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FEDERATED U.S. GOVERNMENT BOND FUND
PROSPECTUS
A no-load, open-end, diversified management investment company (a
mutual fund) investing primarily in U.S. government bonds to pursue
total return.
This prospectus contains the information you should read and know
before you invest in Federated U.S. Government Bond Fund (the "Fund").
Keep this prospectus for future reference.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
The Fund has also filed a Statement of Additional Information dated
October 31, 1994, with the Securities and Exchange Commission. The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy
of the Statement of Additional Information free of charge by calling
1-800-235-4669. To obtain other information or to make inquiries about
the Fund, contact the Fund at the address listed in the back of this
prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated October 31, 1994
TABLE OF CONTENTS
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<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Investment Limitations 7
FUND INFORMATION 8
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Management of the Fund 8
Distribution of Fund Shares 9
Administration of the Fund 9
NET ASSET VALUE 10
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INVESTING IN THE FUND 10
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Share Purchases 10
Minimum Investment Required 11
What Shares Cost 11
Exchanging Securities for Fund Shares 11
Subaccounting Services 11
Certificates and Confirmations 11
Dividends 12
Capital Gains 12
REDEEMING SHARES 12
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Telephone Redemption 12
Written Requests 12
Accounts With Low Balances 13
SHAREHOLDER INFORMATION 13
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Voting Rights 13
Massachusetts Partnership Law 14
TAX INFORMATION 14
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Federal Income Tax 14
Pennsylvania Corporate and Personal
Property Taxes 14
PERFORMANCE INFORMATION 14
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FINANCIAL STATEMENTS 16
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REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS 24
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ADDRESSES 25
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</TABLE>
I
SUMMARY OF FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................................. None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................. None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable)........................................................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................ None
Exchange Fee...................................................................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee.................................................................................... 0.60%
12b-1 Fee......................................................................................... None
Total Other Expenses.............................................................................. 0.25%
Shareholder Services Fee (1)......................................................... 0.05%
Total Fund Operating Expenses (2)................................................................. 0.85%
<FN>
(1) The maximum shareholder services fee is 0.25%.
(2) The Total Fund Operating Expenses in the table above are based on expenses
expected during the fiscal year ending August 31, 1995. The Total Fund
Operating Expenses were 0.83% for the fiscal year ended August 31, 1994,
and would have been 1.00% absent the voluntary waiver of the management
fee.
</TABLE>
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete description of the various costs and
expenses, see "Fund Information." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN
$5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period............................................... $9 $27 $47 $105
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1
FEDERATED U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 24.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986*
--------- --------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $11.04 $ 10.03 $ 9.48 $ 8.90 $ 9.12 $ 8.78 $ 9.08 $10.00 $ 10.00
- ------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------------
Net investment income 0.54 0.58 0.63 0.66 0.71 0.70 0.76 0.86 0.66
- ------------------------------
Net realized and unrealized
gain (loss) on investments (1.09) 1.01 0.55 0.58 (0.22) 0.34 (0.30) (0.89) (0.03)
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ------------
Total from investment
operations (0.55) 1.59 1.18 1.24 0.49 1.04 0.46 (0.03) 0.63
- ------------------------------
LESS DISTRIBUTIONS
- ------------------------------
Dividends to shareholders
from net investment income (0.54) (0.58) (0.63) (0.66) (0.71) (0.70) (0.76) (0.89) (0.63)
- ------------------------------
Distributions to
shareholders from net
realized gain on investment
transactions (0.23) -- -- -- -- -- -- -- --
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ------------
Total distributions (0.77) (0.58) (0.63) (0.66) (0.71) (0.70) (0.76) (0.89) (0.63)
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD $9.72 $ 11.04 $ 10.03 $ 9.48 $ 8.90 $ 9.12 $ 8.78 $9.08 $ 10.00
- ------------------------------ --------- --------- --------- --------- --------- --------- --------- --------- ------------
TOTAL RETURN** (5.23%) 16.44% 12.89% 14.37% 5.50% 12.35% 5.23% (0.43%) 5.75%
- ------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------
Expenses 0.83% 0.81% 0.88% 0.78% 0.78% 0.80% 0.75% 0.76% 0.91% (b)
- ------------------------------
Net investment income 5.25% 5.58% 6.54% 7.17% 7.81% 7.87% 8.40% 8.87% 9.87% (b)
- ------------------------------
Expense waiver/reimbursement
(a) 0.17% 0.62% 0.88% 0.85% 0.76% 0.96% 1.17% 0.75% 1.50% (b)
- ------------------------------
SUPPLEMENTAL DATA
- ------------------------------
Net assets, end of period
(000 omitted) $138,016 $82,737 $34,125 $27,427 $43,729 $36,325 $13,125 $11,067 $1,467
- ------------------------------
Portfolio turnover rate 22% 53% 98% 73% 42% 35% 152% 62% 25%
- ------------------------------
<FN>
* Reflects operations for the period from December 3, 1985 (start of business)
to August 31, 1986.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST 31, 1994, WHICH CAN BE OBTAINED
FREE OF CHARGE.
2
GENERAL INFORMATION
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The Fund was established as a Massachusetts business trust under a Declaration
of Trust dated May 24, 1985. The Declaration of Trust permits the Fund to offer
separate series of shares representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate classes.
With respect to this Fund, as of the date of this prospectus, the Board of
Trustees (the "Trustees") has not established separate portfolios of securities
or separate classes of shares.
The Fund is designed primarily for individuals and institutions seeking total
return through a professionally managed, diversified portfolio consisting
primarily of U.S. government bonds. A minimum initial investment of $25,000 over
a 90-day period is required.
