FEDERATED ARMS FUND, 485BPOS, 1999-10-29

FEDERATED ARMS FUND
485BPOS, 1999-10-29

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1933 Act File No. 2-98491
1940 Act File No. 811-4539

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ..............................

Post-Effective Amendment No. 25 ............................. X
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and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 24 ............................................ X
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FEDERATED ARMs FUND

(Exact Name of Registrant as Specified in Charter)

Federated Investors Funds

5800 Corporate Drive

Pittsburgh, Pennsylvania 15237-7000

(Address of Principal Executive Offices)

(412) 288-1900

(Registrant's Telephone Number)

John W. McGonigle, Esquire

1001 Liberty Avenue

Federated Investors Tower

Pittsburgh, Pennsylvania 15222-3779

(Name and Address of Agent for Service)

(Notices should be sent to the Agent for Service)

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
_X on OCTOBER 31, 1999 pursuant to paragraph (b)

60 days after filing pursuant to paragraph (a)(i) on pursuant to paragraph
(a)(i) 75 days after filing pursuant to paragraph (a)(ii) on
_________________ pursuant to paragraph (a)(ii) of Rule 485

If appropriate, check the following box:

This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

Copies To: Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP

2101 L Street, N.W.
Washington, D.C. 20037

PROSPECTUS

Federated ARMs Fund

INSTITUTIONAL SHARES

A mutual fund seeking to provide current income consistent with minimal
volatility of principal by investing at least 65% of its assets in adjustable
and floating rate mortgage backed securities which are issued or guaranteed by
the U.S. government, its agencies or instrumentalities.

As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.

OCTOBER 31, 1999

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 3

What are the Fund's Investment Strategies? 4

What are the Principal Securities in Which the Fund Invests? 5

What are the Specific Risks of Investing in the Fund? 8

What Do Shares Cost? 9

How is the Fund Sold? 10

How to Purchase Shares 10

How to Redeem Shares 11

Account and Share Information 13

Who Manages the Fund? 14

Last Meeting of Shareholders 15

Financial Information 18

Report of Ernst & Young LLP, Independent Auditors 29

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide current income consistent with
minimal volatility of principal. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in adjustable (including floating rate) mortgage backed securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Mortgage backed securities generally offer higher yields than
comparable U.S. Treasury securities, but are subject to prepayment risk which
the Adviser seeks to manage by selecting mortgage backed securities which (based
primarily on the Adviser's interest rate outlook) have characteristics that make
prepayment less likely. The Fund limits its investments to those that would
enable it to qualify as a permissible investment for federal credit unions and
Federal savings associations, and as an appropriate direct investment for
national banks.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:

* INTEREST RATE RISK. Prices of fixed income securities generally fall when
interest rates rise.

* PREPAYMENT RISK. When homeowners prepay their mortgages in response to lower
interest rates, the Fund will be required to reinvest the proceeds at the lower
interest rates available. Also, when interest rates fall, the price of mortgage
backed securities may not rise to as great an extent as that of other fixed
income securities.

* CREDIT RISKS. Credit risk is the possibility that an issuer will default
on a security by failing to pay interest or principal when due. If an
issuer defaults, the Fund will lose money.

* LIQUIDITY RISKS. Trading opportunities are more limited for fixed income
securities that have not received any credit ratings, have received ratings
below investment grade, have complex terms or are not widely held.

The Shares offered by this prospectus are not deposits or obligations of any
bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.

RISK/RETURN BAR CHART AND TABLE

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Shares as of the calendar
year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with "0%" and increasing in
increments of 4% up to 16%.

The `x' axis represents calculation periods for the last ten calendar years of
the Fund, beginning with the earliest year. The light gray shaded chart features
ten distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentage for the Fund's
Institutional Shares for each calendar year is stated directly at the top of
each respective bar, for the calendar years 1989 through 1998, The percentages
noted are: 15.85%, 6.62%, 15.73%, 3.71%, 4.29%, 0.27%, 8.81%, 6.52%, 6.24% and
4.19% respectively.

The bar chart shows the variability of the Fund's Institutional Shares total
returns on a calendar year-end basis.

The Fund's Institutional Shares are not sold subject to a sales charge (load).
The total returns displayed above are based upon net asset value.

The Fund's Institutional Shares total return for the nine-month period from
January 1, 1999 to September 30, 1999 was 3.26%.

Within the period shown in the Chart, the Fund's Institutional Shares highest
quarterly return was 10.09% (quarter ended June 30, 1989). Its lowest quarterly
return was (3.05%) (quarter ended March 31, 1990).

Note: The Fund changed its investment policy from investing primarily in
intermediate and long-term U.S. Treasury securities to investing primarily
in adjustable rate U.S. government mortgage securities, effective 1/20/92.

AVERAGE ANNUAL TOTAL RETURN TABLE

The following table represents the Fund's Institutional Shares Average Annual
Total Returns for the calendar periods ended December 31, 1998.

The table shows the Fund's Institutional Shares total returns averaged over a
period of years relative to the Lehman Brothers 1-3 Year Government Bond Index
(LB1-3GBI), the Lehman Brothers Adjustable Rate Mortgage Index (LBARMI) and the
Merrill Lynch 1-Year Treasury Index (ML1TI), broad-based market indexes, and the
Lipper Adjustable Rate Mortgage Funds Average (LARMFA), an average of funds with
similar investment objectives. The ML1TI is an unmanaged index tracking 1 year
U.S. Government Securities. The index is produced by Merrill Lynch, Pierce,
Fenner & Smith, Inc. The Fund's Adviser has elected to change the benchmark
index from the LB1-3GBI to the ML1TI because it is more representative of the
securities in which the Fund invests. Total returns for the indexes shown do not
reflect sales charges, expenses or other fees that the SEC requires to be
reflected in the Fund's performance. Indexes are unmanaged, and it is not
possible to invest directly in an index.

<TABLE>

CALENDAR PERIOD IS CLASS LB1-3GBI LBARMI ML1TI LARMFA
<S> <C> <C> <C> <C> <C>
1 Year 4.19% 6.96% 5.27% 5.89% 4.13%
5 Years 5.18% 5.96% 6.10% 5.53% 4.97%
10 Years 7.13% 7.35% N/A N/A 6.44%

</TABLE>

Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
returns.

What are the Fund's Fees and Expenses?

FEDERATED ARMS FUND

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
the Fund's Institutional Shares.

<TABLE>

SHAREHOLDER FEES

<S> <C>

Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases

(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, as applicable) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
(and other Distributions) (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL FUND OPERATING EXPENSES (Before Waivers) 1

Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee 2 0.60%
Distribution (12b-1) Fee None
Shareholder Services Fee 3 0.25%
Other Expenses 0.15%
Total Annual Fund Operating Expenses 1.00%
1 Although not contractually obligated to do so, the Adviser and shareholder
services provider waived certain amounts. These are shown below along with the
net expenses the Fund actually paid for the fiscal year ended August 31, 1999.
Total Waiver of Fund Expenses 0.45%
Total Annual Operating Expenses (after waivers) 0.55%

2 The Adviser voluntarily waived a portion of the management fee. The Adviser
can terminate this voluntary waiver at any time. The management fee paid by the
Fund (after the voluntary waiver) was 0.40% for the fiscal year ended August 31,
1999. 3 The shareholder services fee has been voluntarily reduced. This
voluntary reduction can be terminated at any time. The shareholder services fee
paid by the Fund's Institutional Shares (after the voluntary reduction) was
0.00% for the fiscal year ended August 31, 1999.

</TABLE>

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund's
Institutional Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Institutional Shares
for the time periods indicated and then redeem all of your Shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the Fund's Institutional Shares operating expenses are BEFORE
WAIVERS as shown in the table and remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:

<TABLE>

<S> <C>
1 Year $ 102
3 Years $ 318
5 Years $ 552
10 Years $ 1,225

</TABLE>

What are the Fund's Investment Strategies?

The Fund, under normal circumstances, invests at least 65% of its total assets
in adjustable rate mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. It is anticipated that such a
portfolio will generally provide higher current yields than money market
securities or alternative investments of comparable credit quality and
volatility. While the Fund's net asset value will exhibit greater volatility
than that of a money market portfolio, it should exhibit less volatility than a
portfolio of fixed-rate mortgages. The Fund may invest up to 35% of its total
assets in other U.S. government securities, and in mortgage backed securities
issued by non-governmental entities which are rated in one of the two highest
rating categories by a nationally recognized statistical rating agency (NRSRO).
A description of the various types of securities in which the Fund invests, and
their risks, immediately follows this strategy discussion.

Mortgage backed securities generally offer higher yields than comparable U.S.
Treasury securities. The extra yield compensates for prepayment risk. Underlying
mortgages, which act as collateral for mortgage securities, may, in most cases,
be prepaid by homeowners at any time without penalty. One important reason for
prepayments is changes in market interest rates from the time of mortgage
origination.

The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage
backed securities with characteristics that make prepayment less likely. An
important factor in the Adviser's assessment of these characteristics is the
Adviser's interest rate outlook. Characteristics that the Adviser may consider
in selecting securities include the interest rate formulas of the underlying
mortgages, the index upon which the mortgage rate is based, the length of time
the underlying mortgages have been outstanding, the prior prepayment history of
the mortgages and the federal agencies (if any) that securitize the mortgages.

The Adviser formulates its interest rate outlook and otherwise attempts to
anticipate changes in economic and market conditions by analyzing a variety of
factors such as:

* current and expected U.S. economic growth;

* current and expected interest rates and inflation;

* the Federal Reserve Board monetary policy; and

* changes in the supply of or demand for U.S. government securities.

There is no assurance that the Adviser's efforts to forecast market interest
rates and assess the impact of market interest rates on particular securities
will be successful.

The Adviser may attempt to take advantage of current and potential yield
differentials existing from time to time between various government adjustable
rate mortgage backed securities in order to increase the Fund's return. In
addition, the Adviser may invest up to 35% of the Fund's assets in fixed rate
U.S. government mortgage securities, in mortgage backed securities issued by
non-governmental entities which are rated in one of the two highest rating
categories by an NRSRO, or in U.S. government securities that are not mortgage
backed securities, such as U.S. Treasury securities and U.S. government agency
securities, when in the Adviser's judgment, such investment will potentially
enhance return or manage risk under current or anticipated economic and market
conditions. The Fund may also engage in dollar roll transactions for their
potential to enhance income.

The Adviser may use collateralized mortgage obligations ("CMOs") with relatively
predictable cash flows (such as sequential pay, planned amortization class and
targeted amortization class), to reduce pre-payment risk.

TEMPORARY DEFENSIVE INVESTMENTS

The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash and shorter-term debt securities and similar
obligations. It may do this to minimize potential losses and maintain liquidity
to meet shareholder redemptions during adverse market conditions. This may cause
the Fund to give up greater investment returns to maintain the safety of
principal, that is, the original amount invested by shareholders.

What are the Principal Securities in Which the Fund Invests?

FIXED INCOME SECURITIES

A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.

The following describes the types of fixed income securities in which the Fund
principally invests:

MORTGAGE BACKED SECURITIES

Mortgage backed securities represent interests in "pools" (groups) of mortgages.
The mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates.

Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and pre-payments from the underlying mortgages.
As a result, the holders assume all the prepayment risks of the underlying
mortgages.

ADJUSTABLE RATE MORTGAGES

The Fund invests in interests in pools of adjustable rate mortgages, which are
known as ARMs. While fixed rate mortgage securities have a stated interest rate,
ARMs have periodic adjustments in the interest rate on the underlying mortgages.
The adjustable rate feature of the mortgages underlying the ARMs will help to
limit sharp movements in the Fund's net asset value in response to normal
fluctuations in interest rates. As interest rates on the mortgages underlying
ARMs reset periodically (for example, semi-annually or annually), the yields of
the ARMs held in the portfolio will gradually adjust to reflect the overall
changes in interest rates.

COLLATERALIZED MORTGAGE OBLIGATIONS

CMOs, including interests in real estate mortgage investment conduits (REMICs),
allocate payments and prepayments from an underlying pass-through certificate
among holders of different classes of mortgage backed securities. This creates
different prepayment and interest rate risks for each CMO class. The degree of
prepayment risk of CMOs depends upon the structure of the CMOs. However, the
actual returns of any type of mortgage backed security depends upon the
performance of the underlying pool of mortgages, which no one can predict and
will vary among pools.

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

Non-government mortgage backed securities (including non-governmental CMOs) are
issued by private entities, rather than by U.S. government agencies. These
securities involve credit risks and liquidity risks. The Fund may invest in
non-government mortgage backed securities that are rated in one of the two
highest rating categories by an NRSRO.

TREASURY SECURITIES

Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.

AGENCY SECURITIES

Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risks, but not as low as Treasury
securities.

The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risk, it does not
reduce the interest rate and prepayment risks of these mortgage backed
securities.

CREDIT ENHANCEMENT

Credit enhancement consists of an arrangement in which a company agrees to pay
amounts due on a fixed income security if the issuer defaults. In some cases the
company providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For this
reason, the Adviser usually evaluates the credit risk of a fixed income security
based solely upon its credit enhancement.

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price paid by the dealer or bank exceeds the sale
price, reflecting the Fund's return on the transaction. This return is unrelated
to the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the adviser.

DELAYED DELIVERY TRANSACTIONS

Delayed delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default.

