FEDERATED U.S. GOVERNMENT BOND FUND
Annual Report for Fiscal Year Ended August 31, 1998
MANAGEMENT DISCUSSION AND ANALYSIS
Federated U.S. Government Bond Fund represents a fully-invested
participation in U.S. Treasury and government agency obligations which have
an average duration of 6 to 10 years. During the fund's fiscal year ended
August 31, 1998, the fund was primarily invested in U.S. Treasury securities.
During the fund's annual reporting period, fixed income performance
continued to reflect above trend economic growth combined with subdued
inflation and a stronger dollar. Consumer prices increased at only a 1.60%
annual rate through August 1998 and the Asian financial crisis eliminated
the possibility of a tightening of Federal Reserve Board (the "Fed")
monetary policy. With the Fed on hold, the 2- to 30-year coupon curve
flattened from 66 basis points on August 31, 1997 to 12 basis points in June
1998. However, as market expectations of an easing of Fed policy grew, the
coupon curve steepened back out to 49 basis points by the fund's fiscal year
end. The flight to quality bid which had supported the Treasury market
during the fourth quarter of 1997 intensified during the late Spring/Summer
of 1998 as the global economic and financial crisis worsened and U.S. equity
markets declined. As a result, U.S. Treasury securities outperformed the
spread sectors both on a nominal and duration-adjusted basis. U.S. Treasury
yields fell across the curve, ending the fund's fiscal year well below the
federal funds target rate of 5.50%. The 30-year Treasury bond yield declined
from 6.61% at the end of August 1997 to 5.26% at the end of August 1998.
Due to the counteracting forces of the underlying strength in the U.S.
economy and the potential deflationary impact of the Asian crisis, the
fund's average duration was managed within its neutral range. While
consumer confidence and the housing market remained strong, manufacturing
and export sectors were slowing. The average duration was extended past its
midpoint when the 30-year Treasury yield rose back above 6.00% in late April
and ended August at its midpoint of 8 years. The fund's net total return for
the year ended August 31, 1998 was 15.94%* compared to 15.32% for the
Merrill Lynch 10-Year Treasury Index and 25.54% for the Merrill Lynch 30-
Year Treasury Index.**
*Performance quoted represents past performance and is not indicative of
futur e resul ts. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost.
**Merrill Lynch 10-Year Treasury Index and Merrill Lynch 30-Year Treasury
Index are unmanaged indicies tracking U.S. government securities. Investment
cannot be made in an index.
FEDERATED U.S. GOVERNMENT BOND FUND
GROWTH OF $25,000 INVESTED IN FEDERATED U.S. GOVERNMENT BOND FUND
The graph below illustrates the hypothetical investment of $25,000* in the
Federated U.S. Government Bond Fund ("the Fund") from August 31, 1988 to
August 31, 1998, compared to the Merrill Lynch 10-15 Year U.S. Treasury Index
(ML10-15YRUSTI)+ and the Merill Lynch 10-Year Treasury Index (ML10TI).+
[Graphic representation omitted. See Appendix A1.]
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceeded or accompanied by the Fund's prospectus dated
October 31, 1998, and, together with financial statements contained therein,
constitutes the Fund's annual report.
*The Fund's performance assumes the reinvestment of all dividends and
distributions. The ML10-15YRUSTI and the ML10TI have been adjusted to
reflect reinvestment of dividends on securities in the indices.
**For this illustration, the ML10TI began performance on December 18, 1988.
The index was assigned a beginning value of $26,987, the value of the Fund on
December 18, 1988.
+The ML10-15YRUSTI and the ML10TI are not adjusted to reflect sales charges,
expenses, or other fees that the Securities and Exchange Commission requires
to be reflected in the Fund's performance. The indices are unmanaged.
[Graphic]
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314284100
G00569-01 (10/98)
[Graphic]
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,
1998, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. PROSPECTUS DATED OCTOBER 31, 1998
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.
YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's service
providers (among them, the adviser, distributor, administrator and transfer
agent) must ensure that their computer systems are adjusted to properly process
and calculate date-related information from and after January 1, 2000. Many
software programs and, to a lesser extent, the computer hardware in use today
cannot distinguish the year 2000 from the year 1900. Such a design flaw could
have a negative impact in the handling of securities trades, pricing and
accounting services. The Fund and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Fund's operations.
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
("S&P"); or AAA, AA, or A by Fitch IBCA, 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 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, 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.
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 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 investment 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
As a matter of non-fundamental investment policy, which can be changed without
shareholder approval, the Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses.
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:
n 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:
n 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;
n lend any of its assets except portfolio securities up to one- third of the
value of its total assets;
n 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;
n 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 objective, policies, and
limitations;
n 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
n 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 0.60%
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.
