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, 1996, with the Securities and Exchange Commission ("SEC"). 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 or a paper copy of this prospectus
if you have received your prospectus electronically, free of charge by
calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact the Fund at the address listed on the back of this
prospectus. The Statement of Additional Information, material incorporated
by reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
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, 1996
TABLE OF CONTENTS
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TABLE OF CONTENTS
SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Investment Limitations 7
FUND INFORMATION 7
Management of the Fund 7
Distribution of Fund Shares 8
Administration of the Fund 9
NET ASSET VALUE 9
INVESTING IN THE FUND 9
Share Purchases 9
Minimum Investment Required 10
What Shares Cost 10
Exchanging Securities for Fund Shares 10
Certificates and Confirmations 11
Dividends 11
Capital Gains 11
REDEEMING SHARES 11
Telephone Redemption 11
Redeeming Shares By Mail 12
Accounts With Low Balances 12
SHAREHOLDER INFORMATION 12
Voting Rights 12
TAX INFORMATION 13
Federal Income Tax 13
State and Local Taxes 13
PERFORMANCE INFORMATION 13
FINANCIAL STATEMENTS 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 21
ADDRESSES 22
</TABLE>
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge 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
</TABLE>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
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Management Fee (after waiver)(1) 0.49%
12b-1 Fee None
Total Other Expenses 0.36%
Shareholder Services Fee (after waiver)(2) 0.05%
Total Operating Expenses(3) 0.85%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.60%.
(2) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholder services fee. The shareholder
services provider can terminate this voluntary waiver at any time at its
sole discretion. The maximum shareholder services fee is 0.25%.
(3) The total operating expenses would have been 1.16% absent the voluntary
waivers of a portion of the management fee and a portion of the
shareholder services fee.
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 descriptions of the various costs
and expenses, see "Fund Information." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
<TABLE>
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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.
FEDERATED U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Independent Public Accountants on page 21.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.45 $ 9.72 $11.04 $10.03 $ 9.48 $ 8.90 $ 9.12 $ 8.78 $ 9.08 $10.00
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.60 0.60 0.54 0.58 0.63 0.66 0.71 0.70 0.76 0.86
Net realized and
unrealized gain
(loss) on
investments (0.43) 0.73 (1.09) 1.01 0.55 0.58 (0.22) 0.34 (0.30) (0.89)
Total from
investment
operations 0.17 1.33 (0.55) 1.59 1.18 1.24 0.49 1.04 0.46 (0.03)
LESS DISTRIBUTIONS
Distributions
from net
investment income (0.60) (0.60) (0.54) (0.58) (0.63) (0.66) (0.71) (0.70) (0.76) (0.89)
Distributions
from net
realized gain on
investments (0.08) -- (0.23) -- -- -- -- -- -- --
Total distributions (0.68) (0.60) (0.77) (0.58) (0.63) (0.66) (0.71) (0.70) (0.76) (0.89)
NET ASSET
VALUE, END OF
PERIOD $ 9.94 $10.45 $ 9.72 $11.04 $10.03 $ 9.48 $ 8.90 $ 9.12 $ 8.78 $ 9.08
TOTAL RETURN(A) 1.37% 14.34% (5.23)% 16.44% 12.89% 14.37% 5.50% 12.35% 5.23% (0.43)%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.85% 0.85% 0.83% 0.81% 0.88% 0.78% 0.78% 0.80% 0.75% 0.76%
Net investment
income 5.71% 6.10% 5.25% 5.58% 6.54% 7.17% 7.81% 7.87% 8.40% 8.87%
Expense waiver/
reimbursement(b) 0.31% 0.22% 0.17% 0.62% 0.88% 0.85% 0.76% 0.96% 1.17% 0.75%
SUPPLEMENTAL DATA
Net assets, end of
period (000 $84,806 $124,696 $138,016 $82,737 $34,125 $27,427 $43,729 $36,325 $13,125 $11,067
omitted)
Portfolio
turnover 53% 37% 22% 53% 98% 73% 42% 35% 152% 62%
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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
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 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
associations, the Fund will dispose of those securities at times
advantageous to the Fund. The permitted investments of the Fund are:
* direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies or instrumentalities which receive or have access to federal
funding; 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 are backed by the
full faith and credit of the U.S. Treasury.
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 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
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 Trustees and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the value of
the securities loaned.
There is the risk that when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
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 associations) 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 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.
