[LOGO] FEDERATED INVESTORS
Government
Income
Securities, Inc.
9th Semi-Annual Report
August 31, 1995
Established 1986
President's Message
Dear Fellow Shareholder:
I am pleased to present the Government Income Securities, Inc. Semi-Annual
Report for the period March 1, 1995 to August 31, 1995. The report contains an
interview with the fund's portfolio manager, Kathy Foody-Malus, Vice President
of Federated Advisers. Following the interview, you will find the fund's
Financial Statements and a complete listing of the fund's investments in U.S.
government securities.
On August 31, 1995, the fund's assets were $2.4 billion. On March 1, 1995, the
fund's per share net asset value was $8.55 per share and on August 31, 1995,
the net asset value per share was $8.73. Shareholders received dividends of
$0.31 per share totaling $88.9 million. The share value increased 2.11%. Adding
back the dividends, the total return was 3.67% for the six-month period.*
On July 6, 1995, Alan Greenspan, Chairman of the Federal Reserve Board, lowered
short-term interest rates by 0.25% to 5.75%. This occurred after the Federal
Reserve Board had raised interest rates seven times in the previous 12 months a
most welcome event. Just as the previous interest rate increases depressed bond
prices, this modest interest rate reduction caused bond prices to increase
across the U.S. government bond market.
The present level of U.S. government bond prices reflect attractive investment
value and returns a buyer's market. Our outlook for the remainder of 1995 and
1996 is encouraging (i.e. good for mortgage-backed security issues selected for
the Government Income Securities, Inc. portfolio).
The fund's managers invest primarily in U.S. government mortgage-backed
securities. These securities offer high current income, and mortgage-backed
securities offer attractive yield spreads over Treasury bonds. The fund's
managers are confident in their neutral position: the fund's average duration
is 4.6 years, and the average coupon is 8.37%, the fund's 30-day distribution
rate was 7.16% as of August 31, 1995, and the 30-day SEC yield as of August 31,
1995, was 6.51%* based on the offering price.** The total returns as of August
31, 1995, for the fund, were 6.92% for one year, 7.12% for five years, and
7.43% since inception on April 4, 1986 based on offering price.*
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that when shares are redeemed, they may be
worth more or less than the original cost.
** Distribution rate reflects actual distribution made to shareholders. It is
calculated by dividing the monthly annualized dividend plus short-term
capital gains, if any, by the average 30-day offering price. Current net
yield is calculated by dividing the net investment income per share for the
prior 30 days by the maximum offering price per share on that date.
The breakdown of the fund's portfolio as of August 31, 1995 was:
58% Government National Mortgage Association (GNMA) $1.703 billion
9% Federal National Mortgage Association (FNMA) $276.8 million
11% Treasury Notes $327.4 million
4% Federal Home Loan Mortgage Corporation $121.4 million
18% Repurchase Agreements $526.2 million
I urge you to read the interview with Kathy Foody-Malus as she gives you her
views on today's interest rate environment and how your fund is positioned.
Over the last six, twelve, and eighteen months, the fund's managers have held
to their belief that it is prudent to invest in mortgage-backed securities for
high current income. These mortgage-backed securities are pre-selected for
their attractive yields over the U.S. Treasury issues.
Thank you for your continued support of Government Income Securities, Inc. If
you are in a position to add money to your account, I urge you to consider
doing so as you are buying shares with attractive yield potential. If you have
any questions or comments, please do not hesitate to write.
Very sincerely yours,
Richard B. Fisher
President
October 16, 1995
Investment Review
Where does Government Income Securities, Inc. fit into an investor's
portfolio?
The fund is designed for individuals and institutions seeking ownership of a
professionally managed portfolio of U.S. government securities. Its main
emphasis is current income with total assets allocated primarily to
mortgage-backed securities and non-callable U.S. Treasurys.
What are the fund's vital statistics and investment objective?
As of August 31, 1995, total net assets were $2.4 billion and the average 30-day
net yield as calculated under SEC guidelines was 6.51% based upon the offering
price of $8.82.* The fund's net total return for the twelve months ended August
31, 1995 was 9.16%* compared to 9.22% for the Lipper Mortgage Fund Average. The
fund is rated AAAf,** the highest mutual fund credit rating of Standard & Poor's
Ratings Group, and will continue to pursue its objective of providing monthly
cash flow and daily liquidity while seeking competitive yields.
