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FEDERATED U.S.
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GOVERNMENT
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BOND FUND
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(formerly, Federated Bond Fund)
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SEMI-ANNUAL REPORT
TO SHAREHOLDERS
FEBRUARY 28, 1994
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FEDERATED SECURITIES CORP.
(LOGO)
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Distributor
A subsidiary of FEDERATED INVESTORS
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FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
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8040402 (4/94)
PRESIDENT'S MESSAGE
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Dear Investor:
I am pleased to present the Semi-Annual Report to Shareholders for Federated
U.S. Government Bond Fund (formerly, Federated Bond Fund) (the "Fund"). The
Report covers the six-month period ended February 28, 1994 and includes the
Fund's Investment Review, Portfolio of Investments, and Financial Statements.
During the period, the Fund pursued monthly income from a portfolio invested
exclusively in U.S. Treasury notes and bonds and a repurchase agreement backed
by Treasury obligations.
At the end of the report period, net assets had increased to $106.9 million,
compared to $82.7 million from the beginning of the period. During the period,
the Fund paid dividends of $.26 per share, or $2,500,839, to shareholders in
addition to capital gains of $.23 per share, or $2,249,765.
Thank you for your participation in this quality investment. We welcome your
questions and comments.
Sincerely,
Glen R. Johnson
President
April 15, 1994
INVESTMENT REVIEW
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The six-month period ended February 28, 1994 was a reverse of the previous
six-month period. The benchmark 30-year Treasury bond, which began the period at
a yield of 6.1%, increased approximately 60 basis points to 6.7%. Yields on
shorter maturities increased even more, however, as five-year and three-year
notes increased 70 and 80 basis points, respectively.
Accelerating economic growth was the engine behind the rate increases. The
economy's growth rate, as measured by the Gross Domestic Product ("GDP"),
increased by 7% in the fourth quarter of 1993 and is expected to be strong in
the first quarter of 1994. This high rate of growth tends to cause bond
investors concern as they begin to forecast higher inflation. While the broad
inflation numbers (Consumer Price Index "CPI" and Producer Price Index "PPI")
have not yet signaled that inflation will be a major problem in the near term,
other indicators of inflation, such as industrial commodity prices and
purchasing managers price indices, have increased significantly.
Management has had the Fund positioned in a defensive mode since the spring of
1993. The Fund's duration, a measure of interest rate sensitivity, was targeted
at 7 in the context of an allowable range of 6 to 10. This relatively defensive
posture helped the Fund dampen some of the impact of rising interest rates.
However, as a long duration government bond fund, the Fund was unable to offset
all of the effects of the rate increases. Thus, the rise in rates caused a
decline in the net asset value of the Fund as it moved from $11.04 on September
1, 1993, to $10.32 on February 28, 1994. Due to the relatively high level of
income associated with long Treasuries, the total return for the six-months
declined to (2.2%). This figure compared to the return of the Fund's benchmark,
the Merrill Lynch 10-Year Note Index, which had a total return of (2.7%) for the
six-month period and 4.3% for the year ended February 28, 1994.* The Fund
managed to outperform its benchmark in both periods due to its duration
management and yield curve positioning.
Despite the choppy market backdrop, the Fund continued to grow in asset size
over the past six months. The Fund's net asset value for the six-month period
ended February 28, 1994 was $106.9 million, up from $82.7 million at the
beginning of the period. Due to the growth in the Fund and the consistent
strategy maintained throughout the quarter, most of the transactions within the
Fund involved purchasing Treasury securities which kept the portfolio duration
and structure at their respective targets.
Looking ahead, management continues to believe that we are at a time where risk
should be emphasized along with return in the bond market and has, therefore,
maintained a defensive duration. Interest rate pressures from strong economic
growth could continue to emerge, thus causing some difficulty for long duration
assets. However, the bond market has clearly begun to discount some future
inflation, thus providing a cushion for the expected growth. This along with the
extra level of income associated with long Treasuries should provide a
reasonable risk/return outlook for the Fund.
* This index is unmanaged.
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
(UNAUDITED)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------ ------------
<C> <C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--90.2%
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U.S. TREASURY BONDS--51.1%
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$ 7,000,000 10.75%, 2/15/2003 $ 9,211,510
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5,000,000 11.125%, 8/15/2003 6,756,200
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3,000,000 10.75%, 8/15/2005 4,071,540
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6,600,000 9.375%, 2/15/2006 8,268,546
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7,000,000 11.25%, 2/15/2015 10,497,760
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4,180,000 7.25%, 5/15/2016 4,387,662
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2,260,000 8.875%, 2/15/2019 2,807,327
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6,000,000 8.125%, 8/15/2021 6,959,940
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1,500,000 8.00%, 11/15/2021 1,719,840
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Total 54,680,325
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U.S. TREASURY NOTES--39.1%
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5,000,000 8.75%, 8/15/2000 5,762,450
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5,000,000 8.50%, 11/15/2000 5,714,050
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7,000,000 7.50%, 5/15/2002 7,632,170
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10,500,000 6.375%, 8/15/2002 10,660,755
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12,000,000 6.25%, 2/15/2003 12,067,440
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Total 41,836,865
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TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST, $96,529,130) 96,517,190
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</TABLE>
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
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<C> <C> <S> <C>
*REPURCHASE AGREEMENT--9.9%
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$10,635,000 J. P. Morgan Securities, Inc., 3.49%, dated 2/28/94, due 3/1/94
(at amortized cost) (Note 2B) $ 10,635,000
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TOTAL INVESTMENTS (IDENTIFIED COST, $107,164,130) $107,152,190+
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</TABLE>
* 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 $107,164,130. The
net unrealized depreciation of investments on a federal tax basis amounts to
$11,940, which is comprised of $1,566,585 appreciation and $1,578,525
depreciation at February 28, 1994.
