FEDERATED SHORT-TERM INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares of Federated Short-Term Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities Trust
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to seek to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Combined Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1995, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information, which is in paper form only, or a paper copy of this prospectus, if
you have received it electronically, free of charge by calling 1-800-235-4669.
To obtain other information, or make inquiries about the Fund, contact the Fund
at the address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1995
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Special Considerations 14
Portfolio Turnover 14
Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 15
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Management of the Trust 15
Distribution of Institutional Shares 16
Administration of the Fund 16
NET ASSET VALUE 18
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INVESTING IN INSTITUTIONAL SHARES 18
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Share Purchases 18
Minimum Investment Required 18
What Shares Cost 18
Subaccounting Services 19
Certificates and Confirmations 19
Dividends 19
Capital Gains 19
REDEEMING INSTITUTIONAL SHARES 19
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Telephone Redemption 20
Written Requests 20
Accounts with Low Balances 21
SHAREHOLDER INFORMATION 21
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Voting Rights 21
Massachusetts Partnership Law 21
TAX INFORMATION 22
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Federal Income Tax 22
Pennsylvania Corporate and
Personal Property Taxes 22
PERFORMANCE INFORMATION 22
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OTHER CLASSES OF SHARES 23
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FINANCIAL STATEMENTS 24
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
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ADDRESSES 38
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................................ None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)...................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
INSTITUTIONAL SHARES ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)............................................. 0.37%
12b-1 Fee.................................................................... None
Total Other Expenses......................................................... 0.19%
Shareholder Services Fee (after waiver)(2)................................. 0.00%
Total Institutional Shares Operating Expenses(3)........................ 0.56%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(2) The maximum shareholder services fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses would have been 0.59%
absent the voluntary waiver of a portion of the management fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Institutional Shares" and
"Federated Income Securities Trust Information." Wire-transferred redemptions of
less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period........ $ 6 $ 18 $ 31 $ 70
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
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(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 37.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992(A) 1991 1990 1989 1988 1987(B)
----- ----- ----- ------- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $8.85 $9.17 $8.98 $9.07 $9.16 $9.41 $9.56 $9.98 $10.00
- ----------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ----------------------------
Net investment income 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74
- ----------------------------
Net realized and unrealized
gain (loss) on investments (0.24) (0.32) 0.16 (0.07) (0.08) (0.25)(0.15) (0.42) (0.02 )
- ---------------------------- --- --- --- ----- --- --- --- --- -----
Total from investment
operations 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72
- ----------------------------
LESS DISTRIBUTIONS
- ----------------------------
Distributions from net
investment income (0.54) (0.51)(0.55) (0.60) (0.83) (0.93)(0.94) (0.94) (0.74 )
- ----------------------------
Distributions in excess of
net investment income 0.00 0.00 0.00 (0.02)(c)(0.01)(c)0.00 0.00 0.00 0.00
- ---------------------------- --- --- --- ----- --- --- --- --- -----
Total distributions (0.54) (0.51)(0.55) (0.62) (0.84) (0.93)(0.94) (0.94) (0.74 )
- ---------------------------- --- --- --- ----- --- --- --- --- -----
NET ASSET VALUE, END OF
PERIOD $8.61 $8.85 $9.17 $8.98 $9.07 $9.16 $9.41 $9.56 $ 9.98
- ---------------------------- --- --- --- ----- --- --- --- --- -----
TOTAL RETURN (D) 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40 %
- ----------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------
Expenses 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50 %(e)
- ----------------------------
Net investment income 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58 %(e)
- ----------------------------
Expense
waiver/reimbursement (f) 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60 %(e)
- ----------------------------
SUPPLEMENTAL DATA
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Net assets, end of period
(000 omitted) $219,649 $353,106$144,129$36,047 $47,223 $65,429 $69,904 $90,581 $80,073
- ----------------------------
Portfolio turnover 38% 44% 62% 114% 23% 34% 38% 77% 82 %
- ----------------------------
</TABLE>
(a) On December 31, 1991, the shareholders approved a change in the fundamental
investment policies which state that the Fund will be invested in high-grade
as opposed to lower-rated debt securities, and as a result, investment
income per share is lower.
