[LOGO] FEDERATED INVESTORS
Since 1955
Federated
Government
Income
Securities, Inc.
11th Annual Report
February 28, 1997
Established 1986
President's Message
[PHOTO APPEARS HERE]
Dear Fellow Shareholder:
Federated Government Income Securities, Inc. was created in 1986, and has been
serving income investors for over a decade. I am pleased to present the 11th
Annual Report for the fund.
This report covers the 12-month period from March 1, 1996 through February 28,
1997. It begins with a discussion with the fund's portfolio manager, Kathy
Foody-Malus, Vice President of Federated Advisers. She offers you her views on
today's interest rate environment, fund performance and how your fund is
positioned.
Following Kathy's discussion are three additional items of shareholder
interest. First is a series of graphs that display the fund's performance of a
lump sum investment with income dividends reinvested, and the investment
results of making systematic annual investments in the fund shares with
dividends reinvested. Second is a complete listing of the fund's holdings in
U.S. government securities, mortgaged-backed securities and U.S. Treasury
bonds. Third is the publication of the fund's financial statements.
The fund's management has continued to emphasize mortgage-backed issues, for
their attractive yields and good long-term value. These mortgage-backed
securities are issued by Government National Mortgage Association, Federal
National Mortgage Corporation and Federal Home Loan Mortgage Corporation, and
more than 60% of the fund's assets were invested in those securities. These
government securities are guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities.
The fund's portfolio duration was a neutral 5.1 years, and the average coupon
of its holdings was 7.74%.
During the past 12 months, the bond market has forecasted interest rate
increases, and finally on March 25, 1997, Alan Greenspan, Chairman of the
Federal Reserve Board, raised interest rates 0.25%. Many people believe Mr.
Greenspan will again raise interest rates in May. His moves are in anticipation
of rising inflation; however, his actions have certainly been reflected in both
the stock and bond markets, negatively.
For over one year, we have had increased volatility in both the stock and bond
markets, anticipating no Federal Reserve Board's action of increasing rates.
Historically, raising interest rates affects business by increasing the cost of
borrowing money and impacting earnings of corporations. Long term, we believe
Mr. Greenspan's actions are good for the bond market because a slowdown in the
economy, brought on by the high cost of money, would cause business to be more
conscientious of their expansion plans and inventories. They are hesitant to
borrow money because the price of money could decline and bond prices may
increase.
Over the 12-month reporting period, due largely to the fund's mortgage-backed
securities holdings, each share class outperformed the overall Treasury market
as well as the average U.S. government bond fund. Individual share class total
return performance and income distributions follow.*
<TABLE>
<CAPTION>
Income Share Price
Total Return Distributions Movement
<S> <C> <C> <C>
Class A Shares 3.34% $0.324 $8.63 to $8.59
Class B Shares 3.00% $0.296 $8.63 to $8.59
Class C Shares 3.02% $0.297 $8.63 to $8.59
Class F Shares 4.81% $0.564 $8.75 to $8.59
</TABLE>
Please note that in addition to Class F Shares, this report also contains
financial information about Class A Shares, Class B Shares and Class C Shares,
which were added to the fund on August 5, 1996.
Thank you for your continued participation in Federated Government Income
Securities, Inc. If you have any questions or comments, please do not hesitate
to write.
Very sincerely yours,
/s/ Richard B. Fisher
Richard B. Fisher
President
April 15, 1997
* Performance quoted is based on net asset value and reflects past performance.
Performance is not indicative of 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. Total returns for the
period, based on offering price, for Class A, B, C and F Shares were -1.35%,
-2.61%, 1.94% and 2.66%, respectively.
Investment Review
[PHOTO APPEARS HERE]
Kathy Foody-Malus
Vice President
Federated Advisers
Q Please comment on the market's uncertainty about the economy, and the
subsequent impact on the bond market during the 12-month period?
A The theme, due to uncertainties on inflation, rising economy and the
Federal Reserve Board's (the "Fed") actions, throughout 1996 was a trading
range environment; however, there were times when the market moved swiftly and
sharply due to shifting expectations of Fed anticipated actions. Given this
environment, the mortgage-backed securities sector was the best performing
fixed-income sector during the fiscal year of the fund. On a total rate of
return basis for the fiscal year, mortgages outperformed their U.S. Treasury
counterparts by over 200 basis points. The fundamentals and technicals in the
mortgage market were attractive during this reporting period due to the
relatively stable interest rate environment we experienced. The U.S. Treasury
market in 1996 offered lackluster returns to investors versus the market's
impressive returns in 1995 and played second fiddle to the stellar gains in the
1996 equity market. Short duration U.S. Treasuries posted slightly positive
returns while the long end of the yield curve produced negative returns.
Q How did Federated Government Income Securities, Inc. perform for
shareholders in terms of total return and income during the 12-month reporting
period ended February 28, 1997?
A For the 12-month period that ended on February 28, 1997, investors in the
fund's Class F Shares received a total net return of 4.81% based on net asset
value. Investors in Class A, B, and C Shares, which have been in operation
since August 5, 1996, received total net returns of 3.34%, 3.00%, and 3.02%,
respectively, based on net asset value.*
The fund's returns were all greater than the market overall and the average
U.S. government mutual fund. For the 12-month period, the Merrill Lynch 5-Year
and 10-Year U.S. Treasury Index returns were 3.06% and 3.08%, respectively.**
The total return for the Lipper General U.S. Government Fund Average was
3.86%.+
* Performance quoted reflects past performance. Performance is not indicative
of 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. Total returns for the period, based on offering price,
for Class A, B, C and F Shares were -1.35%, -2.61%, 1.94% and 2.66%,
respectively.
** Merrill Lynch 5-Year and 10-Year Treasury Note Indexes are comprised of the
most recently issued 5-year U.S. Treasury notes and 10-year U.S. Treasury
notes, respectively. Index returns are calculated as total returns for
periods of 1, 3, 6, and 12 months as well as year-to-date. Indexes are
unmanaged. Investments cannot be made in an index.
+ Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. These figures do not reflect sales
charges.
In terms of income, the fund's Class F Shares, which have been in operation
since 1986, paid a consistent monthly dividend stream of $0.047 during the
period for a total of $0.564 per share over the fiscal year. Class A Shares,
Class B Shares, and Class C Shares paid dividends totaling $0.324, $0.296, and
$0.297, respectively, since their inception on August 5, 1996 through February
28, 1997.