Note: The categories of investments are shown as a percentage of net assets
($106,932,368) at February 28, 1994.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1994
(UNAUDITED)
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<TABLE>
<S> <C> <C>
ASSETS:
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Investments in other securities $96,517,190
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Investments in repurchase agreements 10,635,000
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Total investments, at amortized cost and value (Note 2A and 2B)
(identified and tax cost $107,164,130) $107,152,190
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Cash 3,643
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Interest receivable 618,980
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Receivable for Fund shares sold 35,219
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Total assets 107,810,032
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LIABILITIES:
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Payable for Fund shares redeemed 427,617
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Dividends payable 340,889
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Accrued expenses and other liabilities 109,158
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Total liabilities 877,664
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NET ASSETS for 10,365,249 shares of beneficial interest outstanding $106,932,368
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NET ASSETS CONSIST OF:
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Paid-in capital $106,936,724
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Unrealized depreciation of investments (11,940)
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Accumulated net realized gain on investments 7,584
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Total $106,932,368
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NET ASSET VALUE, Offering Price and Redemption Price Per Share:
($106,932,368 / 10,365,249 shares of beneficial interest outstanding) $10.32
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</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1994
(UNAUDITED)
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<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
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Interest income (Note 2C) $ 2,926,222
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EXPENSES:
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Investment advisory fee (Note 4) $313,295
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Trustees' fees 7,300
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Custodian and record keeping fees and expenses 58,931
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Administrative personnel and services (Note 4) 178,803
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Auditing fees 16,798
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Legal fees 6,900
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Printing and postage 14,500
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Fund share registration costs 24,045
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Insurance premiums 7,528
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Taxes 117
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Transfer and dividend disbursing agent fees and expenses 9,869
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Miscellaneous 158
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Total expenses 638,244
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Deduct--Waiver of investment advisory fee (Note 4) 212,861
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Net expenses 425,383
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Net investment income 2,500,839
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Net change in unrealized appreciation (depreciation) on investments (5,017,964)
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Change in net assets resulting from operations $(2,517,125)
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</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1994* 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------
Net investment income $ 2,500,839 $ 2,794,504
- ----------------------------------------------------------------
Net realized gain (loss) on investment transactions ($0 and
$2,272,871 net gain, respectively, as computed for federal tax
purposes) -- 2,272,871
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Change in unrealized appreciation (depreciation) of investments (5,017,964) 3,468,352
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Change in net assets resulting from operations (2,517,125) 8,535,727
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DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2F)--
- ----------------------------------------------------------------
Dividends to shareholders from net investment income (2,500,839) (2,794,504)
- ----------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (2,249,765) --
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Change in net assets from distributions to shareholders (4,750,604) (2,794,504)
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FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
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Net proceeds from sale of shares 76,237,120 81,129,017
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Net asset value of shares issued to shareholders electing to
receive payment of dividends in Fund shares 428,157 819,693
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Cost of shares redeemed (45,201,830) (39,078,037)
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Change in net assets from Fund share transactions 31,463,447 42,870,673
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Change in net assets 24,195,718 48,611,896
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NET ASSETS:
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Beginning of period 82,736,650 34,124,754
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End of period $106,932,368 $ 82,736,650
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</TABLE>
* Six months ended February 28, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
FINANCIAL HIGHLIGHTS
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SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<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 0.26 0.58 0.63 0.66 0.71 0.70 0.76 0.86 0.66
- -----------------------------
Net realized and unrealized
gain (loss) on investments (0.49) 1.01 0.55 0.58 (0.22) 0.34 (0.30) (0.89) (0.03 )
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ------
Total from investment
operations (0.23) 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 (0.26) (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 (0.49) (0.58) (0.63) (0.66) (0.71) (0.70) (0.76) (0.89) (0.63 )
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ------
NET ASSET VALUE, END OF
PERIOD $10.32 $11.04 $10.03 $ 9.48 $ 8.90 $ 9.12 $ 8.78 $ 9.08 $10.00
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ------
TOTAL RETURN*** (2.21%) 16.44% 12.89% 14.37% 5.50% 12.35% 5.23% (0.43%) 5.75 %
- -----------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------
Expenses 0.81%(a) 0.81% 0.88% 0.78% 0.78% 0.80% 0.75% 0.76% 0.91 %(a)
- -----------------------------
Net investment income 4.79%(a) 5.58% 6.54% 7.17% 7.81% 7.87% 8.40% 8.87% 9.87 %(a)
- -----------------------------
Expense waiver/
reimbursement (b) 0.41%(a) 0.62% 0.88% 0.85% 0.76% 0.96% 1.17% 0.75% 1.50 %(a)
- -----------------------------
SUPPLEMENTAL DATA
- -----------------------------
Net assets, end of period
(000 omitted) $106,932 $82,737 $34,125 $27,427 $43,729 $36,325 $13,125 $11,067 $1,467
- -----------------------------
Portfolio turnover rate 0% 53% 98% 73% 42% 35% 152% 62% 25 %
- -----------------------------
</TABLE>
* For the six months ended February 28, 1994 (unaudited).