TO BE ANNOUNCED SECURITIES (TBAS)

As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the particular
securities to be delivered. Instead, the Fund agrees to accept any security that
meets specified terms. For example, in a TBA mortgage backed transaction, the
Fund and the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. The seller would not identify the specific underlying
mortgages until it issues the security. TBA mortgage backed securities increase
interest rate risks because the underlying mortgages may be less favorable than
anticipated by the Fund.

DOLLAR ROLLS

Dollar rolls are transactions where the Fund sells mortgage backed securities
with a commitment to buy similar, but not identical, mortgage backed securities
on a future date at a lower price. Normally, one or both securities involved are
TBA mortgage backed securities. Dollar rolls are subject to interest rate risks
and credit risks.

ASSET COVERAGE

In order to secure its obligations in connection with derivatives contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations entering into an offsetting derivative contract or terminating
a special transaction. This may cause the Fund to miss favorable trading
opportunities or to realize losses on derivative contracts or special
transactions.

INVESTMENT RATINGS FOR NON-GOVERNMENT MORTGAGE BACKED SECURITIES

The Adviser will determine whether a nongovernment mortgage backed security is
eligible for investment by the Fund based upon the credit ratings given by one
or more NRSROs. For example, Standard and Poor's, an NRSRO, assigns ratings to
securities based on its assessment of the likelihood of the issuer's inability
to pay interest or principal (default) when due on each security. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment that
the security is comparable to investment grade.

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

* Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.

* Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.

PREPAYMENT RISKS

* Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments on
mortgage backed securities include both interest and a partial payment of
principal. This partial payment of principal may be comprised of a scheduled
principal payment as well as an unscheduled payment from the voluntary
prepayment, refinancing, or foreclosure of the underlying loans. These
unscheduled payments of principal can adversely affect the price and yield of
mortgage backed securities. For example, during periods of declining interest
rates, prepayments can be expected to accelerate, and the Fund would be required
to reinvest the proceeds at the lower interest rates then available. In
addition, like other interest-bearing securities, the values of mortgage backed
securities generally fall when interest rates rise. Since rising interest rates
generally result in decreased prepayments of mortgage backed securities, this
could cause mortgage securities to have greater average lives than expected and
their value may decline more than other fixed income securities. Conversely,
when interest rates fall, their potential for capital appreciation is limited
due to the existence of the prepayment feature.

* Generally, mortgage backed securities compensate for greater prepayment risk
by paying a higher yield. The additional interest paid for risk is measured by
the difference between the yield of a mortgage backed security and the yield of
a U.S. Treasury security with a comparable maturity (the spread). An increase in
the spread will cause the price of the security to decline. Spreads generally
increase in response to adverse economic or market conditions.

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.

* Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not received
a rating, the Fund must rely entirely upon the Adviser's credit assessment.

* Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of a security and
the yield of a U.S. Treasury security with a comparable maturity (the spread)
measures the additional interest paid for risk. Spreads may increase generally
in response to adverse economic or market conditions. A security's spread may
also increase if the security's rating is lowered, or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.

* Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to lose
the benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.

LIQUIDITY RISKS

* Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment grade or
are not widely held.

* Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell or
buy a security at a favorable price or time. Consequently, the Fund may have to
accept a lower price to sell a security, sell other securities to raise cash or
give up an investment opportunity, any of which could have a negative effect on
the Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.

* Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security when it wants to. If this happens, the Fund will be required to
continue to hold the security, and the Fund could incur losses.

What Do Shares Cost?

You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is
open. When the Fund receives your transaction request in proper form (as
described in the prospectus) it is processed at the next calculated net asset
value (NAV). The Fund does not charge a front-end sales charge. NAV is
determined at the end of regular trading (normally 4:00 p.m. Eastern time) each
day the NYSE is open.

The Fund generally values fixed income securities at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
individual pricing service.

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

An account may be opened with a smaller amount as long as the $25,000 minimum is
reached within 90 days. An institutional investor's minimum investment is
calculated by combining all accounts it maintains with the Fund. Accounts
established through investment professionals may be subject to a smaller minimum
investment amount. Keep in mind that investment professionals may charge you
fees for their services in connection with your Share transactions.

How is the Fund Sold?

The Fund offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Shares. Each share class has
different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.

The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to financial intermediaries, public, and private
organizations or to individuals, directly or through investment professionals.

The Distributor and its affiliates may pay out of their assets other
amounts (including items of material value) to investment professionals
for marketing and servicing Shares. The Distributor is a subsidiary of
Federated Investors, Inc. (Federated).

How to Purchase Shares

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL

* Establish an account with the investment professional; and

* Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive
the next calculated NAV if the investment professional forwards the order to the
Fund on the same day and the Fund receives payment within one business day. You
will become the owner of Shares and receive dividends when the Fund receives
your payment.

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

* Establish your account with the Fund by submitting a completed New
Account Form; and

* Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees incurred by the Fund or Federated Shareholder Services Company,
the Fund's transfer agent.

An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.

BY WIRE

Send your wire to:

State Street Bank and Trust Company

Boston, MA

Dollar Amount of Wire

ABA Number 011000028

Attention: EDGEWIRE

Wire Order Number, Dealer Number, or Group Number

Nominee/Institution Name

Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

BY CHECK

Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:

Federated Shareholder Services Company

P.O. Box 8600

Boston, MA 02266-8600

If you send your check by A PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:

Federated Shareholder Services Company

1099 Hingham Street

Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).

BY AUTOMATED CLEARING HOUSE (ACH)

Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.

How to Redeem Shares

You should redeem Shares:

* through an investment professional if you purchased Shares through an
investment professional; or

* directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

Submit your redemption request to your investment professional by the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption
amount you will receive is based upon the next calculated NAV after the Fund
receives the order from your investment professional.

DIRECTLY FROM THE FUND

BY TELEPHONE

You may redeem Shares by calling the Fund at 1-800-341-7400 once you have
completed the appropriate authorization form for telephone transactions. If you
call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern
time) you will receive a redemption amount based on that day's NAV.

BY MAIL

You may redeem Shares by mailing a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form.

Send requests by mail to:

Federated Shareholder Services Company

P.O. Box 8600

Boston, MA 02266-8600

Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:

Federated Shareholder Services Company

1099 Hingham Street

Rockland, MA 02370-3317

All requests must include:

* Fund Name and Share Class, account number and account registration;

* amount to be redeemed and

* signatures of all shareholders exactly as registered.

Call your investment professional or the Fund if you need special instructions.

SIGNATURE GUARANTEES

Signatures must be guaranteed if:

* your redemption will be sent to an address other than the address of
record;

* your redemption will be sent to an address of record that was changed
within the last 30 days;

* a redemption is payable to someone other than the shareholder(s) of
record.

A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.

PAYMENT METHODS FOR REDEMPTIONS

Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:

* an electronic transfer to your account at a financial institution that is
an ACH member; or

* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

REDEMPTION IN KIND

Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.

LIMITATIONS ON REDEMPTION PROCEEDS

Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:

* to allow your purchase to clear;

* during periods of market volatility; or

* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.

ADDITIONAL CONDITIONS

TELEPHONE TRANSACTIONS

The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

SHARE CERTIFICATES

The Fund no longer issues share certificates. If you are redeeming Shares
represented by certificates previously issued by the Fund, you must return the
certificates with your written redemption request. For your protection, send
your certificates by registered or certified mail, but do not endorse them.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases and redemptions. In addition, you
will receive periodic statements reporting all account activity, including
dividends and capital gains paid.

DIVIDENDS AND CAPITAL GAINS

The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase Shares by wire, you begin earning dividends on the day your wire is
received. If you purchase Shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.

In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.

If you purchase Shares just before a Fund declares a capital gain distribution,
you will pay the full price for the Shares and then receive a portion of the
price back in the form of a taxable distribution, whether or not you reinvest
the distribution in Shares. Therefore, you should consider the tax implications
of purchasing Shares shortly before the Fund declares a capital gain. Contact
your investment professional or the Fund for information concerning when
dividends and capital gains will be paid.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, accounts may be
closed if redemptions cause the account balance to fall below the minimum
initial investment amount. Before an account is closed, you will be notified and
allowed 30 days to purchase additional Shares to meet the minimum.

TAX INFORMATION

The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.

Fund distributions are expected to be primarily dividends. Redemptions are
taxable sales. Please consult your tax adviser regarding your federal, state,
and local tax liability.

Who Manages the Fund?

The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Investment Management Company. The Adviser manages the Fund's
assets, including buying and selling portfolio securities. The Adviser's address
is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.

THE FUND'S PORTFOLIO MANANGERS ARE:

TODD A. ABRAHAM

Todd A. Abraham has been the Fund's portfolio manager since August 1995. He
is Vice President of the Fund. Mr. Abraham has been a Portfolio Manager
since 1995 and a Vice President of the Fund's Adviser since 1997.
Mr. Abraham joined Federated in 1993 as an Investment Analyst and served as
Assistant Vice President from 1995 to 1997. Mr. Abraham served as a
Portfolio Analyst at Ryland Mortgage Co. from 1992 to 1993. Mr. Abraham is
a Chartered Financial Analyst and received his M.B.A. in Finance from
Loyola College.

KATHLEEN M. FOODY-MALUS

Kathleen M. Foody-Malus has been the Fund's portfolio manager since
January 1992. She is Vice President of the Fund. Ms. Foody-Malus joined
Federated in 1983 and has been a Senior Portfolio Manager since 1996 and a
Vice President of the Fund's Adviser since 1993. She was a Portfolio
Manager and a Vice President of the Fund's Adviser from 1993 to 1996.
Ms. Foody-Malus received her M.B.A. in Accounting/Finance from the
University of Pittsburgh.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.60% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses. This does not include
reimbursement to the Fund of any expenses incurred by shareholders who use the
transfer agent's subaccounting facilities.

YEAR 2000 READINESS

The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999 or experience other date-related problems. The Year 2000 problem may cause
systems to process information incorrectly and could disrupt businesses, such as
the Fund, that rely on computers.

While it is impossible to determine in advance all of the risks to the Fund, the
Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.

The Fund's service providers are making changes to their computer systems to fix
any Year 2000 problems. In addition, they are working to gather information from
third-party providers to determine their Year 2000 readiness.

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.

Last Meeting of Shareholders

A Special Meeting of the Fund's shareholders was held on June 21, 1999. On April
23, 1999, the record date for shareholders voting at the meeting, there were
46,352,326 total outstanding shares. The following items were considered by
shareholders and the results of their voting were as follows:

AGENDA ITEM 1

Election of Trustees: 1

<TABLE>

WITHHELD
AUTHORITY

NAMES FOR TO VOTE
<S> <C> <C>
Thomas G. Bigley 30,067,640 7,423,084
Nicholas P. Constantakis 30,067,640 7,423,084
John F. Cunningham 30,067,640 7,423,084
J. Christopher Donahue 30,067,640 7,423,084
Charles F. Mansfield, Jr. 30,067,640 7,423,084
John E. Murray, Jr., J.D., S.J.D. 30,067,640 7,423,084
John S. Walsh 30,067,640 7,423,084

</TABLE>

1 The following Trustees of the Fund continued their terms as Trustees of
the Fund: John F. Donahue, Lawrence D. Ellis, and Marjorie P. Smuts.

AGENDA ITEM 2

To ratify the selection of Ernst & Young LLP as the Fund's Independent Auditors.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
37,448,755 24,557 17,411

</TABLE>

AGENDA ITEM 3

To make changes to the Fund's fundamental investment policies.

(a) To amend the Fund's fundamental investment policy regarding diversification.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(b) To amend the Fund's fundamental investment policy regarding borrowing money
and issuing senior securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(d) To amend the Fund's fundamental policy regarding investing in commodities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(e) To amend the Fund's fundamental investment policy regarding underwriting
securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(f) To amend the Fund's fundamental investment policy regarding lending by the
Fund.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(g) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding buying securities on margin.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(h) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding pledging assets.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(i) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding investing in illiquid securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(j) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding investing in other investment companies.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(k) To make non-fundamental the Fund's fundamental investment policy regarding
investing in adjustable and floating rate mortgage securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(l) To make non-fundamental the Fund's fundamental investment policy regarding
investing in U.S. government securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(m) To make non-fundamental the Fund's fundamental investment policy regarding
investing in mortgage related securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(n) To make non-fundamental the Fund's fundamental investment policy regarding
purchasing collateralized mortgage obligations.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(o) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in dollar roll transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(p) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in repurchase agreements.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(q) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in reverse repurchase agreements.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(r) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in securities lending transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(s) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in when-issued and delayed delivery transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(t) To make non-fundamental the Fund's fundamental investment policy regarding
investing in stripped mortgage securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

AGENDA ITEM 4

To eliminate certain of the Fund's fundamental investment policies.

(a) To remove the Fund's fundamental investment policy on investing in
securities of new issuers.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

(b) To remove the Fund's fundamental investment policy on selling securities
short.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

(d) To remove the Fund's fundamental investment policy regarding temporary
investments.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

AGENDA ITEM 5

To approve an amendment and restatement to the Fund's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Fund without seeking
shareholder approval.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,610,128 12,230,086 650,510

</TABLE>

Financial Information

FINANCIAL HIGHLIGHTS

The following Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years. Some of the information is presented
on a per share basis. Total returns represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of any
dividends and capital gains.

This information has been audited by Ernst & Young LLP, whose report, along with
the Fund's audited financial statements, is included in this prospectus.

Financial Highlights

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 29.