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, Inc. All of the Class A (voting)
shares of Federated Investors Inc. are owned by a trust, the trustees of which
are John F. Donahue, Chairman and Director of Federated Investors, Inc., Mr.
Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, President and
Director of Federated Investors, Inc. Federated Management and other
subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December 31, 1997,
Federated Investors, Inc. is one of the largest mutual fund investment
managers in the United States. With more than 2,000 employees, Federated
continues to be led by the management who founded the company in 1955.
Federated funds are presently at work in and through approximately 4,000
financial institutions nationwide.
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.
Susan M. Nason has been the Fund's portfolio manager since 1994. Ms. Nason
joined Federated Investors, Inc., or its predecessor in 1987 and has been a
Senior Vice President of the Fund's investment adviser since April 1997. Ms.
Nason served as a Vice President of the investment adviser from 1993 to 1997,
and as an Assistant Vice President from 1990 until 1992. Ms. Nason is a
Chartered Financial Analyst and received her M.S.I.A. concentrating in Finance
from Carnegie Mellon University.
Donald T. Ellenberger has been the Fund's portfolio manager since October
1997. Mr. Ellenberger joined Federated Investors, Inc., or its predecessor in
1996 as a Vice President of a Federated advisory subsidiary. He has been a
Vice President of the Fund's adviser since March 1997. From 1986 to 1996, he
served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr. Ellenberger
received his M.B.A. in Finance from Stanford University.
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, Inc.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, Inc., 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, Inc., 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, Inc. as
specified below:
MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first
$250million
0.125% on the next
$250million
0.100% on the next
$250million
0.075% on assets in excess
of $750million
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 and Trust Company ("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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.
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
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 SEC) 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.
<PAGE>
Federated U.S. Government Bond Fund
PROSPECTUS
OCTOBER 31, 1998
A No-Load, Open-End, Diversified
Management Investment Company
FEDERATED U.S. GOVERNMENT BOND FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank
and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP 2100 One PPG Place Pittsburgh, PA 15222 Cusip 314284100
8100308A (10/98)
Federated U.S. Government Bond Fund
Statement of Additional Information
This Statement of Additional Information should be read with the prospectus
of Federated U. S. Government Bond Fund dated October 31, 1998. 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 U.S. GOVERNMENT BOND FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000
Statement dated October 31, 1998
Cusip 314284100
8100308B (10/98)
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Repurchase Agreements 2
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Investing in Securities of Other Investment
Companies 3
Portfolio Turnover 3
INVESTMENT LIMITATIONS 4
Buying on Margin 4
Issuing Senior Securities and Borrowing Money 4
Pledging Assets 4
Investing in Real Estate 4
Investing in Commodities 4
Restricted Securities 4
Underwriting 4
Lending Cash or Securities 4
Concentration of Investments 4
Selling Short 5
Investing in Minerals 5
Diversification of Investments 5
Acquiring Securities 5
Investing in New Issuers 5
Investing in Issuers whose Securities
are owned by Officers and Trustees
of the Fund 5
Investing In Illiquid Securities 5
Writing Covered Call Options and Purchasing
Put Options 5
FEDERATED U.S. GOVERNMENT BOND
FUND MANAGEMENT 6
Fund Ownership 9
Trustee Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Administrative Services 11
Custodian and Portfolio Accountant 11
Transfer Agent 11
Independent Public Accountants 12
Shareholder Services 12
PURCHASING SHARES 12
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
Determining Market Value of Securities12
REDEEMING SHARES 13
Redemption in Kind 13
MASSACHUSETTS PARTNERSHIP LAW 13
EXCHANGING SECURITIES FOR FUND SHARES 13
Tax Consequences 13
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 14
YIELD 14
PERFORMANCE COMPARISONS 14
Economic and Market Information 15
ABOUT FEDERATED INVESTORS, INC. 16
Mutual Fund Market 16
APPENDIX 17
<PAGE>
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.
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; or AAA,
AA, or A by Fitch IBCA, 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:
o the full faith and credit of the U.S. Treasury; the issuer's right to
borrow from the U.S. Treasury; the discretionary authority of the U.S.
government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing
the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Farm Credit Banks;
o Banks for Cooperatives;
o Federal Home Loan Banks;
o The Student Loan Marketing Association; and
o Federal National Mortgage Association.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective 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.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
As a matter of non-fundamental policy, which can be changed without shareholder
approval, the Fund may invest in the securities of affiliated money market funds
as an efficient means of managing the Fund's uninvested cash.
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, 1998, and
1997, the portfolio turnover rates were 67% and 90%, respectively.
INVESTMENT LIMITATIONS
The following investment limitations cannot be changed without shareholder
approval.
