PRESIDENT'S MESSAGE
Dear Investor:
I am pleased to present the Semi-Annual Report for Federated ARMs Fund. The
report covers the six-month period ended February 28, 1998, and includes an
investment review by the portfolio manager, a complete list of holdings, and the
financial statements for the fund's two classes of shares: Institutional Shares
and Institutional Service Shares.
Federated ARMs Fund offers the potential for monthly income at a level beyond
what is available through money market securities. In addition, its portfolio of
adjustable rate and floating rate mortgage securities helps investors keep pace
with fluctuating interest rates. The prompt payment of principal and interest on
these securities is guaranteed by the U.S. government. Of course, fund shares
are not guaranteed.
Over the six-month period, the fund's Institutional Shares paid dividends
totaling $0.29 per share and achieved a total return of 2.62%. The Institutional
Service Shares paid dividends totaling $0.28 per share and produced a total
return of 2.49%. On February 28, 1998, net assets in the fund totaled $580.4
million.*
Thank you for your participation in Federated ARMs Fund. We welcome your
questions and comments.
Sincerely,
[Graphic]
Glen R. Johnson
President
April 15, 1998
* Performance quoted represents past performance. Unlike money market funds,
which strive to maintain a stable $1.00 share price, investment return and
principal value of the fund 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 provides shareholders with a professionally-managed
portfolio of U.S. government adjustable rate securities. The fund is managed for
a short effective duration of 0.5 to 1.0 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 7.61% and a weighted average effective duration of 0.55 years.
Activity in the U.S. bond market during the semi-annual period was dominated by
events in the Far East. The net result of the East Asian meltdown was a positive
for investors in the U.S. bond market. The flight to quality resulted in the
longer end of the yield curve rallying to 5.69% in mid-January, lower than the
5.78% level reached in October 1993. The economic numbers continue to point to
an economy experiencing a strong labor market and low inflation. The
unemployment rate continues to decline, reaching 4.6%, the lowest level in 27
years. In spite of the record job creation, inflation remains contained. On a
year-over-year basis, the consumer price index (CPI) has increased by 1.4%, the
smallest increase in 30 years. Given these events, the Federal Reserve Board has
moved from a bias toward increasing short-term interest rates to a neutral
policy directive until further economic information is forthcoming regarding the
Far East situation on the U.S. economy.
The rally in the Treasury market has re-ignited mortgage investors concerns over
increased prepayment activity. During the semi-annual reporting period, the
10-year Treasury rallied 70 basis points, and the spread between 1- and 10-year
Treasuries flattened by 55 basis points. This combination provides the perfect
environment for refinancing activity. For an adjustable rate mortgage (ARM)
borrower, this is the best opportunity to refinance to a fixed rate mortgage.
The next several months may be potentially fragile for ARM investors as
prepayment dollars are returned at a rapid pace. One positive potential
technical for adjustable rate investors was the announcement by the FHA that
they have reached their limit to guarantee GNMA ARMs for fiscal year 1998. While
it is not clear what the impact on the secondary GNMA ARM market will be, the
potential exists for other sectors of the adjustable rate market to benefit. The
conventional ARM sector should be the major beneficiary due to limited
origination of ARM product given the FHA situation, flatness of the yield curve,
and investors desire for short duration assets.
Certain sectors of the adjustable rate market have performed reasonably well
during this volatile period. The fund's emphasis on seasoned ARMs in the
conventional and GNMA sectors proved to be beneficial. For example, over the
course of the reporting period, the fund increased exposure to the seasoned GNMA
ARM sector. Like their conventional counterparts, seasoned GNMA ARMs have
substantially lower prepayment risk relative to newer originated adjustable rate
mortgage securities.
As of February 28, 1998, the fund recorded net assets of $580.4 million with an
average 30-day yield as calculated under SEC guidelines of 6.04%* for
Institutional Shares and 5.78%* for Institutional Service Shares, based upon a
net asset value of $9.70. The fund's net total rate of return for the
semi-annual period ending February 28, 1998, was 2.62%* for the Institutional
Shares and 2.49%* for the Institutional Service Shares compared to 2.79% for the
Merrill Lynch 1-Year Treasury Index,** 3.43% for the Merrill Lynch 2-Year
Treasury Index,** and 3.40% 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 and is not indicative of future
results. Investment return and principal value will fluctuate, so when shares
are redeemed, they may be worth more or less than the 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 1, 3, 6, and 12 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. 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.