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. With over $80 billion invested across more
than 250 funds under management and/or administration by its subsidiaries,
as of December 31, 1995, Federated Investors is one of the largest mutual
fund investment managers in the United States. With more than 1,800
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,000
financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.
Susan M. Nason has been the Fund's portfolio manager since 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. Ms. Nason is a
Chartered Financial Analyst and received her M.S. in Industrial
Administration from Carnegie Mellon University.
Joseph M. Balestrino has been the Fund's portfolio manager since 1995. Mr.
Balestrino joined Federated Investors in 1986 and has been a Vice President
of the Fund's investment adviser since 1995. Mr. Balestrino served as an
Assistant Vice President of the investment adviser from 1991 to 1995. Mr.
Balestrino is a Chartered Financial Analyst and received his Master's Degree
in Urban and Regional Planning from the University of Pittsburgh.
Both the Fund and the adviser have adopted strict codes of ethics governing
the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to
the Fund's shareholders and must place the interests of shareholders ahead
of the employees' own interests. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or
being considered for purchase or sale, by the Fund; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Trustees and could result in severe penalties.
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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
SHAREHOLDER SERVICES. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to 0.25% of the average
daily net asset value of the Fund to obtain certain personal services for
shareholders and to maintain shareholder accounts. Under the Shareholder
Services Agreement, 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 fees will be paid will be determined from time to
time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments
made pursuant to the Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or shareholder
services. The support may include sponsoring sales, educational and training
seminars at recreational-type facilities 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 financial institution sells or may sell, and/or upon
the type and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by the
Fund's adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all funds
advised by affiliates of Federated Investors as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% 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 Services Company may choose voluntarily to waive a portion of its
fee.
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 Shareholder
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 by wire
on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the
telephone number listed on your account statement.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable
to Federated U.S. Government Bond Fund to Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. 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 the check is received by State Street Bank.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any financial
intermediary'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
financial intermediary 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 financial intermediary may be charged an
additional service fee by that financial intermediary.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time), on the New York Stock Exchange, 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.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder 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.
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. Investors who redeem shares through a
financial intermediary may be charged a service fee by that financial
intermediary. 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. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative at
the telephone number listed on your account statement.
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 "Redeeming Shares
By Mail," should be considered.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: the Fund name; the account name as
registered with the Fund; the account number, and the number of shares to be
redeemed or the dollar amount requested. All owners of the account must sign
the request exactly as the shares are registered. Normally, a check for the
proceeds is mailed within one business day, but in no event more than seven
days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting 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 their signatures guaranteed by a
commercial or savings bank, trust company, or saving association whose
deposits are insured by an organization which is administered by the Federal
Deposit Insurance Corporation; a member firm of a domestic stock exchange;
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.
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.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code, as amended, 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.
STATE AND LOCAL TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Fund, 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.
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 charge or other similar non-recurring
charges.
From time to time, advertisements for the Fund may refer to ratings,
rankings and other information in certain financial publications and/or
compare the Fund's performance to certain indices.
FEDERATED U.S. GOVERNMENT BOND FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS -- 99.8%
U.S. TREASURY NOTES AND BONDS -- 99.8%
$ 1,550,000 5.75%, 8/15/2003 $ 1,456,581
1,700,000 6.25%, 2/15/2003 1,649,850
3,710,000 10.75%, 2/15/2003 4,455,265
5,000,000 11.125%, 8/15/2003 6,159,400
9,900,000 7.25%, 8/15/2004 10,105,920
1,750,000 12.375%, 5/15/2004 2,313,220
6,800,000 6.50%, 8/15/2005 6,601,712
5,000,000 12.00%, 5/15/2005 6,627,600
8,000,000 6.875%, 5/15/2006 7,956,400
1,100,000 7.00%, 7/15/2006 1,104,488
2,000,000 13.25%, 5/15/2014 3,001,380
8,000,000 7.25%, 5/15/2016 7,986,720
7,800,000 8.75%, 8/15/2020 9,084,114
6,000,000 8.00%, 11/15/2021 6,492,900
8,000,000 8.125%, 8/15/2021 8,768,720
1,000,000 6.00%, 2/15/2026 858,770
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $83,827,497) $ 84,623,040
(A)REPURCHASE AGREEMENT -- 1.2%
990,000 Bankers Trust Company, 5.27%, dated 8/30/1996, due 9/3/1996
(AT AMORTIZED COST) 990,000
TOTAL INVESTMENTS (IDENTIFIED COST $84,817,497)(B) $ 85,613,040
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $84,846,873.