<TABLE>

YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING

OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63
INCOME FROM INVESTMENT
OPERATIONS:

Net investment income 0.51 0.56 0.59 0.58 0.56
Net realized and
unrealized gain (loss)
on investments (0.16) (0.07) 0.10 (0.01) 0.02
TOTAL FROM INVESTMENT

OPERATIONS 0.35 0.49 0.69 0.57 0.58
LESS DISTRIBUTIONS:

Distributions from net

investment income (0.51) (0.56) (0.59) (0.58) (0.56)
NET ASSET VALUE, END OF

PERIOD $ 9.51 $ 9.67 $ 9.74 $ 9.64 $ 9.65
TOTAL RETURN 1 3.74% 5.13% 7.31% 6.02% 6.21%

RATIOS TO AVERAGE NET

ASSETS:

Expenses 2 1.00% 0.99% 0.99% 0.99% 0.98%
Net investment income 2 4.83% 5.33% 5.59% 5.50% 5.31%
Expenses (after waivers) 0.55% 0.55% 0.55% 0.55% 0.55%
Net investment income
(after waivers) 5.28% 5.77% 6.03% 5.94% 5.74%
SUPPLEMENTAL DATA:
Net assets, end of period

(000 omitted) $384,011 $420,988 $498,220 $653,313 $856,500
Portfolio turnover 83% 56% 84% 134% 124%

</TABLE>

1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

2 During the period, certain fees were voluntarily waived. If such voluntary
waivers had not occurred, the ratios would have been as indicated. See
Notes which are an integral part of the Financial Statements

Portfolio of Investments

AUGUST 31, 1999

<TABLE>

PRINCIPAL

AMOUNT VALUE
<S> <C> <C>

U.S. GOVERNMENT

OBLIGATIONS-97.0%

FEDERATED HOME LOAN
MORTGAGE CORP. ARM-28.3%

$ 114,918,050 6.705% -7.064%, 11/1/2016
- 7/1/2030 $ 118,046,553
FEDERATED HOME LOAN
MORTGAGE CORP. REMIC-0.9%

3,922,523 Series 1544-E,6.250%,

6/15/2008 3,921,543

FEDERATED NATIONAL
MORTGAGE ASSOCIATION ARM-

18.2%
76,228,566 5.730% - 7.056%, 9/1/18 -
5/1/2036 75,851,634

FEDERATED NATIONAL

MORTGAGE ASSOCIATION

REMIC-4.4%
10,000,000 Series 98-36PA, 6.250%,

7/18/2013 9,949,758
8,625,450 Series 93-206E, 5.650%,
5/25/2017 8,578,527
TOTAL 18,528,285

FEDERATED NATIONAL
MORTGAGE ASSOCIATION-13.9%

14,773 12.000%, 3/1/2013 16,868
1,641,100 11.500%, 8/1/2014 -
11/1/2015 1,831,369
2,431,517 11.000%, 12/1/2015 2,635,908
8,500,000 7.500%, TBA 8,574,375
4,690,000 1 7.000%, TBA 4,647,509
29,371,000 1 6.500%, TBA 28,545,087
12,234,334 6.500%, 6/1/2014 11,890,305
TOTAL 58,141,421

GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION ARM-

24.8%
18,443,655 6.625%, 8/20/2017 -

7/20/2024 18,694,305
23,131,214 6.375%, 3/20/2016 -
3/20/2023 23,331,724
25,335,998 6.125%, 12/20/2017 -
11/20/2023 25,573,547
16,631,480 5.500%, 4/20/2029 -
5/20/2029 16,407,620
19,782,880 5.000%, 4/20/2029 19,280,965
TOTAL 103,288,161

GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION-6.5%

1,879,244 12.000%, 9/15/2013 -

1/15/2014 2,162,402
13,720,208 11.500%, 10/15/2010 -
3/15/2020 15,561,480
8,566,772 11.000%, 12/15/2009 -
7/15/2020 9,542,456
TOTAL 27,266,338

TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED

COST $409,167,619) 405,043,935
<CAPTION>

PRINCIPAL

AMOUNT VALUE
<S> <C> <C>

REPURCHASE AGREEMENTS-
10.5% 2

$ 29,370,000 3, 4 Morgan Stanley Group,
Inc., 5.180%, dated
8/16/1999, due 9/20/1999 $ 29,370,000
4,690,000 3, 4 Morgan Stanley Group,
Inc., 5.190%, dated

8/10/1999, due 9/20/1999 4,690,000
9,805,000 Salomon Brothers, Inc.,
5.500%, dated 8/31/1999,
due 9/1/1999 9,805,000

TOTAL REPURCHASE
AGREEMENTS (AT AMORTIZED

COST) 43,865,000

TOTAL INVESTMENTS
(IDENTIFIED COST

$453,032,619) 5 $ 448,908,935

</TABLE>

1 Indicates securities subject to dollar roll transactions with a total market
value of $33,192,596.

2 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.

3 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.

4 Securities held as collateral for future dollar roll transactions.

5 The cost of investments for federal tax purposes amounts to $453,068,881. The
net unrealized depreciation of investments on a federal tax basis amounts to
$4,159,946 which is comprised of $694,388 appreciation and $4,854,334
depreciation at August 31, 1999.

Note: The categories of investments are shown as a percentage of net assets
($417,387,595) at August 31, 1999.

The following acronyms are used throughout this portfolio:

ARM -Adjustable Rate Mortgage
REMIC -Real Estate Mortgage Investment Conduit
TBA -To Be Announced

See Notes which are an integral part of the Financial Statements

Statement of Assets and Liabilities

AUGUST 31, 1999

<TABLE>

Payable for investments

purchased $ 8,631,927
Payable for shares redeemed 205,623
Income distribution
payable 1,251,310
Payable for dollar roll
transactions 33,227,511
Accrued expenses 36,722
TOTAL LIABILITIES 43,353,093
Net assets for 43,874,118
shares outstanding $ 417,387,595
NET ASSETS CONSIST OF:

Paid in capital $ 502,737,671
Net unrealized
depreciation of
investments (4,123,684)
Accumulated net realized
loss on investments (80,943,703)
Distributions in excess of
net investment income (282,689)
TOTAL NET ASSETS $ 417,387,595
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$384,011,263 / 40,365,700
shares outstanding $9.51
INSTITUTIONAL SERVICE
SHARES:
$33,376,332 / 3,508,418
shares outstanding $9.51

</TABLE>

See Notes which are an integral part of the Financial Statements

Statement of Operations

YEAR ENDED AUGUST 31, 1999

<TABLE>

<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar
roll expense of $217,338) $ 25,503,605
EXPENSES:

Investment advisory fee $ 2,624,894
Administrative personnel
and services fee 329,862
Custodian fees 54,531
Transfer and dividend
disbursing agent fees and
expenses 17,284
Directors'/Trustees' fees 10,299
Auditing fees 17,635
Legal fees 7,012
Portfolio accounting fees 140,948
Distribution services fee-
Institutional Service
Shares 91,366
Shareholder services fee-
Institutional Shares 1,002,338
Shareholder services fee-
Institutional Service
Shares 91,366
Share registration costs 24,299
Printing and postage 28,447
Insurance premiums 2,623
Taxes 75
Miscellaneous 20,453
TOTAL EXPENSES 4,463,432
WAIVERS:
Waiver of investment
advisory fee $ (853,071)
Waiver of distribution
services fee-Institutional
Service Shares (90,269)
Waiver of shareholder
services fee-Institutional
Shares (1,002,338)
Waiver of shareholder
services fee-Institutional
Service Shares (1,096)
TOTAL WAIVERS (1,946,774)
Net expenses 2,516,658
Net investment income 22,986,947
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on
investments (1,188,247)
Net change in unrealized
depreciation
of investments (5,642,395)
Net realized and
unrealized loss on
investments (6,830,642)
Change in net assets
resulting from operations $ 16,156,305

</TABLE>

See Notes which are an integral part of the Financial Statements

Statement of Changes in Net Assets

<TABLE>

YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET

ASSETS
OPERATIONS:

Net investment income $ 22,986,947 $ 31,752,906
Net realized gain (loss) on
investments ($154,668 and
$1,245,992, respectively,
as computed for federal tax

purposes) (1,188,247) 1,245,992
Net change in unrealized
depreciation of
investments (5,642,395) (5,409,340)
CHANGE IN NET ASSETS

RESULTING FROM OPERATIONS 16,156,305 27,589,558
DISTRIBUTIONS TO
SHAREHOLDERS:

Distributions from net
investment income

Institutional Shares (21,452,481) (26,468,625)
Institutional Service
Shares (1,866,943) (5,231,032)
CHANGE IN NET ASSETS
RESULTING FROM

DISTRIBUTIONS

TO SHAREHOLDERS (23,319,424) (31,699,657)
SHARE TRANSACTIONS:
Proceeds from sale of
shares 42,550,113 85,623,659
Net asset value of shares
issued to shareholders in
payment of
distributions declared 6,478,661 9,463,263
Cost of shares redeemed (94,151,152) (206,845,928)
CHANGE IN NET ASSETS
RESULTING FROM SHARE

TRANSACTIONS (45,122,378) (111,759,006)
Change in net assets (52,285,497) (115,869,105)
NET ASSETS:

Beginning of period 469,673,092 585,542,197
End of period (including
undistributed net
investment income of $0 and
$49,788, respectively) $ 417,387,595 $ 469,673,092

</TABLE>

See Notes which are an integral part of the Financial Statements

Notes to Financial Statements

AUGUST 31, 1999

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 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 60
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 provision for federal tax is
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 income tax purposes.

At August 31, 1999, the Fund, for federal tax purposes, had a capital loss
carryforward of $79,600,637, 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:

<TABLE>

EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2002 $13,730,287
2003 57,180,753
2004 8,689,597

</TABLE>

Additionally, net capital losses of $1,306,800 attributable to security
transactions after October 31, 1998, are treated as arising on September 1,
1999, 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.

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>

YEAR ENDED AUGUST 31 1999 1998
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 4,017,476 $ 38,720,960 3,030,823 $ 29,442,519
Shares issued to
shareholders in payment of
distributions declared 604,546 5,801,151 658,748 6,398,162
Shares redeemed (7,803,994) (74,921,713) (11,287,079) (109,644,658)
NET CHANGE RESULTING FROM
INSTITUTIONAL SHARE

TRANSACTIONS (3,181,972) $ (30,399,602) (7,597,508) $ (73,803,977)

YEAR ENDED AUGUST 31 1999 1998
INSTITUTIONAL SERVICE
SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 398,206 $ 3,829,153 5,771,167 $ 56,181,140
Shares issued to
shareholders in payment of
distributions declared 70,541 677,510 315,591 3,065,101
Shares redeemed (1,996,613) (19,229,439) (10,014,646) (97,201,270)
NET CHANGE RESULTING FROM
INSTITUTIONAL SERVICE

SHARE TRANSACTIONS (1,527,866) $ (14,722,776) (3,927,888) $ (37,955,029)
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS (4,709,838) $ (45,122,378) (11,525,396) $ (111,759,006)

</TABLE>

INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE

Federated Investment Management Company, 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, Inc. 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 Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC 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 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 Trustees of the Fund are Officers and Directors or
Trustees of the above companies.

INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 1999, were as follows:

<TABLE>

<S> <C>
Purchases $ 354,522,350
Sales $ 376,745,629

</TABLE>

YEAR 2000 (UNAUDITED)

Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.

Report of Ernst & Young LLP, Independent Auditors

TO THE TRUSTEES AND SHAREHOLDERS OF

FEDERATED ARMS FUND:

We have audited the accompanying statement of assets and liabilities of
Federated ARMs Fund, including the portfolio of investments, as of August 31,
1999, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1999, by correspondence with the custodian and brokers, or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated ARMs Fund at August 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.

[Graphic]

Boston, Massachusetts

October 19, 1999

[Graphic]
Federated

World-Class Investment Manager

PROSPECTUS

Federated ARMs Fund

INSTITUTIONAL SHARES

OCTOBER 31, 1999

A Statement of Additional Information (SAI) dated October 31, 1999 is
incorporated by reference into this prospectus. Additional information about the
Fund and its investments is contained in the Fund's SAI and Annual and
Semi-Annual Report to shareholders as they become available. The Annual Report's
Management Discussion and Analysis discusses market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. To obtain the SAI, the Annual Report, Semi-Annual Report and other
information without charge, and make inquiries, call your investment
professional or the Fund at 1-800-341-7400.

You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, DC. You may also access fund
information from the EDGAR Database on the SEC's internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, DC 20549-0102. Call 1-202-942- 8090 for
information on the Public Reference Room's operations and copying fees.

[Graphic]
Federated

Federated ARMs Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

WWW.FEDERATEDINVESTORS.COM

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4539

Cusip 314082108

8100309A-IS (10/99)

[Graphic]

PROSPECTUS

Federated ARMs Fund

INSTITUTIONAL SERVICE SHARES

OCTOBER 31, 1999

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 3

What are the Fund's Investment Strategies? 4

What are the Principal Securities in Which the

Fund Invests? 6

What are the Specific Risks of Investing in the Fund? 10

What Do Shares Cost? 12

How is the Fund Sold? 12

How to Purchase Shares 13

How to Redeem Shares 14

Account and Share Information 16

Who Manages the Fund? 17

Last Meeting of Shareholders 18

Financial Information 22

Report of Ernst & Young LLP, Independent Auditors 34

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in adjustable (including floating) rate mortgage backed securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Mortgage backed securities generally offer higher yields than
comparable U.S. Treasury securities, but are subject to prepayment risk which
the Adviser seeks to manage by selecting mortgage backed securities which (based
primarily on the Adviser's interest rate outlook) have characteristics that make
prepayment less likely. The Fund limits its investments to those that would
enable it to qualify as a permissible investment for federal credit unions and
Federal savings associations, and as an appropriate direct investment for
national banks.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:

* INTEREST RATE RISK. Prices of fixed income securities generally fall when
interest rates rise.