(b) Reflects operations for the period from July 1, 1986 (date of initial public
investment) to April 30, 1987.
(c) Distributions in excess of net investment income for the years ended April
30, 1992 and 1991, were a result of certain book and tax timing differences.
These distributions did not represent a return of capital for federal income
tax purposes for the year ended April 30, 1992 and 1991.
(d) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(e) Computed on an annualized basis.
(f) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended April 30, 1995, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") has
established two classes of shares, Institutional Shares and Institutional
Service Shares. This prospectus relates only to Institutional Shares of the
Fund.
Institutional Shares ("Shares") are designed primarily for retail and private
banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales load
imposed by the Fund.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS. The high grade debt securities in which the Fund
invests include medium and long-term instruments rated by one or more nationally
recognized statistical rating organizations ("NRSROs") in one of their three
highest rating categories (e.g., AAA, AA or A by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's
Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or
more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). Although the Fund may
invest in unrated debt securities that are determined by the Fund's investment
adviser to be of comparable quality to instruments having such ratings, as a
matter of operating policy, the Fund will invest only in rated securities.
Downgraded securities will be evaluated on a case by case basis by the adviser.
The adviser will determine whether or not the security continues to be an
acceptable investment. If not, the security will be sold.
Acceptable investments currently include the following:
- corporate debt obligations, including medium-term notes and variable rate
demand notes;
- asset-backed securities;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and
other deposit institutions ("Bank Instruments");
- interest rate swaps, caps and floors;
- medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
- auction rate securities (see below);
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on published interest rate or interest rate
index. Many variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days' prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features."
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related, private loans, receivables or other
lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks, although they
may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal
payments, may be lower than the yield on the original asset-backed security. As
a consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranche of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are:
(i) issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency
or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and/or principal. The interest portion
of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. Typically, the ARMS in which the Fund invests are
issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be
collateralized by whole loans or private pass through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and/or interest and
may receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed-income securities.
Like other fixed-income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but
may be collateralized by whole loans or private pass-through securities.
The CMOs in which the Fund may invest may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by
pools of mortgages without a government guarantee as to payment of
principal and interest, but which have some form of credit enhancement.
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs. Most of the CMOs in which the Fund invests use the
same basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final tranche (Z bond)
typically receives any excess income from the underlying investments
after payments are made to the other
tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security
tranche (or B bond.) This process continues until all of the tranches
have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of
the Internal Revenue Code, as amended. Issuers of REMICs may take several
forms, such as trusts, partnerships, corporations, associations, or
segregated pools of mortgages. Once REMIC status is elected and obtained,
the entity is not subject to federal income taxation. Instead, income is
passed through the entity and is taxed to the person or persons who hold
interests in the REMIC. A REMIC interest must consist of one or more
classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property.
RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and
REMICs in which the Fund may invest will be readjusted at intervals of one
year or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to have somewhat less volatile
interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMO's may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly
increased price volatility. In the event that the Fund purchases such
residual interest mortgage securities, it will factor in the increased
interest and price volatility of such securities when determining its
dollar-weighted average portfolio maturity and duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund may invest will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund may invest may be
affected if market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying residential
mortgages are adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in which the
Fund invests to be shorter than the maturities stated in the underlying
mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are structured similarly to collateralized
mortgage obligations and mortgage pass-through securities, which are
described above. Also, these securities may be issued either by non-
governmental entities and carry no direct or indirect governmental
guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset-backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although
non-mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such reregistration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time
Deposits ("ETDs").
FOREIGN INVESTMENTS. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and
Europaper are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholdings or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing bank, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term. As
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the facility. The Fund generally acquires a
participation interest in a revolving credit facility from a bank or other
financial institution. The terms of the participation require the Fund to make a
pro rata share of all loans extended to the borrower and entitles the Fund to a
pro rata share of all payments made by the
borrower. Demand notes and revolving facilities usually provide for floating or
variable rates of interest.
INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate on $10 million principal amount in exchange for the right to receive
the equivalent of a fixed rate of interest on $10 million principal amount.
Neither party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and the Fund will
segregate liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will segregate liquid
assets in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps,
caps or floors are determined by the investment adviser to be illiquid, they
will be included in the Fund's limitation on investments in illiquid securities.
To the extent the Fund sells caps and floors, it will maintain in a segregated
account cash and/or U.S. Government Securities having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of the portfolio
security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio securities.
The Fund may purchase and sell caps and floors without limitation, subject to
the segregated account requirement described above.
AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities, (collectively, "auction rate
securities"). Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at par
value at specified intervals. The interest rate or dividend is reset by "Dutch"
auction in which bids are made by broker-dealers and other institutions for a
certain amount of securities at a specified minimum yield. The interest rate or
dividend rate set by the auction is the lowest interest or dividend rate that
covers all securities offered for sale. While this process is designed to permit
auction rate securities to be traded at par value, there is some risk that an
auction will fail due to insufficient demand for the securities. If so, the
securities may become illiquid and subject to the Fund's 15% limitation on
illiquid securities.
AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not maintain a
stable net asset value, the adviser will seek to limit, to the extent consistent
with the Fund's investment objective of current income, the magnitude of
fluctuations in the Fund's net asset value by limiting the dollar-weighted
average maturity and duration of the Fund's portfolio. Securities with shorter
maturities and durations generally have less volatile prices than securities of
comparable quality with longer maturities or durations. The Fund should be
expected to maintain a higher average maturity and duration during periods of
lower expected market volatility, and a lower average maturity and duration
during periods of higher expected market volatility. In any event, the Fund's
dollar-weighted average maturity will not exceed three years, and its
dollar-weighted average duration will not exceed three years.
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
and illiquid securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies, but
which are subject to restriction on resale under federal securities law. The
Fund will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities in which the
Fund may invest to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
up to one-third of the value of its total assets to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will limit the amount of
portfolio securities it may lend to not more than one-third of its total assets.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral equal
to at least 100% of the value of the securities loaned. This policy may not be
changed without the approval of the Fund's shareholders.
There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, the disposition of the securities may be delayed pending court
action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date. The Fund will limit its purchase of
securities on a when-issued or delayed delivery basis to no more than 20% of the
value of its total assets. This policy may not be changed without the approval
of the Fund's shareholders.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
PORTFOLIO TURNOVER
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
- to take advantage of short-term differentials in yields or market values;
- to take advantage of new investment opportunities;
- to respond to changes in the creditworthiness of an issuer; or
- to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of its total assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
- sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value
of its net assets is held as collateral for those positions;
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations;
- invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
- with respect to 75% of its assets, invest more than 5% of the value of
its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes the Fund takes all
common stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
FEDERATED INCOME SECURITIES TRUST INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Deborah A. Cunningham has been the Fund's portfolio manager since July
1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice
President of the Fund's investment adviser since 1993. Ms. Cunningham
served as an Assistant Vice President of the investment adviser from 1989
until 1992, and from 1986 until 1989 she acted as an investment analyst.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- ----------------------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
on assets in excess of $750
0.075 of 1% 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 Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net assets of Fund Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, certain financial
institutions may be compensated by the Adviser or its affiliates for the
continuing investment of customers' assets in certain funds, including the Fund,
advised by those entities. These payments will be made directly by the
distributor or Adviser from their assets, and will not be made from the assets
of the Fund or by the assessment of a sales load on Shares.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors is transfer agent
for the shares of the Fund, and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, One Oxford Centre, Pittsburgh, Pennsylvania.
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding.