Can you comment on the interest rate environment over the six-month period?
From March 1, 1995 to August 31, 1995, interest rates declined across the entire
yield curve in response to weaker economic news such as the industrial sector
data via new factory orders, and the purchasing manager's index.
Offsetting the weakness in the industrial sector was the employment picture,
which showed much stronger monthly employment data as well as weekly initial
claims. The critical key to the U.S. economy remains the consumer. For example,
the recent housing rebound reflects the lure of lower interest rates. However,
given the late stage of the business cycle, the odds are against housing
continuing to remain strong.
Although economic data has been quite mixed, the U.S. Treasury market during
this period has chosen to focus on the economic data that has shown signs of a
weakening economy.
* Performance quoted represents past performance. Investment return and
principal will fluctuate, so that an investor's shares, when redeemed, may
be worth more or less than their origianal cost. The fund's total return
reflecting all sales charges for this period was 6.92%.
** This rating is obtained after Standard & Poor's Ratings Group evaluates a
number of factors, including credit quality, market price exposure, and
management. They monitor fluctuating portfolios monthly for developments
that could cause changes in ratings.
How did investors respond to this, and how did mortgage-backed securities
ultimately perform ?
Mortgage securities performed well relative to U.S. Treasurys in the first
quarter of 1995, and then underperformed their U.S. Treasury counterparts
during the second quarter. With the U.S. Treasury market rallying during this
time period, spreads on mortgage securities were widening because of an
increase in volatility, heightened prepayment fears, and investor selling of
mortgage securities in an attempt to keep positively convex securities in their
portfolios. However, as the third quarter started, the risk return profile in
mortgages shifted in their favor. From a portfolio manager's point of view, it
is a "hands on" job every day.
Performance in the mortgage market going forward will continue to be driven
strongly by market direction.
U.S. Treasury Bonds currently represent approximately 15% of the fund's assets.
Why?
This Treasury position acts as a hedge against mortgage prepayments and helps
cushion overall performance by adding predictable cash flows. Current investment
strategy emphasizes a diversified range of coupons averaging 8.37% and offering
a weighted average effective duration of 3.7 years. The fund's total portfolio
will have price volatility similar to an intermediate-term government security
(i.e. 3-7 years).
What's your outlook for mortgage backed securities?
Throughout 1995, interest rate volatility has been the driving force in the
mortgage market. Over the next six months, barring a major interest rate rally
which Federated does not anticipate, the mortgage market should perform well
Interest rate volatility has been on the decline, and this trend should
continue. The mortgage market should benefit from lower levels of mortgage
originations coupled with attractive yields which will attract investor demand
How are you structuring the portfolio to reflect this outlook?
The current structure of the portfolio reflects a neutral duration strategy.
With the mortgage to U.S. Treasury relationship having been very market
directional, the bias has been to favor current coupon mortgage securities and
U.S. Treasurys in the ten-year area of the yield curve. Again the fund's average
maturity is only 6.8 years and the fund's gross yield is 8.12%.
Portfolio structure favors an overweighted position in mortgage-backed
securities as they are expected to provide good long term value versus other
fixed-income assets.
Two Ways You May Seek to Invest for Success in
Government Income Securities, Inc.
Initial Investment:
If you had made an initial investment of $10,000 in Government Income
Securities, Inc. on April 4, 1986, reinvested dividends and capital gains, and
didn't redeem any shares, your account would have been worth $19,628 on August
31, 1995. You would have earned a 7.43%* average annual total return for the
9-year investment life span.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of September 30, 1995, the fund's average annual one-year, five-year and
since inception (4/4/86) total returns were 9.05%, 7.15%, and 7.47%,
respectively.
[GRAPH GOES HERE]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1% sales
charge and 1% contingent deferred sales charge prior to 48 months. Data quoted
represents past performance and does not guarantee future results. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Government Income Securities, Inc.
One Step at a Time:
$1,000 invested each year for 9 years (reinvesting all dividends and capital
gains) grew to $14,387.
With this approach, the key is consistency.