The net unrealized appreciation of investments on a federal tax basis
amounts to $766,167 which is comprised of $1,773,057 appreciation and
$1,006,890 depreciation at August 31, 1996.
Note: The categories of investments are shown as a percentage of net assets
($84,806,093) at August 31, 1996.
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $84,817,497 and
tax cost $84,846,873) $85,613,040
Income receivable 978,611
Receivable for shares sold 270,489
Total assets 86,862,140
LIABILITIES:
Payable for shares redeemed 1,699,715
Income distribution payable 260,659
Payable to Bank 65,179
Accrued expenses 30,494
Total liabilities 2,056,047
Net Assets for 8,530,714 shares outstanding $84,806,093
NET ASSETS CONSIST OF:
Paid in capital $83,478,872
Net unrealized appreciation of investments 795,543
Accumulated net realized gain on investments 531,678
Total Net Assets $84,806,093
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$84,806,093 / 8,530,714 shares outstanding $9.94
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 6,369,885
EXPENSES:
Investment advisory fee $ 582,504
Administrative personnel and services fee 125,000
Custodian fees 23,811
Transfer and dividend disbursing agent fees and expenses 33,225
Directors'/Trustees' fees 15,236
Auditing fees 14,500
Legal fees 5,534
Portfolio accounting fees 47,619
Shareholder services fee 242,710
Share registration costs 21,105
Printing and postage 12,504
Taxes 182
Miscellaneous 1,856
Total expenses 1,125,786
Waivers --
Waiver of investment advisory fee $(102,131)
Waiver of shareholder services fee (194,168)
Total waivers (296,299)
Net expenses 829,487
Net investment income $ 5,540,398
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,200,449
Net change in unrealized appreciation of investments (5,262,955)
Net realized and unrealized loss on investments (3,062,506)
Change in net assets resulting from operations $ 2,477,892
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 5,540,398 $ 8,605,441
Net realized gain on investments ($2,200,449 and $716,495 net gains,
respectively, as computed for federal tax purposes) 2,200,449 75,396
Net change in unrealized appreciation (depreciation) (5,262,955) 10,866,451
Change in net assets resulting from operations 2,477,892 19,547,288
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (5,540,398) (8,605,441)
Distributions from net realized gains (716,127) --
Change in net assets resulting from distributions to
shareholders (6,256,525) (8,605,441)
SHARE TRANSACTIONS--
Proceeds from sale of shares 102,051,549 88,288,665
Net asset value of shares issued to shareholders in payment of
distributions declared 1,691,349 1,458,853
Cost of shares redeemed (139,853,982) (114,009,694)
Change in net assets resulting from share transactions (36,111,084) (24,262,176)
Change in net assets (39,889,717) (13,320,329)
NET ASSETS:
Beginning of period 124,695,810 138,016,139
End of period $ 84,806,093 $ 124,695,810
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED U.S. GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
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 management investment company. The investment objective of the fund
is to pursue total return.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS -- U.S. government securities 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 valued at
amortized cost, which approximates fair market value.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS -- It is the policy of the Fund
to require the custodian bank or broker to take possession, to have legally
segregated in the Federal Reserve Book Entry System, or to have segregated
within the custodian bank's vault, all securities held as collateral under
repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's collateral to ensure that the value of
collateral at least equals the repurchase price to be paid under the
repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Fund's adviser to be creditworthy pursuant to guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of these agreements. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
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.
FEDERATED U.S. GOVERNMENT BOND FUND
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
<S> <C> <C>
Shares sold 9,780,023 9,078,568
Shares issued to shareholders in payment of distributions declared 162,691 149,974
Shares redeemed (13,340,606) (11,499,261)
Net change resulting from share transactions (3,397,892) (2,270,719)
</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 0.60% of the Fund's average daily net assets. The
Adviser may voluntarily choose to waive any portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
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 daily average net assets of the Fund for the period. The fee
paid to FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. FSS may voluntarily choose to waive any
portion of its fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is
based on the size, type, and number of accounts and transactions made by
shareholders.
FEDERATED U.S. GOVERNMENT BOND FUND
PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.
GENERAL -- Certain of the Officers and 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
period ended August 31, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $50,029,433
SALES $82,991,942
</TABLE>
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, 1996, and
the related statement of operations for the year then ended, the statement
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, 1996, 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 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, 1996, 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
September 20, 1996
ADDRESSES
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 P.O. Box 8600
Trust Company Boston, Massachusetts 02266-8600
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Federated Investors Tower
Services Company Boston, Massachusetts 02266-8600
Independent Public Accountants
Arthur Andersen LLP 2100 One PPG Place
Pittsburgh, Pennsylvania 15222
FEDERATED U.S.