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 objective, 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:
o during the time the short position is open, it owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for securities of
the same issuer as, and equal in amount to, the securities sold short; and
o not more than 10% of the Fund's net assets (taken at current value) is held
as collateral for such sales at any one time.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral exploration
or development programs, although it may purchase the securities of issuers
which invest in or sponsor such programs.
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 total 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.
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."
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.
<PAGE>
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
Chief Executive Officer and Director or Trustee of the Funds; Chairman and
Director, Federated Investors, Inc.; Chairman and Trustee, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport Research,
Ltd.; Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director or Trustee of the Funds; Director, Member of Executive Committee,
Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc.; Director, Member of Executive Committee,
University of Pittsburgh.
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
Director or Trustee of the Funds; 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.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director or Trustee of the Funds; 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, United Refinery;
Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Pittsburgh
Civic Light Opera.
James E. Dowd, Esq.
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Director or Trustee of the Funds; Attorney-at-law; Director, The Emerging
Germany Fund, Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional
Administrator, United States Securities and Exchange Commission.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Director or Trustee of the Funds; Professor of Medicine, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; formerly, Member, National Board of Trustees, Leukemia Society of
America.
Edward L. Flaherty, Jr., Esq. @
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Director or Trustee of the Funds; Attorney, Of Counsel, Miller, Ament, Henny &
Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon
Financial, F.A., Western Region; Partner, Meyer and Flaherty.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Director or Trustee of the Funds; formerly, Representative, Commonwealth of
Massachusetts General Court; President, State Street Bank and Trust Company and
State Street Corporation; Director, VISA USA and VISA International; Chairman
and Director, Massachusetts Banker Association; Director, Depository Trust
Corporation.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
Director or Trustee of the Funds; President, Law Professor, Duquesne University;
Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law,
University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
University School of Law.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Director or Trustee of the Funds; President, World Society for Ekistics, Athens;
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; formerly, Professor, United States
Military Academy; Professor, United States Air Force Academy.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Director or Trustee of the Funds; Public relations/Marketing/Conference
Planning; formerly, National Spokesperson, Aluminum Company of America; business
owner.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
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 or Executive Vice President of the Funds; President and Director,
Federated Investors, Inc.; President and Trustee, 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; Director or Trustee of some of
the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Trustee of
the Trust.
<PAGE>
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Trustee or Director of some of the Funds; President, Executive Vice President
and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.;
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.
- -------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds; Executive Vice President, Secretary, and Director, Federated Investors,
Inc.; 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.
- ----------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
President or Vice President of some of the Funds; Director or Trustee of some of
the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and
Director, Federated Securities Corp.
- -----------------------------------------------------------------------------
* 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: Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; CCB Funds; 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 Core Trust; 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 Investment Portfolios; Federated Investment Trust; 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.; Fixed Income Securities, 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 Obligations Trust II; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Regions Funds; RIGGS Funds; Targeted Duration Trust;
Tax-Free Instruments Trust; The Planters Funds; 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; WesMark Funds;
WCT Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of October 9, 1998, the following shareholders of record owned 5% or more of
the shares of the Fund: Charles Schwab & Co., Inc., San Francisco, California
owned approximately 1,285,884 shares (12.23%); and Union Planters National Bank,
Memphis, Tennessee owned approximately 685,920 shares (6.53%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AGGREGATE
NAME COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND*# FROM FUND COMPLEX
- ------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue $0 $0 for the Fund and
Chairman and Trustee 56 other investment companies in the Fund
Complex
Thomas G. Bigley $1075.42 $111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
John T. Conroy, Jr. $1183.15 $122,362 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
William J. Copeland $1183.15 $122,362 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
James E. Dowd, Esq. $1183.15 $122,362 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D. $1075.42 $111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., Esq.$1183.15 $122,362 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
Peter E. Madden $1075.42 $111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
John E. Murray, Jr., J.D.,S.J.D. $1075.42$111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
Wesley W. Posvar $1075.42 $111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
Marjorie P. Smuts $1075.42 $111,222 for the Fund and
Trustee 56 other investment companies in the Fund
Complex
</TABLE>
* Information is furnished for the fiscal year ended August 31, 1998.
# The aggregate compensation is provided for the Fund which is comprised of one
portfolio.
The information is provided for the last calendar year.
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 (the "Adviser"). It
is a subsidiary of Federated Investors, Inc. All of the voting securities of
Federated Investors, Inc. 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, 1998, 1997, and 1996, the Adviser earned $527,474, $458,492, and
$582,504, respectively, of which $118,126, $122,217, and $102,131, respectively,
was voluntarily waived because of undertakings to limit the Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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, 1998, 1997,
and 1996, 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, Inc., 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, a subsidiary of Federated Investors, Inc., served as the Fund's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
August 31, 1998, 1997, and 1996, the Administrators earned $125,002, $125,002,
and $125,000, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund. Federated
Services Company, Pittsburgh, Pennsylvania, 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,
Pennsylvania.