INVESTING IN INSTITUTIONAL SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Short-Term Income Fund--Institutional Shares; Fund Number (this number
can be found on the account statement or by contacting the Fund); Group Number
or Order Number; Nominee or Institution Name; and ABA Number 011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Federated Short-Term Income Fund--Institutional Shares to: Federated Services
Company, c/o State Street Bank and Trust Company, P.O. Box 8602, Boston,
Massachusetts 02266-8602. Orders by mail are considered received after payment
by check is converted by the transfer agent's bank, State Street Bank, into
federal funds. This is normally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange each day the New York Stock
Exchange is open, except on: (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions 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 provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted upon instruction of
by the transfer agent into federal funds. Dividends are automatically reinvested
on payment dates in additional Shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SHARES
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The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset
value. Redemption requests must be received in proper form and can be made by
telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his or her name, the Fund name and class
name, the shareholder's account number, and the share or dollar amount
requested. If Share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail to Federated
Services Company, 500 Victory Road - 2nd Floor, Quincy, Massachusetts 02171 with
the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request, provided that the transfer agent has received
payment for the Shares from the shareholders.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees or by a
two-thirds vote of the shareholders at a special meeting. A special meeting of
shareholders shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the Trust's outstanding shares of all
portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Information on
the tax status of dividends and distributions is provided annually.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
- The Fund is not subject to Pennsylvania corporate or personal property
taxes; and
- Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to such
taxes if owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for
Institutional Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Institutional Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Institutional Shares over a thirty-day period by the net asset value per
share of Institutional Shares on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by Institutional Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.
The Institutional Shares are sold without any sales load or other similar
non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Service
Shares, which are sold primarily to banks and other institutions that hold
assets in an agency capacity. Institutional Service Shares are sold at net asset
value and are subject to a minimum initial investment of $25,000. Institutional
Service Shares are distributed pursuant to a 12b-1 Plan adopted by the Trust.
Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences, however, between Shares and Institutional Service
Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-235-4669 or contact their financial institution.
FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--59.5%
- -----------------------------------------------------------------------------------
AUTOMOTIVE--6.7%
----------------------------------------------------------------
$ 3,622,465 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/1997 $ 3,601,890
----------------------------------------------------------------
1,110,779 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/1998 1,091,540
----------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, 7.38%, 4/15/1999 5,021,100
----------------------------------------------------------------
1,000,000 General Motors Acceptance Corp., MTN, 7.63%, 3/9/1998 1,005,830
----------------------------------------------------------------
3,450,000 Navistar Financial Dealer Note 1990, Class A-3, 6.98%+,
1/25/2003 3,488,813
----------------------------------------------------------------
1,256,141 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/1998 1,224,060
----------------------------------------------------------------
571,402 Volvo Auto Trust 1991-A, 5.65%, 12/15/1998 569,557
---------------------------------------------------------------- ------------
Total 16,002,790
---------------------------------------------------------------- ------------
BANKING--12.6%
----------------------------------------------------------------
3,000,000 Bankamerica Corp., FRN, 6.69%+, 6/25/2003 2,812,500
----------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Master Trust 1991-1, Class A, 8.75%,
8/15/1999 3,081,270
----------------------------------------------------------------
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%,
5/15/2000 5,029,500
----------------------------------------------------------------
5,000,000 Chemical Bank, FRN, 7.25%+, 7/29/2003 4,850,000
----------------------------------------------------------------
4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/1998 4,025,920
----------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust, Class B, FRN, 6.53%+,
12/15/1999 3,998,800
----------------------------------------------------------------