Q What were the fund's weighting in mortgage-backed and Treasury securities,
and why?
A The current structure of the Fund's assets is a neutral duration of 5.1
years versus a blend of the Lehman Brothers Government and Lehman Brothers
Mortgage Indexes.* The asset structure continues to favor an overweighted
position in mortgage-backed securities due to our belief of good long-term
value versus comparable government securities.
Our U.S. Treasury position represented about 30% of overall net assets and
provides duration and positive upside potential to the overall portfolio. As
of February 28, 1997, the portfolio composition of net assets was:
<TABLE>
<S> <C>
Government National Mortgage Association 60.6%
U.S. Treasury Obligations 30.1%
Federal National Mortgage Corporation 4.7%
Federal Home Loan Mortgage Corporation 2.6%
Repurchase Agreement 2.3%
</TABLE>
* Lehman Brothers Government Index is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or any
agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included. Lehman Brothers Mortgage-Backed Securities Index is a universe of
fixed rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corp. (FHLMC), and Federal
Notional Mortgage Association (FNMA). These indexes are unmanaged, and actual
investments cannot be made in an index.
Q What do you see ahead for the bond market through 1997?
A As anticipated by bond market participants, the Fed increased the Fed Funds
rate by a quarter of a percent on March 25th. Initial reaction was muted as
investors have reflected on the increase, however, Treasury yields have risen
due to their concerns over further potential tightenings. Our viewpoint is that
when the announcement was made regarding the rate increase, the move was taken
in light of stronger growth rather than emerging inflation pressures. Chairman
Greenspan, prior to and after the announcement, has attempted to dispel the
notion that 1997 is a repeat of 1994. The strength of the dollar combined with
the increase in Treasury yields we believe should help moderate growth moving
forward in 1997 and help to restrain inflation. Given this scenario, then there
will be no need for continuous tightening moves and the outlook for the fixed
rate mortgage market in 1997 seems favorable. The year has already started out
strongly for fixed income products that offer incremental yield pick up over
U.S. Treasury securities.
Two Ways You May Seek to Invest for Success in
Federated Government Income Securities, Inc.
Initial Investment:
If you had made an initial investment of $11,000 in the Class F Shares of
Federated Government Income Securities, Inc. on 4/4/86, reinvested dividends
and capital gains, and didn't redeem any shares, your account would have been
worth $23,523 on 2/28/97. You would have earned a 7.22%* average annual total
return for the 11-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 3/31/97, the Class F Shares' average annual one-year, five-year and
ten-year total returns were 1.78%, 4.98%, and 7.01%, respectively.
As of 3/31/97, the cumulative total returns since inception on 8/5/96 for Class
A Shares, Class B Shares and Class C Shares were -2.76%, -4.06% and 0.51%,
respectively
SEE APPENDIX A FOR GRAPIC DESCRIPTION
* 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 an investor's shares,
when redeemed, may be worth more or less than their original cost.
Federated Government Income Securities, Inc.
One Step at a Time:
$1,000 invested each year for 11 years (reinvesting all dividends and capital
gains) grew to $16,690.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class F Shares of Federated
Government Income Securities, Inc. on 4/4/86, reinvested your dividends and
capital gains and didn't redeem any shares, you would have invested only
$11,000, but your account would have reached a total value of $16,690* by
2/28/97. You would have earned an average annual total return of 6.91%.
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,
money, and compounding to work!
SEE APPENDIX B FOR GRAPHIC DESCRIPTION
* 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.
Federated Government Income Securities, Inc.
Hypothetical Investor Profile: Investing for Current Income
Eleven 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 Federated 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 account for an occasional
extravagance-like the $50,000 Jaguar they bought this August to celebrate their
10th anniversary-without touching their original principal.
The Laughlins' account totaled $213,845 as of 2/28/97 for a total return of
7.22%.*
SEE APPENDIX C FOR GRAPHIC DESCRIPTION
* 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.
Federated Government Income Securities, Inc.
Portfolio Update
The chart shows the percentage of fund assets diversified across different
types of U.S. Government securities at the end of the reporting period.
SEE APPENDIX D FOR GRAPHIC DESCRIPTION
Federated Government Income Securities, Inc.
(Class A Shares)
Growth of $10,000 Invested in Federated Government Income Securities, Inc.
(Class A Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Government Income Securities, Inc. (Class A Shares) (the "Fund") from
August 5, 1996 (start of performance) to February 28, 1997 compared to the
Salomon Brothers 15 Year Mortgage-Backed Securities Index (SB15MSI)+, the
Lipper U.S. Mortgage Funds Average (LUSMF)++, the Merrill Lynch 5 Year Treasury
Index (ML5YRT)+, the Merrill Lynch 10 Year Treasury Index (ML10YRT)+, and the
Lipper U.S. Government Funds Average (LUSGFA)++.
SEE APPENDIX E FOR GRAPHIC DESCRIPTION
TOTAL RETURN** FOR THE PERIOD ENDED FEBRUARY 28, 1997
START OF PERFORMANCE (8/5/96)(CUMULATIVE) (1.35)%
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $9,550 in the Fund after deducting
the maximum sales charge of 4.50% ($10,000 investment minus $450 sales
charge = $9,550). The Fund's performance assumes the reinvestment of all
dividends and distributions. The SB15MSI, LUSMF, ML5YRT, ML10YRT and the
LUSGFA have been adjusted to reflect reinvestment of dividends on securities
in the indices and averages.
** Total returns quoted reflect all applicable sales charges and contingent
deferred sales charges.
+ The SB15MSI, ML5YRT, and ML10YRT are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.
++ The LUSMF and LUSGFA represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling in the respective category, are not adjusted to reflect any sales
charges. However, these total returns are reported net of expenses or other
fees that the SEC requires to be reflected in a fund's performance.
Federated Government Income Securities, Inc.
(Class B Shares)
Growth of $10,000 Invested in Federated Government Income Securities, Inc.