* CREDIT RISKS. Credit risk is the possibility that an issuer will default
on a security by failing to pay interest or principal when due. If an
issuer defaults, the Fund will lose money.

RISK/RETURN BAR CHART AND TABLE

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Service Shares as of the
calendar year-end for each of six years.

The `y' axis reflects the "% Total Return" beginning with "0.0%" and increasing
in increments of 2.5% up to 10.0%.

The `x' axis represents calculation periods from the earliest calendar year end
of the Fund's start of business through the calendar year ended 1998. The light
gray shaded chart features six distinct vertical bars, each shaded in charcoal,
and each visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentage for the Fund's Institutional Service Shares for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1993
through 1998, The percentages noted are: 4.03%, 0.02%, 8.54%, 6.25%, 6.00% and
3.93% respectively.

The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a calendar year-end basis.

The Fund's Institutional Service Shares are not sold subject to a sales charge
(load). The total returns displayed above are based upon net asset value.

The Fund's Institutional Service Shares total return for the nine-month period
from January 1, 1999 to September 30, 1999 was 3.07%.

Within the period shown in the Chart, the Fund's Institutional Service Shares
highest quarterly return was 3.00% (quarter ended March 31, 1995). Its lowest
quarterly return was (0.63%) (quarter ended June 30, 1994).

AVERAGE ANNUAL TOTAL RETURN TABLE

The following table represents the Fund's Institutional Service Shares Average
Annual Total Returns for the calendar periods ended December 31, 1998.

The table shows the Fund's Institutional Service Shares total returns averaged
over a period of years relative to the Lehman Brothers 1-3 Year Government Bond
Index (LB1-3GBI), the Lehman Brothers Adjustable Rate Mortgage Index (LBARMI)
and the Merrill Lynch 1-Year Treasury Index (ML1TI), broad-based market indexes,
and the Lipper Adjustable Rate Mortgage Funds Average (LARMFA), an average of
funds with similar investment objectives. The ML1TI is an unmanaged index
tracking 1 year U.S. government securities. The index is produced by Merrill
Lynch, Pierce, Fenner & Smith, Inc. The Fund's Adviser has elected to change the
benchmark index from the LB1-3GBI to the ML1TI because it is more representative
of the securities in which the Fund invests. Total returns for the indexes shown
do not reflect sales charges, expenses or other fees that the SEC requires to be
reflected in the Fund's performance. Indexes are unmanaged, and it is not
possible to invest directly in an index.

<TABLE>

CALENDAR PERIOD ISS CLASS LB1-3GBI LBARMI ML1TI LARMFA
<S> <C> <C> <C> <C> <C>
1 Year 3.93% 6.96% 5.27% 5.89% 4.13%
5 Years 4.92% 5.96% 6.10% 5.53% 4.97%
Start of Performance 1 4.80% 6.18% 6.26% 5.21% 4.71%

</TABLE>

1 The Fund's Institutional Service Shares start of performance date was April
25, 1992.

What are the Fund's Fees and Expenses?

FEDERATED ARMS FUND

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
the Fund's Institutional Service Shares.

<TABLE>

SHAREHOLDER FEES

<S> <C>
Fees Paid Directly From
Your Investment
Maximum Sales Charge
(Load) Imposed on
Purchases (as a percentage
of offering price) None
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
as applicable) None
Maximum Sales Charge
(Load) Imposed on
Reinvested Dividends (and
other Distributions)
(as a percentage of
offering price). None
Redemption Fee (as a
percentage of amount
redeemed, if applicable) None
Exchange Fee None

ANNUAL FUND OPERATING
EXPENSES (Before Waivers)

Expenses That are Deducted
From Fund Assets (as a
percentage of average net
assets)

Management Fee 2 0.60%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 4 0.25%
Other Expenses 0.15%
Total Annual Fund
Operating Expenses 1.25%
1 Although not
contractually obligated to
do so, the Adviser,
distributor and
shareholder services
provider waived certain
amounts. These are shown
below along with the net
expenses the Fund actually
paid for the fiscal year
ended August 31, 1999.
Total Waiver of Fund
Expenses 0.45%

Total Annual Operating
Expenses (after waivers) 0.80%
2 The Adviser voluntarily
waived a portion of the
management fee. The
Adviser can terminate this
voluntary waiver at any
time. The management fee
paid by the Fund (after the
voluntary waiver) was
0.40% for the fiscal year
ended August 31, 1999.
3 The distribution (12b-1)
fee has been voluntarily
reduced. This voluntary
reduction can be
terminated at any time. The
distribution (12b-1) fee
paid by the Fund's
Institutional Service
Shares (after the
voluntary reduction) was
0.00% for the fiscal year
ended August 31, 1999.
4 The shareholder services
fee has been voluntarily
reduced. This voluntary
reduction can be
terminated at any time. The
shareholder services fee
paid by the Fund's
Institutional Service
Shares (after the
voluntary reduction) was
0.25% for the fiscal year
ended August 31, 1999.

</TABLE>

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund's
Institutional Service Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Institutional Service
Shares for the time periods indicated and then redeem all of your Shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Fund's Institutional Service Shares operating
expenses are BEFORE WAIVERS as shown in the table and remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:

<TABLE>

<S> <C>
1 Year $ 127
3 Years $ 397
5 Years $ 686
10 Years $ 1,511

</TABLE>

What are the Fund's Investment Strategies?

The Adviser formulates its interest rate outlook and otherwise attempts to
anticipate changes in economic and market conditions by analyzing a variety of
factors such as:

* current and expected U.S. economic growth;

* current and expected interest rates and inflation;

* the Federal Reserve Board monetary policy; and

* changes in the supply of or demand for U.S. government securities.

There is no assurance that the Adviser's efforts to forecast market interest
rates and assess the impact of market interest rates on particular securities
will be successful.

TEMPORARY DEFENSIVE INVESTMENTS

The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash and shorter-term, debt securities and similar
obligations. It may do this to minimize potential losses and maintain liquidity
to meet shareholder redemptions during adverse market conditions. This may cause
the Fund to give up greater investment returns to maintain the safety of
principal, that is, the original amount invested by shareholders.

What are the Principal Securities in Which the Fund Invests?

FIXED INCOME SECURITIES

The following describes the types of fixed income securities in which the Fund
principally invests:

MORTGAGE BACKED SECURITIES

Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and prepayments from the underlying mortgages. As
a result, the holders assume all the prepayment risks of the underlying
mortgages.

ADJUSTABLE RATE MORTGAGES

COLLATERALIZED MORTGAGE OBLIGATIONS

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

TREASURY SECURITIES

Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.

AGENCY SECURITIES

CREDIT ENHANCEMENT

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

DELAYED DELIVERY TRANSACTIONS

Delayed delivery transactions, including when- issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default.

TO BE ANNOUNCED SECURITIES (TBAS)

DOLLAR ROLLS

ASSET COVERAGE

INVESTMENT RATINGS FOR NON-GOVERNMENT MORTGAGE BACKED SECURITIES

The Adviser will determine whether a non-government mortgage backed security is
eligible for investment by the Fund based upon the credit ratings given by one
or more NRSROs. For example, Standard and Poor's, an NRSRO, assigns ratings to
securities based on its assessment of the likelihood of the issuer's inability
to pay interest or principal (default) when due on each security. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment that
the security is comparable to investment grade.

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

PREPAYMENT RISKS

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.

LIQUIDITY RISKS

* Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment grade or
are not widely held.

What Do Shares Cost?

The Fund generally values fixed income securities at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
individual pricing service.

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

How is the Fund Sold?

The Fund offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Service Shares. Each share class
has different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.

The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to financial institutions, credit unions, savings
associations and national banks or to individuals, directly or through
investment professionals.

When the Distributor receives marketing fees, it may pay some or all of them to
investment professionals. The Distributor and its affiliates may pay out of
their assets other amounts (including items of material value) to investment
professionals for marketing and servicing Shares. The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Institutional Service Shares. Because these
Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.

How to Purchase Shares

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL

* Establish an account with the investment professional; and

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

* Establish your account with the Fund by submitting a completed New
Account Form; and

* Send your payment to the Fund by Federal Reserve wire or check.

An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.

BY WIRE

Send your wire to:

State Street Bank and Trust Company

Boston, MA

Dollar Amount of Wire

ABA Number 011000028

Attention: EDGEWIRE

Wire Order Number, Dealer Number or Group Number

Nominee/Institution Name

Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

BY CHECK

Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:

Federated Shareholder Services Company

P.O. Box 8600

Boston, MA 02266-8600

If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:

Federated Shareholder Services Company

1099 Hingham Street

Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund
will not accept third-party checks (checks originally payable to someone
other than you or The Federated Funds).

BY AUTOMATED CLEARING HOUSE (ACH)

How to Redeem Shares

You should redeem Shares:

* through an investment professional if you purchased Shares through an
investment professional; or

* directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

Submit your redemption to your investment professional by the end of regular
trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you
will receive is based upon the next calculated NAV after the Fund receives the
order from your investment professional.

DIRECTLY FROM THE FUND

BY TELEPHONE

BY MAIL

You may redeem Shares by mailing a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after the
Fund receives your written request in proper form.

Send requests by mail to:

Federated Shareholder Services Company

P.O. Box 8600

Boston, MA 02266-8600

Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:

Federated Shareholder Services Company

1099 Hingham Street

Rockland, MA 02370-3317

All requests must include:

* Fund Name and Share Class, account number and account registration;

* amount to be redeemed and

* signatures of all shareholders exactly as registered.

Call your investment professional or the Fund if you need special instructions.

SIGNATURE GUARANTEES

Signatures must be guaranteed if:

* your redemption will be sent to an address other than the address of
record;

* your redemption will be sent to an address of record that was changed
within the last 30 days;

* a redemption is payable to someone other than the shareholder(s) of
record.

PAYMENT METHODS FOR REDEMPTIONS

* an electronic transfer to your account at a financial institution that is
an ACH member; or

* wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

REDEMPTION IN KIND

Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.

LIMITATIONS ON REDEMPTION PROCEEDS

Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:

* to allow your purchase to clear;

* during periods of market volatility; or

* when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.

ADDITIONAL CONDITIONS

TELEPHONE TRANSACTIONS

The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

SHARE CERTIFICATES

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases and redemptions. In addition, you
will receive periodic statements reporting all account activity, including
dividends and capital gains paid.

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

Fund distributions are expected to be primarily dividends. Redemptions are
taxable sales. Please consult your tax adviser regarding your federal, state,
and local tax liability.

Who Manages the Fund?

THE FUND'S PORTFOLIO MANAGERS ARE:

TODD A. ABRAHAM

KATHLEEN M. FOODY-MALUS

ADVISORY FEES

YEAR 2000 READINESS

Last Meeting of Shareholders

AGENDA ITEM 1

Election of Trustees: 1

<TABLE>

NAMES FOR WITHHELD AUTHORITY TO VOTE
<S> <C> <C>
Thomas G. Bigley 30,067,640 7,423,084
Nicholas P. Constantakis 30,067,640 7,423,084
John F. Cunningham 30,067,640 7,423,084
J. Christopher Donohue 30,067,640 7,423,084
Charles F. Mansfield, Jr. 30,067,640 7,423,084
John E. Murray, Jr., J.D., S.J.D. 30,067,640 7,423,084
John S. Walsh 30,067,640 7,423,084

</TABLE>

1 The following Trustees of the Fund continued their terms as Trustees of
the Fund: John F. Donahue, Lawrence D. Ellis, and Marjorie P. Smuts.

AGENDA ITEM 2

To ratify the selection of Ernst & Young LLP as the Fund's Independent Auditors:

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
37,448,755 24,557 17,411

</TABLE>

AGENDA ITEM 3

To make changes to the Fund's fundamental investment policies:

(a) To amend the Fund's fundamental investment policy regarding diversification.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(b) To amend the Fund's fundamental investment policy regarding borrowing money
and issuing senior securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(d) To amend the Fund's fundamental policy regarding investing in commodities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(e) To amend the Fund's fundamental investment policy regarding underwriting
securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(f) To amend the Fund's fundamental investment policy regarding lending by the
Fund.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(g) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding buying securities on margin.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(h) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding pledging assets.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(i) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding investing in illiquid securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(j) To amend, and to make non-fundamental, the Fund's fundamental investment
policy regarding investing in other investment companies.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(k) To make non-fundamental the Fund's fundamental investment policy regarding
investing in adjustable and floating rate mortgage securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(l) To make non-fundamental the Fund's funda-mental investment policy regarding
investing in U.S. government securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(m) To make non-fundamental the Fund's fundamental investment policy regarding
investing in mortgage related securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(n) To make non-fundamental the Fund's fundamental investment policy regarding
purchasing collateralized mortgage obligations.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(o) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in dollar roll transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(p) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in repurchase agreements.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(q) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in reverse repurchase agreements.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(r) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in securities lending transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(s) To make non-fundamental the Fund's fundamental investment policy regarding
engaging in when-issued and delayed delivery transactions.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

(t) To make non-fundamental the Fund's fundamental investment policy regarding
investing in stripped mortgage securities.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,639,087 12,060,446 791,191

</TABLE>

AGENDA ITEM 4

To eliminate certain of the Fund's fundamental investment policies:

(a) To remove the Fund's fundamental investment policy on investing in
securities of new issuers.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

(b) To remove the Fund's fundamental investment policy on selling securities
short.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

(d) To remove the Fund's fundamental investment policy regarding temporary
investments.