If you had started investing $1,000 annually in Government Income Securities
Inc. on April 4, 1986, reinvested your dividends and capital gains and didn't
redeem any shares, you would have invested only $10,000, but your account would
have reached a total value of $14,387* by August 31, 1995. You would have earned
an average annual total return of 7.25%.
A practical investment plan helps you pursue long-term performance from U.S.
government securities. Through systematic investing, you buy shares on a regular
basis and reinvest all earnings. An investment plan works for you when you
invest only $1,000 annually. You can take it one step at a time. Put time and
compounding to work!
[GRAPH GOES HERE]
* No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at
various prices, investors can purchase more shares at lower prices, and all
accumulated shares have the ability to pay income to the investor. Because
such a plan involves continuous investment, regardless of changing price
levels, the investor should consider whether or not to continue purchases
through periods of low price levels.
Government Income Securities, Inc.
Hypothetical Investor Profile: Investing for Current Income
Nine years ago, in April 1986, Anne and Denny Laughlin, an imaginary working
couple with no children, had to decide how to invest a $100,000 inheritance from
her late father's estate. They chose Government Income Securities, Inc. because
it invests in government securities which traditionally are some of the safest,
most credit-worthy securities issued in America.
They like the way they can use their GISI account for an occasional
extravagance like the $50,000 Jaguar without touching their original principal.
- -
The Laughlin's account totaled $196,278 as of 8/31/95 for a total return of
7.43%.*
[GRAPH GOES HERE]
* This hypothetical scenario is provided for illustrative purposes only and does
not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
Government Income Securities, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------ ----------------
LONG-TERM OBLIGATIONS--100.2%
- ----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--5.0%
------------------------------------------------------------------------------
$ 399,036 11.50%, 8/1/2013 $ 436,442
------------------------------------------------------------------------------
4,168,542 11.00%, 1/1/2001-7/1/2019 4,563,016
------------------------------------------------------------------------------
26,329,823 10.50%, 7/1/2004-12/1/2020 28,594,175
------------------------------------------------------------------------------
83,876,397 9.00%, 8/1/2004-5/1/2010 87,778,161
------------------------------------------------------------------------------ ----------------
Total 121,371,794
------------------------------------------------------------------------------ ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--11.4%
------------------------------------------------------------------------------
6,228,906 12.25%, 12/1/2010-2/1/2012 7,005,464
------------------------------------------------------------------------------
3,005,800 11.50%, 11/1/2015 3,352,368
------------------------------------------------------------------------------
42,290,664 11.00%, 9/1/2010-5/1/2023 46,862,708
------------------------------------------------------------------------------
1,707,991 10.50%, 9/1/2004 1,800,837
------------------------------------------------------------------------------
759,562 10.00%, 2/1/2004 798,952
------------------------------------------------------------------------------
9,357,322 9.00%, 5/1/2010 9,792,905
------------------------------------------------------------------------------
25,000,000 (a) 7.50%, 8/1/2025 25,085,500
------------------------------------------------------------------------------
]15,299,999 7.00%, 7/1/2025-8/1/2025 15,041,582
------------------------------------------------------------------------------
115,000,000 (a) 7.00%, 8/1/2002-8/1/2025 114,769,950
------------------------------------------------------------------------------
28,200,652 6.50%, 6/1/2009 27,777,360
------------------------------------------------------------------------------
25,000,000 (a) 6.00%, 8/1/2025 24,484,000
------------------------------------------------------------------------------ ----------------
Total 276,771,626
------------------------------------------------------------------------------ ----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--70.3%
------------------------------------------------------------------------------
11,261,186 12.50%, 4/15/2010-9/20/2015 12,877,698
------------------------------------------------------------------------------
32,403,274 12.00%, 5/15/2011-4/20/2016 36,656,403
------------------------------------------------------------------------------
43,099,902 11.50%, 3/15/2010-3/20/2020 48,252,231
------------------------------------------------------------------------------
27,103,788 11.00%, 8/20/2009-5/15/2020 29,687,907
------------------------------------------------------------------------------
36,277,270 10.50%, 11/15/2015-9/15/2020 39,930,419
------------------------------------------------------------------------------
148,304,589 10.00%, 3/15/2016-1/15/2021 161,373,650