(Class B Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Government Income Securities, Inc. (Class B Shares) (the "Fund") from
August 5, 1996 (start of performance) to February 28, 1997 compared to the
Salomon Brothers 15 Year Mortgage-Backed Securities Index (SB15MSI)+, the
Lipper U.S. Mortgage Funds Average (LUSMF)++, the Merrill Lynch 5 Year
Treasury Index (ML5YRT)+, the Merrill Lynch 10 Year Treasury Index (ML10YRT)+,
and the Lipper U.S. Government Funds Average (LUSGFA)++.
SEE APPENDIX F FOR GRAPHIC DESCRIPTION
TOTAL RETURN** FOR THE PERIOD ENDED FEBRUARY 28, 1997
START OF PERFORMANCE (8/5/96)(CUMULATIVE) (2.61)%
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects the maximum contingent deferred sales charge of 5.50% on
any redemption less than 1 year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions.
The SB15MSI, LUSMF, ML5YRT, ML10YRT and the LUSGFA have been adjusted to
reflect reinvestment of dividends on securities in the indices and averages.
** Total returns quoted reflect all applicable sales charges and contingent
deferred sales charges.
+ The SB15MSI,ML5YRT and ML10YRT are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.
++ The LUSMF and LUSGFA represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling in the respective category, and are not adjusted to reflect any
sales charges. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance.
Federated Government Income Securities, Inc.
(Class C Shares)
Growth of $10,000 Invested in Federated Government Income Securities, Inc.
(Class C Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Government Income Securities, Inc. (Class C Shares) (the "Fund") from
August 5, 1996 (start of performance) to February 28, 1997 compared to the
Salomon Brothers 15 Year Mortgage-Backed Securities Index (SB15MSI)+, the
Lipper U.S. Mortgage Funds Average (LUSMF)++, the Merrill Lynch 5 Year
Treasury Index (ML5YRT)+, the Merrill Lynch 10 Year Treasury Index (ML10YRT)+,
and the Lipper U.S. Government Funds Average (LUSGFA)++.
SEE APPENDIX G FOR GRAPHIC DESCRIPTION
TOTAL RETURN** FOR THE PERIOD ENDED FEBRUARY 28, 1997
START OF PERFORMANCE (8/5/96)(CUMULATIVE) (1.94)%
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 1.00% contingent deferred sales charge applied on any
redemption less than 1 year from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions. The SB15MSI,
LUSMF, ML5YRT, ML10YRT and the LUSGFA have been adjusted to reflect
reinvestment of dividends on securities in the indices and averages.
** Total returns quoted reflect all applicable sales charges and contingent
deferred sales charges.
+ The SB15MSI,ML5YRT and ML10YRT are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.
++ The LUSMF and LUSGFA represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling in the respective category, and are not adjusted to reflect any
sales charges. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance.
Federated Government Income Securities, Inc.
(Class F Shares)
Growth of $10,000 Invested in Federated Government Income Securities, Inc.
(Class F Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Government Income Securities, Inc. (Class F Shares) (the "Fund") from
February 28, 1987 to February 28, 1997 compared to the Salomon Brothers 15 Year
Mortgage-Backed Securities Index (SB15MSI)+, the Lipper U.S. Mortgage Funds
Average (LUSMF)++, the Merrill Lynch 5 Year Treasury Index (ML5YRT)+, the
Merrill Lynch 10 Year Treasury Index (ML10YRT)+, and the Lipper U.S. Government
Funds Average (LUSGFA)++.
SEE APPENDIX H FOR GRAPHIC DESCRIPTION
AVERAGE ANNUAL TOTAL RETURN** FOR THE PERIOD ENDED FEBRUARY 28, 1997
1 YEAR 2.66%
5 YEAR 5.23%
10 YEAR 7.18%
START OF PERFORMANCE (4/4/86) 7.20%
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 1.00% ($10,000 investment minus $100 sales
charge=$9,900). The ending value of the Fund reflects a contingent deferred
sales charge of 1.00% on any redemption less than 4 years from the purchase
date. The Fund's performance assumes the reinvestment of all dividends and
distributions. The SB15MSI, LUSMF, ML5YRT, ML10YRT and the LUSGFA have been
adjusted to reflect reinvestment of dividends on securities in the indices
and averages.
** Total returns quoted reflect all applicable sales charges and contingent
deferred sales charges.
*** For this illustration, the ML5YRT Index began performance on January 1,
1988. The index was assigned a beginning value of $10,257, the value of the
Fund on December 31, 1987.
**** For this illustration, the ML10YRT Index began performance on January 1,
1988. The index was assigned a beginning value of $10,257, the value of the
Fund on December 31, 1987.
+ The SB15MSI, ML5YRT and ML10YRT are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.
++ The LUSMF and LUSGFA represent the average of the total returns reported by
all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling in the respective category, and are not adjusted to reflect any
sales charges. However, these total returns are reported net of expenses
or other fees that the SEC requires to be reflected in a fund's
performance.
