PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Investor:
I am pleased to present the Semi-Annual Report to Shareholders for Federated
ARMs Fund (the "Fund"). The report covers the six-month period ended February
28, 1995, and includes the Fund's Investment Review and Financial Statements
which include the Portfolio of Investments. In addition, separate Financial
Highlights tables have been included for the Fund's two classes of shares
("Institutional Shares" and "Institutional Service Shares").
To help you keep pace with fluctuating interest rates, the Fund pursues monthly
income from a portfolio of adjustable rate and floating rate mortgage
securities. The prompt payment of principal and interest on these securities is
guaranteed by the U.S. government. Of course, Fund shares are not guaranteed.
At the end of the report period, nearly 60% of the Fund's total net assets were
invested in Federal Home Loan Mortgage Corp. adjustable rate mortgage
securities. More than 20% of assets were invested in Federal National Mortgage
Association adjustable rate mortgage securities. The balance of Fund assets was
invested in U.S. Treasury notes and other mortgage securities and repurchase
agreements issued by the Government National Mortgage Association, J.P. Morgan
Securities, Inc., and Harris Government Securities.
During the period, the Fund paid dividends of $.26 per share, or $29,144,266, to
shareholders of Institutional Shares and $.25 per share, or $5,402,635, to
shareholders of Institutional Service Shares. At the end of the reporting
period, the Fund's net assets stood at $1.1 billion.
Thank you for your participation in the Fund. We welcome your questions and
comments.
Sincerely,
Glen R. Johnson
President
April 15, 1995
1
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Federated ARMs Fund (the "Fund") provides shareholders with a professionally
managed portfolio consisting primarily of U.S. government adjustable rate
mortgage-backed securities. The Fund is managed for a short duration of 1.5 to
2.0 years. Current investment strategy emphasizes a diversified range of
adjustable rate mortgage securities ("ARMs") with coupons averaging 7.09% and a
weighted average modified duration of 1.75 years. The Fund's portfolio targets a
volatility level similar to a two-year U.S. Treasury.
During the current semi-annual reporting period, interest rates continued their
trek upward. In response to continued tightening of monetary policy by the
Federal Reserve Board (the "Fed"), short-to intermediate-term interest rates
rose further than long rates, thus flattening the yield curve. By tightening
policy on two occasions, the Fed increased the Federal Funds target rate from
4.75% to 6%, justifying their decision as a precautionary measure in reaction to
a strong U.S. economy and pressures on resource utilization. The two-year U.S.
Treasury rate yield increased from 6.14% to 6.76% during the six month reporting
period. Early in the reporting period, spreads on ARM securities were trading at
near-distressed levels and offered significant potential from a relative value
standpoint. Over the last two months, ARMs have posted strong returns, aided by
a Treasury market rally, lower volatility, lower cap prices, and favorable
technicals. Although several factors have been responsible for the above average
performance that ARMs have enjoyed, declining volatility has been the major
component. The recently low implied yield volatility in the Eurodollar market is
unusually low, and therefore not expected to remain for an extended period.
Since ARMs possess higher option cost due to prepayments as well as caps, they
are characterized by greater sensitivity to changes in volatility. With
volatility beginning to increase, we are cautious on the ARMs sector in the near
term, while longer-term this sector offers value versus other short duration
products.
As of February 28, 1995, the Fund recorded net assets of $1.1 billion with an
average 30-day yield as calculated under SEC guidelines of 5.65%* for
Institutional Shares and 5.40%* for Institutional Service Shares based upon net
asset value of $9.60. The Fund is rated AAAf/aa+ for credit quality and risk by
Standard & Poor's Ratings Group,** and Aaa by Moody's Investors Service, Inc.,**
and will continue to strive to provide monthly cash flow and daily liquidity
while seeking competitive yields.
* PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE. 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.
** THESE RATINGS ARE OBTAINED AFTER STANDARD & POOR'S AND MOODY'S EVALUATE A
NUMBER OF FACTORS, INCLUDING CREDIT QUALITY, MARKET PRICE EXPOSURE AND
MANAGEMENT. THEY MONITOR THE PORTFOLIO MONTHLY FOR DEVELOPMENTS THAT COULD
CAUSE CHANGES IN RATINGS.