------------------------------------------------------------------------------
210,162,841 9.50%, 4/15/2016-2/15/2022 224,549,385
------------------------------------------------------------------------------
</TABLE>
Government Income Securities, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
-------------- ------------------------------------------------------------------------------ ----------------
LONG-TERM OBLIGATIONS--CONTINUED
----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--CONTINUED
------------------------------------------------------------------------------
$ 207,664,626 9.00%, 2/15/2009-10/15/2021 $ 219,306,162
------------------------------------------------------------------------------
172,552,333 8.50%, 1/15/2017-1/15/2025 179,427,326
------------------------------------------------------------------------------
210,291,746 8.00%, 8/15/2022-8/15/2025 215,662,713
------------------------------------------------------------------------------
30,000,000 (a) 8.00%, 8/1/2025 30,759,000
------------------------------------------------------------------------------
104,013,721 7.50%, 6/15/2023-8/15/2025 104,629,482
------------------------------------------------------------------------------
135,000,000 (a) 7.50%, 8/1/2025 135,799,200
------------------------------------------------------------------------------
138,963,044 7.00%, 8/15/2015-8/15/2025 136,659,035
------------------------------------------------------------------------------
130,000,000 (a) 7.00%, 8/1/2025 127,844,600
------------------------------------------------------------------------------ ----------------
Total 1,703,415,211
------------------------------------------------------------------------------ ----------------
UNITED STATES TREASURY NOTES--13.5%
------------------------------------------------------------------------------
75,000,000 7.875%, 11/15/2004 82,939,500
------------------------------------------------------------------------------
131,000,000 7.50%, 11/15/2001-2/15/2005 141,410,660
------------------------------------------------------------------------------
50,000,000 7.25%, 5/15/2004 53,086,500
------------------------------------------------------------------------------
39,000,000 6.75%, 6/30/1999 39,936,390
------------------------------------------------------------------------------
10,000,000 6.25%, 2/15/2003 10,003,600
------------------------------------------------------------------------------ ----------------
Total 327,376,650
------------------------------------------------------------------------------ ----------------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $2,406,050,852) 2,428,935,281
------------------------------------------------------------------------------ ----------------
(B) REPURCHASE AGREEMENTS--21.7%
- ----------------------------------------------------------------------------------------------
70,000,000 Harris, Nesbitt, Thomson Securities, Inc., 5.80%, dated
8/31/1995, due 9/1/1995 70,000,000
------------------------------------------------------------------------------
5,245,000 J.P. Morgan Securities, Inc., 5.83%, dated 8/31/1995 due 9/1/1995 5,245,000
------------------------------------------------------------------------------
60,000,000 (c) CS First Boston Corp., 5.76%, dated 8/14/1995, due 9/14/1995 60,000,000
------------------------------------------------------------------------------
50,000,000 (c) CS First Boston Corp., 5.76%, dated 8/17/1995, due 9/18/1995 50,000,000
------------------------------------------------------------------------------
229,000,000 (c) Goldman, Sachs & Co., 5.76%, dated 8/21/1995, due 9/19/1995 229,000,000
------------------------------------------------------------------------------
32,000,000 (c) Morgan Stanley & Co., Inc., 5.75%, dated 8/21/1995,
due 9/19/1995 32,000,000
------------------------------------------------------------------------------
$ 80,000,000 (c) Morgan Stanley & Co., Inc., 5.75%, dated 8/23/1995,
due 9/20/1995 $ 80,000,000
------------------------------------------------------------------------------ ----------------
</TABLE>
Government Income Securities, Inc.
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- -------------- ------------------------------------------------------------------------------ ----------------
(B) REPURCHASE AGREEMENTS--CONTINUED
- ----------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 526,245,000
------------------------------------------------------------------------------ ----------------
TOTAL INVESTMENTS (IDENTIFIED COST $2,932,295,852)(D) $ 2,955,180,281
------------------------------------------------------------------------------ ----------------
</TABLE>
(a) These securities are subject to dollar roll transactions.
(b) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements is through
participation in joint account with other Federated funds.
(c) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if the creditworthiness of the issuer is
downgraded.
(d) The cost of investments for federal tax purposes amounts to $2,932,295,852.
The unrealized appreciation of investments on a federal tax basis amounts to
$22,884,429 which is comprised of $35,535,117 appreciation and $12,650,688
depreciation at August 31, 1995.
