PRESIDENT'S MESSAGE
Dear Investor:
I am pleased to present the Semi-Annual Report to shareholders for Federated
U.S. Government Securities Fund: 2-5 Years. The Report covers the six-month
period from February 1, 1997, through July 31, 1997, and includes the fund's
investment review, portfolio of investments and financial statements.
During the reporting period, the fund pursued attractive income through a
portfolio that consisted primarily of U.S. Treasury notes. Dividends paid by the
fund during this period totaled $0.29 per share for Institutional Shares and
$0.28 per share for Institutional Service Shares. Net asset value for both share
classes increased by $0.12 to end the period at $10.60. Total returns for
Institutional Shares and Institutional Service Shares, over the six-month
reporting period, were 4.00% and 3.87%,* respectively. The fund's total net
assets stood at $744.9 million on the last day of the period.
During the six-month reporting period, the fund maintained its AAAf rating by
Standard & Poor's Ratings Group, the highest available from this independent
rating service.**
Thank you for your continued confidence in Federated U.S. Government
Securities Fund: 2-5 Years. As always, we welcome your questions and
comments.
Sincerely,
[Graphic]
Glen R. Johnson
President
September 15, 1997
* Performance quoted represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so when shares
are redeemed, they may be worth more or less than their original cost.
** An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults.
Ratings are subject to change, and do not remove market risks.
INVESTMENT REVIEW
Federated U.S. Government Securities Fund: 2-5 Years represents a fully-invested
participation in those obligations of the U.S. Treasury and certain government
agencies which have a maximum maturity of five years and an average maturity of
three to four years. Since the fund's January 31, 1997, fiscal year end, the
fund has remained fully invested in U.S. Treasury securities. Standard & Poor's
Ratings Group has maintained the fund's "AAAf" credit rating.*
During the first half of the fund's semi-annual reporting period, fixed income
performance reflected stronger economic growth combined with subdued inflation.
After remaining on hold for over a year and citing persisting strength in demand
as increasing the risk of inflationary imbalances, the Federal Reserve Board
(the "Fed") increased the federal funds target rate from 5.25% to 5.50% near the
end of March. This was the first tightening of monetary policy in over two
years. The 3-year Treasury note yield increased from 6.04% at the end of January
1997, to 6.69% in mid-April, as the short-tointermediate portion of the yield
curve transitioned from pricing in a status quo to a more restrictive Fed
monetary policy.
U.S. Treasury yields declined during the second half of the fund's reporting
period, more than offsetting the preceding interest rate rise. Economic growth
slowed significantly from the 4.9% growth rate during the first quarter to 2.2%
(preliminary estimate) in the second quarter due to sluggish consumer demand.
Consumer prices increased at only a 1.5% annual rate through July year to date.
Slower economic growth combined with benign inflation allowed the Fed's monetary
policy to remain status quo, and as market expectations shifted from a tighter
monetary policy back to one on hold, the 3-year Treasury note yield declined to
5.78% at the end of July 1997. Although the fund's average maturity/duration has
been managed within its neutral range, its average maturity/duration at the end
of July was slightly shorter at 3.3/3.0 years due to the limited upside offered
by the front end of the yield curve.
The fund's net total return for the six months ended July 31, 1997, was 4.00%**
for Institutional Shares and 3.87%** for Institutional Service Shares compared
to 3.83% for the Merrill Lynch 3-Year Treasury Index*** and 4.51% for the
Merrill Lynch 3-5 Year Treasury Index.***
* "AAAf" rated fund portfolio holdings and counterparties provide extremely
strong protection against losses from credit defaults. Ratings do not remove
market risks, and are subject to change.
** Performance quoted represents past performance and 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.
*** Merrill Lynch 3-Year Treasury Index is comprised of the most recently issued
3-year U.S. Treasury notes. Merrill Lynch 3-5 Year Treasury Index is
comprised of U.S. Treasury securities with maturities between 3 and 4.99
years. Indexes are unmanaged and investments cannot be made in an index.
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
PORTFOLIO OF INVESTMENTS
JULY 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. TREASURY NOTES--98.2%
$ 80,000,000 7.500%, 10/31/1999 $ 82,931,200
75,000,000 7.750%, 12/31/1999 78,350,250
39,340,000 7.750%, 1/31/2000 41,144,132
30,000,000 5.875%, 2/15/2000 30,085,800
63,300,000 6.875%, 3/31/2000 65,019,228
20,000,000 6.125%, 9/30/2000 20,187,600
55,000,000 5.500%, 12/31/2000 54,470,900
69,000,000 6.375%, 3/31/2001 70,204,050
30,000,000 6.250%, 4/30/2001 30,416,700
25,000,000 6.500%, 5/31/2001 25,553,500
50,000,000 6.625%, 6/30/2001 51,333,000
50,000,000 6.500%, 8/31/2001 51,147,500
35,500,000 6.250%, 10/31/2001 36,001,260
60,000,000 6.125%, 12/31/2001 60,570,000
13,000,000 6.250%, 1/31/2002 13,186,030
20,000,000 6.500%, 5/31/2002 20,494,600
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $720,305,578) 731,095,750
(A) REPURCHASE AGREEMENT--1.0%
7,485,000 BT Securities Corp., 5.790%, dated 7/31/1997,
due 8/1/1997 (AT AMORTIZED COST) 7,485,000
TOTAL INVESTMENTS (IDENTIFIED COST $727,790,578)(B) $ 738,580,750
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. Treasury
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.
