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
<TABLE>
<CAPTION>
<S> <C>
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
<TABLE>
<S> <C>
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)
<TABLE>
<S> <C> <C>
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>
<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.
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
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of the Fund dated October 31, 1996. This
Statement is not a prospectus. You may request a copy of the prospectus
or a copy of this Statement, if you have received it electronically,
free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated October 31, 1996
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 314284100
8100308B (10/96)
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 3
Option Transactions 3
Lending of Portfolio Securities 6
Reverse Repurchase Agreements 6
Portfolio Turnover 7
INVESTMENT LIMITATIONS 7
FEDERATED U.S. GOVERNMENT BOND FUND
MANAGEMENT 6
Fund Ownership 21
Trustee Compensation 21
Trustee Liability 23
INVESTMENT ADVISORY SERVICES 23
Adviser to the Fund 23
Advisory Fees 24
Other Related Services 25
BROKERAGE TRANSACTIONS 25
OTHER SERVICES 26
Administrative Services 26
Custodian and Portfolio Accountant 27
Transfer Agent 27
Independent Public Accountants 27
SHAREHOLDER SERVICES 27
PURCHASING SHARES 28
Conversion to Federal Funds 28
DETERMINING NET ASSET VALUE 28
Determining Market Value of Securities 28
REDEEMING SHARES 29
MASSACHUSETTS PARTNERSHIP LAW 30
EXCHANGING SECURITIES FOR FUND SHARES 30
Tax Consequences 31
TAX STATUS 31
The Fund's Tax Status 31
Shareholders' Tax Status 31
TOTAL RETURN 32
YIELD 32
PERFORMANCE COMPARISONS 33
Economic and Market Information 36
Duration 37
ABOUT FEDERATED INVESTORS 37
Mutual Fund Market 38
Institutional 38
Trust Organizations 39
Broker/Dealers and Bank Broker/Dealer Subsidiaries 39
APPENDIX 18
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:
o obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; and
o 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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe 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:
oFarm Credit Banks;
oBanks for Cooperatives;
oFederal Home Loan Banks;
oThe Student Loan Marketing Association; and
oFederal 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 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 Board of Trustees (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.
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 objective. For the fiscal years ended
August 31, 1996, and 1995, the portfolio turnover rates were 53%, and 37%,
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.
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:
oduring 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
onot 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.
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.
FEDERATED U.S. GOVERNMENT BOND FUND MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated U.S. Government Bond Fund, and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Trustee of the
Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
Seacliff
562 Bellevue Avenue
Newport, RI
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.
*This Trustee is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Master Trust; Federated Municipal
Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.;
Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus 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, 1996, the following shareholders of record owned 5% or
more of the shares of the Fund: Edward C. Gonzales, TTEE Federated
Investors Employee PSP, Pittsburgh, Pennsylvania, owned approximately
530,282 shares (6.87%); Charles Schwab & Co., Inc., San Francisco,
California, owned approximately 402,812 shares (5.22%); Bozworth Company,
Boatmen's Trust Company, Little Rock, Arkansas, owned approximately 417,267
shares (5.40%); and Defco #22038653, The State Bank & Trust Co., Defiance,
Ohio, owned approximately 471,602 shares (6.11%).
TRUSTEE COMPENSATION
AGGREGATE
NAME COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND *# FROM FUND COMPLEX +
John F. Donahue $0 $ 0 for the Fund
Chairman and Trustee 54 other investment companies in
the Fund Complex
Thomas G. Bigley++ $1105 $ 86,331 for the Fund
Trustee 54 other investment companies in
the Fund Complex
John T. Conroy, Jr. $1105 $ 115,760 for the Fund
Trustee 54 other investment companies in
the Fund Complex
William J. Copeland $1213 $ 115,760 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
James E. Dowd $1105 $ 115,760 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D. $1105 $ 104,898
for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr. $1105 $ 115,760
for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Peter E. Madden $1105 $ 104,898 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Gregor F. Meyer $1105 $ 104,898 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
John E. Murray, Jr. $1105 $ 104,898 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Wesley W. Posvar $1105 $ 104,898 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
Marjorie P. Smuts $1105 $ 104,898 for the Fund and
Trustee 54 other investment companies in
the Fund Complex
*Information is furnished for the fiscal year ended August 31, 1996.
#The aggregate compensation is provided for the Fund which is comprised of
one portfolio.
+The information is provided for the last calendar year.
++ Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.
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.
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, 1996, 1995, and 1994, the Fund's adviser earned
$582,504, $846,894, and $642,275, respectively, of which $102,131, $31,460,
and $177,861, respectively, was 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.
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. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the 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. Research
services provided by brokers and dealers may be used by the adviser or its
affiliates in advising the Fund and 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. 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. For the fiscal years
ended August 31, 1996, 1995, and 1994, the Fund paid no brokerage
commissions on brokerage transactions.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors For purposes of this Statement of Additional Information,
Federated Services Company Federated Administrative Services and Federated
Administrative Services, Inc. may hereinafter collectively be referred to
as the "Administrators." For the fiscal years ended August 31, 1996, 1995,
and 1994, the Administrators earned $125,000, $125,000, and $201,377,
respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company (`State Street Bank''), Boston, MA, is
custodian for the securities and cash of the Fund. Federated Services
Company, Pittsburgh, PA, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid for
this service is based upon the level of the Fund's average net assets for
the period plus out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on the
size, type, and number of accounts and transactions made by shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
The public accountants for the Fund are Arthur Andersen LLP, Pittsburgh,
PA.
SHAREHOLDER SERVICES
This arrangement permits the payment of fees to Federated Shareholder
Services and 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. By adopting the
Shareholder Services Agreement, the Trustees expect that the Fund will
benefit by (1) providing personal services to the shareholders; (2)
investing shareholder assets with a minimum of delay and administrative
detail; (3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholder's requests and inquiries concerning their accounts.
For the fiscal years ended August 31, 1996, and 1995, the Fund paid
shareholder services fees in the amounts of $242,710, and $352,872, of
which $194,168 and $282,298, respectively, was waived.
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.
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:
o according to the last sale price on a national securities exchange, if
available;
o 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;
o 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
o at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o 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.
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 on behalf of the Fund.
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.
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.
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, as amended,
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:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o 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, five-year, and
ten-year periods ended August 31, 1996, were 1.37%, 7.62% and 7.45%,
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, 1996, was
6.29%.
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 offering price 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:
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses; and
o 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:
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Funds. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
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.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making - structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the government sector, as of December 31, 1995, Federated managed 9
mortgage-backed, 5 government/agency, and 17 government money market mutual
funds, with assets approximating $7.7 billion, $1.7 billion, and $20.9
billion, respectively. Federated trades approximately $300 million in U.S.
government and mortgage-backed securities daily and places approximately
$13 billion in repurchase agreements each day. Federated introduced the
first U.S. government fund to invest in U.S. government bond securities in
1969. Federated has been a major force in the short-term and intermediate-
term government markets since 1982 and currently manages nearly $10 billion
in government funds within these maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees
the management of Federated Investors' international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide - including 200 New York Stock Exchange firms - supported
by more wholesalers than any other mutual fund distributor. The marketing
effort to these firms is headed by James F. Getz, President, Broker/Dealer
Division.
* source: Investment Company Institute
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.
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.