Note: The categories of investments are shown as a percentage of net assets
($2,423,813,458) at August 31, 1995.
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Statement of Assets and Liabilities
----------------------------------------------------------------------------
August 31, 1995
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Investments in repurchase agreements $ 526,245,000
- -----------------------------------------------------------------------------
Investments in securities 2,428,935,281
- ----------------------------------------------------------------------------- ----------------
Total investments in securities, at value (identified
and tax cost $2,932,295,852) $ 2,955,180,281
- -----------------------------------------------------------------------------------------------
Cash 3,721
- -----------------------------------------------------------------------------------------------
Income receivable 17,418,775
- -----------------------------------------------------------------------------------------------
Receivable for investments sold 28,099,041
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 382,098
- ----------------------------------------------------------------------------------------------- ----------------
Total assets $ 3,001,083,916
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------------
Payable for investments purchased 110,144,813
- -----------------------------------------------------------------------------
Payable for shares redeemed 3,537,179
- -----------------------------------------------------------------------------
Income distribution payable 7,260,895
- -----------------------------------------------------------------------------
Payable for dollar roll transactions 455,769,457
- -----------------------------------------------------------------------------
Accrued expenses 558,114
- ----------------------------------------------------------------------------- ----------------
Total liabilities 577,270,458
----------------------------------------------------------------------------------------------- ----------------
NET ASSETS FOR 277,486,793 SHARES OUTSTANDING $ 2,423,813,458
----------------------------------------------------------------------------------------------- ----------------
NET ASSETS CONSIST OF:
-----------------------------------------------------------------------------------------------
Paid in capital $ 2,835,656,528
-----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 22,884,429
-----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (439,195,068)
-----------------------------------------------------------------------------------------------
Undistributed net investment income 4,467,569
----------------------------------------------------------------------------------------------- ----------------
Total Net Assets $ 2,423,813,458
----------------------------------------------------------------------------------------------- ----------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
-----------------------------------------------------------------------------------------------
NET ASSET VALUE Per Share ($2,423,813,458 / 277,486,793 shares outstanding) $8.73
----------------------------------------------------------------------------------------------- ----------------
Offering Price Per Share (100/99.00 of $8.73)* $8.82
----------------------------------------------------------------------------------------------- ----------------
Redemption Proceeds Per Share (99.00/100 of $8.73)** $8.64
----------------------------------------------------------------------------------------------- ----------------
</TABLE>
*See "What Shares Cost" in the Prospectus.
**See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Statement of Operations
- --------------------------------------------------------------------------------
Six Months Ended August 31, 1995
(unaudited)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
-------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $14,139,259) $ 102,080,570
-------------------------------------------------------------------------------------------------
EXPENSES:
-------------------------------------------------------------------------------------------------
Investment advisory fee $ 9,390,373
----------------------------------------------------------------------------------
Administrative personnel and services fee 947,802
----------------------------------------------------------------------------------
Custodian fees 179,060
----------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 934,332
----------------------------------------------------------------------------------
Directors'/Trustees' fees 17,664
----------------------------------------------------------------------------------
Auditing fees 8,832
----------------------------------------------------------------------------------
Legal fees 10,352
----------------------------------------------------------------------------------
Portfolio accounting fees 86,391
----------------------------------------------------------------------------------
Shareholder services fee 3,130,124
----------------------------------------------------------------------------------
Share registration costs 38,088
----------------------------------------------------------------------------------
Printing and postage 155,848
----------------------------------------------------------------------------------
Insurance premiums 26,128
----------------------------------------------------------------------------------
Taxes 276,832
- ----------------------------------------------------------------------------------
Miscellaneous 10,120
- ---------------------------------------------------------------------------------- -------------
Total expenses 15,211,946
- ----------------------------------------------------------------------------------
Waivers and reimbursements--
- ----------------------------------------------------------------------------------