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,499,144 12,195,063 796,517

</TABLE>

AGENDA ITEM 5

To approve an amendment and restatement to the Fund's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Fund without seeking
shareholder approval:

<TABLE>

ABSTENTIONS

AND BROKER

FOR AGAINST NON-VOTES
<S> <C> <C>
24,610,128 12,230,086 650,510

</TABLE>

Financial Information

FINANCIAL HIGHLIGHTS

This information has been audited by Ernst & Young LLP, whose report, along with
the Fund's audited financial statements, is included in this prospectus.

Financial Highlights

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 34.

<TABLE>

YEAR ENDED AUGUST 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING

OF PERIOD $ 9.67 $ 9.74 $ 9.64 $ 9.65 $ 9.63
INCOME FROM INVESTMENT
OPERATIONS:

Net investment income 0.48 0.53 0.56 0.55 0.54
Net realized and
unrealized gain (loss)
on investments (0.15) (0.07) 0.10 (0.01) 0.02
TOTAL FROM INVESTMENT

OPERATIONS 0.33 0.46 0.66 0.54 0.56
LESS DISTRIBUTIONS:

Distributions from net

investment income (0.49) (0.53) (0.56) (0.55) (0.54)
NET ASSET VALUE, END OF

PERIOD $ 9.51 $ 9.67 $ 9.74 $ 9.64 $ 9.65
TOTAL RETURN 1 3.49% 4.87% 7.05% 5.75% 5.94%

RATIOS TO AVERAGE NET

ASSETS:

Expenses 2 1.25% 1.24% 1.24% 1.24% 1.23%
Net investment income 2 4.58% 5.11% 5.34% 5.25% 5.01%
Expenses (after waivers) 0.80% 0.80% 0.80% 0.80% 0.80%
Net investment income
(after waivers) 5.03% 5.55% 5.78% 5.69% 5.44%
SUPPLEMENTAL DATA:
Net assets, end of period

(000 omitted) $33,376 $48,685 $87,322 $109,536 $135,689
Portfolio turnover 83% 56% 84% 134% 124%

</TABLE>

1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

2 During the period, certain fees were voluntarily waived. If such voluntary
waivers had not occurred, the ratios would have been as indicated.

See Notes which are an integral part of the Financial Statements

Portfolio of Investments

AUGUST 31, 1999

<TABLE>

PRINCIPAL

AMOUNT VALUE
<S> <C> <C>

U.S. GOVERNMENT

OBLIGATIONS-97.0%

FEDERATED HOME LOAN
MORTGAGE CORP. ARM-28.3%

$ 114,918,050 6.705% -7.064%, 11/1/2016
- 7/1/2030 $ 118,046,553
FEDERATED HOME LOAN
MORTGAGE CORP. REMIC-0.9%

3,922,523 Series 1544-E,6.250%,

6/15/2008 3,921,543

FEDERATED NATIONAL
MORTGAGE ASSOCIATION ARM-

18.2%
76,228,566 5.730% - 7.056%, 9/1/18 -
5/1/2036 75,851,634

FEDERATED NATIONAL

MORTGAGE ASSOCIATION

REMIC-4.4%
10,000,000 Series 98-36PA, 6.250%,

7/18/2013 9,949,758
8,625,450 Series 93-206E, 5.650%,
5/25/2017 8,578,527
TOTAL 18,528,285

FEDERATED NATIONAL
MORTGAGE ASSOCIATION-13.9%

GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION ARM-

24.8%
18,443,655 6.625%, 8/20/2017 -

GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION-6.5%

1,879,244 12.000%, 9/15/2013 -

1/15/2014 2,162,402
13,720,208 11.500%, 10/15/2010 -
3/15/2020 15,561,480
8,566,772 11.000%, 12/15/2009 -
7/15/2020 9,542,456
TOTAL 27,266,338

TOTAL U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED
COST $409,167,619) 405,043,935

PRINCIPAL

AMOUNT VALUE
<S> <C> <C>

REPURCHASE AGREEMENTS-
10.5% 2

$ 29,370,000 3, 4 Morgan Stanley Group,
Inc., 5.180%, dated
8/16/1999, due 9/20/1999 $ 29,370,000
4,690,000 3, 4 Morgan Stanley Group,
Inc., 5.190%, dated

8/10/1999, due 9/20/1999 4,690,000
9,805,000 Salomon Brothers, Inc.,
5.500%, dated 8/31/1999,
due 9/1/1999 9,805,000

TOTAL REPURCHASE

AGREEMENTS (AT AMORTIZED

COST) 43,865,000

TOTAL INVESTMENTS
(IDENTIFIED COST

$453,032,619) 5 $ 448,908,935

</TABLE>

1 Indicates securities subject to dollar roll transactions with a total market
value of $33,192,596.

3 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.

4 Securities held as collateral for future dollar roll transactions.

Note: The categories of investments are shown as a percentage of net assets
($417,387,595) at August 31, 1999.

The following acronyms are used throughout this portfolio:

ARM -Adjustable Rate Mortgage
REMIC -Real Estate Mortgage Investment Conduit
TBA -To Be Announced

See Notes which are an integral part of the Financial Statements

Statement of Assets and Liabilities

AUGUST 31, 1999

<TABLE>

<S> <C> <C>
ASSETS:
Total investments in
securities, at value
(identified cost
$409,167,619 and tax cost
$409,203,881) $ 405,043,935
Investments in repurchase
agreements (at amortized
cost) 43,865,000
Income receivable 5,201,152
Receivable for investments
sold 6,615,582
Receivable for shares sold 15,019
TOTAL ASSETS 460,740,688
LIABILITIES:
Payable for investments
purchased $ 8,631,927
Payable for shares
redeemed 205,623
Income distribution
payable 1,251,310
Payable for dollar roll
transactions 33,227,511
Accrued expenses 36,722
TOTAL LIABILITIES 43,353,093
Net assets for 43,874,118
shares outstanding $ 417,387,595
NET ASSETS CONSIST OF:
Paid in capital $ 502,737,671
Net unrealized
depreciation of
investments (4,123,684)
Accumulated net realized
loss on investments (80,943,703)
Distributions in excess of
net investment income (282,689)
TOTAL NET ASSETS $ 417,387,595
NET ASSET VALUE, OFFERING
PRICE AND REDEMPTION
PROCEEDS PER SHARE
INSTITUTIONAL SHARES:
$384,011,263 / 40,365,700
shares outstanding $9.51
INSTITUTIONAL SERVICE
SHARES:
$33,376,332 / 3,508,418
shares outstanding $9.51

</TABLE>

See Notes which are an integral part of the Financial Statements

Statement of Operations

YEAR ENDED AUGUST 31, 1999

<TABLE>

<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar
roll expense of $217,338) $ 25,503,605
EXPENSES:

</TABLE>

See Notes which are an integral part of the Financial Statements

Statement of Changes in Net Assets

<TABLE>

YEAR ENDED AUGUST 31 1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET

ASSETS
OPERATIONS:

Net investment income $ 22,986,947 $ 31,752,906
Net realized gain (loss) on
investments ($154,668 and
$1,245,992, respectively,
as computed for federal tax

purposes) (1,188,247) 1,245,992
Net change in unrealized
depreciation of
investments (5,642,395) (5,409,340)
CHANGE IN NET ASSETS

RESULTING FROM OPERATIONS 16,156,305 27,589,558
DISTRIBUTIONS TO
SHAREHOLDERS:

Distributions from net
investment income

Institutional Shares (21,452,481) (26,468,625)
Institutional Service
Shares (1,866,943) (5,231,032)
CHANGE IN NET ASSETS
RESULTING FROM

DISTRIBUTIONS

TRANSACTIONS (45,122,378) (111,759,006)
Change in net assets (52,285,497) (115,869,105)
NET ASSETS:

Beginning of period 469,673,092 585,542,197
End of period (including
undistributed net
investment income of $0 and
$49,788, respectively) $ 417,387,595 $ 469,673,092

</TABLE>

See Notes which are an integral part of the Financial Statements

Notes to Financial Statements

AUGUST 31, 1999

ORGANIZATION

SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT VALUATIONS

REPURCHASE AGREEMENTS

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS

FEDERAL TAXES

<TABLE>

EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2002 $13,730,287
2003 57,180,753
2004 8,689,597

</TABLE>

Additionally, net capital losses incurred of $1,306,800 attributable to security
transactions after October 31, 1998, are treated as arising on September 1,
1999, the first day of the Fund's next taxable year.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

DOLLAR ROLL TRANSACTIONS

USE OF ESTIMATES

OTHER

Investment transactions are accounted for on the trade date.

SHARES OF BENEFICIAL INTEREST

<TABLE>

YEAR ENDED AUGUST 31 1999 1998
INSTITUTIONAL SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 4,017,476 $ 38,720,960 3,030,823 $ 29,442,519
Shares issued to
shareholders in payment of
distributions declared 604,546 5,801,151 658,748 6,398,162
Shares redeemed (7,803,994) (74,921,713) (11,287,079) (109,644,658)
NET CHANGE RESULTING FROM
INSTITUTIONAL SHARE

TRANSACTIONS (3,181,972) $ (30,399,602) (7,597,508) $ (73,803,977)

YEAR ENDED AUGUST 31 1999 1998
INSTITUTIONAL SERVICE
SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 398,206 $ 3,829,153 5,771,167 $ 56,181,140
Shares issued to
shareholders in payment of
distributions declared 70,541 677,510 315,591 3,065,101
Shares redeemed (1,996,613) (19,229,439) (10,014,646) (97,201,270)
NET CHANGE RESULTING FROM
INSTITUTIONAL SERVICE

SHARE TRANSACTIONS (1,527,866) $ (14,722,776) (3,927,888) $ (37,955,029)
NET CHANGE RESULTING FROM
SHARE TRANSACTIONS (4,709,838) $ (45,122,378) (11,525,396) $ (111,759,006)

</TABLE>

INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE

ADMINISTRATIVE FEE

DISTRIBUTION SERVICES FEE

SHAREHOLDER SERVICES FEE

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES

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.

INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 1999, were as follows:

<TABLE>

<S> <C>
Purchases $ 354,522,350
Sales $ 376,745,629

</TABLE>

YEAR 2000 (UNAUDITED)

Report of Ernst & Young LLP, Independent Auditors

TO THE TRUSTEES AND SHAREHOLDERS OF

FEDERATED ARMS FUND:

[Graphic]

Boston, Massachusetts

October 19, 1999

[Graphic]
Federated

World-Class Investment Manager

PROSPECTUS

Federated ARMs Fund

INSTITUTIONAL SERVICE SHARES

OCTOBER 31, 1999

You can obtain information about the Fund (including the SAI) by writing to or
visiting the Public Reference Room in Washington, DC. You may also access fund
information from the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can purchase copies of this information by contacting
the SEC by email at [email protected] or by writing to the SEC's Public
Reference Section, Washington, DC 20549-0102. Call 1-202-942- 8090 for
information on the Public Reference Room's operations and copying fees.

[Graphic]
Federated

Federated ARMs Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

WWW.FEDERATEDINVESTORS.COM

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4539

Cusip 314082207

8100309A-SS (10/99)

[Graphic]

STATEMENT OF ADDITIONAL INFORMATION

Federated ARMs Fund

INSTITUTIONAL SHARES

INSTITUTIONAL SERVICE SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated ARMs Fund (the "Fund"),
dated October 31, 1999. Obtain the prospectuses and the Annual Report's
Management Discussion and Analysis without charge by calling 1- 800-341-7400.

OCTOBER 31, 1999

[Graphic]
Federated

World-Class Investment Manager
Federated ARMs Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

WWW.FEDERATEDINVESTORS.COM

Federated Securities Corp., Distributor

8100309B (10/99)

[Graphic]

CONTENTS

How is the Fund Organized? 1

Securities in Which the Fund Invests 1

What Do Shares Cost? 5

How is the Fund Sold? 5

Exchanging Securities for Shares 6

Subaccounting Services 6

Redemption in Kind 6

Massachusetts Partnership Law 6

Account and Share Information 6

Tax Information 6

Who Manages and Provides Services to the Fund? 7

How Does the Fund Measure Performance? 10

Who is Federated Investors, Inc.? 12

Financial Information 13

Investment Ratings 13

Addresses 15

How is the Fund Organized?

The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on May 24, 1985.

The Board of Trustees (the Board) has established two classes of shares of the
Fund, known as Institutional Shares and Institutional Service Shares (Shares).
This SAI relates to both classes of Shares. The Fund's investment adviser is
Federated Investment Management Company (Adviser). Effective March 31, 1999,
Federated Management, former Adviser to the Fund, became Federated Investment
Management Company (formerly, Federated Advisers).

Securities in Which the Fund Invests

In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.

SECURITIES DESCRIPTIONS AND TECHNIQUES

FIXED INCOME SECURITIES

Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.

The following describes the types of fixed income securities in which the Fund
invests:

TREASURY SECURITIES

Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.

AGENCY SECURITIES

The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the interest rate and prepayment risks of these mortgage backed
securities.

MORTGAGE BACKED SECURITIES

Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.

Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and prepayments from the underlying mortgages. As
a result, the holders assume all the prepayment risks of the underlying
mortgages.