Fund shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Fund.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to pursue total return. While there is
no assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus. The
investment objective stated above cannot be changed without approval of
shareholders. Unless stated otherwise, the investment policies and limitations
stated below cannot be changed without shareholder approval. A description of
the ratings categories is contained in the Appendix to the Statement of
Additional Information.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests primarily in debt obligations (i.e.,
bills, notes and bonds) of the U.S. government, its agencies and
instrumentalities, with at least 65% of the value of its total assets being
invested under normal circumstances in U.S. government bonds. This policy may be
changed without shareholder approval. The Fund will limit its investments to
those that are permitted for purchase by federally chartered savings and loan
associations pursuant to applicable rules, regulations, or interpretations of
the Office of Thrift Supervision. Should additional permitted investments be
allowed as a result of future changes in applicable regulations or federal laws,
the Fund reserves the right, without shareholder approval, to make such
investments consistent with the Fund's investment objective, policies, and
limitations. Further, should existing statutes or regulations change, so as to
cause any securities held by the Fund to become ineligible for purchase by
federally chartered savings and loan associations, the Fund will dispose of
those securities at times advantageous to the Fund. The permitted investments of
the Fund are:
- obligations of the United States;
- notes, bonds, and discount notes of the following U.S. government agencies
or instrumentalities: Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Banks for
Cooperatives, Farm Credit Banks,
3
Tennessee Valley Authority, Export-Import Bank of the United States,
Commodity Credit Corporation, Federal Financing Bank, The Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or National
Credit Union Administration; and
- domestic issues of corporate debt obligations (rated Aaa, Aa, or A by
Moody's Investors Service, Inc. ("Moody's"); AAA, AA, or A by Standard &
Poor's Ratings Group ("S&P"); or AAA, AA, or A by Fitch Investors Service,
Inc. ("Fitch")).
The prices of fixed income securities (debt obligations) fluctuate inversely to
the direction of interest rates.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed in a variety of ways by the U.S. government, its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Obligations of the Farm Credit Banks are also
backed by the issuer's right to borrow from the U.S. Treasury. Obligations of
Federal Home Loan Banks and the Student Loan Marketing Association are backed by
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities. Obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation are backed by the credit of the agency or
instrumentality issuing the obligations.
The Fund may also purchase put options on financial futures contracts and on
portfolio securities and write call options on its portfolio securities. The
Fund will engage in such transactions only to the extent permitted under
applicable Office of Thrift Supervision rules, regulations, or interpretations
thereof.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies but which are
subject to restriction on resale under federal securities law. However, the Fund
will limit investments in illiquid securities, including certain restricted
securities determined by the Trustees to be illiquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 10% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under the federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Board of Trustees of the Fund are quite liquid. The
Fund intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as
4
determined by the Fund's investment adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash and money
market instruments during times of unusual market conditions for defensive
purposes and to maintain liquidity. These money market instruments consist of:
- commercial paper which matures in 270 days or less so long as at least two
ratings are high quality ratings by nationally recognized rating services.
Such ratings would include: A-1 or A-2 by S&P, Prime-1 or Prime-2 by
Moody's, or F-1 or F-2 by Fitch;
- time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") or in institutions whose accounts are insured by
the Savings Association Insurance Fund ("SAIF"), including certificates of
deposit issued by and other time deposits in foreign branches of
BIF-insured banks which, if negotiable, mature in six months or less or if
not negotiable, either mature in ninety days or less, or are withdrawable
upon notice not exceeding ninety days;
- bankers' acceptances issued by a BIF-insured bank, or issued by the bank's
Edge Act subsidiary and guaranteed by the bank, with remaining maturities
of nine months or less. The total acceptances of any bank held by the Fund
cannot exceed 0.25% of such bank's total deposits according to the bank's
last published statement of condition preceding the date of acceptance;
- obligations of the U.S. government or its agencies or instrumentalities;
and
- repurchase agreements collateralized by eligible investments.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the time of sale
to repurchase them at a mutually agreed upon time and price. To the extent that
the original seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis up to
one-third of the value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Fund's Board of Trustees and will
5
receive collateral in the form of cash or U.S. government securities equal to at
least 100% of the value of the securities loaned.
PUT AND CALL OPTIONS. The Fund may purchase put options on financial futures
contracts and put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. For the immediate
future, the Fund will enter into futures contracts directly only when it desires
to exercise a financial futures put option in its portfolio rather than either
closing out the option or allowing it to expire. The Fund will only purchase
puts on financial futures contracts which are traded on a recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings and loan
institutions) deemed creditworthy by the Fund's adviser.
In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or which it has the right to obtain without payment
of further consideration or for which it has segregated cash in the amount of
any additional consideration. The call options which the Fund writes and sells
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.
The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts. The Fund will
notify shareholders before it begins engaging in these transactions.
RISKS. When the Fund writes a call option, the Fund risks not participating
in any rise in the value of the underlying security. In addition, when the
Fund purchases puts on financial futures contracts to protect against
declines in prices of portfolio securities, there is a risk that the prices
of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This
may cause the futures contract and its corresponding put
6
to react differently than the portfolio securities to market changes. In
addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as
interest rate movements. In such an event, the Fund may lose the purchase
price of the put option. Finally, it is not certain that a secondary market
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into option transactions, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. The Fund's ability to establish
and close out option positions depends on this secondary market.
The Fund will engage in such transactions only to the extent permitted under
applicable rules, regulations, or interpretations thereof of the Office of
Thrift Supervision.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may:
- borrow up to one-third of the value of its total assets and pledge up to
10% of the value of those assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
- sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions;
- invest more than 10% of the value of its total assets in securities
subject to restrictions on resale under the federal securities laws
(except for commercial paper issued under Section 4(2) of the Securities
Act of 1933);
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of securities in accordance with its investment objectives, policies, and
limitations;
- invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations). The Fund may invest up to 15% of its total assets in the
certificates of deposit of one bank; or
- invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations.
The above investment limitations cannot be changed without shareholder approval.
7
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The Fund is managed by a Board of Trustees. The Trustees are
responsible for managing the Fund's business affairs and for exercising all the
Fund's powers, except those reserved for the shareholders. An Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser, subject to direction by the Trustees.
The adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments, for
which it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .60 of 1% of the Fund's average daily net assets. The
investment advisory contract allows for the voluntary reimbursement of
expenses by the adviser from time to time. The adviser can terminate any
voluntary reimbursement of expenses at any time at its sole discretion. The
adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust organized
on April 11, 1989, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. Total assets under management or administration by these
and other subsidiaries of Federated Investors are approximately $70 billion.