Waiver of investment advisory fee $ (3,146,777)
- -------------------------------------------------------------------
Waiver of shareholder services fee (25,041)
- ------------------------------------------------------------------- -------------
Total waivers (3,171,818)
- ---------------------------------------------------------------------------------- -------------
Net expenses 12,040,128
- ------------------------------------------------------------------------------------------------- --------------
Net investment income 90,040,442
- ------------------------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------------------------------------
Net realized gain on investments 11,903,629
- -------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 42,295,774
- ------------------------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments 54,199,403
- ------------------------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 144,239,845
- ------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Statement of Changes in Net Assets
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, 1995 FEBRUARY 28, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------
Net investment income $ 90,040,442 $ 215,756,944
- -------------------------------------------------------------------
Net realized gain (loss) on investments ($11,903,629 net gain and
$192,317,284 net loss, respectively, as computed for federal tax
purposes) 11,903,629 (192,595,526)
- -------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 42,295,774 3,066,135
- ------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets resulting from operations 144,239,845 26,227,553
- ------------------------------------------------------------------- ---------------------- ---------------------
NET EQUALIZATION CREDITS (DEBITS)-- (919,551) (2,212,810)
- ------------------------------------------------------------------- ---------------------- ---------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------------------
Distributions from net investment income (88,949,379) (209,071,289)
- ------------------------------------------------------------------- ---------------------- ---------------------
SHARE TRANSACTIONS--
- -------------------------------------------------------------------
Proceeds from sale of shares 31,885,781 140,367,951
- -------------------------------------------------------------------
Net asset value of shares issued to shareholders
in payment of distributions declared 31,713,198 63,719,987
- -------------------------------------------------------------------
Cost of shares redeemed (232,169,710) (1,023,096,149)
------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets resulting from
share transactions (168,570,731) (819,008,211)
------------------------------------------------------------------- ---------------------- ---------------------
Change in net assets (114,199,816) (1,004,064,757)
-------------------------------------------------------------------
NET ASSETS:
-------------------------------------------------------------------
Beginning of period 2,538,013,274 3,542,078,031
------------------------------------------------------------------- ---------------------- ---------------------
End of period (including undistributed net investment income of
$4,467,569 and $4,296,058, respectively) $ 2,423,813,458 $ 2,538,013,274
------------------------------------------------------------------- ---------------------- ---------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Statement of Cash Flows
- --------------------------------------------------------------------------------
Six Months Ended August 31, 1995
(unaudited)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------
Investment income received $ 133,046,779
-----------------------------------------------------------------------------------------------
Payment of operating expenses (12,358,190)
-----------------------------------------------------------------------------------------------
Proceeds from sales and maturities of investments 2,072,414,098
-----------------------------------------------------------------------------------------------
Purchase of investments (1,942,973,520)
-----------------------------------------------------------------------------------------------
Net purchase of short-term investments (70,140,000)
----------------------------------------------------------------------------------------------- -----------------
Cash provided by operating activities 179,989,167
----------------------------------------------------------------------------------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
-----------------------------------------------------------------------------------------------
Net proceeds from share activity (201,412,346)
-----------------------------------------------------------------------------------------------
Increase in payable for dollar roll transactions 82,007,658
-----------------------------------------------------------------------------------------------
Distributions paid (60,583,632)
----------------------------------------------------------------------------------------------- -----------------
Cash used for financing activities (179,988,320)
----------------------------------------------------------------------------------------------- -----------------
Increase in cash 847
-----------------------------------------------------------------------------------------------
Cash at beginning of period 2,874
----------------------------------------------------------------------------------------------- -----------------
Cash at end of period $ 3,721
----------------------------------------------------------------------------------------------- -----------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO CASH PROVIDED BY OPERATING
ACTIVITIES:
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 144,239,845