2
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ---------------------------------------------------------------------- --------------
<C> <S> <C>
GOVERNMENT AGENCY OBLIGATIONS--89.7%
- ------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ADJUSTABLE RATE MORTGAGE--57.4%
----------------------------------------------------------------------
$631,021,000 5.869% - 7.765%, 8/1/2017 - 9/1/2032 $ 644,175,410
---------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ADJUSTABLE RATE MORTGAGE-- 23.3%
----------------------------------------------------------------------
255,077,917 5.948% - 7.70%, 7/1/2018 - 7/1/2024 261,352,096
---------------------------------------------------------------------- --------------
FEDERAL HOME LOAN CORP. REMIC--2.6%
----------------------------------------------------------------------
10,023,450 10.15%, Series MH1A, 4/15/2006 10,209,585
----------------------------------------------------------------------
1,677,350 6.825%, Series 44A, 5/15/2019 1,686,911
----------------------------------------------------------------------
18,876,700 6.92%, Series 1578FE, 7/15/2022 17,293,511
---------------------------------------------------------------------- --------------
Total 29,190,007
---------------------------------------------------------------------- --------------
FEDERAL HOME LOAN MORTGAGE CORP.--0.4%
----------------------------------------------------------------------
4,012,648 11.50%, 5/1/2019 4,363,714
---------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--1.5%
----------------------------------------------------------------------
5,874,521 6.512%, Series G91-15F, 6/25/2021 5,808,139
----------------------------------------------------------------------
5,304,048 6.662%, Series G92-16F, 3/25/2022 5,260,767
----------------------------------------------------------------------
5,910,303 6.662%, Series G92-21F, 4/25/2022 5,873,482
---------------------------------------------------------------------- --------------
Total 16,942,388
---------------------------------------------------------------------- --------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.5%
----------------------------------------------------------------------
5,485,723 11.50%, 2/1/2020 6,008,513
---------------------------------------------------------------------- --------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--4.0%
----------------------------------------------------------------------
16,645,585 11.00%, 12/15/2009 - 7/15/2020 18,247,556
----------------------------------------------------------------------
17,445,693 11.50%, 10/15/2010 - 4/15/2020 19,288,133
----------------------------------------------------------------------
6,676,250 12.00%, 9/15/2013 - 1/15/2014 7,450,161
---------------------------------------------------------------------- --------------
Total 44,985,850
---------------------------------------------------------------------- --------------
TOTAL GOVERNMENT AGENCY OBLIGATIONS (IDENTIFIED COST,
$1,009,460,596) 1,007,017,978
---------------------------------------------------------------------- --------------
</TABLE>
3
FEDERATED ARMS FUND
- ---------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ---------------------------------------------------------------------- --------------
<C> <S> <C>
TREASURY OBLIGATION--3.5%
- ------------------------------------------------------------------------------------
U.S. TREASURY NOTE--3.5%
----------------------------------------------------------------------
$ 40,000,000 6.125%, 7/31/1996 (IDENTIFIED COST, $39,914,016) $ 39,728,000
---------------------------------------------------------------------- --------------
(A) REPURCHASE AGREEMENTS--5.6%
- ------------------------------------------------------------------------------------
62,000,000 Harris Government Securities, 6.07%, dated 2/28/1995, due 3/1/1995 62,000,000
----------------------------------------------------------------------
885,000 J. P. Morgan Securities, Inc., 6.13%, dated 2/28/1995, due 3/1/1995 885,000
---------------------------------------------------------------------- --------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 62,885,000
---------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $1,112,259,612)(B) $1,109,630,978
---------------------------------------------------------------------- --------------
<FN>
(a) The repurchase agreements are fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreements is through participation in joint
accounts with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $1,112,259,612.
The net unrealized depreciation on a federal tax cost basis amounts to
$2,628,634, and is comprised of $5,871,545 appreciation and $8,500,179
depreciation at February 28, 1995.
Note: The categories of investments are shown as a percentage of net assets
($1,122,976,245) at February 28, 1995.
</TABLE>
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
PC --Participation Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
(See Notes which are an integral part of the Financial Statements.)
