- --------------------------------------------------------------------------------
FEDERATED
- --------------------------------------------------------------------------------
ARMs FUND
- --------------------------------------------------------------------------------
Semi-Annual Report
To Shareholders
FEBRUARY 29, 1996
FEDERATED INVESTORS
(LOGO)
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 314082108
Cusip 314082207
8040404 (4/96)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Investor:
I'm pleased to present the Semi-Annual Report to Shareholders for Federated ARMs
Fund. The Report covers the six-month period ended February 29, 1996, and
includes the fund's Investment Review and Financial Statements. Separate
Financial Highlights tables are included for the fund's two classes of shares:
Institutional Shares and Institutional Service Shares.
To help investors keep pace with fluctuating interest rates, Federated ARMs Fund
pursues monthly income from a portfolio of adjustable rate and floating rate
mortgage securities. The prompt payment of principal and interest on these
portfolio securities is guaranteed by the U.S. government, its agencies or
instrumentalities. Of course, fund shares are not guaranteed.
For the period ended February 29, 1996, the fund's Institutional Shares achieved
a total return of 3.40%* and paid dividends totaling $0.29 per share, while the
Institutional Service Shares achieved a total return of 3.27%* and paid
dividends totaling $0.28. On February 29, 1996, total net assets in the fund
stood at $864.8 million.
Thank you for your participation in Federated ARMs Fund. We welcome your
questions and comments.
Sincerely,
LOGO
Glen R. Johnson
President
April 15, 1996
* 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.
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Federated ARMs Fund (the "Fund") provides shareholders with a professionally
managed portfolio of U.S. government adjustable rate securities. The Fund is
managed for a short effective duration of 1.0 to 1.5 years and is invested
primarily in adjustable rate mortgage-backed securities. Current investment
strategy emphasizes a diversified range of adjustable rate mortgage securities
with coupons averaging 7.6% and a weighted average effective duration of 1.2
years.
Over the course of 1995, ARMs underperformed comparable duration Treasuries and
fixed rate mortgage securities. The reason for this underperformance was due to
the 200 plus basis point rally in the Treasury market and mortgage rates closing
in on levels witnessed in 1993. The combination of these two events brought a
larger percentage of the conventional ARM universe into refinanceable territory.
However, the first two months of 1996 have witnessed a reversal of this trend to
the benefit of investors in the adjustable rate sector.
As a result, investors are focusing greater attention on the seasoning
characteristics of adjustable rate securities. These securities have had prior
opportunities to refinance during the 1989 yield curve inversion and the 1993
lows in mortgage rates. Therefore, we believe that these securities should offer
good return from cash flow with limited downside risk and a cushion against a
back up in rates or a steepening of the yield curve.
Current strategy is to maintain core holdings of fully indexed, seasoned
securities while selling new production ARMs, predominantly 1992-94 vintage,
which have higher prepayment risk. During the semi-annual reporting period, the
Fund also reduced exposure to the GNMA ARM sector due to the outperformance on a
duration adjusted basis to U.S. Treasuries. In addition, the portfolio scaled
down its holdings of teaser conventional ARMs. Cash flow from these transactions
was deployed into the short end of the U.S. Treasury market to take advantage of
the increase in market yields in late February.
As of February 29, 1996, the Fund recorded net assets of $864.8 million with an
average 30-day yield as calculated under SEC guidelines of 6.08%* for
Institutional Shares and 5.82%* for Institutional Service Shares, based upon a
net asset value of $9.68. The Fund's net total return for the six months ended
February 29, 1996, was 3.40% for the Institutional Shares and 3.27% for the
Institutional Service Shares* compared to 2.96% for the Merrill Lynch 1-Year
Treasury Index,** 3.35% for the Merrill Lynch 2-Year Treasury Index,** and 1.27%
for the Lipper ARM Fund Average.*** The Fund is rated AAAf+ for credit quality
by Standard & Poor's, and Aaa+ by Moody's, 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.
** Merrill Lynch 1-Year Treasury Index is comprised of the most recently issued
1-year Treasury notes. Merrill Lynch 2-Year Treasury Index is comprised of
the most recently issued 2-year Treasury notes. Index returns are calculated
as total returns for periods of one, three, six and twelve months as well as
year-to-date. Indexes are unmanaged. Investments cannot be made in an index.
*** Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the respective categories indicated. These figures do not reflect sales
charges.
+ An AAAf rating means that the fund's portfolio holdings and counterparties
provide extremely strong protection against losses from credit defaults.
Money market funds and bond funds rated Aaa by Moody's are judged to be of
an investment quality similar to Aaa-rated fixed income obligations, that
is, they are judged to be of the best quality. These ratings do not remove
market risks and are subject to change.
FEDERATED ARMS FUND
PORTFOLIO OF INVESTMENTS
FEBRUARY 29, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- ------------- --------------------------------------------------------------------------- -------------
U.S. GOVERNMENT OBLIGATIONS--82.4%
- --------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--45.7%
---------------------------------------------------------------------------
$ 383,728,041 5.580%-8.335%, 11/1/2017-7/1/2030 $ 394,909,449
--------------------------------------------------------------------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.4%
---------------------------------------------------------------------------
19,602 12.000%, 3/1/2013 22,358
---------------------------------------------------------------------------
3,676,480 11.500%, 8/1/2014-11/1/2015 4,162,400
---------------------------------------------------------------------------
6,254,539 11.000%, 12/1/2015 7,003,020
---------------------------------------------------------------------------
9,000,000 9.500%, 7/1/2016 9,798,750
--------------------------------------------------------------------------- -------------
Total 20,986,528
--------------------------------------------------------------------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--14.6%
---------------------------------------------------------------------------
122,219,733 5.665%-8.302%, 8/1/2018-8/1/2027 126,099,157
--------------------------------------------------------------------------- -------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION NOTE--1.1%
---------------------------------------------------------------------------
10,000,000 6.000%, 4/9/1999 9,906,250
--------------------------------------------------------------------------- -------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--8.3%
---------------------------------------------------------------------------
5,167,784 12.000%, 9/15/2013-1/15/2014 5,938,043
---------------------------------------------------------------------------
14,189,718 11.500%, 10/15/2010-4/15/2020 16,145,061
---------------------------------------------------------------------------
13,880,841 11.000%, 12/15/2009-7/15/2020 15,620,110
---------------------------------------------------------------------------
31,716,887 9.500%, 7/15/2007 33,976,715
--------------------------------------------------------------------------- -------------
Total 71,679,929
--------------------------------------------------------------------------- -------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--10.3%
---------------------------------------------------------------------------
40,000,000 (a) 5.500%-6.000%, 2/28/2026 40,175,000
---------------------------------------------------------------------------
48,947,480 5.500%-6.000%, 10/20/2025-3/20/2026 49,220,016
--------------------------------------------------------------------------- -------------
Total 89,395,016
--------------------------------------------------------------------------- -------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST,
$708,161,572) 712,976,329
--------------------------------------------------------------------------- -------------
</TABLE>
<ST,,,0>
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <C> <S> <C>
- ------------- --------------------------------------------------------------------------- -------------
U.S. TREASURY OBLIGATIONS--12.2%
- --------------------------------------------------------------------------------------------
U.S. TREASURY NOTES--12.2%
---------------------------------------------------------------------------
$ 54,300,000 5.250%, 12/31/1997 $ 54,141,444
---------------------------------------------------------------------------
50,000,000 7.250%, 2/15/1998 51,652,500
--------------------------------------------------------------------------- -------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST, $106,442,675) 105,793,944
--------------------------------------------------------------------------- -------------
(B) REPURCHASE AGREEMENTS--14.9%
- --------------------------------------------------------------------------------------------
49,225,000 B.T. Securities (Australia) Ltd., 5.450%, dated 2/29/1996, due 3/1/1996 49,225,000
---------------------------------------------------------------------------
25,000,000 (c) Morgan Stanley & Co., Inc., 5.265%, dated 2/22/1996, due 3/21/1996 25,000,000
---------------------------------------------------------------------------
55,000,000 (c) UBS Securities, Inc., 5.360%, dated 2/22/1996, due 3/21/1996 55,000,000
--------------------------------------------------------------------------- -------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 129,225,000
--------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST, $943,829,247)(D) $ 947,995,273
--------------------------------------------------------------------------- -------------
</TABLE>
(a) These securities are subject to dollar roll transactions.
(b) 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
investments in the repurchase agreements are through participation in joint
accounts with other Federated funds.
(c) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if the creditworthiness of the issuer is
downgraded.