1,000,000 J.P. Morgan and Co., Inc., FRN, 6.13%+, 8/19/2002 960,000
----------------------------------------------------------------
1,000,000 PNC Bank Sub. Note, 7.88%, 4/15/2005 1,000,950
----------------------------------------------------------------
4,000,000 Toronto Dominion Bank Sub. Note, 7.88%, 8/15/2004 3,985,600
---------------------------------------------------------------- ------------
Total 29,744,540
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
FINANCE-RETAIL--14.7%
----------------------------------------------------------------
$ 5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/15/1998 $ 5,103,500
----------------------------------------------------------------
2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/1998 2,570,950
----------------------------------------------------------------
5,000,000 Discover Credit Card Trust 1992-B, Class 1, 6.80%, 6/16/2000 4,946,550
----------------------------------------------------------------
2,218,826 (a) Encyclopedia Britannica Dom. Funding Corp., Series 1994-1,
6.76%, 3/15/2000 2,189,704
----------------------------------------------------------------
4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/1997 4,027,440
----------------------------------------------------------------
6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/1997 5,923,980
----------------------------------------------------------------
2,000,000 Household Private Label Credit Card 1994-1, Class B, 7.55%,
5/20/1997 2,020,625
----------------------------------------------------------------
8,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/1998 8,093,920
---------------------------------------------------------------- ------------
Total 34,876,669
---------------------------------------------------------------- ------------
HOME EQUITY RECEIVABLES--16.7%
----------------------------------------------------------------
5,292,164 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 5,274,330
----------------------------------------------------------------
2,307,967 Advanta Home Equity Loan Trust 1992-3, Class A-2, 6.00%,
8/25/2008 2,190,007
----------------------------------------------------------------
3,013,537 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 2,986,144
----------------------------------------------------------------
6,581,807 (a) Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 6,110,352
----------------------------------------------------------------
2,000,000 (a) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%,
11/15/2013 1,871,120
----------------------------------------------------------------
4,245,628 (a) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 3,989,882
----------------------------------------------------------------
1,503,820 GE Capital Home Equity Loan, 1991-1, Class A, 7.20%, 9/15/2011 1,494,136
----------------------------------------------------------------
4,000,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 9/15/2011 4,054,600
----------------------------------------------------------------
4,726,596 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, FRN,
7.12%+, 2/15/2003 4,760,674
----------------------------------------------------------------
6,775,595 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 6,705,671
---------------------------------------------------------------- ------------
Total 39,436,916
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
LEASING--0.2%
----------------------------------------------------------------
$ 483,951 (a) Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%,
1/20/1999 $ 474,891
---------------------------------------------------------------- ------------
MANUFACTURED HOUSING RECEIVABLES--8.6%
----------------------------------------------------------------
1,754,097 Fleetwood Credit Corp. 1992-1, Class A, 7.10%, 2/15/2007 1,748,028
----------------------------------------------------------------
6,695,709 Greentree Manufactured Housing 1992-1, Class A-5, 6.50%,
10/15/2017 6,300,595
----------------------------------------------------------------
4,963,664 Merrill Lynch Mortgage Investments, Inc., 1991-I, Class A,
7.65%, 1/15/2012 4,952,546
----------------------------------------------------------------
519,036 Merrill Lynch Mortgage Investments, Inc., 1992-B, Mfd. 8.50%,
4/15/2012 515,630
----------------------------------------------------------------
6,875,417 (a) Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B, 9.25%
5/15/2011 6,918,389
---------------------------------------------------------------- ------------
Total 20,435,188
---------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $147,120,768) 140,970,994
---------------------------------------------------------------- ------------
GOVERNMENT AGENCIES--2.1%
- -----------------------------------------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.84%, 4/26/2000 5,029,000
---------------------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $5,042,970) 5,029,000
---------------------------------------------------------------- ------------
MORTGAGE-BACKED SECURITIES--34.9%
- -----------------------------------------------------------------------------------
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES--34.9%
----------------------------------------------------------------
325,000 Citicorp Mortgage Securities, Inc., Series 1992-5, Class A-1,
8.00%, 9/25/2021 324,304
----------------------------------------------------------------
2,364,457 GCA 1993-AF1, Class B-1, FRN, 7.01%+, 9/25/2023 2,290,567