4
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,112,259,612, and tax cost $1,112,259,612) $1,109,630,978
- ------------------------------------------------------------------------------------------------------------------
Cash 2,023
- ------------------------------------------------------------------------------------------------------------------
Income receivable 18,810,882
- ------------------------------------------------------------------------------------------------------------------
Receivable for shares sold 39,004
- ------------------------------------------------------------------------------------------------------------------ --------------
Total assets 1,128,482,887
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------
Payable for shares redeemed $1,404,219
- ------------------------------------------------------------------------------------------------------
Income distribution payable 4,017,109
- ------------------------------------------------------------------------------------------------------
Accrued expenses 85,314
- ------------------------------------------------------------------------------------------------------ ----------
Total liabilities 5,506,642
- ------------------------------------------------------------------------------------------------------------------ --------------
NET ASSETS for 116,968,683 shares outstanding $1,122,976,245
- ------------------------------------------------------------------------------------------------------------------ --------------
NET ASSETS CONSISTS OF:
- ------------------------------------------------------------------------------------------------------------------
Paid in capital $1,209,736,350
- ------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (2,628,634)
- ------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (84,300,479)
- ------------------------------------------------------------------------------------------------------------------
Undistributed net investment income 169,008
- ------------------------------------------------------------------------------------------------------------------ --------------
Total Net Assets $1,122,976,245
- ------------------------------------------------------------------------------------------------------------------ --------------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
- ------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
($952,485,030 DIVIDED BY 99,210,800 shares outstanding) $ 9.60
- ------------------------------------------------------------------------------------------------------------------ --------------
INSTITUTIONAL SERVICE SHARES:
($170,491,215 DIVIDED BY 17,757,883 shares outstanding) $ 9.60
- ------------------------------------------------------------------------------------------------------------------ --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
5
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $58,109) $ 38,516,159
- --------------------------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------------------------
Investment advisory fee $3,858,126
- --------------------------------------------------------------------------------------------------------
Administrative personnel and services fee 486,767
- --------------------------------------------------------------------------------------------------------
Custodian fees 135,034
- --------------------------------------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 25,721
- --------------------------------------------------------------------------------------------------------
Directors'/Trustees' fees 12,489
- --------------------------------------------------------------------------------------------------------
Auditing fees 9,955
- --------------------------------------------------------------------------------------------------------
Legal fees 21,358
- --------------------------------------------------------------------------------------------------------
Portfolio accounting fees 57,872
- --------------------------------------------------------------------------------------------------------
Institutional Service Shares--Distribution services fee 263,634
- --------------------------------------------------------------------------------------------------------
Institutional Service Shares--Shareholder services fee 259,521
- --------------------------------------------------------------------------------------------------------
Share registration costs 22,082
- --------------------------------------------------------------------------------------------------------
Printing and postage 10,860
- --------------------------------------------------------------------------------------------------------
Insurance premiums 15,385
- --------------------------------------------------------------------------------------------------------
Taxes 9,955
- --------------------------------------------------------------------------------------------------------
Miscellaneous 14,615
- -------------------------------------------------------------------------------------------------------- ----------
Total expenses 5,203,374
- --------------------------------------------------------------------------------------------------------
Deduct--
- --------------------------------------------------------------------------------------------
Waiver of investment advisory fee $1,143,603
- --------------------------------------------------------------------------------------------
Waiver of distribution services fee 259,521
- -------------------------------------------------------------------------------------------- ----------
Total waivers 1,403,124
- -------------------------------------------------------------------------------------------------------- ----------
Net expenses 3,800,250
- -------------------------------------------------------------------------------------------------------------------- ------------
Net investment income 34,715,909
- -------------------------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (13,696,328)
- --------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments 5,635,812
- -------------------------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (8,060,516)
- -------------------------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 26,655,393
- -------------------------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
6
FEDERATED ARMS FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1995 YEAR ENDED
(UNAUDITED) AUGUST 31, 1994
----------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------
Net investment income $ 34,715,909 $ 109,274,386
- ---------------------------------------------------------
Net realized gain (loss) on investments ($13,696,328 and
$16,735,698, respectively, as computed for federal income
tax purposes) (13,696,328) (55,879,989)
- ---------------------------------------------------------
Net change in unrealized appreciation (depreciation) 5,635,812 (24,269,803)
- --------------------------------------------------------- ----------------- ---------------
Change in assets resulting from operations 26,655,393 29,124,594