(d) The cost of investments for federal tax purposes amounts to $943,829,247.
The net unrealized appreciation of investments on a federal tax basis
amounts to $4,166,026 which is comprised of $6,984,025 appreciation and
$2,817,999 depreciation at February 29, 1996.
Note: The categories of investments are shown as a percentage of net assets
($864,852,310) at February 29, 1996.
The following acronyms are used throughout this portfolio:
<TABLE>
<S> <C>
ARM--Adjustable Rate Mortgage
PC --Participation Certificate
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996 (UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------
Investments in repurchase agreements $129,225,000
- ---------------------------------------------------------------
Investments in securities 818,770,273
- --------------------------------------------------------------- ------------
Total investments in securities, at value
(identified and tax cost $943,829,247) $ 947,995,273
- ------------------------------------------------------------------------------
Income receivable 16,663,108
- ------------------------------------------------------------------------------
Receivable for investments sold 90,058,568
- ------------------------------------------------------------------------------
Receivable for shares sold 18,628
- ------------------------------------------------------------------------------ --------------
Total assets 1,054,735,577
- ------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------
Payable for investments purchased $104,888,710
- ---------------------------------------------------------------
Payable for shares redeemed 4,838
- ---------------------------------------------------------------
Income distribution payable 4,325,893
- ---------------------------------------------------------------
Payable to bank 6,804
- ---------------------------------------------------------------
Payable for dollar roll transactions 80,566,579
- ---------------------------------------------------------------
Accrued expenses 90,443
- --------------------------------------------------------------- ------------
Total liabilities 189,883,267
- ------------------------------------------------------------------------------ --------------
NET ASSETS for 89,337,220 shares outstanding $ 864,852,310
- ------------------------------------------------------------------------------ --------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------
Paid in capital $ 942,913,553
- ------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,166,026
- ------------------------------------------------------------------------------
Accumulated net realized loss on investments (82,236,064)
- ------------------------------------------------------------------------------
Undistributed net investment income 8,795
- ------------------------------------------------------------------------------ --------------
Total Net Assets $ 864,852,310
- ------------------------------------------------------------------------------ --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ------------------------------------------------------------------------------
Institutional Shares:
($738,216,583 / 76,256,069 shares outstanding) $9.68
- ------------------------------------------------------------------------------ --------------
Institutional Service Shares:
($126,635,727 / 13,081,151 shares outstanding) $9.68
- ------------------------------------------------------------------------------ --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -----------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $412,370) $30,572,308
- -----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------------
Investment advisory fee $ 2,770,522
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 349,332
- ----------------------------------------------------------------------------------------
Custodian fees 88,268
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 50,019
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 7,372
- ----------------------------------------------------------------------------------------
Auditing fees 8,918
- ----------------------------------------------------------------------------------------
Legal fees 3,352
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 70,493
- ----------------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 160,873
- ----------------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 993,511
- ----------------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 160,873
- ----------------------------------------------------------------------------------------
Share registration costs 14,014
- ----------------------------------------------------------------------------------------
Printing and postage 9,644
- ----------------------------------------------------------------------------------------
Insurance premiums 8,008
- ----------------------------------------------------------------------------------------
Taxes 8,372
- ----------------------------------------------------------------------------------------
Miscellaneous 10,920
- ---------------------------------------------------------------------------------------- ---------
Total expenses 4,714,491
- ----------------------------------------------------------------------------------------
Waivers--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee $(839,488)
- ----------------------------------------------------------------------------
Waiver of distribution services fee--Institutional Service Shares (158,942)
- ----------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (993,511)
- ----------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Service Shares (1,930)
- ---------------------------------------------------------------------------- --------
Total waivers (1,993,871)
- ---------------------------------------------------------------------------------------- ---------
Net expenses 2,720,620
- -------------------------------------------------------------------------------------------------------- -----------
Net investment income 27,851,688
- -------------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------------
Net realized gain on investments 3,264,941
- --------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments (500,213)