ADJUSTABLE RATE MORTGAGES

The fund invests in interests in "pools" (groups) of adjustable rate mortgages,
which are known as ARMs. While fixed rate mortgage securities have a stated
interest rate, ARMs have periodic adjustments in the interest rate on the
underlying mortgages. The adjustable rate feature of the mortgages underlying
the ARMs will help to limit sharp movements in the Fund's net asset value in
response to normal fluctuations in interest rates. As interest rates on the
mortgages underlying ARMs reset periodically (for example, semi-annually or
annually), the yields of the ARMs held in the portfolio will gradually adjust to
reflect the overall changes in interest rates.

COLLATERALIZED MORTGAGE OBLIGATIONS

CMOs, including interests in real estate mortgage investment conduits (REMICs),
allocate payments and prepayments from an underlying pass-through certificate
among holders of different classes of mortgage backed securities. This creates
different prepayment and interest rate risks for each CMO class. The degree of
increased or decreased prepayment risks depends upon the structure of the CMOs.
However, the actual returns on any type of mortgage backed security depend upon
the performance of the underlying pool of mortgages, which no one can predict
and will vary among pools.

SEQUENTIAL CMOS

In a sequential pay CMO, one class of CMOs receives all principal payments and
prepayments. The next class of CMOs receives all principal payments after the
first class is paid off. This process repeats for each sequential class of CMO.
As a result, each class of sequential pay CMOs reduces the prepayment risks of
subsequent classes.

PACS AND TACS

More sophisticated CMOs include planned amortization classes (PACs) and targeted
amortization classes (TACs). PACs and TACs are issued with companion classes.
PACs and TACs receive principal payments and prepayments at a specified rate.
The companion classes receive principal payments and prepayments in excess of
the specified rate. In addition, PACs will receive the companion classes' share
of principal payments, if necessary, to cover a shortfall in the prepayment
rate. This helps PACs and TACs to control prepayment risks by increasing the
risks to their companion classes.

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

CREDIT ENHANCEMENT

Common types of credit enhancement include guarantees, letters of credit, bond
insurance and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income security. If
a default occurs, these assets may be sold and the proceeds paid to security's
holders. Either form of credit enhancement reduces credit risks by providing
another source of payment for a fixed income security.

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

Reverse repurchase agreements are repurchase agreements in which the Fund is the
seller (rather than the buyer) of the securities, and agrees to repurchase them
at an agreed upon time and price. A reverse repurchase agreement may be viewed
as a type of borrowing by the Fund. Reverse repurchase agreements are subject to
credit risks. In addition, reverse repurchase agreements create leverage risks
because the Fund must repurchase the underlying security at a higher price,
regardless of the market value of the security at the time of repurchase.

DELAYED DELIVERY TRANSACTIONS

TO BE ANNOUNCED SECURITIES (TBAS)

As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the particular
securities to be delivered. Instead, the Fund agrees to accept any security that
meets specified terms. For example, in a TBA mortgage backed transaction, the
Fund and the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. The seller would not identify the specific underlying
mortgages until it issues the security. TBA mortgage backed securities increase
market risks because the underlying mortgages may be less favorable than
anticipated by the Fund.

DOLLAR ROLLS

ASSET COVERAGE

INVESTMENT RATINGS FOR NON-GOVERNMENT MORTGAGE BACKED SECURITIES

The Adviser will determine whether a non-government backed security is eligible
for investment by the Fund based upon the credit ratings given by one or more
NRSRO's. For example, Standard and Poor's, a NRSRO, assigns ratings to
securities based on its assessment of the likelihood of the issuer's inability
to pay interest or principal (default) when due on each security. Lower credit
ratings correspond to higher credit risk. If a security has not received a
rating, the Fund must rely entirely upon the Adviser's credit assessment that
the security is comparable to investment grade.

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

SECURITIES LENDING

The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.

The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.

Loans are subject to termination at the option of the Fund or the borrower. The
Fund will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund may pay
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.

Securities lending activities are subject to market risks and credit risks.

INVESTMENT RISKS

There are many factors which may affect an investment in the Fund. The Fund's
principal risks are described in its prospectus. Additional risk factors are
outlined below.

There are many factors which may effect an investment in the Fund. The Fund's
risks are described below:

INTEREST RATE RISKS

* Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall. However, market factors, such as the demand for
particular fixed income securities, may cause the price of certain fixed income
securities to fall while the prices of other securities rise or remain
unchanged.

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the Fund
will lose money.

PREPAYMENT RISKS

* Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments on
mortgage backed securities include both interest and a partial payment of
principal. This partial payment of principal may be comprised of a scheduled
principal payment as well as an unscheduled payment from the voluntary
prepayment, refinancing or foreclosure of the underlying loans. These
unscheduled payments of principal can adversely affect the price and yield of
mortgage backed securities. For example, during periods of declining interest
rates, prepayments can be expected to accelerate, and the Fund would be required
to reinvest the proceeds at the lower interest rates then available. In
addition, like other interest bearing securities, the values of mortgage backed
securities generally fall when interest rates rise. Since rising interest rates
generally result in decreased prepayments of mortgage backed securities, this
could cause mortgage securities to have greater average lives than expected and
their value may decline more than other fixed income securities. Conversely,
when interest rates fall, their potential for capital appreciation is limited
due to the existence of the prepayment feature.

LIQUIDITY RISKS

* Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment grade or
are not widely held.

REGULATORY COMPLIANCE

In accordance with the rules and regulations established by the National Credit
Union Administration (NCUA), unless the purchase is made solely to reduce
interest-rate risk, the Fund will not invest in any CMO or REMIC security that
meets any of the following three tests: (1) the CMO or REMIC has an expected
average life greater than 10 years; (2) the average life of the CMO or REMIC
extends by more than four years assuming an immediate and sustained parallel
shift in the yield curve of plus 300 basis points, or shortens by more than six
years assuming an immediately and sustained parallel shift in the yield curve of
minus 300 basis points; or (3) the estimated change in the price of the CMO or
REMIC is more than 17%, due to an immediate and sustained parallel shift in the
yield curve of plus or minus 300 basis points.

Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely used
market rate; and (d) the instrument varies directly (no inversely) and is reset
in proportion with the index's changes.

The Fund may not purchase a residual interest in CMO or REMIC. In addition, the
Fund will not purchase zero coupon securities with maturities greater than 10
years.

FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICIES

* The Fund's investment objective is to pursue current income with minimal
volatility of principal. The investment objective may not be changed by the
Fund's Trustee's without shareholder approval.

INVESTMENT LIMITATIONS

ISSUING SENIOR SECURITIES AND BORROWING MONEY

* The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.

DIVERSIFICATION

* With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities of any one issuer (other than cash, cash
items, securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities; and securities of other investment companies) if, as
a result, more than 5% of the value of its total assets would be invested in
securities of that issuer, or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

INVESTING IN REAL ESTATE

* The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.

INVESTING IN COMMODITIES

* The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.

UNDERWRITING

* The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.

LENDING

* The Fund may not make loans, provided that this restriction does not prevent
the Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.

THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
TRUSTEES (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT. THE FOLLOWING
LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS
BECOMES EFFECTIVE.

PURCHASES ON MARGIN

* The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities.

PLEDGING ASSETS

* The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.

ILLIQUID SECURITIES

* The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits maturing
in more than seven days, if immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the Fund's net assets.

INVESTING IN OTHER INVESTMENT COMPANIES

* The Fund may invest its assets in securities of other investment companies,
including securities of affiliated investment companies, as an efficient means
of carrying out its investment policies and managing its uninvested cash.

STRIPPED MORTGAGE SECURITIES

* The Fund will not invest in stripped mortgage securities, including securities
which represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities.

RELATED POLICY INFORMATION

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
having capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."

As a non-fundamental operating policy, for purposes of the foregoing policy,
investments in transactions involving futures contracts and options, forward
currency contracts, swap transaction and other financial contracts that settle
by payment of cash are not deemed to be investments in commodities.

PORTFOLIO TURNOVER

* The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal years ended August 31, 1999, and
1998, the portfolio turnover rates were 83% and 56%, respectively.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities are determined as follows:

* for fixed income securities, at the last sale price on a national securities
exchange, if available, otherwise, as determined by an independent pricing
service;

* for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and

* for all other securities at fair value as determined in good faith by the
Board.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.

What Do Shares Cost?

The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund. The NAV for each class of
Shares may differ due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

How is the Fund Sold?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.

RULE 12B-1 PLAN (INSTITUTIONAL SERVICE SHARES)

As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professionals such as banks,
broker/dealers, trust departments of banks, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. In
addition, the Fund's service providers that receive asset-based fees also
benefit from stable or increasing Fund assets.

The Fund may compensate the Distributor more or less than its actual marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.

The maximum Rule 12b-1 Plan fee that can be paid in any one year may not be
sufficient to cover the marketing-related expenses the Distributor has incurred.
Therefore, it may take the Distributor a number of years to recoup these
expenses.

SHAREHOLDER SERVICES

The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated), for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.

SUPPLEMENTAL PAYMENTS

Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.

Investment professionals receive such fees for providing distribution- related
or shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professionals may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.

Exchanging Securities for Shares

You may contact the Distributor to request a purchase of Shares in exchange for
securities you own. The Fund reserves the right to determine whether to accept
your securities and the minimum market value to accept. The Fund will value your
securities in the same manner as it values its assets. This exchange is treated
as a sale of your securities for federal tax purposes.

Subaccounting Services

Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.

Redemption in Kind

Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.

Because the Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, the Fund is obligated to pay Share redemptions to any one
shareholder in cash only up to the lesser of $250,000 or 1% of the net assets
represented by such Share class during any 90-day period.

Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.

Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving the portfolio securities and selling them before
their maturity could receive less than the redemption value of the securities
and could incur certain transaction costs.

Massachusetts Partnership Law

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Fund. To protect its
shareholders, the Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Fund.

In the unlikely event a shareholder is held personally liable for the Fund's
obligations, the Fund is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Fund will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Fund. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Fund itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.

Account and Share Information

VOTING RIGHTS

Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All Shares of the Fund have
equal voting rights, except that in matters affecting only a particular class,
only Shares of that class are entitled to vote.

Trustees may be removed by the Board or by shareholders at a special meeting. A
special meeting of shareholders will be called by the Board upon the written
request of shareholders who own at least 10% of the Fund's outstanding shares.

As of October 6, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Shares: APCO Employees Credit Union,
Birmingham, AL, owned 6,008,538 Institutional Shares (14.43%); and Commonwealth
Bank, Valley Forge, PA, owned 2,123,231

Institutional Shares (5.10%).

Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.

Tax Information

FEDERAL INCOME TAX

The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive special tax treatment and will pay federal income tax.

Who Manages and Provides Services to the Fund?

BOARD OF TRUSTEES

The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Fund,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Fund for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Federated Fund Complex is
comprised of 54 investment companies, whose investment advisers are affiliated
with the Fund's Adviser.

As of October 6, 1999, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Shares.

<TABLE>

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM FUND
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer $0 $0 for the Fund and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHAIRMAN AND TRUSTEE Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Chairman and
Director, Federated Investment
Counseling, and Federated Global
Investment Management Corp.; Chairman,
Passport Research, Ltd.

THOMAS G. BIGLEY Director or Trustee of $1,417.96 $113,860.22 for the Fund
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
TRUSTEE Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director,
MED 3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.

JOHN T. CONROY, JR. Director or Trustee of the $1,559.99 $125,264.48 for the Fund
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex

3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
TRUSTEE Associates, Inc.,

Realtors; Partner or
Trustee in private real
estate ventures in
Southwest Florida;
formerly: President,
Naples Property
Management, Inc. and
Northgate Village
Development Corporation.

NICHOLAS CONSTANTAKIS Director or Trustee of the $1,056.13 $47,958.02 for the Fund
Birth Date: September 3, 1939 Federated Fund Complex; and 29 other investment
175 Woodshire Drive formerly: Partner, companies in the
Pittsburgh, PA Andersen Worldwide SC. Fund Complex
TRUSTEE

JOHN F. CUNNINGHAM Director or Trustee of $0 $0 for the Fund and
Birth Date: March 5, 1943 some of the Federated Fund 46 other investment
353 El Brillo Way Complex; companies in the
Palm Beach, FL Chairman, President and Fund Complex
TRUSTEE Chief Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting); Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,417.96 $113,860.22 for the Fund
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
TRUSTEE University of Pittsburgh

Medical Center-Downtown; Hematologist,
Oncologist, and Internist, University
of Pittsburgh Medical Center; Member,
National Board of Trustees, Leukemia
Society of America.

PETER E. MADDEN Director or Trustee of the $1,417.96 $113,860.22 for the Fund
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
TRUSTEE Court; President, State
Street Bank and Trust
Company and
State Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM FUND
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND AND FUND COMPLEX
<S> <C> <C> <C>
CHARLES F. MANSFIELD, JR. Director or Trustee of some $0 $0 for the Fund and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
TRUSTEE Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.

JOHN E. MURRAY, JR., J.D., S.J.D. Director or Trustee of $1,417.96 $113,860.22 for the Fund
Birth Date: December 20, 1932 the Federated Fund and 54 other investment
President, Duquesne University Complex; President, Law companies in the
Pittsburgh, PA Professor, Duquesne Fund Complex
TRUSTEE University; Consulting
Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations,
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.

MARJORIE P. SMUTS Director or Trustee of the $1,417.96 $113,860.22 for the Fund
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
TRUSTEE Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.

JOHN S. WALSH Director or Trustee of some $0 $0 for the Fund and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
TRUSTEE (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.