Federated Investors, which was founded in 1956 as Federated Investors, Inc.,
develops and manages mutual funds primarily for the financial industry.
Federated Investors' track record of competitive performance and its
disciplined, risk averse investment philosophy serve approximately 3,500 client
institutions nationwide. Through these same client institutions, individual
shareholders also have access to this same level of investment expertise.
Susan M. Nason has been the Fund's portfolio manager since October, 1994. Ms.
Nason joined Federated Investors in 1987 and has been a Vice President of the
Fund's investment adviser since 1993. Ms. Nason served as an Assistant Vice
President of the investment adviser from 1990 until 1992, and from 1987 until
1990 she acted as an investment analyst. Ms. Nason is a Chartered Financial
Analyst and received her M.B.A. in Finance from Carnegie Mellon University.
8
Gary J. Madich has been the Fund's co-portfolio manager since October, 1994. Mr.
Madich joined Federated Investors in 1984 and has been a Senior Vice President
of the Fund's investment adviser since 1993. Mr. Madich served as a Vice
President of the Fund's investment adviser from 1988 until 1993. Mr. Madich is a
Chartered Financial Analyst and received his M.B.A. in Public Finance from the
University of Pittsburgh.
DISTRIBUTION OF FUND SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
- -------------------- -----------------------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Fund has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of the Fund to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The Fund's adviser or its affiliates
may offer to pay a fee from their own assets to financial institutions as
financial assistance for providing substantial marketing and sales support. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of shares the dealer sells or may sell, and/or upon
the type and nature of sales or operational support
9
furnished by the financial institution. These payments will be made by the
Fund's adviser and will not be made from the assets of the Fund.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
MA, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund. Federated Services Company is a
subsidiary of Federated Investors.
LEGAL COUNSEL. Legal counsel is provided by Houston, Houston & Donnelly,
Pittsburgh, PA and Dickstein, Shapiro & Morin, L.L.P., Washington, D.C.
INDEPENDENT PUBLIC ACCOUNTANTS. The independent public accountants for the Fund
are Arthur Andersen LLP, Pittsburgh, PA.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. It is determined by dividing
the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Fund shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated U.S. Government Bond Fund; Fund Number (this number can be found on
the account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased on
days on which the New York Stock Exchange is closed and on federal holidays
restricting wire transfers.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable to
Federated U.S. Government Bond Fund to Federated Services Company, P.O. Box
8602, Boston, Massachusetts 02266-8602. Orders by mail are considered received
after payment by check is converted by the transfer agent's bank, State Street
Bank, into federal funds. This is normally the next business day after State
Street Bank receives the check.
10
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90 days. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Fund. Accounts established through a non-
affiliated bank or broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund.
Investors who purchase Fund shares through a non-affiliated bank or broker may
be charged an additional service fee by that bank or broker. The net asset value
is determined at 4:00 p.m. (Eastern time), Monday through Friday, except on: (i)
days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; or (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange certain securities or a combination of securities and
cash for Fund shares. The securities and any cash must have a market value of at
least $25,000. The Fund reserves the right to determine the acceptability of
securities to be exchanged. Securities accepted by the Fund are valued in the
same manner as the Fund values its assets. Investors wishing to exchange
securities should first contact Federated Securities Corp.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions holding
Fund shares in a fiduciary, agency, custodial or similar capacity may charge or
pass through subaccounting fees as part of or in addition to normal trust or
agency account fees. They may also charge fees for other services provided,
which may be related to the ownership of Fund shares. This prospectus should,
therefore, be read together with any agreement between the customer and the
institution with regard to the services provided, the fees charged for those
services, and any restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
11
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for shares is placed on the
preceding business day, shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
shares and payment by wire are received on the same day, shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted, upon instruction of
the transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System, provided State
Street Bank has received payment for shares from the shareholder. If at any time
the Fund shall determine it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, shareholders may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Fund shares may also be redeemed by sending a written request to the Fund. Call
the Fund for specific instructions before redeeming by letter. The shareholder
will be asked to provide in the request his or her name, the Fund name, the
shareholder's account number, and the share or dollar amount requested. If share
certificates have been issued, they must be properly endorsed and should be sent
by registered or certified mail with the written request.
12
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF;
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request provided State Street Bank has received payment for
shares from the shareholder.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of any portfolios
in the Fund have equal voting rights except that in matters affecting only a
particular portfolio or class, only shares of that portfolio or class are
entitled to vote.
As a Massachusetts business trust, the Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Trustees under certain
circumstances.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Fund's outstanding
shares.
13
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Fund. To protect its
shareholders, the Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Fund. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Fund or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Fund's
obligations, the Fund is required to use its property to protect or compensate
the shareholder. On request, the Fund will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Fund. Therefore,
financial loss resulting from liability as a shareholder will occur only if the
Fund itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the shares.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund:
- the Fund is not subject to Pennsylvania corporate or personal property
taxes; and
- Fund shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that
the Fund's portfolio securities would be subject to such taxes if owned
directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
14
The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This number is then annualized using semi-annual compounding.
The yield does not necessarily reflect income actually earned by the Fund and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
The Fund is sold without any sales load or other similar non-recurring charges.
From time to time, the Fund may advertise its performance using certain
financial publications and/or compare its performance to certain indices.