- -------------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 2,764,728
- -------------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $30,616,416
- -------------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 29, 1996 YEAR ENDED
(UNAUDITED) AUGUST 31, 1995
----------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------
Net investment income $ 27,851,688 $ 66,805,803
- -------------------------------------------------------
Net realized gain (loss) on investments ($3,264,941 net
gain and $57,180,753 net loss, respectively, as
computed for federal tax purposes) 3,264,941 (14,896,854)
- -------------------------------------------------------
Net change in unrealized appreciation (depreciation) (500,213) 12,930,685
- ------------------------------------------------------- ------------- --------------
Change in net assets resulting from operations 30,616,416 64,839,634
- ------------------------------------------------------- ------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- -------------------------------------------------------
Distributions from net investment income
- -------------------------------------------------------
Institutional Shares (24,310,403) (56,778,571)
- -------------------------------------------------------
Institutional Service Shares (3,776,991) (9,782,730)
- ------------------------------------------------------- ------------- --------------
Change in net assets resulting from distributions
to shareholders (28,087,394) (66,561,301)
- ------------------------------------------------------- ------------- --------------
SHARE TRANSACTIONS--
- -------------------------------------------------------
Proceeds from sales of shares 30,886,586 53,202,918
- -------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 5,245,241 16,413,082
- -------------------------------------------------------
Cost of shares redeemed (165,998,090) (570,408,807)
- ------------------------------------------------------- ------------- --------------
Change in net assets resulting from share
transactions (129,866,263) (500,792,807)
- ------------------------------------------------------- ------------- --------------
Change in net assets (127,337,241) (502,514,474)
- -------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------
Beginning of period 992,189,551 1,494,704,025
- ------------------------------------------------------- ------------- --------------
End of period (including undistributed net investment
income of $8,795 and $244,502, respectively) $ 864,852,310 $ 992,189,551
- ------------------------------------------------------- ------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 29,
(UNAUDITED) YEAR ENDED AUGUST 31,
------------ ----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET
VALUE,
BEGINNING
OF PERIOD $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99 $ 9.98
- -----------
INCOME FROM
INVESTMENT
OPERATIONS
- -----------
Net
investment
income 0.29 0.56 0.45 0.50 0.63 0.69 0.71 0.72 0.73 0.78
- -----------
Net
realized
and
unrealized
gain
(loss)
on
investments 0.03 0.02 (0.35) (0.03) 0.42 0.68 (0.48) 0.59 (0.11) (0.99)
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from
investment
operations 0.32 0.58 0.10 0.47 1.05 1.37 0.23 1.31 0.62 (0.21)
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS
DISTRIBUTIONS
- -----------
Distributions
from net
investment
income (0.29) (0.56) (0.45) (0.50) (0.63) (0.69) (0.71) (0.72) (0.73) (0.78)
- -----------
Distributions
from net
realized
gain on
investment
transactions -- -- -- -- (0.08) -- -- -- -- --
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total
distributions (0.29) (0.56) (0.45) (0.50) (0.71) (0.69) (0.71) (0.72) (0.73) (0.78)
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET
VALUE,
END OF
PERIOD $ 9.68 $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.67 $ 8.99 $ 9.47 $ 8.88 $ 8.99
- ----------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL
RETURN(A) 3.40% 6.21% 0.99% 4.82% 11.21% 15.73% 2.45% 15.25% 7.09% (2.33)%
- -----------
RATIOS TO
AVERAGE
NET ASSETS
- -----------
Expenses 0.55%* 0.55% 0.55% 0.51% 0.51% 0.78% 0.78% 0.79% 0.75% 0.81%
- -----------
Net
investment
income 6.07%* 5.74% 4.51% 4.97% 5.95% 7.36% 7.62% 7.81% 8.10% 7.88%
- -----------
Expense
waiver/
reimbursement(b) 0.43%* 0.43% 0.14% 0.21% 0.32% 1.02% 1.02% 0.95% 1.18% 0.75%
- -----------
SUPPLEMENTAL
DATA
- -----------
Net
assets,
end of
period
(000
omitted) $738,216 $856,500 $1,238,813 $2,669,888 $1,090,944 $30,330 $26,261 $25,574 $16,753 $7,405
- -----------
Portfolio
turnover
rate 59% 124% 65% 36% 38% 127% 170% 85% 125% 228%
- -----------
</TABLE>
* Computed on an annualized basis.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 29,
(UNAUDITED) YEAR ENDED AUGUST 31,
------------- ------------------------------------------
1996 1995 1994 1993 1992(A)
------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 9.63 $ 9.98 $10.01 $ 9.98
- ---------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------
Net investment income 0.28 0.54 0.42 0.48 0.18
- ---------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.03 0.02 (0.35) (0.03) 0.03
- --------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations 0.31 0.56 0.07 0.45 0.21
- ---------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------
Distributions from net investment income (0.28) (0.54) (0.42) (0.48) (0.18)
- --------------------------------------------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.68 $ 9.65 $ 9.63 $ 9.98 $10.01
- --------------------------------------------- ------ ------ ------ ------ ------
TOTAL RETURN(B) 3.27% 5.94% 0.74% 4.56% 2.11%
- ---------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------
Expenses 0.80%* 0.80% 0.80% 0.76% 0.76%*
- ---------------------------------------------
Net investment income 5.82%* 5.44% 4.26% 4.72% 5.46%*
- ---------------------------------------------
Expense waiver/reimbursement(c) 0.43%* 0.43% 0.23% 0.21% 0.32%*
- ---------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------
Net assets, end of period (000 omitted) $126,635 $135,689 $255,891 $499,418 $113,095
- ---------------------------------------------
Portfolio turnover rate 59% 124% 65% 36% 38%
- ---------------------------------------------
</TABLE>
* Computed on an annualized basis.