----------------------------------------------------------------
7,976,025 GCA 1993-LB2, Class A-1, FRN, 7.15%+, 8/25/2023 7,936,145
----------------------------------------------------------------
4,629,172 GCA 1993-LB3, Class A-1, FRN, 7.11%+, 1/25/2024 4,606,026
----------------------------------------------------------------
8,024,342 (a) GCA 1994-B, Class A, FRN, 6.54%+, 1/25/2018 7,969,175
----------------------------------------------------------------
16,930,000 GCA Long Beach Bank Mortgage PTC, Class A-2, FRN, 6.91%+,
7/25/2022 16,729,041
----------------------------------------------------------------
2,441,322 (a) GCA REMIC PTC, 1991-4, Class B-1A, FRN, 8.53%+, 7/1/2019 2,404,702
----------------------------------------------------------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
MORTGAGE-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES--CONTINUED
----------------------------------------------------------------
$ 3,942,574 GCA REMIC Trust V, 1993-5, Class B, FRN 6.13%+, 5/1/2020 $ 3,656,737
----------------------------------------------------------------
8,648,636 GE Capital Mortgage Services, Inc., 1993-9, Class A-1, 6.00%,
8/25/2008 7,565,048
----------------------------------------------------------------
2,175,619 Glendale Federal Bank, Series 1988-1A, FRN 7.05%+, 11/25/2027 2,154,543
----------------------------------------------------------------
975,166 (a) Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2022 989,793
----------------------------------------------------------------
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 5,805,600
----------------------------------------------------------------
2,832,763 (a) Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 11/25/2022 2,721,351
----------------------------------------------------------------
618,193 Residential Funding Mortgage Securities, Inc., 1993-S18, Class
A-2, 7.50%, 5/25/2023 613,253
----------------------------------------------------------------
1,476,570 Residential Funding Mortgage Securities, Inc., 1992-S43, Class
A-4, 8.00%, 12/25/2022 1,473,129
----------------------------------------------------------------
2,000,000 Resolution Trust Corp., 1992-12, Class B-3, FRN 7.27%+,
12/25/2025 1,958,760
----------------------------------------------------------------
2,000,125 Resolution Trust Corp., 1992-7, Class B-2B, 8.35%, 6/29/2029 1,991,385
----------------------------------------------------------------
12,000,000 Salomon Brothers Mortgage Securities VII, Inc., 1993-5, Class
A-3C, 7.44%, 10/25/2023 11,403,720
---------------------------------------------------------------- ------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $82,585,925) 82,593,279
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
*REPURCHASE AGREEMENT--3.2%
- -----------------------------------------------------------------------------------
$ 7,659,000 J.P. Morgan Securities, Inc., 5.97%, dated 4/28/1995, due
5/1/1995 $ 7,659,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 7,659,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $242,408,663)(B) $236,252,273
---------------------------------------------------------------- ------------
</TABLE>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws. These securities have been determined to be liquid under
criteria established by the Board of Trustees.
(b) The cost of investments for federal tax purposes amounts to $242,408,663.
The net unrealized depreciation of investments on a federal tax cost basis
amounts to $6,156,390, which is comprised of $917,394 appreciation and
$7,073,784 depreciation at April 30, 1995.
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
+ Denotes variable rate and floating rate obligations for which the current
yield is shown.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
FRN --Floating Rate Note
MTN --Medium Term Note
PTC --Pass Through Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
Note: The categories of investments are shown as a percentage of net assets
($236,739,786) at April 30, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $242,408,663) $236,252,273
- --------------------------------------------------------------------------------
Income receivable 1,738,408
- --------------------------------------------------------------------------------
Receivable for investments sold 87,717
- --------------------------------------------------------------------------------
Receivable for shares sold 53,606
- -------------------------------------------------------------------------------- ------------
Total assets 238,132,004
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Income distribution payable $1,266,907
- -------------------------------------------------------------------
Payable for shares redeemed 80,771
- -------------------------------------------------------------------
Payable to bank 445
- -------------------------------------------------------------------
Accrued expenses 44,095
- ------------------------------------------------------------------- ----------
Total liabilities 1,392,218
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 27,489,137 shares outstanding $236,739,786
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSISTS OF:
- --------------------------------------------------------------------------------
Paid in capital $268,680,167
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (6,156,390)
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (25,783,991)
- -------------------------------------------------------------------------------- ------------
Total Net Assets $236,739,786
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