(b) The cost of investments for federal tax purposes amounts to $727,790,578.
The net unrealized appreciation of investments on a federal tax basis
amounts to $10,790,172 which is comprised of $10,798,339 appreciation and
$8,167 depreciation at July 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($744,904,471) at July 31, 1997.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $727,790,578) $ 738,580,750
Income receivable 9,940,117
Receivable for shares sold 3,571,529
Total assets 752,092,396
LIABILITIES:
Payable for shares redeemed $ 92,475
Income distribution payable 3,504,336
Payable to Bank 3,503,107
Accrued expenses 88,007
Total liabilities 7,187,925
NET ASSETS for 70,306,472 shares outstanding $ 744,904,471
NET ASSETS CONSIST OF:
Paid in capital $ 775,615,460
Net unrealized appreciation of investments 10,790,172
Accumulated net realized loss on investments (41,501,161)
Total Net Assets $ 744,904,471
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$715,261,921 / 67,508,710 shares outstanding $10.60
INSTITUTIONAL SERVICE SHARES:
$29,642,550 / 2,797,762 shares outstanding $10.60
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 23,400,254
EXPENSES:
Investment advisory fee $ 1,517,007
Administrative personnel and services fee 286,335
Custodian fees 33,159
Transfer and dividend disbursing agent fees and expenses 111,278
Directors'/Trustees' fees 10,433
Auditing fees 7,019
Legal fees 4,930
Portfolio accounting fees 59,627
Distribution services fee -- Institutional Service Shares 33,770
Shareholder services fee -- Institutional Shares 914,360
Shareholder services fee -- Institutional Service Shares 33,770
Share registration costs 14,399
Printing and postage 10,619
Insurance premiums 4,737
Miscellaneous 5,103
Total expenses 3,046,546
Waivers --
Waiver of distribution services fee -- Institutional Service $ (31,068)
Shares
Waiver of shareholder services fee -- Institutional Shares (914,360)
Waiver of shareholder services fee -- Institutional Service (2,701)
Shares
Total waivers (948,129)
Net expenses 2,098,417
Net investment income 21,301,837
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,349,325)
Net change in unrealized appreciation of investments 9,649,560
Net realized and unrealized gain on investments 7,300,235
Change in net assets resulting from operations $ 28,602,072
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
(UNAUDITED) JANUARY 31,
JULY 31, 1997 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 21,301,837 $ 45,808,408
Net realized gain (loss) on investments
($2,349,325 net loss and $2,863,569 net gain, respectively,
as computed for federal tax purposes) (2,349,325) 2,103,327
Net change in unrealized appreciation/depreciation 9,649,560 (24,522,667)
Change in net assets resulting from operations 28,602,072 23,389,068
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (20,574,937) (44,291,755)
Institutional Service Shares (726,900) (1,516,653)
Change in net assets resulting from distributions to shareholders (21,301,837) (45,808,408)
SHARE TRANSACTIONS--
Proceeds from sale of shares 116,346,054 274,782,417
Net asset value of shares issued to shareholders in payment
of distributions declared 7,052,615 17,030,963
Cost of shares redeemed (193,642,231) (365,828,600)
Change in net assets resulting from share transactions (70,243,562) (74,015,220)
Change in net assets (62,943,327) (96,434,560)
NET ASSETS:
Beginning of period 807,847,798 904,282,358
End of period $ 744,904,471 $ 807,847,798
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
JULY 31, YEAR ENDED JANUARY 31,
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.48 $10.74 $10.11 $10.78 $10.61 $10.25
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.29 0.57 0.64 0.54 0.46 0.57
Net realized and unrealized
gain (loss) on investments 0.12 (0.26) 0.63 (0.67) 0.17 0.36
Total from investment
operations 0.41 0.31 1.27 (0.13) 0.63 0.93
LESS DISTRIBUTIONS
Distributions from net
investment income (0.29) (0.57) (0.64) (0.54) (0.46) (0.57)
NET ASSET VALUE, END OF PERIOD $10.60 $10.48 $10.74 $10.11 $10.78 $10.61
TOTAL RETURN(A) 4.00% 3.01% 12.86% (1.18%) 6.07% 9.37%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.54%* 0.54% 0.54% 0.54% 0.52% 0.50%
Net investment income 5.63%* 5.42% 6.07% 5.16% 4.30% 5.52%
Expense waiver/
reimbursement(b) 0.25%* 0.26% 0.25% 0.02% -- --
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $715,262 $782,056 $871,966 $731,280 $951,528 $845,620
Portfolio turnover 35% 99% 117% 163% 131% 85%
</TABLE>
* Computed on an annualized basis.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) 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 U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
JULY 31, YEAR ENDED JANUARY 31,
1997 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.48 $10.74 $10.11 $10.78 $10.61 $10.35
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.28 0.54 0.61 0.51 0.44 0.34
Net realized and unrealized
gain (loss) on investments 0.12 (0.26) 0.63 (0.67) 0.17 0.26
Total from investment
operations 0.40 0.28 1.24 (0.16) 0.61 0.60
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.54) (0.61) (0.51) (0.44) (0.34)
NET ASSET VALUE, END OF PERIOD $10.60 $10.48 $10.74 $10.11 $10.78 $10.61