15
FEDERATED U.S. GOVERNMENT BOND FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ ------------------------------------------------------------------- ------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--95.2%
---------------------------------------------------------------------------------
U.S. TREASURY NOTES AND BONDS--95.2%
-------------------------------------------------------------------
$ 3,000,000 8.75%, 8/15/2000 $ 3,270,630
-------------------------------------------------------------------
5,000,000 8.50%, 11/15/2000 5,397,650
-------------------------------------------------------------------
12,000,000 6.25%, 2/15/2003 11,343,120
-------------------------------------------------------------------
7,000,000 10.75%, 2/15/2003 8,627,570
-------------------------------------------------------------------
5,000,000 11.125%, 8/15/2003 6,322,700
-------------------------------------------------------------------
5,000,000 5.875%, 2/15/2004 4,558,300
-------------------------------------------------------------------
3,000,000 12.375%, 5/15/2004 4,073,190
-------------------------------------------------------------------
5,000,000 12.00%, 5/15/2005 6,739,350
-------------------------------------------------------------------
3,000,000 10.75%, 8/15/2005 3,779,070
-------------------------------------------------------------------
6,600,000 9.375%, 2/15/2006 7,676,460
-------------------------------------------------------------------
2,000,000 13.25%, 5/15/2014 3,014,920
-------------------------------------------------------------------
7,000,000 11.25%, 2/15/2015 9,644,110
-------------------------------------------------------------------
4,180,000 7.25%, 5/15/2016 4,025,841
-------------------------------------------------------------------
10,260,000 8.875%, 2/15/2019 11,667,980
-------------------------------------------------------------------
10,000,000 8.75%, 8/15/2020 11,266,400
-------------------------------------------------------------------
8,000,000 8.125%, 5/15/2021 8,475,120
-------------------------------------------------------------------
11,500,000 8.00%, 11/15/2021 12,028,310
-------------------------------------------------------------------
10,000,000 7.125%, 2/15/2023 9,494,200
------------------------------------------------------------------- ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST, $136,212,874) $131,404,921
------------------------------------------------------------------- ------------
</TABLE>
16
FEDERATED U.S. GOVERNMENT BOND FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ ------------------------------------------------------------------- ------------
<C> <S> <C>
*REPURCHASE AGREEMENT--4.4%
---------------------------------------------------------------------------------
$ 6,030,000 J.P. Morgan Securities, Inc. 4.85%, dated 8/31/94, due 9/1/94 (at
amortized cost) $ 6,030,000
------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $142,242,874) $137,434,921+
------------------------------------------------------------------- ------------
<FN>
* 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.
+ The cost of investments for federal tax purposes amounts to $142,242,874.
The net unrealized depreciation of investments on a federal tax cost
basis amounts to $4,807,953, which is comprised of $453,118 appreciation
and $5,261,071 depreciation at August 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($138,016,139) at August 31, 1994.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
17
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------
Investments in other securities $131,404,921
- ------------------------------------------------------------------
Investment in repurchase agreement 6,030,000
- ------------------------------------------------------------------ -----------
Total investments, at amortized cost and value (Identified and
tax cost $142,242,874) $137,434,921
- -------------------------------------------------------------------------------
Cash 1,034
- -------------------------------------------------------------------------------
Interest receivable 1,202,838
- -------------------------------------------------------------------------------
Receivable for Fund shares sold 25,583
- ------------------------------------------------------------------------------- -----------
Total assets 138,664,376
- -------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------
Dividends payable 524,762
- ------------------------------------------------------------------
Payable for Fund shares redeemed 66,457
- ------------------------------------------------------------------
Accrued expenses 57,018
- ------------------------------------------------------------------ -----------
Total liabilities 648,237
- ------------------------------------------------------------------------------- -----------
NET ASSETS for 14,199,325 shares of beneficial interest outstanding $138,016,139
- ------------------------------------------------------------------------------- -----------
-----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Paid-in capital $143,852,133
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (4,807,953)
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (1,028,041)
- ------------------------------------------------------------------------------- -----------
Total Net Assets $138,016,139
- ------------------------------------------------------------------------------- -----------
-----------
NET ASSET VALUE, Offering Price, and Redemption Proceeds Per Share:
($138,016,139 DIVIDED BY 14,199,325 shares of beneficial interest outstanding) $ 9.72
- ------------------------------------------------------------------------------- -----------
-----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
18
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------
Interest income $ 6,508,692
- ---------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------
Investment advisory fee $ 642,275
- --------------------------------------------------------------------------------
Trustees' fees 8,727
- --------------------------------------------------------------------------------
Administrative personnel and services fees 201,377
- --------------------------------------------------------------------------------
Custodian and portfolio accounting fees and expenses 79,329
- --------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 18,530
- --------------------------------------------------------------------------------
Shareholder services fees 27,414
- --------------------------------------------------------------------------------
Fund share registration costs 38,818
- --------------------------------------------------------------------------------
Auditing fees 17,595
- --------------------------------------------------------------------------------
Legal fees 9,058
- --------------------------------------------------------------------------------
Printing and postage 17,687
- --------------------------------------------------------------------------------
Insurance premiums 4,830
- --------------------------------------------------------------------------------
Taxes 428
- --------------------------------------------------------------------------------
Miscellaneous 3,221
- -------------------------------------------------------------------------------- ----------
Total expenses 1,069,289
- --------------------------------------------------------------------------------
Deduct--Waiver of investment advisory fee 177,861
- -------------------------------------------------------------------------------- ----------
Net expenses 891,428
- --------------------------------------------------------------------------------------------- -----------
Net investment income 5,617,264
- ---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (1,028,041)
- ---------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (9,813,977)
- --------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments (10,842,018)
- --------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $(5,224,754)
- --------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
19
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------------------
Net investment income $ 5,617,264 $ 2,794,504
- ---------------------------------------------------------------------------
Net realized gain (loss) on investments ($1,028,041 net loss and $2,272,871
net gain, respectively, as computed for federal tax purposes) (1,028,041) 2,272,871
- ---------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (9,813,977) 3,468,352
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations (5,224,754) 8,535,727
- ---------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------------------
Dividends to shareholders from net investment income (5,617,264) (2,794,504)
- ---------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (2,249,765) --
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (7,867,029) (2,794,504)
- ---------------------------------------------------------------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ---------------------------------------------------------------------------
Proceeds from sale of shares 147,438,720 81,129,017
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends
declared 1,039,068 819,693
- ---------------------------------------------------------------------------
Cost of shares redeemed (80,106,516) (39,078,037)
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets from Fund share transactions 68,371,272 42,870,673
- --------------------------------------------------------------------------- ------------- -------------
Change in net assets 55,279,489 48,611,896
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 82,736,650 34,124,754
- --------------------------------------------------------------------------- ------------- -------------
End of period $ 138,016,139 $ 82,736,650
- --------------------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
20
FEDERATED U.S. GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1994
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated U.S. Government Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end, no-load, management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less at the time of purchase may be stated at
amortized cost, which approximates value.