Institutional Shares ($219,648,540 / 25,504,633 shares outstanding) $ 8.61
- -------------------------------------------------------------------------------- ------------
Institutional Service Shares ($17,091,246 / 1,984,504 shares outstanding) $ 8.61
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------
Interest $ 20,540,470
- ---------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------
Investment advisory fee $1,212,210
- -------------------------------------------------------------------------
Administrative personnel and services fee 229,413
- -------------------------------------------------------------------------
Custodian fees 137,357
- -------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 32,833
- -------------------------------------------------------------------------
Directors'/Trustees' fees 7,271
- -------------------------------------------------------------------------
Auditing fees 20,213
- -------------------------------------------------------------------------
Legal fees 13,694
- -------------------------------------------------------------------------
Portfolio accounting fees 32,159
- -------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 62,175
- -------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 59,688
- -------------------------------------------------------------------------
Share registration costs 39,134
- -------------------------------------------------------------------------
Printing and postage 35,701
- -------------------------------------------------------------------------
Insurance premiums 10,342
- -------------------------------------------------------------------------
Taxes 4,320
- -------------------------------------------------------------------------
Miscellaneous 7,247
- ------------------------------------------------------------------------- ----------
Total expenses 1,903,757
- -------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------
Waiver of investment advisory fee $84,776
- ---------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares 59,688 144,464
- --------------------------------------------------------------- ------- ----------
Net expenses 1,759,293
- --------------------------------------------------------------------------------------- ------------
Net investment income 18,781,177
- --------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on investments (13,861,223)
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 4,124,069
- --------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (9,737,154)
- --------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 9,044,023
- --------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 18,781,177 $ 17,557,868
- ---------------------------------------------------------------
Net realized gain (loss) on investments ($5,572,713 and
$669,532 net loss, respectively, as computed for federal
income tax purposes) (13,861,223) (2,324,205)
- ---------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments 4,124,069 (11,254,546)
- --------------------------------------------------------------- ------------- -------------
Change in assets resulting from operations 9,044,023 3,979,117
- --------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------
Distributions from net investment income:
- ---------------------------------------------------------------
Institutional Shares (17,312,790) (16,047,919)
- ---------------------------------------------------------------
Institutional Service Shares (1,468,387) (1,509,949)
- --------------------------------------------------------------- ------------- -------------
Change in net assets resulting from distributions to
shareholders (18,781,177) (17,557,868)
- ---------------------------------------------------------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------
Proceeds from sale of Shares 62,830,948 513,518,367
- ---------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of
distributions declared 3,515,879 3,669,215
- ---------------------------------------------------------------
Cost of Shares redeemed (212,625,473) (270,654,913)
- --------------------------------------------------------------- ------------- -------------
Change in net assets resulting from Share transactions (146,278,646) 246,532,669
- --------------------------------------------------------------- ------------- -------------
Change in net assets (156,015,800) 232,953,918
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 392,755,586 159,801,668
- --------------------------------------------------------------- ------------- -------------
End of period $ 236,739,786 $ 392,755,586
- --------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of two, diversified
portfolios. The financial statements included herein present only those of
Federated Short-Term Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Listed corporate bonds (and other fixed
income and asset-backed securities), unlisted securities (and other
fixed-income and asset-backed securities and/or private placements), and
short-term securities are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees ("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
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At April 30, 1995, the Fund, for federal tax purposes, had a capital loss
carry forward of ($15,666,103), which will reduce the Fund taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carry forward will expire in 1996, ($791,359), 1997, ($3,077,752), 1998,
($316,627), 1999, ($1,132,354), 2000, ($4,105,766), 2002, ($669,532), 2003,
($5,572,713).