** Reflects operations for the period from December 3, 1985 to August 31, 1986.
For the period from the start of business, November 18, 1985 to December 2,
1985, net investment income aggregating $0.030 per share ($300) was
distributed to the Fund's investment adviser. Such distribution represented
the net investment income of the Fund prior to the initial public offering
of Fund shares which commenced on December 3, 1985.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
<TABLE>
<S> <C>
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above
(Note 4).
</TABLE>
(See Notes which are an integral part of the Financial Statements.)
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end, management investment company. 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.
(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. The
policies are in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
A. INVESTMENT VALUATIONS--U.S. government obligations and corporate bonds are valued at the
mean between the over-the-counter bid and asked prices as furnished by an independent
pricing service. Short-term obligations are valued at the mean between bid and asked
prices as furnished by an independent pricing service; however, such issues with
remaining maturities of sixty days or less at the time of purchase are valued at
amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian bank to take
possession of, 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 securities to ensure the existence of a proper level of
collateral.
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. Risks may arise from
the potential inability of counterparties to honor the terms of a repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Interest income is recorded on the accrual basis. Interest income includes
interest and discount earned (net of premium) on short-term obligations, and interest
earned on all other debt securities including discount (net of premium) and original
issue discount as required by the Internal Revenue Code.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to investment companies and to distribute to shareholders each
year all of its
</TABLE>
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
taxable income, including any net realized gain on investments. Accordingly, no provision
for federal income tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or
delayed delivery transactions. The Fund records when-issued securities 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. OTHER--Investment transactions are accounted for on the date of the transaction.
Dividends and distributions to shareholders are recorded on the ex-dividend date.
</TABLE>
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------
1994* 1993
- ------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Shares outstanding, beginning of period 7,497,305 3,403,834
- -------------------------------------------------------------------
Shares sold 6,999,777 7,729,440
- -------------------------------------------------------------------
Shares issued to shareholders electing to receive
payment of dividends in Fund shares 39,874 79,323
- -------------------------------------------------------------------
Shares redeemed (4,171,707) (3,715,292)
- ------------------------------------------------------------------- ---------- ----------
Shares outstanding, end of period 10,365,249 7,497,305
- ------------------------------------------------------------------- ---------- ----------
</TABLE>
* Six months ended February 28, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Federated Management, the Fund's investment adviser ("Adviser"), receives for
its services an annual investment advisory fee equal to 0.60 of 1% of the Fund's
average daily net assets. Adviser may voluntarily choose to waive a portion of
its fee. Adviser can modify or terminate this voluntary waiver at any time at
its sole discretion.
Administrative personnel and services were provided at approximate cost by
Federated Administrative Services, Inc. Effective March 1, 1994, Federated
Administrative Services ("FAS") will provide administrative personnel and
services. The fee is based on the level of average aggregate net assets of the
total Federated Funds for the period. 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. Certain of the Officers and Trustees of the Fund are
Officers and Directors or Trustees of the above companies.
FEDERATED U.S. GOVERNMENT BOND FUND
(FORMERLY, FEDERATED BOND FUND)
- --------------------------------------------------------------------------------
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term obligations) for the
six-months ended February 28, 1994 were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES-- $32,292,969
- ------------------------------------------------------------------------------- -----------
SALES-- $ --
- ------------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- -----------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Glen R. Johnson
James E. Dowd President
Lawrence D. Ellis, M.D. J. Christopher Donahue
Edward L. Flaherty, Jr. Vice President
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
Wesley W. Posvar Edward C. Gonzales
Marjorie P. Smuts Vice President and Treasurer
John A. Staley, IV John W. McGonigle
Vice President and Secretary
John A. Staley, IV
Vice President
David M. Taylor
Assistant Treasurer
Victor R. Siclari
Assistant Secretary
</TABLE>
Mutual funds are not obligations of or insured by any bank nor are they insured
by the federal government or any of its agencies. Investment in these shares
involves risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus which contains facts concerning its
objective and policies, management fees, expenses and other information.