Federated Government Income Securities, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
February 28, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------------- ---------------------------------------------------------------------------- ----------------
LONG-TERM OBLIGATIONS--98.0%
- ----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--1.5%
----------------------------------------------------------------------------
<C> <S> <C>
$ 26,000,000 8.00% 3/1/2027 $ 26,528,060
---------------------------------------------------------------------------- ----------------
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--1.1%
----------------------------------------------------------------------------
27,316,811 Series 176 Class 2, (Interest Only), 6/1/2026 9,663,322
----------------------------------------------------------------------------
17,603,508 Series G48-AE, (Principal Only), 1/25/2023 10,358,608
---------------------------------------------------------------------------- ----------------
Total 20,021,930
---------------------------------------------------------------------------- ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--1.5%
----------------------------------------------------------------------------
16,262,094 8.00%, 3/1/2023 16,627,991
----------------------------------------------------------------------------
11,126,045 6.50%, 8/12/2010-4/1/2026 10,602,214
---------------------------------------------------------------------------- ----------------
Total 27,230,205
---------------------------------------------------------------------------- ----------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--3.2%
----------------------------------------------------------------------------
9,501,210 Series 264-2, (Interest Only), 7/1/2024 3,058,250
----------------------------------------------------------------------------
16,840,960 Series 96-14P, (Principal Only), 5/25/2023 10,378,242
----------------------------------------------------------------------------
17,389,145 Series 96-38B, (Principal Only), 11/25/2023 8,191,852
----------------------------------------------------------------------------
20,000,000 Series 96-52B, (Principal Only), 11/25/2026 13,256,200
----------------------------------------------------------------------------
5,704,172 Series 96-54M, (Principal Only), 9/25/2023 3,229,987
----------------------------------------------------------------------------
19,600,000 Series 96-50D, (Principal Only), 11/25/2026 12,666,500
----------------------------------------------------------------------------
12,304,163 Series 97-3D, (Principal Only), 9/25/2023 6,967,232
---------------------------------------------------------------------------- ----------------
Total 57,748,263
---------------------------------------------------------------------------- ----------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--60.6%
----------------------------------------------------------------------------
7,021,134 12.50%, 4/15/2010-7/15/2015 8,176,017
----------------------------------------------------------------------------
19,355,015 12.00%, 5/15/2011-12/15/2015 22,428,782
----------------------------------------------------------------------------
6,892,899 10.50%, 3/15/2016 7,707,088
----------------------------------------------------------------------------
36,870,605 10.00%, 3/15/2016-7/15/2022 40,615,843
----------------------------------------------------------------------------
64,881,531 9.50%, 8/15/2016-2/15/2022 70,433,863
----------------------------------------------------------------------------
74,249,029 9.00%, 2/15/2009-11/15/2025 79,114,200
----------------------------------------------------------------------------
136,945,327 8.50%, 1/15/2017-11/15/2026 142,535,287
----------------------------------------------------------------------------
$ 200,554,682 8.00%, 5/15/2017-11/15/2026 $ 205,104,962
----------------------------------------------------------------------------
</TABLE>
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------------- ---------------------------------------------------------------------------- ----------------
LONG-TERM OBLIGATIONS--CONTINUED
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--CONTINUED
----------------------------------------------------------------------------
<C> <S> <C>
262,141,812 7.50%, 5/15/2022-1/15/2026 262,757,812
----------------------------------------------------------------------------
166,269,366 7.00%, 7/15/2023-12/15/2025 162,978,832
----------------------------------------------------------------------------
78,386,131 6.50%, 12/15/2023-5/15/2024 74,857,835
---------------------------------------------------------------------------- ----------------
Total 1,076,710,521
---------------------------------------------------------------------------- ----------------
UNITED STATES TREASURY BONDS--13.4%
----------------------------------------------------------------------------
21,000,000 11.625%, 11/15/2004 27,398,490
----------------------------------------------------------------------------
12,600,000 11.25%, 2/15/2015 18,296,586
----------------------------------------------------------------------------
77,800,000 10.75%, 8/15/2005 98,641,064
----------------------------------------------------------------------------
20,000,000 9.25%, 2/15/2016 24,973,600
----------------------------------------------------------------------------
38,800,000 8.125%, 8/15/2019-5/15/2021 44,119,004
----------------------------------------------------------------------------
13,000,000 7.625%, 2/15/2025 14,152,320
----------------------------------------------------------------------------
6,705,000 6.00%, 2/15/2026 5,960,276
----------------------------------------------------------------------------
27,000,000 0.00%, STRIP, 8/15/2020 5,227,740
---------------------------------------------------------------------------- ----------------
Total 238,769,080
---------------------------------------------------------------------------- ----------------
UNITED STATES TREASURY NOTES--16.7%
----------------------------------------------------------------------------
54,000,000 8.875%, 2/15/1999 56,765,340
----------------------------------------------------------------------------
28,000,000 7.50%, 11/15/2001 29,253,280
----------------------------------------------------------------------------
55,300,000 7.00%, 7/15/2006 56,874,944
----------------------------------------------------------------------------
25,000,000 6.375%, 9/30/2001 24,990,250
----------------------------------------------------------------------------
54,000,000 6.25%, 6/30/1998-4/30/2001 54,089,920
----------------------------------------------------------------------------
59,500,000 6.125%, 9/30/2000 59,191,790
----------------------------------------------------------------------------
14,500,000 5.875%, 1/31/1999 14,454,035
---------------------------------------------------------------------------- ----------------
Total 295,619,559
---------------------------------------------------------------------------- ----------------
TOTAL LONG-TERM OBLIGATIONS (IDENTIFIED COST $1,740,407,905) 1,742,627,618
---------------------------------------------------------------------------- ----------------
<CAPTION>
CALL OPTIONS--0.3%
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
198,004,854 (a) Series FNCPT 96-C4B 2,677,026
----------------------------------------------------------------------------
$ 197,448,872 (a) Series FNCPT 96-C5B $ 2,930,141
---------------------------------------------------------------------------- ----------------
</TABLE>
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------------- ---------------------------------------------------------------------------- ----------------
CALL OPTIONS--CONTINUED
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
TOTAL CALL OPTIONS (IDENTIFIED COST $5,656,250) 5,607,167
---------------------------------------------------------------------------- ----------------
(B) REPURCHASE AGREEMENTS--2.3%
- ----------------------------------------------------------------------------------------------
41,565,000 BT Securities Corporation, 5.380%, dated 2/28/1997,
due 3/3/1997 (at amortized cost) 41,565,000
---------------------------------------------------------------------------- ----------------
TOTAL INVESTMENTS (IDENTIFIED COST $1,787,629,155)(C) $ 1,789,799,785
---------------------------------------------------------------------------- ----------------
</TABLE>
(a) Beginning in October 1997, the Fund may exercise the option to "call away"
the security's underlying collateral from holders of the security at any
amount exceeding par value.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(c) The cost of investments for federal tax purposes amounts to $1,787,590,858.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,208,927 which is comprised of $20,126,200 appreciation and
$17,917,273 depreciation at February 28, 1997.
Note: The categories of investments are shown as a percentage of net assets
($1,777,957,543) at February 28, 1997.
