* MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day effective yield.
Advertising and other promotional literature may include charts, graphs, and
other illustrations using the Trust's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Trust can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by portfolio managers and their views and analysis on how such
developments could affect the funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making --structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders
dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
In the money market sector, Federated Investors gained prominence in the mutual
fund industry in 1974 with the creation of the first institutional money market
fund. Simultaneously, the company pioneered the use of the amortized cost method
of accounting for valuing shares of money market funds, a principal means used
by money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1997, Federated Investors managed more than $63.1 billion in assets across 51
money market funds, including 17 government, 12 prime, and 22 municipal with
assets approximating $29.7 billion, $22.5 billion, and $10.9 billion,
respectively.
J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high-yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed-income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global
portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
* Source: Investment Company Institute
Institutional Clients
Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of applications, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwidewe have over 2,200 broker/dealer and bank broker/dealer relationships
across the countrysupported by more wholesalers than any other mutual fund
distributor. Federated's service to financial professionals and institutions has
earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President, Federated
Securities Corp.
APPENDIX
STANDARD & POOR'S SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A Standard & Poor's (S&P) note rating reflects the liquidity concerns and market
access risks unique to notes.
SP-1Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
sign (+) designation.
SP-2Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a variable rate demand feature. The first rating (long-term rating)
addresses the likelihood of repayment of principal and interest when due, and
the second rating (short-term rating) describes the demand characteristics.
Several examples are AAA/A-l+, AA/A-I+, A/A-1. (The definitions for the
long-term and the short-term ratings are provided below.)
COMMERCIAL PAPER (CP) RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
LONG-TERM DEBT RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rate AA has a very strong capacity to pay interest and repay principal
and differs from the highest 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 effects of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC., SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's Investor Service, Inc. (Moody's) short-term ratings are designated
Moody's Investment Grade (MIG or VMIG) (see below). The purpose of the MIG or
VMIG ratings is to provide investors with a simple system by which the relative
investment qualities of short-term obligations may be evaluated.
MIG1--This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated broad
based access to the market for refinancing.
MIG2--This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. In this case, two ratings are usually assigned, (for example,
Aaa/VMIG-1); the first representing an evaluation of the degree of risk
associated with scheduled principal and interest payments, and the second
representing an evaluation of the degree of risk associated with the demand
feature. The VMIG rating can be assigned a 1 or 2 designation using the same
definitions described above for the MIG rating.
COMMERCIAL PAPER (CP) RATINGS
P-1--Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structure with moderate reliance on debt
and ample asset protection, broad margins in earning coverage of fixed financial
charges and high internal cash generation, well-established access to a range of
financial markets and assured sources of alternate liquidity.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
LONG-TERM DEBT 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.
NR--Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.
NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AAA by S&P or Aaa by Moody's.
NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AA by S&P or Aa by Moody's.
NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt rated
A by S&P or Moody's.
FITCH INVESTORS SERVICE, L.P. SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment, only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