B. 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 in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure that the value of collateral at least equals
the principal amount of the repurchase agreement, including accrued
interest.
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 guidelines established
by the Board of Trustees ("Trustees"). 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.
C. 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.
D. 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 taxable income. Accordingly,
no provisions for federal tax are necessary. Additionally, net capital
losses of $1,028,041 attributable to security transactions incurred after
October 31, 1993 are treated as arising on September 1, 1994, the first day
of the Fund's next taxable year.
21
FEDERATED U.S. GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. RECLASSIFICATION--During the current period year ended 1994, the Fund
adopted Statement of Position 93-2, Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
differences have been reclassified to paid-in capital. The Fund reclassified
$7,584 from accumulated net realized loss to paid-in capital in accordance
with SOP 93-2. Net investment income, net realized gains, and net assets
were not affected by this change.
G. 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 intest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994 1993
- --------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Shares sold 14,322,697 7,729,440
- ---------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 102,603 79,323
- ---------------------------------------------------------------------------
Shares redeemed (7,723,265) (3,715,292)
- --------------------------------------------------------------------------- ------------ -----------
Net change resulting from Fund share transactions 6,702,035 4,093,471
- --------------------------------------------------------------------------- ------------ -----------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .60 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides Fund with
administrative personnel and services. Prior to March 1, 1994, these services
were provided at approximate cost. Effective March 1, 1994, the FAS fee is based
on the level of average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors for the period. The administrative fee
received during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25 of
1% of average net assets of the Fund
22
FEDERATED U.S. GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
for the period. This fee is to obtain certain personal services for shareholders
and to maintain the shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer agent and dividend disbursing agent for the Fund.
The FServ fee is based on the size, type, and number of accounts and
transactions made by shareholders.
Certain of the Officers and Trustees 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
fiscal year ended August 31, 1994, were as follows:
<TABLE>
<S> <C>
Purchases $95,020,313
- ------------------------------------------------------------------ -----------
Sales $21,494,063
- ------------------------------------------------------------------ -----------
</TABLE>
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ---------------------------------------------------------
To the Shareholders and Board of Trustees of
FEDERATED U.S. GOVERNMENT BOND FUND:
We have audited the accompanying statement of assets and liabilities of
Federated U.S. Government Bond Fund (a Massachusetts business trust), including
the schedule of portfolio investments, as of August 31, 1994, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, 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 securities owned as of
August 31, 1994, by correspondence with the custodian. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated U.S. Government Bond Fund as of August 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
periods presented in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 5, 1994
24
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fund
Federated U.S. Government Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8602
- -------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -------------------------------------------------------------------------------------------
Legal Counsel
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- -------------------------------------------------------------------------------------------
Legal Counsel
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
Washington, D.C. 20037
- -------------------------------------------------------------------------------------------
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
</TABLE>
25
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FEDERATED
U.S. GOVERNMENT
BOND FUND
PROSPECTUS
A No-Load, Open-End, Diversified
Management Investment Company
Prospectus dated October 31, 1994
[LOGO]
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
[LOGO]
RECYCLED
314284100 PAPER
8100308A (10/94)
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Fund dated October 31, 1994. This Statement is not
a prospectus itself. To receive a copy of the prospectus, write or
call Federated U.S. Government Bond Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1994
[LOGO]
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE FUND 1
- ------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 1
Option Transactions 2
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
- ------------------------------------------------------------
FEDERATED U.S. GOVERNMENT BOND FUND MANAGEMENT 6
- ------------------------------------------------------------
Officers and Trustees 6
The Funds 9
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 10
- ------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
Other Related Services 10
ADMINISTRATIVE SERVICES 10
- ------------------------------------------------------------
SHAREHOLDER SERVICES PLAN 10
- ------------------------------------------------------------
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 11
- ------------------------------------------------------------
BROKERAGE TRANSACTIONS 11
- ------------------------------------------------------------
PURCHASING SHARES 11
- ------------------------------------------------------------
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 12
- ------------------------------------------------------------
Determining Market Value of Securities 12
REDEEMING SHARES 12
- ------------------------------------------------------------
EXCHANGING SECURITIES FOR FUND SHARES 12
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Tax Consequences 12
TAX STATUS 13
- ------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ------------------------------------------------------------
YIELD 13
- ------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ------------------------------------------------------------
Duration 15
APPENDIX 16
- ------------------------------------------------------------
</TABLE>
I
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
Federated U.S. Government Bond Fund (the "Fund") was established as a
Massachusetts business trust under a Declaration of Trust dated May 24, 1985. On
August 30, 1993, shareholders of the Fund approved changing the name of the Fund
from Federated Bond Fund to Federated U.S. Government Bond Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to pursue total return. The investment
objective cannot be changed without approval of shareholders. Unless stated
otherwise, the investment policies stated below cannot be changed without
shareholder approval.
TYPES OF INVESTMENTS
The Fund invests primarily in debt obligations (i.e. bills, notes and bonds) of
the U.S. government, its agencies and instrumentalities with at least 65% of the
value of its total assets being invested under normal circumstances in U.S.
government bonds. This policy may be changed without shareholder approval. The
permitted investments of the Fund include:
- obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; and
- domestic issues of corporate debt obligations (rated Aaa, Aa, or A by
Moody's Investors Service, Inc.; AAA, AA, or A by Standard & Poor's
Ratings Group; or AAA, AA, or A by Fitch Investors Service, Inc.).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed
by:
- the full faith and credit of the U.S. Treasury;
- the issuer's right to borrow from the U.S. Treasury;
- the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
- the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
- Farm Credit Banks;
- Banks for Cooperatives;
- Federal Home Loan Banks;
- The Student Loan Marketing Association;
- and Federal National Mortgage Association.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objectives and policies, not for investment leverage. These transactions are
made to secure what is considered to be an advantageous price or yield for the
Fund. Settlement dates may be a month or more after entering into these
transactions and the market values of the securities purchased may vary from the
purchase prices. No fees or other expenses, other than normal transaction costs,
are incurred. However, liquid assets of the Fund sufficient to make payment for
the securities to be purchased are segregated on the Fund"s records at the trade
date. These assets are marked to market daily and are maintained until the
transaction has been settled. As a matter of policy which can be changed without
shareholder approval, the Fund does not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation of
more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect
1
- --------------------------------------------------------------------------------
for custody of the Fund's portfolio securities subject to repurchase agreements,
a court of competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. 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 guidelines established by the Trustees.