The following acronyms are used throughout this portfolio:
REMIC--Real Estate Mortgage Investment Conduit
STRIP--Separate Trading of Registered Interest & Principal of Securities
(See Notes which are an integral part of the Financial Statements)
Federated Government Income Securities, Inc.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
February 28, 1997
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Total investments in securities, at value
(identified cost $1,787,629,155 and tax cost $1,787,590,858) $1,789,799,785
- --------------------------------------------------------------------------------------------------
Cash 42,774
- --------------------------------------------------------------------------------------------------
Income receivable 13,871,373
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 81,397,672
- --------------------------------------------------------------------------------------------------
Receivable for shares sold 2,707,967
- -------------------------------------------------------------------------------------------------- --------------
Total assets 1,887,819,571
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------
Payable for investments purchased $99,499,631
- -------------------------------------------------------------------------------------
Payable for shares redeemed 5,099,574
- -------------------------------------------------------------------------------------
Income distribution payable 4,700,724
- -------------------------------------------------------------------------------------
Accrued expenses 562,099
- ------------------------------------------------------------------------------------- -----------
Total liabilities 109,862,028
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 206,927,139 shares outstanding $1,777,957,543
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid in capital $2,119,384,582
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,170,630
- --------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (343,976,326)
- --------------------------------------------------------------------------------------------------
Undistributed net income 378,657
- -------------------------------------------------------------------------------------------------- --------------
Total Net Assets $1,777,957,543
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------------------------
CLASS A SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($288,768 / 33,613 shares outstanding) $8.59
- -------------------------------------------------------------------------------------------------- --------------
Offering Price Per Share (100/95.50 of $8.59)* $8.99
- -------------------------------------------------------------------------------------------------- --------------
Redemption Proceeds Per Share $8.59
- -------------------------------------------------------------------------------------------------- --------------
CLASS B SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($2,420,545 / 281,716 shares outstanding) $8.59
- -------------------------------------------------------------------------------------------------- --------------
Offering Price Per Share $8.59
- -------------------------------------------------------------------------------------------------- --------------
Redemption Proceeds Per Share (94.50/100 of $8.59)** $8.12
- -------------------------------------------------------------------------------------------------- --------------
CLASS C SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($1,343,021 / 156,273 shares outstanding) $8.59
- -------------------------------------------------------------------------------------------------- --------------
Offering Price Per Share $8.59
- -------------------------------------------------------------------------------------------------- --------------
Redemption Proceeds Per Share (99.00/100 of $8.59)** $8.50
- -------------------------------------------------------------------------------------------------- --------------
CLASS F SHARES:
- --------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($1,773,905,209 / 206,455,537 shares outstanding) $8.59
- -------------------------------------------------------------------------------------------------- --------------
Offering Price Per Share (100/99.00 of $8.59)* $8.68
- -------------------------------------------------------------------------------------------------- --------------
Redemption Proceeds Per Share (99.00/100 of $8.59)** $8.50
- -------------------------------------------------------------------------------------------------- --------------
</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)
Federated Government Income Securities, Inc.
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended February 28, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $6,162,083) $ 146,679,973
- --------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------
Investment advisory fee $ 14,913,257
- ------------------------------------------------------------------------------------
Administrative personnel and services fee 1,502,736
- ------------------------------------------------------------------------------------
Custodian fees 324,994
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 1,580,717
- ------------------------------------------------------------------------------------
Directors'/Trustees' fees 20,696
- ------------------------------------------------------------------------------------
Auditing fees 23,775
- ------------------------------------------------------------------------------------
Legal fees 8,817
- ------------------------------------------------------------------------------------
Portfolio accounting fees 190,797
- ------------------------------------------------------------------------------------
Distribution services fee--Class A Shares 131
- ------------------------------------------------------------------------------------
Distribution services fee--Class B Shares 3,601
- ------------------------------------------------------------------------------------
Distribution services fee--Class C Shares 3,589
- ------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 131
- ------------------------------------------------------------------------------------
Shareholder services fee--Class B Shares 1,200
- ------------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 1,196
- ------------------------------------------------------------------------------------
Shareholder services fee--Class F Shares 4,968,568
- ------------------------------------------------------------------------------------
Share registration costs 22,957
- ------------------------------------------------------------------------------------
Printing and postage 420,897
- ------------------------------------------------------------------------------------
Insurance premiums 18,915
- ------------------------------------------------------------------------------------
Taxes 331,454
- ------------------------------------------------------------------------------------
Miscellaneous 41,224
- ------------------------------------------------------------------------------------ ------------
Total expenses 24,379,652
- ------------------------------------------------------------------------------------
Waivers and reimbursements--
- -----------------------------------------------------------------------
Waiver of investment advisory fee $(5,195,862)
- -----------------------------------------------------------------------
Waiver of distribution services fee--Class A Shares (110)
- -----------------------------------------------------------------------
Waiver of shareholder services fee--Class F Shares (39,749)
- ----------------------------------------------------------------------- -----------
Total waivers (5,235,721)
- ------------------------------------------------------------------------------------ ------------
Net expenses 19,143,931
- -------------------------------------------------------------------------------------------------- -------------
Net investment income 127,536,042
- -------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (25,490,089)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments (12,454,230)
- -------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized loss on investments (37,944,319)
- -------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ 89,591,723
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Government Income Securities, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------
Net investment income $ 127,536,042 $ 169,262,443
- --------------------------------------------------------------------
Net realized gain (loss) on investments ($23,283,777 net loss and
$17,733,056 net loss, respectively, as computed for federal tax
purposes) (25,490,089) 28,475,478
- --------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) (12,454,230) 34,036,205
- -------------------------------------------------------------------- --------------------- ---------------------
Change in net assets resulting from operations 89,591,723 231,774,126
- -------------------------------------------------------------------- --------------------- ---------------------
NET EQUALIZATION CREDITS (DEBITS)-- (1,203,307) (1,642,823)
- -------------------------------------------------------------------- --------------------- ---------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------
Distributions from net investment income
- --------------------------------------------------------------------
Class A Shares (3,920) --
- --------------------------------------------------------------------
Class B Shares (34,408) --
- --------------------------------------------------------------------
Class C Shares (31,848) --
- --------------------------------------------------------------------
Class F Shares (128,455,862) (171,414,167)
- -------------------------------------------------------------------- --------------------- ---------------------
Change in net assets resulting from distributions to
shareholders (128,526,038) (171,414,167)
- -------------------------------------------------------------------- --------------------- ---------------------
SHARE TRANSACTIONS--
- --------------------------------------------------------------------
Proceeds from sale of shares 70,576,821 53,344,226
- --------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 67,780,045 70,463,057
- --------------------------------------------------------------------
Cost of shares redeemed (584,635,386) (456,164,008)
- -------------------------------------------------------------------- --------------------- ---------------------
Change in net assets resulting from share transactions (446,278,520) (332,356,725)
- -------------------------------------------------------------------- --------------------- ---------------------
Change in net assets (486,416,142) (273,639,589)
- --------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------
Beginning of period 2,264,373,685 2,538,013,274
- -------------------------------------------------------------------- --------------------- ---------------------
End of period (including undistributed net investment income of
$378,657 and $501,511, respectively) $ 1,777,957,543 $ 2,264,373,685
- -------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Government Income Securities, Inc.