- -----------------------------------------------------------------------------------------------
Net decrease in investments 22,044,203
- -----------------------------------------------------------------------------------------------
Increase in income receivable (203,459)
- -----------------------------------------------------------------------------------------------
Decrease in receivable for investments sold 36,981,306
- -----------------------------------------------------------------------------------------------
Decrease in payable for investments purchased (22,754,666)
- -----------------------------------------------------------------------------------------------
Decrease in accrued expenses (318,062)
- ----------------------------------------------------------------------------------------------- -----------------
Cash provided by operating activities $ 179,989,167
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Financial Highlights
----------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1995 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49 $ 9.76
- ----------------------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------
Net investment income 0.31 0.63 0.68 0.79 0.83 0.87 0.87 0.86 0.88
- ----------------------
Net realized and
unrealized gain
(loss) on investments 0.18 (0.46) (0.44) (0.05) 0.17 0.15 0.24 (0.53) (0.27)
- ---------------------- ----- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.49 0.17 0.24 0.74 1.00 1.02 1.11 0.33 0.61
- ----------------------
LESS DISTRIBUTIONS
- ----------------------
Distributions from
net
investment income (0.31) (0.62) (0.68) (0.78) (0.83) (0.87) (0.91) (0.82) (0.88)
- ----------------------
Distributions in
excess of net
investment income 0.00 0.00 0.00 0.00 (0.01)(b) (0.02)(b) (0.01)(b) 0.00 0.00
- ---------------------- ----- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.31) (0.62) (0.68) (0.78) (0.84) (0.89) (0.92) (0.82) (0.88)
---------------------- ----- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value,
end of period $ 8.73 $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00 $ 9.49
---------------------- ----- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (C) 5.84% 2.11% 2.63% 8.08% 11.12% 11.63% 12.81% 3.65% 6.80%
----------------------
RATIOS TO
AVERAGE NET ASSETS
- ----------------------
Expenses 0.97%* 0.97% 0.97% 0.90% 0.92% 0.90% 0.93% 0.88% 0.81%
----------------------
Net investment income 7.17%* 7.34% 7.39% 8.27% 8.86% 9.43% 9.42% 9.33% 9.47%
----------------------
Expense waiver/
reimbursement (d) 0.25%* 0.23% 0.19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
----------------------
SUPPLEMENTAL DATA
----------------------
Net assets, end of
period (000 omitted) 2,$423,813 $2,538,013 $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710 $1,482,030 $1,846,198
----------------------
Portfolio Turnover 70 % 143% 134% 43% 36% 37% 76% 62% 34%
----------------------
<CAPTION>
1987(A)
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.99
----------------------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------
Net investment income 0.94
- ----------------------
Net realized and
unrealized gain
(loss) on investments (0.23)
- ---------------------- -----
Total from investment
operations 0.71
- ----------------------
LESS DISTRIBUTIONS
- ----------------------
Distributions from
net
investment income (0.94)
- ----------------------
Distributions in
excess of net
investment income 0.00
- ---------------------- -----
TOTAL DISTRIBUTIONS (0.94)
- ---------------------- -----
Net asset value,
end of period $ 9.76
- ---------------------- -----
TOTAL RETURN (C) 6.76%
- ----------------------
RATIOS TO
AVERAGE NET ASSETS
- ----------------------
Expenses 0.95%*
- ----------------------
Net investment income 9.18%*
----------------------
Expense waiver/
reimbursement (d) 0.00%
----------------------
SUPPLEMENTAL DATA
----------------------
Net assets, end of
period (000 omitted) 3$,183,612
----------------------
Portfolio Turnover 208 %
----------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 4, 1986 (date of initial
public investment) to February 28, 1987.
(b) Distributions in excess of net investment income for the years ended
February 29, 1992, February 28, 1991, and 1990 were a result of certain book
and tax timing differences. These distributions do not represent a return of
capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Government Income Securities, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
August 31, 1995
(unaudited)
(1) ORGANIZATION
Government Income Securities, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly
the Fund could receive less than the repurchase price on the sale of
collateral securities.
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 Fund'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 August 31, 1995, the Fund, for federal tax purposes, had a capital loss
carryforward of $404,873,973, which will reduce the Fund'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 Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
1996 $68,203,141
1997 $35,933,841
1998 $13,325,628
1999 $147,841
2000 $3,842,806
2001 $7,365,127
2002 $83,738,305
2003 $192,317,284
</TABLE>
Additionally, net capital losses of $46,208,535 attributable to security
transactions incurred after October 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund 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.
OPTIONS CONTRACTS--The Fund may write option contracts. A written option
obligates the Fund to deliver a call, or to receive a put, equal to the
contract amount upon exercise by the holder of the option. The value of the
option contract is recorded as a liability and unrealized gain or loss is
measured by the difference between the current value and the premium
received. For the period ended August 31, 1995, the Fund had no options
outstanding.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in
which the Fund loans mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.