- --------------------------------------------------------- ----------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------
Institutional Shares--Distributions from net investment
income (29,144,266) (90,585,086)
- ---------------------------------------------------------
Institutional Service Shares--Distributions from net
investment income (5,402,635) (18,689,300)
- --------------------------------------------------------- ----------------- ---------------
Change in net assets resulting from distributions to
shareholders (34,546,901) (109,274,386)
- ---------------------------------------------------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------
Proceeds from sale of Shares 33,103,286 1,886,076,982
- ---------------------------------------------------------
Net asset value of Shares issued to shareholders in
payment of dividends declared 8,889,744 34,585,437
- ---------------------------------------------------------
Cost of Shares redeemed (405,829,302) (3,515,114,267)
- --------------------------------------------------------- ----------------- ---------------
Change in net assets resulting from share
transactions (363,836,272) (1,594,451,848)
- --------------------------------------------------------- ----------------- ---------------
Change in net assets (371,727,780) (1,674,601,640)
- ---------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------
Beginning of period 1,494,704,025 3,169,305,665
- --------------------------------------------------------- ----------------- ---------------
End of period (including undistributed net investment
income of $169,008 and $0, respectively) $ 1,122,976,245 $1,494,704,025
- --------------------------------------------------------- ----------------- ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
7
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
(UNAUDITED) YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986(A)
------------ ---------- ---------- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING OF
PERIOD $ 9.63 $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98 $10.00
- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
- ---------------
Net
investment
income 0.26 0.45 0.50 0.63 0.69 0.71 0.72 0.73 0.78 0.62
- ---------------
Net realized
and
unrealized
gain (loss)
on
investments (0.03) (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11) (0.99) (0.02)
- --------------- ------ ---------- ---------- ---------- ------- ------- ------- ------- ------- -------
Total from
investment
operations 0.23 0.10 0.47 1.05 1.37 0.23 1.31 0.62 (0.21) 0.60
- ---------------
LESS
DISTRIBUTIONS
- ---------------
Distributions
from net
investment
income (0.26) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- ---------------
Distributions
from net
realized gain
on investment
transactions -- -- -- (0.08) -- -- -- -- -- --
- --------------- ------ ---------- ---------- ---------- ------- ------- ------- ------- ------- -------
Total
distributions (0.26) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73) (0.78) (0.62)
- --------------- ------ ---------- ---------- ---------- ------- ------- ------- ------- ------- -------
NET ASSET
VALUE, END OF
PERIOD $ 9.60 $ 9.63 $ 9.98 $ 10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98
- --------------- ------ ---------- ---------- ---------- ------- ------- ------- ------- ------- -------
TOTAL RETURN
(B) 2.48% 0.99% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09% (2.33)% 6.16%
- ---------------
RATIOS TO
AVERAGE NET
ASSETS
- ---------------
Expenses 0.55%(c) 0.55% 0.51% 0.51% 0.78% 0.78% 0.79% 0.75% 0.81% 0.96%(c)
- ---------------
Net
investment
income 5.44%(c) 4.51% 4.97% 5.95% 7.36% 7.62% 7.81% 8.10% 7.88% 9.84%(c)
- ---------------
Expense
waiver/
reimbursement
(d) 0.18%(c) 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18% 0.75% 1.50%(c)
- ---------------
SUPPLEMENTAL
DATA
- ---------------
Net assets,
end of period
(000 omitted) $952,485 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753 $7,405 $5,433
- ---------------
Portfolio
turnover 52% 65% 36% 38% 127% 170% 85% 125% 228% 89%
- ---------------
<FN>
(a) Reflects operations for the period from December 3, 1985, to August 31,
1986. For the period from the start of business, November 18, 1985, to
December 2, 1985, net investment income was distributed to the Fund's
investment adviser. Such distribution represented the net investment
income of the Fund prior to the initial public offering of Fund shares,
which commenced December 3, 1985.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
8
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
(UNAUDITED) YEAR ENDED AUGUST 31,
------------------------------------------------
1995 1994 1993 1992(A)
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 9.98 $ 10.01 $ 9.98
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.25 0.42 0.48 0.18
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.03) (0.35) (0.03) 0.03
- ---------------------------------------------------------------------- ------ --------- --------- ---------
Total from investment operations 0.22 0.07 0.45 0.21
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Distributions from net investment income (0.25) (0.42) (0.48) (0.18)
- ---------------------------------------------------------------------- ------ --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.60 $ 9.63 $ 9.98 $ 10.01
- ---------------------------------------------------------------------- ------ --------- --------- ---------
TOTAL RETURN (B) 2.35% 0.74% 4.56% 2.11%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.80%(c) 0.80% 0.76% 0.76%(c)
- ----------------------------------------------------------------------
Net investment income 5.17%(c) 4.26% 4.72% 5.46%(c)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.40%(c) 0.23% 0.21% 0.32%(c)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $170,491 $255,891 $499,418 $113,095
- ----------------------------------------------------------------------
Portfolio turnover 52% 65% 36% 38%
- ----------------------------------------------------------------------
<FN>
(a) Reflects operations for the period from May 4, 1992 (date of initial public
investment) to August 31, 1992.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
</TABLE>
(See Notes which are an integral part of the Financial Statements)
9
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION
Federated ARMs Fund (the "Fund") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as a diversified, open-end management
investment company. The Fund provides two classes of shares: Institutional
Shares and Institutional Service Shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Short-term securities with remaining
maturities of sixty days or less at the time of purchase may be valued at
amortized cost, which approximates value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
10
FEDERATED ARMS FUND
- ---------------------------------------------------------
At August 31, 1994, the Fund, for federal tax purposes, had a capital loss
carryforward of $18,535,131, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 2001 ($1,799,433), and 2002 ($16,735,698).