GLEN R. JOHNSON Staff member, Federated $0 $0 for the Fund and
Birth Date: May 2, 1929 Securities Corp. 8 other investment
Federated Investors Tower companies in the
1001 Liberty Avenue Fund Complex

Pittsburgh, PA

PRESIDENT

J. CHRISTOPHER DONAHUE+* President or Executive $0 $0 for the Fund and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
TRUSTEE AND EXECUTIVE Federated Fund Complex;
VICE PRESIDENT President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.

EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Fund and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company and Federated
Investment Counseling, Federated Global
Investment Management Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.

JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Fund and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary, and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
AND SECRETARY Trustee, Federated

Investment Management Company and
Investment Counseling; Director,
Federated Global Investment Management
Corp., Federated Services Company and
Federated Securities Corp.

RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Fund and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President-Funds Financial companies in the
1001 Liberty Avenue Services Division, Fund Complex

Pittsburgh, PA Federated Investors, Inc.;
TREASURER formerly: various

management positions

within Funds Financial
Services Division of
Federated Investors, Inc.

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM FUND
POSITION WITH FUND FOR PAST FIVE YEARS FROM FUND AND FUND COMPLEX
<S> <C> <C> <C>
RICHARD B. FISHER President or Vice $0 $0 for the Fund and
Birth Date: May 17, 1923 President of some of the 6 other investment
Federated Investors Tower Funds in the Federated Fund companies in the
1001 Liberty Avenue Complex; Director or Fund Complex
Pittsburgh, PA Trustee of some of the
VICE PRESIDENT Funds in the Federated Fund
Complex; Executive Vice
President, Federated
Investors, Inc.; Chairman
and Director, Federated
Securities Corp.

WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Fund and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the

1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment

Counseling, Federated Global Investment
Management Corp., Federated Investment
Management Company and Passport
Research, Ltd.; Registered
Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated
Investment Counseling Institutional
Portfolio Management Services Division;
Senior Vice President, Federated
Investment Management Company and
Passport Research, Ltd.

TODD A. ABRAHAM Todd A. Abraham has been $0 $0 for the Fund and
Birth Date: February 10, 1966 the Fund's portfolio 1 other investment
Federated Investors Tower manager since August 1995. company in the
1001 Liberty Avenue He is Vice President of the Fund Complex
Pittsburgh, PA Fund. Mr. Abraham has been
VICE PRESIDENT a Portfolio Manager since
1995 and a Vice President
of the Fund's investment
adviser since 1997.
Mr. Abraham joined
Federated in 1993 as an
Investment Analyst and
served as Assistant Vice
President from 1995 to
1997. Mr. Abraham is a
Chartered Financial
Analyst and received his
M.B.A. in Finance from
Loyola College.

</TABLE>

* An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940.

# A pound sign (#) denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.

+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Trustee of the Fund.

++ Messrs. Cunningham, Mansfield and Walsh became members of the Board of
Trustees on January 1, 1999, July 1, 1999 and January 1, 1999, respectively.
They did not earn any fees for serving the Fund Complex since these fees are
reported as of the end of the last calendar year. They did not receive any fees
as of the fiscal year end of the Fund.

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions for the
Fund.

The Adviser is a wholly owned subsidiary of Federated.

The Adviser shall not be liable to the Fund or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Fund.

OTHER RELATED SERVICES

Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of Fund Shares offered by the Distributor.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. In selecting among firms believed to meet these
criteria, the Adviser may give consideration to those firms which have sold or
are selling Shares of the Fund and other funds distributed by the Distributor
and its affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Fund's Board.

RESEARCH SERVICES

Investment decisions for the Fund are made independently from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.

ADMINISTRATOR

Federated Services Company, a subsidiary of Federated, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at the following annual rate of the average aggregate daily net assets of
all Federated Funds as specified below:

<TABLE>

MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS

<S> <C>

0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million

</TABLE>

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.

Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments for a fee based on
Fund assets plus out-of-pocket expenses.

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type and
number of accounts and transactions made by

shareholders.

INDEPENDENT AUDITORS

The independent auditor for the Fund, Ernst & Young LLP, plans and performs its
audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.

FEES PAID BY THE FUND FOR SERVICES

<TABLE>

FOR THE YEAR ENDED AUGUST 31 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $2,624,894 $3,325,847 $3,977,723
Advisory Fee Reduction 853,071 1,037,318 1,270,395
Brokerage Commissions 0 0 0
Administrative Fee 329,862 418,154 500,691
12B-1 FEE

Institutional Service Shares 1,097 - -
SHAREHOLDER SERVICES FEE

Institutional Shares 0 - -
Institutional Service Shares 90,270 - -

</TABLE>

Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.

How Does the Fund Measure Performance?

The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.

The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.

Share performance fluctuates on a daily basis largely because net earnings
fluctuate daily. Both net earnings and offering price per Share are factors in
the computation of yield and total return.

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns are given for the one-year, five-year and ten-year periods ended
August 31, 1999.

Yield is given for the 30-day period ended August 31, 1999.

<TABLE>

30-DAY

SHARE CLASS PERIOD 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>

INSTITUTIONAL SHARES:

Total Return - 3.74% 5.68% 6.28%
Yield 5.32% - - -

START OF

30-DAY PERFORMANCE

SHARE CLASS PERIOD 1 YEAR 5 YEARS ON 4/25/92
<S> <C> <C> <C> <C>

INSTITUTIONAL
SERVICE SHARES:

Total Return - 3.49% 5.41% 4.70%
Yield 5.07% - - -

</TABLE>

TOTAL RETURN

Total return represents the change (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.

The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.

YIELD

The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The necessarily reflect income
actually earned by Shares because of certain adjustments required by the SEC
and, therefore, may not correlate to the dividends or other distributions paid
to shareholders.

To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

* references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;

* charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;

* discussions of economic, financial and political developments and their impact
on the securities market, including the portfolio manager's views on how such
developments could impact the Funds; and

* information about the mutual fund industry from sources such as the Investment
Company Institute.

The Fund may compare its performance, or performance for the types of securities
in which it invests, to a variety of other investments, including federally
insured bank products such as bank savings accounts, certificates of deposit,
and Treasury bills.

The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.

You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:

LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS INDEX

Lehman Brothers Adjustable Rate Mortgage Funds Index is comprised of all agency
guaranteed securities with coupons that periodically adjust over a spread of a
published index.

LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX

Lehman Brothers 1-3 Year Government Index is comprised of all publicly issued,
non-convertible domestic debt of the U.S. government, or any agency thereof, or
any quasi-federal corporation. The index also includes corporate debt guaranteed
by the U.S. government. Only notes and bonds with a minimum maturity of one year
and maximum maturity of 2.9 years are included.

MERRILL LYNCH 1-YEAR TREASURY INDEX

Merrill Lynch 1-Year Treasury Index is an unmanaged index tracking 1-year U.S.
Government securities. The index is produced by Merrill Lynch, Pierce, Fenner &
Smith, Inc.

LIPPER ANALYTICAL SERVICES, INC.

Lipper Analytical Services, Inc., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "U.S. Mortgage
Funds" category in advertising and sales literature.

MORNINGSTAR, INC.

Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.

Who is Federated Investors, Inc.?

Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.

Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state- of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS

In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

EQUITY FUNDS

In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value- oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

CORPORATE BOND FUNDS

In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.

GOVERNMENT FUNDS

In the government sector, as of December 31, 1998, Federated managed 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.

MONEY MARKET FUNDS

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield-
J. Thomas Madden; U.S. fixed income-William D. Dawson, III; and global
equities and fixed income-Henry A. Frantzen. The Chief Investment Officers
are Executive Vice Presidents of the Federated advisory companies.

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.

FEDERATED CLIENTS OVERVIEW

Federated distributes mutual funds through its subsidiaries for a variety of
investment purposes. Specific markets include:

INSTITUTIONAL CLIENTS

Federated meets the needs of approximately 900 institutional clients nationwide
by managing and servicing separate accounts and mutual funds for a variety of
purposes, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax exempt entities, foundations/endowments,
insurance companies, and investment and financial advisers. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division, Federated Securities Corp.

BANK MARKETING

Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Federated Funds are available to consumers through major brokerage firms
nationwide-we have over 2,200 broker/dealer and bank broker/dealer relationships
across the country-supported by more wholesalers than any other mutual fund
distributor. Federated's service to financial professionals and institutions has
earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Sales Division, Federated Securities Corp.

Financial Information

The Financial Statements for the Fund for the fiscal year ended August 31, 1999
are incorporated herein by reference to the Annual Report to Shareholders of the
Federated ARMs Fund dated August 31, 1999.

Investment Ratings

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA-Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher-rated issues only in small degree.

A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

BB-Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.

B-Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.

CCC-Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B rating.

CC-The rating CC typically is applied to debt subordinated to senior debt that
is assigned an actual or implied CCC debt rating.

C-The rating C typically is applied to debt subordinated to senior debt which is
assigned an actual or implied CCC debt rating. The C rating may be used to cover
a situation where a bankruptcy petition has been filed, but debt service
payments are continued.

MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS

AAA-Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as gilt
edged. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

AA-Bonds which are rated AA are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.

A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

BAA-Bonds which are rated BAA are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA-Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA-Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA-Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C-Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS

AAA-Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA-Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F- 1+.

A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB-Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

BB-Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.

B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC-Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C-Bonds are imminent default in payment of interest or principal.

Addresses

FEDERATED ARMS FUND

Institutional Shares

Institutional Service Shares

Federated Investors Funds

5800 Corporate Drive

Pittsburgh, PA 15237-7000

DISTRIBUTOR

Federated Securities Corp.

Federated Investors Tower

1001 Liberty Avenue

Pittsburgh, PA 15222-3779

INVESTMENT ADVISER

Federated Investment Management Company

Federated Investors Tower

1001 Liberty Avenue

Pittsburgh, PA 15222-3779

CUSTODIAN

State Street Bank and Trust Company

P.O. Box 8600

Boston, MA 02266-8600

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Shareholder Services Company

P.O. Box 8600

Boston, MA 02266-8600

INDEPENDENT AUDITORS

Ernst & Young LLP

200 Clarendon Street

Boston, MA 02116-5072

PART C. OTHER INFORMATION.

Item 23. EXHIBITS:

(a) Conformed copy of Amended and Restated Declaration of Trust
of the Registrant; (16)

(b) (i) Copy of Restated and Amended By-Laws of the Registrant;
(16)

(ii) Copy of Amendment No. 5 to the By-Laws of the Registrant;
(19)

(iii)Copy of Amendment No. 6 to the By-Laws of the Registrant;
(19)

(iv) Copy of Amendment No. 7 to the By-Laws of the Registrant;
(19)

(v) Copy of Amendment No. 8 to the By-Laws of the Registrant;
(19)

(d) Conformed copy of Investment Advisory Contract of the Registrant;
(9)

(e) (i) Conformed copy of Distributor's Contract of the Registrant;
(14)

(ii) Conformed copy of Exhibit A to Distributor's Contract of the
Registrant; (16)

(iii)Conformed copy of Exhibit B to Distributor's Contract of the
Registrant; +

(iv) The Registrant hereby incorporates the conformed copy of the specimen
Mutual Funds Sales and Service Agreement; Mutual Funds Service
Agreement; and Plan Trustee/Mutual Funds Service Agreement from Item
24(b)(6) of the Cash Trust Series II Registration Statement on Form
N-1A filed with the Commission on July 24, 1995. (File Nos. 33-38550
and 811-6269); (f) Not applicable;

(g) (i) Conformed copy of Custodian Contract of
the Registrant; (16)
(ii) Conformed copy of Custodian Fee
Schedule; (19)

+ All exhibits have been filed electronically.

9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed August 24, 1989. (File Nos. 2-98491 and
811-4539).

14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 2-98491
and 811-4539).

15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed October 25, 1993. (File Nos. 2-98491
and 811-4539).

16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 2-98491
and 811-4539).

19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed October 29, 1998. (File Nos. 2-98491
and 811-4539).

(h) (i) Conformed copy of Agreement for Fund Accounting Services,
Administrative Services, Shareholder Transfer Agency Services and
Custody Services Procurement of the Registrant; (17)

(ii) The responses described in Item 24(b)(6) are hereby incorporated
by reference;

(iii)Conformed copy of Amended and restated Shareholder Services
Agreement of the Registrant; (19)

(iv) The Registrant hereby incorporates by reference the conformed
copy of the Shareholder Services Sub-Contract between Fidelity
and Federated Shareholder Services from Item 24(b)(9)(iii) of
Federated GNMA Trust Registration Statement on Form N-1A, filed
with the Commission on March 25, 1996. (File Nos. 2-75670 and
811-3375).

(i) Conformed copy of Opinion and Consent of Counsel as to legality
of shares being registered; (16) (j) Conformed copy of Consent of
Independent Auditors; +

(k) Not applicable;

(l) Conformed copy of Initial Capital Understanding; (16)

(m) (i) Conformed copy of Rule 12b-1 Distribution Plan of the
Registrant; (14)

(ii) The responses described in Item 24(b)(6) are hereby incorporated
by reference;

(n) The Registrant hereby incorporates the conformed copy of specimen
Multiple Class Plan from Item 24(b)(18) of the World Investment
Series, Inc. Registration Statement on Form N-1A, filed with the
Commission on January 26, 1996. (File Nos. 33-52149 and 811-07141).