(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 charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ARMS FUND
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996 (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 offers 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 obligations are generally valued at
the mean of the latest bid and asked price as furnished by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE 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. At August 31, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $75,715,884, which
will reduce the Fund's
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
--------------------------------------------- ------------------
<S> <C>
2001 $ 1,799,433
2002 $16,735,698
2003 $57,180,753
</TABLE>
Additionally, net capital losses of $9,722,167 attributable to security
transactions incurred after October 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.
DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA, and 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, which may enhance the
Fund's current yield and total return.
OTHER--Investment transactions are accounted for on the trade date.
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 YEAR ENDED
FEBRUARY 29, 1996 AUGUST 31, 1995
---------------------------- ----------------------------
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 2,453,687 $ 23,753,461 4,182,411 $ 40,047,848
- ----------------------------------------------
Shares issued to shareholders in
payment of distributions declared 459,491 4,445,043 1,395,941 13,381,363
- ----------------------------------------------
Shares redeemed (15,369,798) (148,667,202) (45,474,917) (434,478,884)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Share transactions (12,456,620) $(120,468,698) (39,896,565) $(381,049,673)
- ---------------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 29, 1996 AUGUST 31, 1995
---------------------------- ----------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 735,710 7,133,125 1,373,723 $ 13,155,070
- ----------------------------------------------
Shares issued to shareholders in
payment of distributions declared 82,726 800,198 316,407 3,031,719
- ----------------------------------------------
Shares redeemed (1,791,313) (17,330,888) (14,200,812) (135,929,923)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Service Share transactions (972,877) $ (9,397,565) (12,510,682) $(119,743,134)
- ---------------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Fund Share transactions (13,429,497) $(129,866,263) (52,407,247) $(500,792,807)
- ---------------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to 0.60% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FServ fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors for
the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
FEDERATED ARMS FUND
- --------------------------------------------------------------------------------
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 0.25% of the average daily net assets of the
Institutional Service Shares, annually, to compensate FSC. FSC may voluntarily
choose to waive a portion of its fee. FSC can modify or terminate this voluntary
waiver at any time at its sole discretion.
SHAREHOLDER SERVICE FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay up to 0.25% of
average daily net assets of the Fund for the period. The fee paid to FSS is to
obtain certain services for shareholders and to maintain shareholder accounts.
FSS may voluntarily choose to waive a portion of this fee. FSS can modify or
terminate this voluntary waiver at any time at its sole discretion. For the
period ended February 29, 1996, the Institutional Shares fully waived its
shareholder services fee.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through
its registered transfer and dividend disbursing agent, Federated Shareholder
Services Company, maintains all necessary shareholder records and receives a fee
based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL--Certain of the Officers and Trustees of the Fund are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 29, 1996, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------
PURCHASES $520,379,740
- ------------------------------------------------------------- ------------
SALES $564,469,480
- ------------------------------------------------------------- ------------
</TABLE>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Executive Vice President
Gregor F. Meyer John W. McGonigle
John E. Murray, Jr. Executive Vice President and
Wesley W. Posvar Secretary
Marjorie P. Smuts Richard B. Fisher
Vice President
David M. Taylor
Treasurer
J. Crilley Kelly
Assistant Secretary
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 the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