PORTFOLIO OF INVESTMENTS
FEDERATED ARMS FUND
FEBRUARY 28, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITIES--94.8%
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--33.7%
$ 188,884,178 7.636% - 7.850%, 2/1/2019 - 7/1/2030 $ 196,039,086
FEDERAL HOME LOAN MORTGAGE CORP. REMIC--7.8%
9,500,000 6.250%, 6/15/2008, FHR 1544E 9,535,055
6,075,000 5.750%, 10/15/2016, FHR 1584E 6,057,443
29,600,000 5.600%, 8/15/2017, FHR 1608E 29,438,088
TOTAL 45,030,586
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--14.4%
81,383,029 6.201% - 8.298%, 8/1/2018 - 5/1/2036 83,342,617
FEDERAL NATIONAL MORTGAGE ASSOCIATION REMIC--3.9%
11,606,000 5.750%, 7/25/2005, FNR 93-209E 11,554,701
11,138,000 5.650%, 5/25/2017, FNR 93-206E 11,067,496
TOTAL 22,622,197
FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.8%
15,321 12.000%, 3/1/2013 17,739
2,469,754 11.500%, 8/1/2014 - 11/1/2015 2,817,050
3,884,270 11.000%, 12/1/2015 4,276,348
5,610,353 9.500%, 7/1/2016 6,094,414
3,021,470 8.500%, 4/1/2018 3,181,034
TOTAL 16,386,585
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--19.4%
9,657,537 7.375%, 6/20/2021 - 5/20/2022 9,907,700
85,325,638 7.000%, 3/20/2016 - 9/20/2024 87,481,377
15,078,408 6.000%, 10/20/2027 15,231,303
TOTAL 112,620,380
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--12.8%
3,046,050 12.000%, 9/15/2013 - 1/15/2014 3,556,286
24,228,987 11.500%, 10/15/2010 - 4/15/2020 27,888,402
14,602,463 11.000%, 12/15/2009 - 7/15/2020 16,567,066
23,848,872 9.500%, 12/15/2021 26,084,701
TOTAL 74,096,455
TOTAL U.S. GOVERNMENT INSTRUMENTALITIES (IDENTIFIED COST 550,137,906
$546,744,791)
</TABLE>
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. TREASURY NOTES--1.7%
$ 10,000,000 5.625%, 10/31/1999 (identified cost $10,053,125) $ 10,008,400
(A)REPURCHASE AGREEMENT--2.7%
15,755,000 BT Securities Corp., 5.640%, dated 2/27/1998, due 3/2/1998 15,755,000
(AT AMORTIZED COST)
TOTAL INVESTMENTS (IDENTIFIED COST $ 575,901,306
$572,552,916)(B)
</TABLE>
(a) The repurchase agreement is 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 agreement is through participation in a joint
account with other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $572,552,916.
The net unrealized appreciation of investments on a federal tax basis amounts to
$3,348,390 which is comprised of $4,006,182 appreciation and $657,792
depreciation at February 28, 1998.
Note: The categories of investments are shown as a percentage of net assets
($580,405,998) at February 28, 1998.
The following acronyms are used throughout this portfolio:
ARM --Adjustable Rate Mortgage
PC --Participation Certification
REMIC --Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED ARMS FUND
FEBRUARY 28, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 575,901,306
$572,552,916)
Income receivable 7,358,607
Receivable for shares sold 81,738
Total assets 583,341,651
LIABILITIES:
Income distribution payable $ 2,838,356
Accrued expenses 97,297
Total liabilities 2,935,653
NET ASSETS for 59,856,702 shares outstanding $ 580,405,998
NET ASSETS CONSIST OF:
Paid in capital $ 657,116,349
Net unrealized appreciation of investments 3,348,390
Accumulated net realized loss on investments (80,066,435)
Undistributed net investment income 7,694
Total net assets $ 580,405,998
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$459,009,641 / 47,337,233 shares outstanding $9.70
INSTITUTIONAL SERVICE SHARES:
$121,396,357 / 12,519,469 shares outstanding $9.70
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED ARMS FUND
SIX MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 19,001,731
EXPENSES:
Investment advisory fee $ 1,725,118
Administrative personnel and services fee 216,934
Custodian fees 36,515
Transfer and dividend disbursing agent fees and 32,203
expenses
Directors'/Trustees' fees 8,507
Auditing fees 8,688
Legal fees 2,896
Portfolio accounting fees 64,980
Distribution services fee--Institutional Service 128,496
Shares
Shareholder services fee--Institutional Shares 590,314
Shareholder services fee--Institutional Service Shares 128,496
Share registration costs 13,575
Printing and postage 12,308
Insurance premiums 4,163
Taxes 8,507
Miscellaneous 4,163
Total expenses 2,985,863
Waivers --
Waiver of investment advisory fee $ (544,690)
Waiver of distribution services fee--Institutional (126,954)
Service Shares
Waiver of shareholder services fee--Institutional (590,314)
Shares
Waiver of shareholder services fee--Institutional (1,542)
Service Shares
Total waivers (1,263,500)
Net expenses 1,722,363
Net investment income 17,279,368
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 935,013
Net change in unrealized appreciation of investments (3,579,661)
Net realized and unrealized loss on investments (2,644,648)
Change in net assets resulting from operations $ 14,634,720
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED ARMS FUND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
FEBRUARY 28, AUGUST 31,
1998 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 17,279,368 $ 39,745,870
Net realized gain (loss) on investments ($935,013 and 935,013 3,454,717
$3,411,098, net gains, respectively, as computed for federal tax
purposes)
Net change in unrealized appreciation/depreciation of (3,579,661) 3,918,165
investments
Change in net assets resulting from operations 14,634,720 47,118,752
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (14,285,479) (34,210,612)
Institutional Service Shares (2,982,734) (5,578,429)
Change in net assets resulting from distributions to (17,268,213) (39,789,041)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 61,760,714 56,479,068
Net asset value of shares issued to shareholders in payment of 4,080,416 9,827,175
distributions declared