(o) (i) Conformed copy of Power of Attorney of the Registrant; +

(ii) Conformed copy of Power of Attorney of Chief Investment Officer of the
Registrant; +

(iii) Conformed copy of Power of Attorney of Trustee of the Registrant; +

+ All exhibits have been filed electronically.

14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 2-98491
and 811-4539).

16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 2-98491
and 811-4539).

17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed October 24, 1996. (File Nos. 2-98491
and 811-4539).

19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed October 29, 1998. (File Nos. 2-98491
and 811-4539).

<PAGE>

Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:

None

Item 25. INDEMNIFICATION: (12)

Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:

For a description of the other business of the investment
adviser, see the section entitled "Who Manages the Fund?" in Part
A. The affiliations with the Registrant of four of the Trustees
and one of the Officers of the investment adviser are included in
Part B of this Registration Statement under "Who Manages and
Provides Services to the Fund?" The remaining Trustee of the
investment adviser, his position with the investment adviser,
and, in parentheses, his principal occupation is: Mark D. Olson
(Partner, Wilson, Halbrook & Bayard), 107 W. Market Street,
Georgetown, Delaware 19947.

The remaining Officers of the investment adviser are:

Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden

Senior Vice Presidents: Joseph M. Balestrino
David A. Briggs
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Jeffrey A. Kozemchak
Sandra L. McInerney
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski

Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Arthur J. Barry
Randall S. Bauer
G. Andrew Bonnewell
Micheal W. Casey
Robert E. Cauley
Alexandre de Bethmann
Anthony Delserone, Jr.
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
James E. Grefenstette
Marc Halperin
Patricia L. Heagy
Susan R. Hill
William R. Jamison
Constantine J. Kartsonas
Robert M. Kowit

12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed December 27, 1991. (File Nos. 2-98491
and 811-4539).

Richard J. Lazarchic
Steven Lehman
Marian R. Marinack
William M. Painter
Jeffrey A. Petro
Keith J. Sabol
Frank Semack
Aash M. Shah
Michael W. Sirianni, Jr.
Christopher Smith
Edward J. Tiedge
Leonardo A. Vila
Paige M. Wilhelm
George B. Wright

Assistant Vice Presidents: Arminda Aviles
Nancy J. Belz
Lee R. Cunningham, II
James H. Davis, II
Jacqueline A. Drastal
Paul S. Drotch
Salvatore A. Esposito
Donna M. Fabiano
Gary E. Farwell
Eamonn G. Folan
John T. Gentry
John W. Harris
Nathan H. Kehm
John C. Kerber
Grant K. McKay
Christopher Matyszewski
Natalie F. Metz
Thomas Mitchell
Joseph M. Natoli
Trent Neville
Ihab Salib
Roberto Sanchez-Dahl, Sr.
James W. Schaub
John Sheehy
John Sidawi
Matthew K. Stapen
Diane Tolby
Timothy G. Trebilcock
Steven J. Wagner
Lori A. Wolff

Secretary: G. Andrew Bonnewell

Treasurer: Thomas R. Donahue

Assistant Secretaries: C. Grant Anderson
Karen M. Brownlee
Leslie K. Ross

Assistant Treasurer: Dennis McAuley, III

The business address of each of the Officers of the investment
adviser is Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779. These individuals are also
officers of a majority of the investment advisers to the
investment companies in the Federated Fund Complex described in
Part B of this Registration Statement.

Item 27. PRINCIPAL UNDERWRITERS:

(a)....Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the following open-end investment
companies, including the Registrant:

Cash Trust Series II; Cash Trust Series, Inc.; CCB Funds; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core
Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated
Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust; Federated High
Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated
U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; Fixed Income
Securities, Inc.; ; Hibernia Funds; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; Regions Funds; RIGGS Funds;
SouthTrust Funds; Tax-Free Instruments Trust; The Planters Funds; The Wachovia
Funds; The Wachovia Municipal Funds; Vision Group of Funds, Inc.; World
Investment Series, Inc.; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
DG Investor Series; High Yield Cash Trust; Investment Series Trust; Star Funds;
Targeted Duration Trust; The Virtus Funds; Trust for Financial Institutions;

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.

<PAGE>

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Richard B. Fisher Chairman, Chief Executive Vice President
Federated Investors Tower Officer, Chief Operating
1001 Liberty Avenue Officer
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Arthur L. Cherry Director --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John B. Fisher President-Institutional Sales --
Federated Investors Tower and Director
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas R. Donahue Director, Assistant Secretary --
Federated Investors Tower and Treasurer
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer and --
Federated Investors Tower Director
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Ronald M. Petnuch Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Ernest G. Anderson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Matthew W. Brown Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David J. Callahan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark Carroll Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Steven R. Cohen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Marc C. Danile Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert J. Deuberry Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark A. Gessner Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

G. Tad Gullickson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Dayna C. Haferkamp Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Charlene H. Jennings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael W. Koenig Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Christopher A. Layton Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael H. Liss Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael R. Manning Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Amy Michalisyn Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Alec H. Neilly Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Larry Sebbens Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward J. Segura Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Colin B. Starks Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert W. Bauman Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David L. Immonen Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

John T. Glickson Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Renee L. Martin Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Timothy S. Johnson Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Dennis McAuley Assistant Treasurer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
</TABLE>

<PAGE>

Item 28. LOCATION OF ACCOUNTS AND RECORDS:

All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:

Registrant Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(Notices should be sent to the Agent for service at the above address)

Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

Federated Shareholder Services Company P.O. Box 8600
("Transfer Agent and Dividend Boston, MA 02266-8600

Disbursing Agent)

Federated Services Company Federated Investors Tower
("Administrator") 1001 Liberty Avenue

Pittsburgh, PA 15222-3779

Federated Investment Management Company Federated Investors Tower
("Adviser") 1001 Liberty Avenue

Pittsburgh, PA 15222-3779

State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600

Item 29. MANAGEMENT SERVICES: Not applicable.

Item 30........UNDERTAKINGS:

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to removal of Trustees
and the calling of special shareholder meetings by shareholders.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED ARMs FUND, certifies
that it meets all of the requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 28th day of October, 1999.

FEDERATED INCOME SECURITIES TRUST

BY: /s/ C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue

October 28, 1999

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:

NAME TITLE DATE

By: /s/ C. Grant Anderson

C. Grant Anderson Attorney In Fact October 28, 1999
ASSISTANT SECRETARY For the Persons

Listed Below

NAME TITLE

John F. Donahue* Chairman and Trustee
(Chief Executive Officer)

William D. Dawson, III* Chief Investment Officer

Glen R. Johnson* President

Richard J. Thomas* Treasurer
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

Nicholas P. Constantakis* Trustee

John F. Cunningham* Trustee

Lawrence D. Ellis, M.D.* Trustee

Peter E. Madden* Trustee

John E. Murray, Jr., J.D., S.J.D.* Trustee

Marjorie P. Smuts* Trustee

* By Power of Attorney

Exhibit (o)(i) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretaries of FEDERATED ARMS FUND and each
of them, their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and stead, in
any and all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means
of the Securities and Exchange Commission's electronic disclosure system known
as EDGAR; and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as each of them
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

SIGNATURES TITLE DATE
<S> <C> <C>
/S/JOHN F. DONAHUE Chairman October 4, 1999
- ----------------------------------------
John F. Donahue (Chief Executive Officer)

/S/GLEN R. JOHNSON President October 4, 1999

Glen R. Johnson

/S/J. CHRISTOPHER DONAHUE Executive Vice President October 4, 1999
- ----------------------------------------
J. Christopher Donahue

/S/RICHARD J. THOMAS Treasurer October 4, 1999
- ----------------------------------------
J. Christopher Donahue (Principal Financial
and Accounting Officer)

/S/THOMS G. BIGLEY Trustee October 4, 1999

Thomas G. Bigley

/S/JOHN T. CONROY, JR. Trustee October 4, 1999
- ----------------------------------------
John T. Conroy, Jr.

<PAGE>

SIGNATURES TITLE DATE

/S/NICHOLAS P. CONSTANTAKIS Trustee October 4, 1999

Nicholas P. Constantakis

/S/LAWRENCE D. ELLIS, M.D. Trustee October 4, 1999
- ----------------------------------------
Lawrence D. Ellis, M.D.

/S/PETER E. MADDEN Trustee October 4, 1999

Peter E. Madden

/S/JOHN E. MURRAY, JR. Trustee October 4, 1999
- ----------------------------------------
John E. Murray, Jr.

/S/WESLEY W. POSVAR Trustee October 4, 1999

Wesley W. Posvar

/S/MARJORIE P. SMUTS Trustee October 4, 1999

Marjorie P. Smuts
</TABLE>

Sworn to and subscribed before me this 13th day of October, 1999.

/S/MADALINE P. KELLY
Notarial Seal
Madaline P. Kelly, Notary Public
Baldwin Boro, Allegheny County
My Commission Expires Feb. 22, 2000
Member, Pennsylvania Association of Notaries

Exhibit (o)(iii) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

SIGNATURES TITLE DATE

/S/JOHN F. CUNNINGHAM Trustee October 4, 1999

John F. Cunningham

Sworn to and subscribed before me this 13th day of October, 1999

/S/MADALINE P. KELLEY
Notarial Seal
Madaline P. Kelly, Notary Public
Baldwin Boro, Allegheny County
My Commission Expires Feb. 22, 2000
Member, Pennsylvania Association of Notaries

Exhibit (o)(ii) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

SIGNATURES TITLE DATE

/S/ WILLIAM D. DAWSON, III Chief Investment Officer October 4, 1999
William D. Dawson, III

Sworn to and subscribed before me this 13th day of October, 1999

/S/MADALINE P. KELLY
Notarial Seal
Madaline P. Kelly, Notary Public
Baldwin Boro, Allegheny County
My Commission Expires Feb. 22, 2000
Member, Pennsylvania Association of Notaries

Exhibit (e) under Form N-1A
Exhibit (1) under Item 601/Reg. S-K

Exhibit B

FEDERATED ARMs FUND

Institutional Service Shares

The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 24th day of April, 1992, between Federated ARMs
Fund and Federated Securities Corp. with respect to the separate Classes of
Shares thereof, first set forth in this Exhibit.

1. The Fund hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to sell
shares of the above-listed Classes ("Shares"), at the current offering price
thereof as described and set forth in the respective prospectuses of the Fund,
and to render administrative support services to the Fund and its shareholders.
In addition, FSC is authorized to select a group of Administrators
("Administrators") to render administrative support services to the Fund and its
shareholders.

2. Administrative support services may include, but are not limited to,
the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker or
Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide accounting
support for all transactions. Broker or Administrator also wires funds and
receives funds for Fund share purchases and redemptions, confirms and reconciles
all transactions, reviews the activity in the Fund's accounts, and provides
training and supervision of its personnel; 6) interest posting: Broker or
Administrator posts and reinvests dividends to the Fund's accounts; 7)prospectus
and shareholder reports: Broker or Administrator maintains and distributes
current copies of prospectuses and shareholder reports; 8) advertisements: the
Broker or Administrator continuously advertises the availability of its services
and products; 9) customer lists: the Broker or Administrator continuously
provides names of potential customers; 10) design services: the Broker or
Administrator continuously designs material to send to customers and develops
methods of making such materials accessible to customers; and 11) consultation
services: the Broker or Administrator continuously provides information about
the product needs of customers.

3. During the term of this Agreement, the Fund will pay FSC for services
pursuant to this Agreement, a monthly fee computed at the annual rate of .25% of
the average aggregate net asset value of the Institutional Service Shares of
Federated ARMs Fund held during the month. For the month in which this Agreement
becomes effective or terminates, there shall be an appropriate proration of any
fee payable on the basis of the number of days that the Agreement is in effect
during the month.

4. FSC may from time-to-time and for such periods as it deems
appropriate reduce its compensation to the extent any Class expenses exceed such
lower expense limitation as FSC may, by notice to the Fund, voluntarily declare
to be effective.

5. FSC will enter into separate written agreements with various firms to
provide certain of the services set forth in Paragraph 1 herein. FSC, in its
sole discretion, may pay Brokers and Administrators a periodic fee in respect of
Shares owned from time to time by their clients or customers. The schedules of
such fees and the basis upon which such fees will be paid shall be determined
from time to time by FSC in its sole discretion.

6. FSC will prepare reports to the Board of Trustees of the Fund on a
quarterly basis showing amounts expended hereunder including amounts paid to
Brokers and Administrators and the purpose for such payments.

In consideration of the mutual covenants set forth in the Distributor's
Contract dated April 24, 1992, between Federated ARMs Fund and Federated
Securities Corp., Federated ARMs Fund executes and delivers this Exhibit on
behalf of the separate Classes of Shares thereof, first set forth in this
Exhibit.

Witness the due execution hereof this 24th day of April, 1992.

ATTEST: FEDERATED ARMs FUND

/S/ JOHN W. MCGONIGLE By:/S/ GLEN R. JOHNSON
Secretary President

(SEAL)

ATTEST: FEDERATED SECURITIES CORP.
/S/ S. ELLIOTT COHAN By:/S/ RICHARD B. FISHER
Secretary President

(SEAL)

Exhibit (j) under N-1A
Exhibit 23 under Item 601/Reg SK

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Financial Highlights"
in the Prospectuses and "Independent Auditors" in the Statement of Additional
Information and to the use of our report dated October 19, 1999, in
Post-Effective Amendment Number 25 to the Registration Statement (Form N-1A No.
2-98491) of Federated ARMs Fund, dated October 31, 1999.

By: /s/ERNST & YOUNG
Ernst & Young

Boston, Massachusetts
October 28, 1999