Additionally, net capital losses of $52,068,567 attributable to security
transactions incurred after August 31, 1994 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
OTHER--Investment transactions are accounted for on the trade date.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, FHLMC, in which
the Fund sells mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon and
maturity) securities at a later date at an agreed upon price. Dollar roll
transactions are short-term financing arrangements which will not exceed
twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments that may enhance the Fund's
current yield and total return.
11
FEDERATED ARMS FUND
- ---------------------------------------------------------
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY YEAR ENDED
28, 1995 AUGUST 31, 1994
-------------------------- -----------------------------
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 2,522,533 $ 24,033,923 141,739,864 $ 1,407,584,109
- ----------------------------------------
Shares issued to shareholders in payment
of dividends declared 751,621 7,163,735 2,487,150 24,495,269
- ----------------------------------------
Shares redeemed (32,672,606) (311,008,716) (283,203,693) (2,797,587,573)
- ---------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from
Institutional Shares transactions (29,398,452) $(279,811,058) (138,976,679) $(1,365,508,195)
- ---------------------------------------- ----------- ------------- ------------ ---------------
<CAPTION>
SIX MONTHS ENDED FEBRUARY YEAR ENDED
28, 1995 AUGUST 31, 1994
-------------------------- -----------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 949,588 $ 9,069,363 48,183,748 $ 478,492,873
- ----------------------------------------
Shares issued to shareholders in payment
of dividends declared 181,080 1,726,009 1,024,374 10,090,168
- ----------------------------------------
Shares redeemed (9,937,496) (94,820,586) (72,696,731) (717,526,694)
- ---------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from
Institutional Service Shares
transactions (8,806,828) $ (84,025,214) (23,488,609) $ (228,943,653)
- ---------------------------------------- ----------- ------------- ------------ ---------------
Net change resulting from Fund share
transactions (38,205,280) $(363,836,272) (162,465,288) $(1,594,451,848)
- ---------------------------------------- ----------- ------------- ------------ ---------------
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .60 of 1% of the Fund's average daily net assets.
The Adviser may voluntarily choose to waive a portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Servicies Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated
12
FEDERATED ARMS FUND
- ---------------------------------------------------------
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. FSC may
voluntarily choose to waive any portion of its fee. FSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Fund for the period. This fee is to obtain
certain personal services for shareholders and to maintain the shareholder
accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's average
net assets for the period plus out-of-pocket expenses.
INTERFUND TRANSACTIONS--During the six months ended February 28, 1995, the Fund
engaged in purchase and sale transactions with funds at current market value
pursuant to Rule 17a-7 under the Act amounting to $114,672,188 and $107,814,458,
respectively.
GENERAL--Certain of the Officers and Trustees of the Fund are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the six
months ended February 28, 1995, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C>
PURCHASES $642,344,781
- ---------------------------------------------------------------------- ------------
SALES $883,849,358
- ---------------------------------------------------------------------- ------------
</TABLE>
13
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
- ---------------------------------------------------------
<S> <C>
John F. Donahue John F. Donahue
John T. Conroy, Jr. CHAIRMAN
William J. Copeland Glen R. Johnson
James E. Dowd PRESIDENT
Lawrence D. Ellis, M.D. J. Christopher Donahue
Edward L. Flaherty, Jr. VICE PRESIDENT
Peter E. Madden Edward C. Gonzales
Gregor F. Meyer VICE PRESIDENT AND TREASURER
John E. Murray, Jr. John W. McGonigle
Wesley W. Posvar VICE PRESIDENT AND SECRETARY
Marjorie P. Smuts David M. Taylor
ASSISTANT TREASURER
Robert C. Rosselot
ASSISTANT SECRETARY
</TABLE>
Mutual funds are not bank deposits or obligations, are not
guaranteed by any bank, and are not insured or guaranteed by the
U.S. government, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other government agency. Investment
in mutual funds involves investment risk, including possible loss
of principal.
This report is authorized for distribution to prospective
investors only when preceded or accompanied by the Fund's
prospectus which contains facts concerning its objective and
policies, management fees, expenses and other information.
14
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FEDERATED
- --------------------------------------------------------------------------------
ARMS
- --------------------------------------------------------------------------------
FUND
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
FEBRUARY 28, 1995
[FEDERATED LOGO] ----------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
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FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
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314082108
314082207
8040404 (4/95)
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