Cost of shares redeemed (68,343,836) (250,943,388)
Change in net assets resulting from share transactions (2,502,706) (184,637,145)
Change in net assets (5,136,199) (177,307,434)
NET ASSETS:
Beginning of period 585,542,197 762,849,631
End of period (including undistributed net investment income of $ 580,405,998 $ 585,542,197
$7,694 and $0, respectively)
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 9.64 $9.65 $ 9.63 $ 9.98 $10.01
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.29 0.59 0.58 0.56 0.45 0.50
Net realized and unrealized gain (loss)
on investments (0.04) 0.10 (0.01) 0.02 (0.35) (0.03)
Total from investment operations 0.25 0.69 0.57 0.58 0.10 0.47
LESS DISTRIBUTIONS
Distributions from net investment income (0.29) (0.59) (0.58) (0.56) (0.45) (0.50)
NET ASSET VALUE, END OF PERIOD $ 9.70 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98
TOTAL RETURN(A) 2.62% 7.31% 6.02% 6.21% 0.99% 4.82%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.55%* 0.55% 0.55% 0.55% 0.55% 0.51%
Net investment income 6.06%* 6.03% 5.94% 5.74% 4.51% 4.97%
Expense waiver/reimbursement(b) 0.44%* 0.44% 0.44% 0.43% 0.14% 0.21%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $459,010 $498,220 $653,313 $856,500 $1,238,813 $2,669,888
Portfolio turnover 30% 84% 134% 124% 65% 36%
</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)
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98 $10.01
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.28 0.56 0.55 0.54 0.42 0.48
Net realized and unrealized gain (loss) (0.04) 0.10 (0.01) 0.02 (0.35) (0.03)
on investments
Total from investment operations 0.24 0.66 0.54 0.56 0.07 0.45
LESS DISTRIBUTIONS
Distributions from net investment income (0.28) (0.56) (0.55) (0.54) (0.42) (0.48)
NET ASSET VALUE, END OF PERIOD $ 9.70 $ 9.74 $ 9.64 $ 9.65 $ 9.63 $ 9.98
TOTAL RETURN(A) 2.49% 7.05% 5.75% 5.94% 0.74% 4.56%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80%* 0.80% 0.80% 0.80% 0.80% 0.76%
Net investment income 5.81%* 5.78% 5.69% 5.44% 4.26% 4.72%
Expense waiver/reimbursement(b) 0.44%* 0.44% 0.44% 0.43% 0.23% 0.21%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $121,396 $87,322 $109,536 $135,689 $255,891 $499,418
Portfolio turnover 30% 84% 134% 124% 65% 36%
</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)
NOTES TO FINANCIAL STATEMENTS
FEDERATED ARMS FUND
FEBRUARY 28, 1998 (UNAUDITED)
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. The investment objective of the Fund is to
provide current income consistent with minimal volatility of principal.
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 and agency securities are generally valued at the
mean of the latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, 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 Directors (the "Directors").
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. Distributions in excess of net investment income were the result of
certain book and tax timing differences. These distributions do not represent a
return of capital for federal tax purposes.
At August 31, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $80,994,383, 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 as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $15,124,033
2003 57,180,753
2004 8,689,597
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses, and revenues reported in
the financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
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 shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 1,081,260 $ 10,529,383 4,079,073 $ 39,681,438
Shares issued to shareholders in payment of
distributions declared 289,694 2,821,092 841,597 8,186,144
Shares redeemed (5,178,901) (50,447,625) (21,517,755) (209,231,332)
Net change resulting from Institutional Share
transactions (3,807,947) $ (37,097,150) (16,597,085) $ (161,363,750)
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1998 AUGUST 31, 1997
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 5,260,984 $ 51,231,331 1,728,054 $ 16,797,630
Shares issued to shareholders in payment of
distributions declared 129,366 1,259,324 168,679 1,641,031
Shares redeemed (1,835,053) (17,896,211) (4,290,564) (41,712,056)
Net change resulting from Institutional Service
Share transactions 3,555,297 $ 34,594,444 (2,393,831) $ (23,273,395)
Net change resulting from share transactions (252,650) $ (2,502,706) (18,990,916) $ (184,637,145)
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
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 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 0.25% of average daily net assets
of the Fund shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC")
serves as transfer and dividend disbursing agent for the Fund. The fee paid to
FSSC is based on the size, type, and number of accounts and transactions made by
shareholders.
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 Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 28, 1998, were as follows:
PURCHASES $174,069,326
SALES $186,178,065
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
Nicholas P. Constantakis
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Nicholas J. Seitanakis
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 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.
NOTES
[Graphic]
Federated Investors
Federated ARMs Fund
SEMI-ANNUAL REPORT TO SHAREHOLDERS FEBRUARY 28, 1998
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Federated Securities Corp., Distributor
Federated Investors Tower
101 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314082108
Cusip 314082207
8040404 (4/98)
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