OPTION TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities to attempt to increase its
current income. The Fund will only engage in such transactions to the extent
permitted under applicable rules, regulations, or interpretations thereof of the
Office of Thrift Supervision.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund could enter into
financial futures contracts directly to hedge its holdings of fixed income
securities, it would enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund
for the original option plus the realized decrease in value of the hedged
securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price.
Currently, the Fund will only enter into futures contracts in order to
exercise put options in its portfolio. If the Fund neither closes out nor
exercises an option, the option will expire on the date provided in the
option contract, and only the premium paid for the contract will be lost.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
2
- --------------------------------------------------------------------------------
WRITING COVERED CALL OPTIONS
The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price.
The Fund may only sell listed call options either on securities held in
its portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any such additional consideration).
The Fund will only engage in such transactions to the extent permitted
under applicable Office of Thrift Supervision rules, regulations, or
interpretations thereof.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. The securities are marked to market daily and
maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objectives. For the fiscal years ended August 31, 1994 and
1993, the portfolio turnover rates were 22% and 53%, respectively.
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
3
- --------------------------------------------------------------------------------
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any such borrowings are outstanding.
During the period any reverse repurchase agreements are outstanding, but
only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or
10% of the value of total assets at the time of the borrowing.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or interests
in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the portfolio
by entering into financial futures contracts and to sell calls on
financial futures contracts. The Fund will notify shareholders before such
a change in its operating policies is implemented.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the federal securities laws
(except for commercial paper issued under Section 4(2) of the Securities
Act of 1933).
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objectives,
policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities in
accordance with that section of the prospectus entitled "Lending of
Portfolio Securities."
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry. However, investing in U.S. government obligations shall
not be considered investments in any one industry.
SELLING SHORT
The Fund will not sell securities short unless:
- during the time the short position is open, it owns an equal amount
of the securities sold or securities readily and freely convertible
into or exchangeable, without payment of additional consideration,
for securities of the same issuer as, and equal in amount to, the
securities sold short; and
- not more than 10% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, although it may purchase the
securities of issuers which invest in or sponsor such programs.
4
- --------------------------------------------------------------------------------
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of the value of its total assets in
any one issuer (except cash and cash items, repurchase agreements, and
U.S. government obligations). The Fund may invest up to 15% of its total
assets in the certificates of deposit of one bank.
The Fund considers the type of bank obligations it purchases as cash
items.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE FUND
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 10% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment. The Fund will not purchase put options on
securities unless the securities are held in the Fund's portfolio.
The above investment limitations cannot be changed without shareholder approval.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period than it
might otherwise, the Fund's investment objective of total return (which includes
current income) is furthered.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. Branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
In addition, in order to comply with certain state restrictions, the Fund will
not purchase or sell real estate limited partnership interests, or oil, gas or
other mineral leases, except that the Fund may purchase or sell securities of
companies which invest in or hold the foregoing. If state requirements change,
these restrictions may be revised without notice to shareholders.
The Fund did not engage in options transactions or reverse repurchase
agreements, sell securities short, borrow money, or invest in illiquid
securities in excess of 5% of the value of its total assets during the last
fiscal year, and has no present intent to do so in the coming fiscal year.
5
FEDERATED U.S. GOVERNMENT BOND FUND MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, principal occupations,
and present positions.
- --------------------------------------------------------------------------------
John F. Donahue+*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue, Vice
President and Trustee.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
- --------------------------------------------------------------------------------
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Professor of Medicine and Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical Center; Director, Trustee, or
Managing General Partner of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.+
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Director, Eat'N Park Restaurants,
Inc., and Statewide Settlement Agency, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Counsel, Horizon Financial, F.A.,
Western Region.
- --------------------------------------------------------------------------------
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation and Trustee,
Lahey Clinic Foundation, Inc.
- --------------------------------------------------------------------------------
Gregor F. Meyer
5916 Penn Mall
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Meyer and Flaherty; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon Financial, F.A.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie Endowment
for International Peace, RAND Corporation, Online Computer Library Center, Inc.,
and U.S. Space Foundation; Chairman, Czecho Slovak Management Center; Director,
Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee, or Managing General
Partner of the Funds.
- --------------------------------------------------------------------------------
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative Services.
- --------------------------------------------------------------------------------
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing General
Partner of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman, Treasurer, and Trustee,
Federated Administrative Services; Trustee or Director of some of the Funds;
Vice President and Treasurer of the Funds.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee, Federated Administrative
Services; Secretary and Trustee, Federated Shareholder Services; Executive Vice
President and Director, Federated Securities Corp.; Vice President and Secretary
of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
+ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board of Trustees between
meetings of the Board.
THE FUNDS
"The Funds," and "Funds" mean the following investment companies: American
Leaders Fund, Inc.; Annuity Management Series; Arrow Funds; Automated Cash
Management Trust; Automated Government Money Trust; California Municipal Cash
Trust; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward
D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Intermediate Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate Government Trust; Federated
Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.; Fortress
Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S.
Government Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; The Medalist Funds:
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; New York Municipal Cash Trust; 111
Corcoran Funds; Peachtree Funds; The Planters Funds; Portage Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of October 7, 1994, the following shareholders of record owned 5% or more of
the outstanding shares of the Fund: First National Bank in Gainesville,
Gainesville, Georgia, owned approximately 3,383,765 shares (23.87%); and Worthen
Bank and Trust Co., N.A., Little Rock, Arkansas, owned approximately 3,315,286
shares (23.39%).
TRUSTEE LIABILITY
The Fund's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
9
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors are
owned by a trust, the trustees of which are John F. Donahue, his wife, and his
son, J. Christopher Donahue.
The adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. During the fiscal years ended
August 31, 1994, 1993, and 1992, the Fund's adviser earned $642,275, $301,709
and $157,979, respectively, of which $177,861, $301,709 and $157,979 were
voluntarily waived because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATION
The adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per
year of the next $70 million of average net assets, and 1-1/2% per year of
the remaining average net assets, the adviser will reimburse the Fund for
its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee. This
arrangement is not part of the advisory contract and may be amended or
rescinded in the future.