TOTAL RETURN(B) 3.87% 2.76% 12.58% (1.42%) 5.81% 5.84%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79%* 0.79% 0.79% 0.79% 0.77% 0.75%*
Net investment income 5.38%* 5.16% 5.85% 5.00% 4.01% 5.13%*
Expense waiver/
reimbursement(c) 0.25%* 0.26% 0.25% 0.21% -- --
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $29,643 $25,791 $32,317 $33,117 $30,763 $12,987
Portfolio turnover 35% 99% 117% 163% 131% 85%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 18, 1992 (date of initial
public investment) to January 31, 1993.
(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 U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997 (UNAUDITED)
1. ORGANIZATION
Federated U.S. Government Securities Fund: 2-5 Years (the "Trust") is
registered under the Investment Company Act of 1940, as amended (the "Act"),
as a diversified, open-end management investment company. The Trust offers
two classes of shares: Institutional Shares and Institutional Service
Shares. The Trust's investment objective is current income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS -- U.S. government 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 Trust 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 Trust 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 Trust will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Trust's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Trust 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 Trust's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At January 31, 1997, the Trust, for federal tax purposes, had a capital loss
carryforward of $38,391,593, which will reduce the Trust's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Trust of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
1998 $8,926,712
2003 $29,464,881
Additionally, net capital losses of $474,873 attributable to security
transactions incurred after October 31, 1996, are treated as arising on the
first day of the Trust's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Trust may engage in
when-issued or delayed delivery transactions. The Trust records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JULY 31, 1997 JANUARY 31, 1997
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 10,280,426 $107,426,507 24,629,328 $257,778,045
Shares issued to shareholders in
payment of distributions declared 628,418 6,537,068 1,505,096 15,719,216
Shares redeemed (18,031,356) (187,701,483) (32,702,252) (341,913,040)
Net change resulting from
Institutional Share transactions (7,122,512) $(73,737,908) (6,567,828) $(68,415,779)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JULY 31, 1997 JANUARY 31, 1997
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 856,617 $8,919,547 1,621,629 $17,004,372
Shares issued to shareholders in
payment of distributions declared 49,551 515,547 125,629 1,311,747
Shares redeemed (569,668) (5,940,748) (2,296,071) (23,915,560)
Net change resulting from
Institutional Service Share transactions 336,500 $3,494,346 (548,813) $(5,599,441)
Net change resulting from
share transactions (6,786,012) $(70,243,562) (7,116,641) $(74,015,220)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Federated Management, the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.40% of the Trust's average daily net assets.
ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Trust with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE -- The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Trust will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Trust to finance activities intended
to result in the sale of the Trust's Institutional Service Shares. The Plan
provides that the Trust may incur distribution expenses up to 0.25% of the
average daily net assets of the Institutional Service Shares annually, to
compensate FSC. FSC may voluntarily choose to waive any portion of its fee.
FSC can modify or terminate this voluntary waiver at any time at its sole
discretion.
SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Trust will pay FSS
up to 0.25% of average daily net assets of the Trust for the period. The fee
paid to FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. FSS may voluntarily choose to waive any
portion of its fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.
PORTFOLIO ACCOUNTING FEES -- FServ maintains the Trust's accounting records
for which it receives a fee. The fee is based on the level of the Trust's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL -- Certain of the Officers and Trustees of the Trust 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 July 31, 1997, were as follows:
PURCHASES $262,353,235
SALES $333,500,581
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Karen Brownlee
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 prospectuses which contain facts
concerning its objective and policies, management fees, expenses and other
information.
FEDERATED U.S.
GOVERNMENT SECURITIES FUND: 2-5 YEARS
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
JULY 31, 1997
[Graphic] Federated Investors
Federated Securities Corp., Distributor
Cusip 31428P103
Cusip 31428P202
8082202 (9/97)
[Graphic]