STATEMENT OF CASH FLOWS--Information on financial transactions which have
been settled through the receipt or disbursement of cash is presented in
the Fund's Statement of Cash Flows. The cash amount shown in the Statement
of Cash Flows is the amount reported as cash in the Fund's Statement of
Assets and Liabilities and represents cash on hand in its custodian
bank account and does not include any short-term investments at
August 31, 1995.
OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK
At August 31, 1995, there were 2,000,000,000 shares of $0.01 par value capital
stock authorized Transactions in shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1995 FEBRUARY 28, 1995
<S> <C> <C>
Shares sold 3,689,932 16,366,043
- ----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 3,662,777 6,992,784
- ----------------------------------------------------------------------
Shares redeemed (26,855,953) (119,737,988)
- ---------------------------------------------------------------------- ------------------- ---------------------
Net change resulting from share transactions (19,503,244) (96,379,161)
- ---------------------------------------------------------------------- ------------------- ---------------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser, (the
"Adviser"), receives for its services an annual investment advisory fee equal to
.75 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive any portion of its fee. The Adviser can modify or terminate this
voluntary waiver and at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This fee 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 Fund will pay FSS up to .25 of
1% of the average daily net assets of the Fund for the period. This fee is to
obtain certain services for shareholders and to maintain shareholder accounts.
FSS may voluntarily choose to waive a portion of this fee. FSS can modify or
terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AGENT FEES--Federated Services Company ("FServ") serves as transfer and
dividend disbursing agent for the Fund. This fee is based on the size, type, and
number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Directors of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1995, were as follows:
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------
PURCHASES $ 1,889,049,186
------------------------------------------------------------------------------------------------ ----------------
SALES $ 1,718,875,516
------------------------------------------------------------------------------------------------ ----------------
</TABLE>
Directors Officers
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Richard B. Fisher
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Richard B. Fisher Edward C. Gonzales
Edward L. Flaherty, Jr. Executive Vice President
Peter E. Madden John W. McGonigle
Gregor F. Meyer Executive Vice President and Secretary
John E. Murray, Jr. David M. Taylor
Wesley W. Posvar Treasurer
Marjorie P. Smuts Charles H. Field
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not 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 mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus, which contains facts
concerning its objective and policies, management fees, expenses, and
other information.
[LOGO]
FEDERATED SECURITIES CORP.
Distributor
A Subsidiary of Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Cusip 383733102
8092706 (10/95)
APPENDIX
A. The graphic representation here displayed consists of a boxed legend in
upper left quadrant indicating the components of the corresponding mountain
chart. The lighter shaded portion represents the value of reinvested income
the Fund. The dark shaded portion reflects the principal value of a $10,000
investment in Government Income Securities, Inc. (the "Fund"). The color-coded
mountain chart is a visual representation of the narrative text above it, which
shows that an initial investment of $10,000 in the Fund on April 4, 1986, would
have grown to $19,628 on August 31, 1995. The "x" axis reflects computation
periods from April 4, 1986 (the Fund's inception date) to August 31, 1995. The
right margin of the chart reflects the ending value of a hypothetical investment
of $10,000 in the Fund measured in increments of $5,000 ranging from $0 to
$20,000.
B. The graphic representation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The lighter shaded portion represents the value of reinvested income for
the Fund. The dark shaded portion reflects the principal value of annual
$1,000 investments in the Fund. The color-coded mountain chart is a visual
representation of the narrative text beneath it, which shows that an annual
investment of $1,000 in the Fund on April 4, 1986, would grow to $14,387 on
August 31, 1995. The "x" axis reflects computation periods from April 4, 1986,
(the Fund's inception date) to August 31, 1995. The right margin of the chart
reflects the ending value of a hypothetical annual $1,000 investment in the Fund
measured in increments of $3000 ranging from $0 to $15,000.
C. The graphic representation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The lighter shaded portion represents the value of reinvested income for
the Fund. The dark shaded portion reflects the principal value of a $100,000
investment in the Fund. The color-coded mountain chart is a visual
representation of the narrative text above it, which shows that an investment of
$100,000 in the Fund in April, 1986, would grow to $196,278 on August 31, 1995.
The "x" axis reflects computation periods from April, 1986 (the Fund's inception
date) to August 31, 1995. The right margin of the chart reflects the ending
value of a hypothetical $100,000 investment in the Fund measured in increments
of $40,000 ranging from $0 to $200,00.