OTHER RELATED SERVICES
Affiliates of the adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. Prior to March 1, 1994, Federated Administrative Services Inc., also
a subsidiary of Federated Investors, served as the Fund's administrator. (For
purposes of this Statement of Additional Information, Federated Administrative
Services and Federated Administrative Services, Inc. may hereinafter
collectively be referred to as the "Administrators.") For the fiscal year ended
August 31, 1994, the Administrators collectively earned $201,377. For the fiscal
years ended August 31, 1993 and August 31, 1992, Federated Administrative
Services, Inc., earned $256,961 and $180,409, respectively. Dr. Henry J.
Gailliot, an officer of Federated Management, the adviser to the Fund, holds
approximately 20% of the outstanding common stock and serves as a director of
Commercial Data Services, Inc., a company which provides computer processing
services to Federated Administrative Services.
SHAREHOLDER SERVICES PLAN
- --------------------------------------------------------------------------------
This arrangement permits the payment of fees to Federated Shareholder Services
and, indirectly, to financial institutions to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may include,
but are not limited to, providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
10
- --------------------------------------------------------------------------------
For the fiscal period ended August 31, 1994, payments in the amount of $27,414
were made pursuant to the Shareholder Services Plan.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
- --------------------------------------------------------------------------------
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee is based on the size, type and number of accounts
and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
is based on the level of the Fund's average net assets for the period plus
out-of-pocket expenses.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of the Fund and other funds
distributed by Federated Securities Corp. The adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Board of Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be
furnished directly to the Fund or to the adviser and may include:
- advice as to the advisability of investing in securities;
- security analysis and reports;
- economic studies;
- industry studies;
- receipt of quotations for portfolio evaluations; and
- similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising other accounts. To the extent that
receipt of these services may supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
For the fiscal years ended August 31, 1994, 1993, and 1992, the Fund paid no
brokerage commissions on brokerage transactions.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge on days on which
the New York Stock Exchange is open for business. The procedure for purchasing
shares of the Fund is explained in the prospectus under "Investing in the Fund."
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
11
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
- according to the last sale price on a national securities exchange, if
available;
- in the absence of recorded sales for equity securities, according to the
mean between the current closing bid and asked prices and for bonds and
other fixed income securities as determined by an independent pricing
service;
- for short-term obligations, according to the mean between bid and asked
prices, as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Board determines this is not fair
value; or
- at fair value as determined in good faith by the Fund's Board of Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
- yield;
- quality;
- coupon rate;
- maturity;
- type of issue;
- trading characteristics; and
- other market data.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
EXCHANGING SECURITIES FOR FUND SHARES
- --------------------------------------------------------------------------------
Investors may exchange securities they already own for Fund shares, or they may
exchange a combination of securities and cash for Fund shares. An investor
should forward the securities in negotiable form with an authorized letter of
transmittal to Federated Securities Corp. The Fund will notify the investor of
its acceptance and valuation of the securities within five business days of
their receipt by State Street Bank.
The Fund values securities in the same manner as the Fund values its assets. The
basis of the exchange will depend upon the net asset value of Fund shares on the
day the securities are valued. One share of the Fund will be issued for each
equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, or other
rights attached to the securities become the property of the Fund, along with
the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
12
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
- derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
- derive less than 30% of its gross income from the sale of securities held
less than three months;
- invest in securities within certain statutory limits; and
- distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for the one-year and five-year periods
ended August 31, 1994, and for the period from December 3, 1985 (effective date
of the Fund's registration statement), to August 31, 1994, were (5.23%), 8.49%
and 7.50%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for the thirty-day period ended August 31, 1994 was 6.47%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the net asset value per share of the Fund on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
- average portfolio maturity;
- type of instruments in which the portfolio is invested;
- changes in interest rates and market value of portfolio securities;
13
- --------------------------------------------------------------------------------
- changes in Fund expenses; and
- various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
- LEHMAN BROTHERS GOVERNMENT INDEX is comprised of long term bonds publicly
issued by the U.S. government or its agencies. It is limited to securities
with maturities of 10 years or longer. The index calculates total return
for one-month, three-month, twelve-month and ten-year periods and
year-to-date.
- MERRILL LYNCH LONG TERM GOVERNMENT INDEX is an unmanaged index comprised
of publicly issued U.S. government or U.S. agency debt obligations with
final maturities of 10 years or longer.
- LEHMAN BROTHERS LONG TERM TREASURY INDEX is comprised of U.S. Treasury
securities, publicly issued by the U.S. Treasury. It is limited to
securities with final maturities of 10 years or longer. The index
calculates total returns for one-month, three-month, twelve-month and
ten-year periods and year-to-date.
- LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly
issued, fixed rate, non-convertible domestic bonds of companies in
industry, public utilities, and finance. The average maturity of these
bonds approximates nine years. The index calculates total returns for
one-month, three-month, twelve-month, and ten-year periods and
year-to-date.
- SALOMON BROTHERS AAA-AA CORPORATES INDEX calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
- LEHMAN BROTHERS LONG TERM CORPORATE INDEX is comprised of publicly issued
fixed rate, non-convertible domestic bonds of companies in industry,
public utilities and finance. All bonds are at least 10 years in length of
maturity and are rated at least BBB by one of the major rating agencies.
- MERRILL LYNCH 10-15 YEAR U.S. TREASURY INDEX is an unmanaged index
tracking long-term U.S. Treasury securities with maturities between 10 and
15 years. The index is produced by Merrill Lynch, Pierce, Fenner and
Smith, Inc.
- MERRILL LYNCH 10-YEAR U.S. TREASURY INDEX is an unmanaged index tracking
current 10-year Treasury notes. The index is produced by Merrill Lynch,
Pierce, Fenner and Smith, Inc.
- MERRILL LYNCH LONG TERM CORPORATE INDEX is an unmanaged index comprised of
publicly issued non-convertible domestic corporate debt obligations having
both a rating of BBB or higher and a maturity of 10 years or longer. These
quality parameters are based on composites of rating assigned by Standard
and Poor's Ratings Group and Moody's Investors Service, Inc.
- MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an unmanaged index
comprised of approximately 4,821 issues which include corporate debt
obligations rated BBB or better and publicly issued, non-convertible
domestic debt of the U.S. government or any agency thereof. These quality
parameters are based on composites of ratings assigned by Standard and
Poor's Ratings Group and Moody's Investors Service, Inc. Only notes and
bonds with a minimum maturity of one year are included.
- MERRILL LYNCH CORPORATE MASTER INDEX is an unmanaged index comprised of
approximately 4,256 corporate debt obligations rated BBB or better. These
quality parameters are based on composites of ratings assigned by Standard
and Poor's Ratings Group and Moody's Investors Service, Inc. Only bonds
with a minimum maturity of one year are included.
14
- --------------------------------------------------------------------------------
- MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated or non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.
DURATION
Duration is a commonly used measure of the potential volatility in the price of
a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in the
price of a bond relative to a given change in the market rate of interest. A
bond's price volatility depends on three primary variables: the bond's coupon
rate; maturity date; and the level of market yields of similar fixed income
securities. Generally, bonds with lower coupons or longer maturities will be
more volatile than bonds with higher coupons or shorter maturities. Duration
combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values of the
cash flows of a bond or bonds, including interest and principal payments, by the
sum of the present values of the cash flows. When the Fund invests in mortgage
pass-through securities, its duration will be calculated in a manner which
requires assumptions to be made regarding future principal prepayments. A more
complete description of this calculation is available upon request from the
Fund.
15
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity
16
- --------------------------------------------------------------------------------
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment but the margin of safety is not as great for
issues assigned "F-1+" and "F-1" ratings.
314284100
8100308B (10/94) 17
FEDERATED U.S. GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1994
MANAGEMENT DISCUSSION AND ANALYSIS:
----------------------------------------------------------------------------
Federated U.S. Government Bond Fund (the "Fund") provides shareholders
with a professionally managed portfolio of U.S. government securities. The
Fund is managed with a long average maturity and is invested primarily in
U.S. Treasury securities. Due to this long average maturity, the Fund is
intended for investors seeking exposure to the long-term Government market
understanding the potential price volatility associated with longer duration
assets.
The fiscal year ended August 31, 1994, was an adverse time for
longer-dated fixed income assets. The yield on the U.S. Treasury's benchmark
30-year bond moved from 6.03% to 7.82% during the period. This rate increase
corresponded to a price decline of over 10% for the 30-year benchmark during
the reporting period. The increases in interest rates were driven by
continued signs of economic expansion and investors' fear of inflation that
is often associated with such economic strength.
Throughout most of the period, management's strategy was a defensive
one, in anticipation of the rising interest rate environment. From February
through mid-July, management targeted a duration, or interest rate
sensitivity, of 7 in a possible range of 6 to 10. In addition to a defensive
duration, management maintained a barbelled portfolio structure. This acted
to limit principal erosion as barbelled portfolio structures tend to
outperform other structures in flattening yield curve environments.
Looking forward, management has become less defensive on its outlook for
the bond market. In mid-July with most of the period's rate increase
accounted for, management altered its outlook from negative to neutral and
consequently moved duration from 7 to 8, the mid-point of the Fund's
duration range. Management's rationale for this move stems from the high
real interest structure (nominal rates minus the rate of inflation) that has
been created by the significant increase in nominal yields over the previous
11 months. In addition, the move to lengthen duration increased the yield of
the Fund as the U.S. Treasury yield curve remains positively sloped.
FEDERATED U.S. GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
GROWTH OF $25,000 INVESTED IN FEDERATED U.S. GOVERNMENT BOND FUND
The graph below illustrates the hypothetical investment of $25,000 in the
Federated U.S. Government Bond Fund (the "Fund") from December 3, 1985 (start of
performance) to August 31, 1994, compared to the Merrill Lynch 10-15 Year U.S.
Treasury Index (ML1015UST)+ and the Merrill Lynch 10 Year Treasury Index
(ML10T).+
Graphic Representation "A" Omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED AUGUST 31, 1994
<TABLE>
<S> <C>
1 Year.................................................................. (5.23%)
5 Year.................................................................. 8.49%
Start of Performance (12/03/85)......................................... 7.50%
</TABLE>
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.
This report must be preceded or accompanied by the Fund's prospectus dated
October 31, 1994, and, together with financial statements contained therein,
constitutes the Fund's annual report.
+The ML1015UST and ML10T are not adjusted to reflect sales loads, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
*The Fund's performance assumes the reinvestment of all dividends and
distributions. The ML1015UST and the ML10T have been adjusted to reflect
reinvestment of dividends on securities in the indices.
**This index was created December 18, 1987, to track the performance of Treasury
securities with maturities of 10 years. $27,019 was the value of the Fund on
the date and was used as the beginning value in calculating performance.
FEDERATED SECURITIES CORP. [LOGO]
---------------------------------------------------------------------------
Distributor
314284100 [LOGO]
RECYCLED
G00569-01 (10/94) PAPER
APPENDIX
A. The graphic presentation here displayed consists of a legend in the
upper left quadrant indicating the components of the corresponding line
graph. The line graph is a visual representation of a comparison of
change in value of a hypothetical $25,000 purchase in Federated U.S.
Government Bond Fund (the "Fund"), The Merrill Lynch 10-15 Year U.S.
Treasury Index , and the Merrill Lynch 10-Year U.S. Treasury Index. The
"x" axis reflects the cost of the investment. The "y" axis reflects
computation periods from the Fund's start of business, 12/3l/85,
through 8/31/94. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to The Merrill Lynch 10-
15 Year U.S. Treasury Index and Merrill Lynch 10-Year Index; the ending
values are $47,062, $61,290 and $46,543 respectively. There is also a
legend below the graphic presentation which indicates the Average
Annual Total Return for the period ended August 31, 1994, beginning with
the inception date of the Fund (12/3l/85), and the one-year and five-
year periods; the Average Annual Total Return is 7.50%, (5.23%) and
8.49%.