Financial Highlights--Class A Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.63
- ------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income 0.30
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.02)
- ------------------------------------------------------------------------------------------------ -------
Total from investment operations 0.28
- ------------------------------------------------------------------------------------------------ -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Distributions from net investment income (0.32)
- ------------------------------------------------------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $ 8.59
- ------------------------------------------------------------------------------------------------ -------
TOTAL RETURN (B) 3.34%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.03%*
- ------------------------------------------------------------------------------------------------
Net investment income 6.45%*
- ------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.50%*
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $289
- ------------------------------------------------------------------------------------------------
Portfolio turnover 97%
- ------------------------------------------------------------------------------------------------
</TABLE>
* Computed an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public offering) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
Federated Government Income Securities, Inc.
Financial Highlights--Class B Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF ON PERIOD $ 8.63
- ------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income 0.28
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.02)
- ------------------------------------------------------------------------------------------------ -------
Total from investment operations 0.26
- ------------------------------------------------------------------------------------------------ -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Distributions from net investment income (0.30)
- ------------------------------------------------------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $ 8.59
- ------------------------------------------------------------------------------------------------ -------
TOTAL RETURN (B) 3.00%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.71%*
- ------------------------------------------------------------------------------------------------
Net investment income 5.80%*
- ------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.26%*
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,421
- ------------------------------------------------------------------------------------------------
Portfolio turnover 97%
- ------------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public offering) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
Federated Government Income Securities, Inc.
Financial Highlights--Class C Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.63
- ------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income 0.27
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.01)
- ------------------------------------------------------------------------------------------------ -------
Total from investment operations 0.26
- ------------------------------------------------------------------------------------------------ -------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------
Distributions from net investment income (0.30)
- ------------------------------------------------------------------------------------------------ -------
NET ASSET VALUE, END OF PERIOD $ 8.59
- ------------------------------------------------------------------------------------------------ -------
TOTAL RETURN (B) 3.02%
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.71%*
- ------------------------------------------------------------------------------------------------
Net investment income 5.65%*
- ------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.26%*
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,343
- ------------------------------------------------------------------------------------------------
Portfolio turnover 97 %
- ------------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public offering) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
Federated Government Income Securities, Inc.
Financial Highlights--Class F Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF ON PERIOD $ 8.75 $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19 $ 9.00
- --------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------
Net investment income 0.55 0.62 0.63 0.68 0.79 0.83 0.87 0.87
- --------------------------
Net realized and
unrealized gain (loss) on
investments (0.15) 0.20 (0.46) (0.44) (0.05) 0.17 0.15 0.24
- -------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.40 0.82 0.17 0.24 0.74 1.00 1.02 1.11
- -------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
- --------------------------
Distributions from net
investment income (0.56) (0.62) (0.62) (0.68) (0.78) (0.83) (0.87) (0.91)
- --------------------------
Distributions in excess
of net investment income -- -- -- -- -- (0.01)(a) (0.02)(a) (0.01)(a)
- -------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.56) (0.62) (0.62) (0.68) (0.78) (0.84) (0.89) (0.92)
- -------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 8.59 $ 8.75 $ 8.55 $ 9.00 $ 9.44 $ 9.48 $ 9.32 $ 9.19
- -------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (B) 4.81% 9.87% 2.11% 2.63% 8.08% 11.12% 11.63% 12.81%
- --------------------------
RATIOS TO AVERAGE NET
ASSETS
- --------------------------
Expenses 0.96% 0.96% 0.97% 0.97% 0.90% 0.92% 0.90% 0.93%
- --------------------------
Net investment income 6.42% 6.96% 7.34% 7.39% 8.27% 8.86% 9.43% 9.42%
- --------------------------
Expense waiver/
reimbursement (c) 0.26% 0.25% 0.23% 0.19% -- -- -- --
- --------------------------
SUPPLEMENTAL DATA
- --------------------------
Net assets, end of period
(000 omitted) $1,773,905 $2,264,374 $2,538,013 $3,542,078 $3,643,180 $2,261,762 $1,322,749 $1,320,710
- --------------------------
Portfolio turnover 97% 161% 143% 134% 43% 36% 37% 76%
- --------------------------
<CAPTION>
1989 1988
<S> <C> <C>
NET ASSET VALUE, BEGINNING
OF ON PERIOD $ 9.49 $ 9.76
- --------------------------
INCOME FROM INVESTMENT
OPERATIONS
- --------------------------
Net investment income 0.86 0.88
- --------------------------
Net realized and
unrealized gain (loss) on
investments (0.53) (0.27)
- -------------------------- --------- ---------
Total from investment
operations 0.33 0.61
- -------------------------- --------- ---------
LESS DISTRIBUTIONS
- --------------------------
Distributions from net
investment income (0.82) (0.88)
- --------------------------
Distributions in excess
of net investment income -- --
- -------------------------- --------- ---------
TOTAL DISTRIBUTIONS (0.82) (0.88)
- -------------------------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 9.00 $ 9.49
- -------------------------- --------- ---------
TOTAL RETURN (B) 3.65% 6.80%
- --------------------------
RATIOS TO AVERAGE NET
ASSETS
- --------------------------
Expenses 0.88% 0.81%
- --------------------------
Net investment income 9.33% 9.47%
- --------------------------
Expense waiver/
reimbursement (c) -- --
- --------------------------
SUPPLEMENTAL DATA
- --------------------------
Net assets, end of period
(000 omitted) $1,482,030 $1,846,198
- --------------------------
Portfolio turnover 62% 34%
- --------------------------
</TABLE>
(a) 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 did not represent a
return of capital for federal income tax purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) 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)
Federated Government Income Securities, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
February 28, 1997
1. ORGANIZATION
Federated 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. The Fund offers four classes of shares:
Class A Shares, Class B Shares, Class C Shares and Class F Shares. The Fund's
objective is to provide current income.
