PAINEWEBBER SHORT-TERM U.S. GOVERNMENT INCOME FUND
Supplement to Prospectus Dated April 1, 1995
1. Effective October 20, 1995, the Fund will change its name to
"PaineWebber Low Duration U.S. Government Income Fund."
2. Effective October 20, 1995, in connection with the change in the Fund's
name and the proposed reorganization of Mitchell Hutchins/Kidder, Peabody
Adjustable Rate Government Fund into the Fund, the following revises and
supplements the information appearing on page 9 under the caption "Investment
Objective and Policies" in the Fund's Prospectus:
The Fund will change its investment policy of maintaining a
dollar-weighted average portfolio maturity not in excess of three years to
one of maintaining an overall average portfolio duration of from one to
three years. Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept of
"term to maturity." Duration incorporates a bond's yield, coupon interest
payments, final maturity and other call features into one measure and is
one of the fundamental tools used by the Fund's sub-adviser in portfolio
selection.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest
rates (which is the "interest rate risk" or "volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides its final payment, taking no account of the pattern of the
security's payments prior to maturity. Duration is a measure of the
expected life of a fixed income security on a present value basis. Duration
takes the length of the time intervals between the present time and the
time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For
any fixed income security with interest payments occurring prior to the
payment of principal, duration is always less than maturity.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which
underlie them. Holding long futures or call option positions (backed by a
segrated account of cash and cash equivalents) will lengthen the Fund's
duration by approximately the same amount as would holding an equivalent
amount of the underlying securities. Short futures or put option positions
have durations roughly equal to the negative duration of the securities
that underlie these positions, and have the effect of reducing portfolio
duration by approximately the same amount as would selling an equivalent
amount of the underlying securities.
There are some situations in which the standard duration calculation
does not properly reflect the interest rate exposure of a security. For
example, floating and variable rate securities often have final maturities
of ten or more years; however, their interest rate exposure corresponds to
the frequency of the coupon reset. Another example where the interest rate
exposure is not properly captured by the standard duration calculation is
the case of mortgage-backed securities. The stated final maturity of such
securities is generally 30 years, but current prepayment rates are more
critical in determining the securities' interest rate exposure. In these
and other similar situations, the Fund's sub-adviser will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its duration and, therefore, its
interest rate exposure.
3. Effective as of June 7, 1995, the following revises and supplements the
information appearing on pages 15 and 19 under the captions "Purchases" and
"Redemptions" in the Fund's Prospectus:
a. The time by which payment for shares purchased is due at PaineWebber
has changed due to the implementation of "T+3" settlement procedures. Payment is
due on the third Business Day after the order is received in PaineWebber's New
York City offices. A "Business Day" is any day on which the New York Stock
Exchange, Inc. is open for business.
b. The time by which redemption proceeds will be paid to the redeeming
shareholder has also changed due to the implementation of "T+3." Repurchase
proceeds will be paid within three Business Days after receipt of the request in
PaineWebber's New York City offices. "Business Day" is defined above.
Supplement Dated: August 17, 1995