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, 1998 and 1997, the Fund paid shareholder services fees in
the amounts of $219,781 and $191,038 of which $175,824 and $152,831
respectively, were 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 MEAN BETWEEN THE OVER-THE-COUNTER BID AND ASKED PRICES
PROVIDED BY AN INDEPENDENT PRICING SERVICE, IF AVAILABLE, OR AT FAIR VALUE AS
DETERMINED IN GOOD FAITH BY THE TRUST'S BOARD OF TRUSTEES; OR
O FOR SHORT-TERM OBLIGATIONS WITH REMAINING MATURITIES OF LESS THAN 60 DAYS AT
THE TIME OF PURCHASE, AT AMORTIZED COST UNLESS THE BOARD OF TRUSTEES DETERMINES
THAT PARTICULAR CIRCUMSTANCES OF THE SECURITY INDICATE OTHERWISE.
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.
REDEMPTION IN KIND
The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of
the Fund's net asset value, whichever is less, for any one shareholder within a
90-day period. Any redemption beyond this amount will also be in cash unless the
Trustees determine that further payments should be in kind. In such cases, the
Fund will pay all or a portion of the remainder of the redemption in portfolio
instruments valued in the same way as the Fund determines net asset value. The
portfolio instruments will be selected in a manner that the Trustees deem fair
and equitable. Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders who sell these securities could receive
less than the redemption value and could incur certain transaction costs.
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 certain securities or a combination of securities and
cash for Shares. The securities and any cash must have a market value of at
least $25,000. Any securities to be exchanged must meet the investment objective
and policies of the Fund, must have a readily ascertainable market value, and
must not be subject to restrictions on resale. 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. Share purchased by exchange of U.S. government securities
cannot be redeemed by telephone for fifteen business days to allow time for the
transfer to settle.
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 basis of the exchange will depend upon the net asset value of 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, dividend, subscription, conversion, or
other rights attached to the securities become the property of the Fund, along
with the securities. 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 Shares, a gain or loss may be realized by the investor.
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 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, 1998, were 15.94%, 7.19%, and 9.69%,
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, 1998, was 4.82%.
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 CORPORATE 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 &
Poor's 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 & Poor's
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
& Poor's 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, INC.
Federated Investors, Inc. 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, 1997, Federated Investors, Inc.
managed 9 mortgage-backed, 6 government/agency, and 18 government money market
mutual funds, with assets approximating $5.9 billion, $1.5 billion, and $35
billion, respectively. Federated trades approximately $400 million in U.S.
government and mortgage-backed securities daily and places approximately $23
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- and intermediate-term government markets
since 1982 and currently manages approximately $36 billion in government funds
within these maturity ranges.
The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated Investors, Inc. are: U.S. equity and high
yield - J. Thomas Madden; U.S. fixed income -William D. Dawson, III; and global
equities and fixed income - Henry A. Frantzen. The Chief Investment Officers are
Executive Vice Presidents of the Federated advisory companies.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*
Federated Investors, Inc. through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors, Inc. meets the needs of approximately 900
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.
BANK MARKETING
Other institutional clients include close relationships with more than
1,600 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
Timothy C. Pillion, Senior Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Federated Securities Corp.
* Source: Investment Company Institute
<PAGE>
APPENDIX
STANDARD & POOR'S CORPORATE BOND RATING DEFINITIONS
AAA --Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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 IBCA, 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 & POOR'S 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 IBCA, 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.
FEDERATED U.S. GOVERNMENT BOND FUND
APPENDIX
A1. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. Federated U.S.
Government Bond Fund (the "Fund") is represented by a solid line. The Merrill
Lynch 10-15 Year U.S. Treasury Index (the "ML10-15YRUSTI") is represented by a
dotted line and the Merrill Lynch 10-Year Treasury Index (the "ML10TI") is
represented by a dashed line. The line graph is a visual representation of a
comparison of change in value of a $25,000 hypothetical investment in the Fund,
the ML10-15YRUSTI and the ML10TI. The "x" axis reflects computation periods from
8/31/88 to 8/31/98. The "y" axis reflects the cost of the investment. The right
margin reflects the ending value of the hypothetical investment in the Fund as
compared to the ML10-15YRUSTI and the ML10TI. The ending values were $63,049,
$67,521, and $61,340, respectively. The legend in the bottom quadrant of the
graphic presentation indicates the Fund's Average Annual Total Return for the
one-year, five-year, ten-year, and start of performance (12/3/85) of the Fund
ended August 31, 1998. The total returns were 15.94%, 7.19%, 9.69%, and 8.45%,
respectively.