Effective August 5, 1996 the Fund added Class A Shares, Class B Shares, and
Class C Shares.
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--U.S. securities, listed corporate bonds, (other
fixed income and asset-backed securities), and unlisted securities and
private placement securities are generally valued at the mean of the latest
bid and asked price as furnished by an independent pricing service.
Short-term securities are valued at the prices provided by an independent
pricing service. However, 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.
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 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.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
primarily due to differing treatments for expiring capital loss
carryforwards and equalization. The following reclassifications have been
made to the financial statements.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
ACCUMULATED
NET REALIZED UNDISTRIBUTED NET
PAID-IN CAPITAL LOSS INVESTMENT INCOME
<S> <C> <C> <C>
$ (38,004,290) $ 35,933,841 $ 2,070,449
</TABLE>
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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 February 28, 1997, the Fund, for federal tax purposes, had a capital
loss carryforward of $341,002,405, 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>
1998 $ 13,473,469
2000 $ 3,842,806
2001 $ 7,365,127
2002 $ 83,738,305
2003 $ 192,317,284
2004 $ 16,981,637
2005 $ 23,283,777
</TABLE>
Additionally, net capital losses of $3,012,218 attributable to security
transactions incurred after October 31, 1996 are treated as arising on the
first day of the Funds 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.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
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
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
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.
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 sells 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.
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.
3. CAPITAL STOCK
At February 28, 1997, par value shares ($0.001) per share authorized were as
follows:
<TABLE>
<CAPTION>
NUMBER OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
<S> <C>
Class A Shares 500,000,000
Class B Shares 500,000,000
Class C Shares 500,000,000
Class F Shares 500,000,000
</TABLE>
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997*
CLASS A SHARES SHARES AMOUNT
<S> <C> <S> <C> <C>
Shares sold 41,367 $ 357,558
- -----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 341 2,956
- -----------------------------------------------------------------------------------------
Shares redeemed (8,095) (69,858)
- ----------------------------------------------------------------------------------------- --------- -----------
Net change resulting from Class A Share
transactions 33,613 $ 290,656
- ----------------------------------------------------------------------------------------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997*
CLASS B SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 292,206 $ 2,532,030
- -----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2,107 18,234
- -----------------------------------------------------------------------------------------
Shares redeemed (12,597) (109,332)
- ----------------------------------------------------------------------------------------- --------- ------------
Net change resulting from Class B Share transactions 281,716 $ 2,440,932
- ----------------------------------------------------------------------------------------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, 1997*
CLASS C SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 162,616 $ 1,405,057
- -----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2,060 17,884
- -----------------------------------------------------------------------------------------
Shares redeemed (8,403) (73,246)
- ----------------------------------------------------------------------------------------- --------- ------------
Net change resulting from Class C Share transactions 156,273 $ 1,349,695
- ----------------------------------------------------------------------------------------- --------- ------------
</TABLE>
*For the period from August 5, 1996 (date of initial public offering) to
February 28, 1997.
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 7,667,232 $ 66,282,176 6,124,214 $ 53,344,226
- -------------------------------------------
Shares issued to shareholders in payment of
distributions declared 7,877,965 67,740,971 8,062,587 70,463,057
- -------------------------------------------
Shares redeemed (67,980,256) (584,382,950) (52,286,242) (456,164,008)
- ------------------------------------------- ------------- --------------- ------------- ---------------
Net change resulting from Class F Share
transactions (52,435,059) $ (450,359,803) (38,099,441) $ (332,356,725)
- ------------------------------------------- ------------- --------------- ------------- ---------------
Net change resulting from share
transactions (51,963,457) $ (446,278,520) (38,099,441) $ (332,356,725)
- ------------------------------------------- ------------- --------------- ------------- ---------------
</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
0.75% 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 at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund 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.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), principal distributor, from the
net assets of the Fund to finance activities intended to result in the sale of
the Fund's Class A Shares, Class B Shares and Class C Shares. The Plan provides
that the Fund may incur distribution expenses according to the following
schedule annually, to compensate FSC.
<TABLE>
<CAPTION>
% OF AVG. DAILY
SHARE CLASS NAME NET ASSETS
<S> <C>
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
</TABLE>
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
Federated Government Income Securities, Inc.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund 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 Fund. 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 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
February 28, 1997, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
PURCHASES $ 1,897,328,825
- ------------------------------------------------------------------------------------------------ ----------------
SALES $ 2,512,087,812
- ------------------------------------------------------------------------------------------------ ----------------
</TABLE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Federated Government Income Securities, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Government Income Securities, Inc. as
of February 28, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for the years ended February 28,
1997 and February 29, 1996 and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund'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
February 28, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Government
Income Securities, Inc. as of February 28, 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
April 11, 1997
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, Secretary and Treasurer
John E. Murray, Jr. Douglas L. Hein
Wesley W. Posvar Assistant Treasurer
Marjorie P. Smuts Elliott Cohan
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 INVESTORS
Since 1955
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 383733102
G01109-01 (4/97)
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
APPENDIX
A. 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 $11,000 investment in the Fund. The color-coded
mountain chart is a visual representation of the narrative text above it,
which shows that an initial investment of $11,000 in the Fund on April 4,
1986 (date of initial public investment) would have grown to $23,523 on
February 28, 1997. The "x" axis reflects computation periods from April 4,
1986 (date of initial public investment) to February 28, 1997. The right
margin of the chart reflects the ending value of a hypothetical investment
of $11,000 in the Fund measured in increments of $5,000 ranging from $0 to
$25,000.
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 Class F Shares of the Fund. The dark shaded portion
reflects the principal value of annual $1,000 investments in Class F Shares
of the Fund. The color-coded mountain chart is a visual representation of
the narrative text above it, which shows that annual investments of $1,000
in Class F Shares of the Fund begining April 4, 1986 (date of initial
public investment) would have grown to $16,690 on February 28, 1997. The
"x" axis reflects computation periods from April 4, 1986 (date of initial
public investment) to February 28, 1997. The right margin of the chart
reflects the ending value of a hypothetical investment of $11,000 in the
Fund measured in increments of $3,000 ranging from $0 to $18,000.