GOVERNMENT BOND FUND
PROSPECTUS
A No-Load, Open-End,
Diversified Management
Investment Company
Prospectus dated October 31, 1996
[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
[Graphic]
Cusip 314284100
8100308A (10/96)
Federated U.S. Government Bond Fund
ANNUAL REPORT FOR FISCAL YEAR ENDED AUGUST 31, 1996
MANAGEMENT DISCUSSION AND ANALYSIS
Federated U.S. Government Bond Fund's portfolio represents a fully-invested
participation in U.S. Treasury and government agency obligations which have
an average duration of 6 to 10 years. During the fiscal year ended August
31, 1996, the fund remained fully invested in U.S. Treasury securities.
Fixed income performance year to date 1996 has been quite the opposite of
that in 1995. At the end of January 1996, the Federal Reserve Board (the
"Fed") had just lowered the Federal Funds target rate for the third time
since early 1995, in response to a moderating economy and reduced
inflationary pressures. By mid-February 1996, however, market sentiment had
soured and interest rates had increased steadily all along the yield curve
in response to stronger economic growth and heightened inflation fears.
Although the Fed's monetary policy has remained on hold since January 31,
1996, short to intermediate-term rates have increased more than long-term
rates as the market has transitioned from pricing in aggressive Fed easing
to pricing in the possibility of Fed tightening. During the first half of
the fund's annual reporting period, the 2- to 30-year Treasury curve
steepened from 80 to 133 basis points as yields on Treasury securities
maturing in 2 to 5 years fell more than 10- to 30-year Treasury yields.
However, this trend reversed during the second half of the reporting period
as the 2- to 30-year curve flattened back to 78 basis points. Specifically,
the 10-year Treasury note yield fell from 6.29% at the end of August 1995 to
5.52% in mid-January 1996, before rising to 6.94% at the end of August 1996.
The fund's net total return for the fiscal year ended August 31, 1996, was
1.37%* compared to 1.39% for the Merrill Lynch 10-Year Treasury Index**.
Currently, the fund's average duration is positioned near the midpoint of
its range due to the attractive level of real interest rates and the
likelihood that the recent strength in the economy will not be sustained.
Although the economy is expected to grow, it is not expected to accelerate
enough to warrant aggressive tightening of monetary policy. Therefore, the
fund's portfolio structure is laddered, in expectation that further
flattening of the yield curve should be limited.
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
** This index is unmanaged.
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 August 31, 1986 to
August 31, 1996 compared to the Merrill Lynch 10-15 Year U.S. Treasury Index
(ML10-15YRUSTI)+ and the Merrill Lynch 10 Year Treasury Index (ML10TI).+
[Graphic-see Appendix]
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, 1996, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN,
CONSTITUTES THE FUND'S ANNUAL REPORT.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The ML10-15YRUSTI and the ML10TI have been adjusted to
reflect reinvestment of dividends on securities in the indices.
** For this illustration, the ML10TI began performance on December 18, 1987.
The index was assigned a beginning value of $26,987, the value of the fund
on December 18, 1987.
+ The ML10-15YRUSTI and the ML10TI are not adjusted to reflect sales
charges, expenses, or other fees that the SEC requires to be reflected in
the Fund's performance. The indices are unmanaged.
[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
[Graphic]
Cusip 314284100
G00569-01 (10/96)
Appendix
The graphic representation here displayed consists of a legend in the upper
left quadrant indicating the components of the corresponding line graph.
The solid black line represents Federated U.S. Government Bond Fund (the
`Fund''). The dotted line represents the Merrill Lynch 10-15 Year U.S.
Treasury Index (`ML10-15YRUSTI''), and the series of dashes represents the
Merrill Lynch 10 Year Treasury Index (`ML10TI''). The line graph is a
visual representation of the narrative text above it, which shows that an
initial investment of $25,000 in the Fund on 8/31/96 compared to the ML10-
15YRUSTI and the ML10TI would have reinvested total values of $51,272,
$56,173, and 53,208, respectively, on 8/31/96. The `x'' axis reflects
annual computation periods from 8/31/96 to 8/31/96. The `y'' axis reflects
the values of the hypothetical investment measured in increments of
$10,000 ranging from $20,000 to $60,000.