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 initial investment of $100,000 in the Fund on April 4,
1986 (date of initial public investment) would have grown to $213,845 on
February 28, 1997. The "x" axis reflects computation periods from April 4,
1986 (date of initial public investment) to February 28, 1997. The right
margin of the chart reflects the ending value of a hypothetical investment
of $100,000 in the Fund measured in increments of $40,000 ranging from $0
to $240,000.
D. The graphic representation here displayed consists of a boxed pie
chart in the upper center of the page which shows the percentage of assets
in Federated Government Income Securities, Inc. that are diversified across
different types of securities as of February 28, 1997. The pie chart is
made up of six pieces labeled as follows (going clockwise starting from
12:00 noon): Call Options, 0.3%; Repurchase Agreements, 2.3%; Federal Home
Loan Mortgage Corp., 2.6%; Federal National Mortgage Association, 4.7%;
U.S. Treasury Obligations, 30.1%; and Government National Mortgage
Association, 60.6%.
E. The graphic representation here displayed consists of a line graph.
The corresponding components of the line graph are listed underneath. The
Class A Shares of the Fund is represented by a solid line. Salomon
Brothers 15 Year Mortgage-Backed Securities Index is represented by a
dotted line. Lipper U.S. Mortgage Funds Average is represented by a broken
line. Merrill Lynch 5 Year Treasury Index is represented by a dashed line.
Merrill Lynch 10 Year Treasury Index is represented by a closely dotted
line. The Lipper U.S. Government Funds Average is represented by a dashed
and dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical investment of $10,000 in the Class A
Shares of the Fund, Salomon Brothers 15 Year Mortgage-Backed Securities
Index, Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury
Index , Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government
Funds Average for the period from August 5, 1996 (start of performance) to
February 28, 1997. The "y" axis reflects the cost of investment. The "x"
axis reflects computation period from August 5, 1996 (start of performance)
to February 28, 1997. The right margin of the chart reflects the ending
value of the hypothetical investment in Class A Shares of the Fund as
compared to Salomon Brothers 15 Year Mortgage-Backed Securities Index,
Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury Index ,
Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government Funds
Average. The ending values are $9,869, $10,684, $10,516, $10,276, $10,294
and $10,454, respectively.
F. The graphic representation here displayed consists of a line graph.
The corresponding components of the line graph are listed underneath. The
Class B Shares of the Fund is represented by a solid line. Salomon
Brothers 15 Year Mortgage-Backed Securities Index is represented by a
dotted line. Lipper U.S. Mortgage Funds Average is represented by a broken
line. Merrill Lynch 5 Year Treasury Index is represented by a dashed line.
Merrill Lynch 10 Year Treasury Index is represented by a closely dotted
line. The Lipper U.S. Government Funds Average is represented by a dashed
and dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical investment of $10,000 in the Class B
Shares of the Fund, Salomon Brothers 15 Year Mortgage-Backed Securities
Index, Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury
Index , Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government
Funds Average for the period from August 5, 1996 (start of performance) to
February 28, 1997. The "y" axis reflects the cost of investment. The "x"
axis reflects computation period from August 5, 1996 (start of performance)
to February 28, 1997. The right margin of the chart reflects the ending
value of the hypothetical investment in Class B Shares of the Fund as
compared to Salomon Brothers 15 Year Mortgage-Backed Securities Index,
Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury Index ,
Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government Funds
Average. The ending values are $9,688, $10,684, $10,516, $10,276, $10,294
and $10,454, respectively.
G. The graphic representation here displayed consists of a line graph.
The corresponding components of the line graph are listed underneath. The
Class C Shares of the Fund is represented by a solid line. Salomon
Brothers 15 Year Mortgage-Backed Securities Index is represented by a
dotted line. Lipper U.S. Mortgage Funds Average is represented by a broken
line. Merrill Lynch 5 Year Treasury Index is represented by a dashed line.
Merrill Lynch 10 Year Treasury Index is represented by a closely dotted
line. The Lipper U.S. Government Funds Average is represented by a dashed
and dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical investment of $10,000 in the Class C
Shares of the Fund, Salomon Brothers 15 Year Mortgage-Backed Securities
Index, Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury
Index , Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government
Funds Average for the period from August 5, 1996 (start of performance) to
February 28, 1997. The "y" axis reflects the cost of investment. The "x"
axis reflects computation period from August 5, 1996 (start of performance)
to February 28, 1997. The right margin of the chart reflects the ending
value of the hypothetical investment in Class C Shares of the Fund as
compared to Salomon Brothers 15 Year Mortgage-Backed Securities Index,
Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury Index ,
Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government Funds
Average. The ending values are $10,148, $10,684, $10,516, $10,276, $10,294
and $10,454, respectively.
H. The graphic representation here displayed consists of a line graph.
The corresponding components of the line graph are listed underneath. The
Class F Shares of the Fund is represented by a solid line. Salomon
Brothers 15 Year Mortgage-Backed Securities Index is represented by a
dotted line. Lipper U.S. Mortgage Funds Average is represented by a broken
line. Merrill Lynch 5 Year Treasury Index is represented by a dashed line.
Merrill Lynch 10 Year Treasury Index is represented by a closely dotted
line. The Lipper U.S. Government Funds Average is represented by a dashed
and dotted line. The line graph is a visual representation of a comparison
of change in value of a hypothetical investment of $10,000 in the Class F
Shares of the Fund, Salomon Brothers 15 Year Mortgage-Backed Securities
Index, Lipper U.S. Mortgage Funds Average, Merrill Lynch 5 Year Treasury
Index , Merrill Lynch 10 Year Treasury Index and Lipper U.S. Government
Funds Average for the period from February 28, 1987 to February 28, 1997.
The "y" axis reflects the cost of investment. The "x" axis reflects
computation in yearly increments from February 28, 1987 to February 28,
1997. The right margin of the chart reflects the ending value of the
hypothetical investment in Class F Shares of the Fund as compared to
Salomon Brothers 15 Year Mortgage-Backed Securities Index, Lipper U.S.
Mortgage Funds Average, Merrill Lynch 5 Year Treasury Index , Merrill Lynch
10 Year Treasury Index and Lipper U.S. Government Funds Average. The
ending values are $20,002, $22,714, $20,295, $20,294, $21,421 and $19,462,
respectively.