Additionally, net capital losses of $10,117,888 attributable to security
transactions incurred after October 31, 1994 are treated as arising on May
1, 1995, 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.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under the criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
market or, if no market prices are available, at the fair value determined
by the Fund's pricing committee. Additional information on each restricted
security held at April 30, 1995 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Encyclopedia Britannica Dom. Funding Corp Series 1994-1 3/21/94 $2,218,826
Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2 9/16/93 6,581,186
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3 2/18/94 1,999,719
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5 2/18/94 4,244,717
Concord Leasing Grantor Trust 1992-C, Class A-1 8/14/92 481,696
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/94 6,983,920
GCA 1994-B, Class A 12/13/94 7,887,678
GCA REMIC PTC, 1991-4, Class B-1A 1/7/93 2,457,343
Long Beach Bank Mortgage Series 1992-3, Class A 6/29/92 1,033,066
Prudential Home Mortgage 1992-A, Class B1-1 10/22/92 2,817,714
</TABLE>
RECLASSIFICATION--During the year ended April 30, 1995, the Fund adopted
Statement of Position 93-2 Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. ("SOP 93-2"). Accordingly, permanent
book and tax differences have been reclassified to paid-in capital. These
differences are primarily due to differing treatments for expiring capital
loss carry forwards. Amounts as of April 30, 1995, have been reclassified
to reflect a decrease in paid-in capital and a decrease in accumulated net
realized loss of $156,518. Net investment income, net realized gains, and
net assets were not affected by this change.
OTHER--Investment transactions are accounted for on the trade date.
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------
1994
----------------------------
SHARES
-----------
1995
----------------------------
INSTITUTIONAL SHARES AMOUNT AMOUNT
- ------------------------------------- ------------- -------------
SHARES
-----------
<S> <C> <C> <C> <C>
Shares Sold 6,446,211 $ 55,884,659 50,506,612 $ 459,763,632
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 317,004 2,739,906 307,713 2,782,792
- -------------------------------------
Shares redeemed (21,161,903) (183,228,360) (26,635,056) (241,204,503)
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Shares transactions (14,398,688) ($124,603,795) 24,179,269 $ 221,341,921
- ------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------
1994
----------------------------
SHARES
-----------
1995
----------------------------
INSTITUTIONAL SERVICE SHARES AMOUNT AMOUNT
- ------------------------------------- ------------- -------------
SHARES
-----------
<S> <C> <C> <C> <C>
Shares Sold 801,654 $ 6,946,289 5,927,113 $ 53,754,735
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 89,844 775,973 97,795 886,423
- -------------------------------------
Shares redeemed (3,388,048) (29,397,113) (3,253,210) (29,450,410)
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Service Shares
transactions (2,496,550) ($ 21,674,851) 2,771,698 $ 25,190,748
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from Fund
share transactions (16,895,238) ($146,278,646) 26,950,967 $ 246,532,669
- ------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .40 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
level of average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least $125,000
per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. The distributor
may voluntarily choose to waive a portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ") serves as transfer and dividend disbursing agent for the Fund.
This fee is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average daily net assets for the period plus, out-of-pocket expenses.
INTERFUND TRANSACTIONS--During the year ended April 30, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser (or affiliated investment advisers), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $67,348,780 and $70,715,829,
respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended April 30, 1995, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
Purchases $113,085,347
- ------------------------------------------------------------------------------ ------------
Sales $228,009,681
- ------------------------------------------------------------------------------ ------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND:
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities of the
Federated Short-Term Income Fund (a portfolio of Federated Income Securities
Trust), including the portfolio of investments, as of April 30, 1995, and the
related statement of operations for the year then ended, and the statements of
changes in net assets, and financial highlights (see page 2 of this prospectus)
for each of the two 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 audits 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 April
30, 1995, by correspondence with the custodian and brokers. 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 Short-Term Income Fund at April 30, 1995, the results of its
operations for the year then ended, and the changes in its net assets, and
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 9, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Short-Term Income Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ------------------------------------------------------------------------------------------------
Transfer Agent & Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED SHORT-TERM
INCOME FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1995
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
31420C209
1111903A-IS (6/95)
FEDERATED SHORT-TERM INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares of Federated Short-Term Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company (a
mutual fund).
The investment objective of the Fund is to seek to provide current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Combined Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1995, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information, which is in paper form only, or a paper copy of this prospectus, if
you have received it electronically, free of charge by calling 1-800-235-4669.
To obtain other information, or make inquiries about the Fund, contact the Fund
at the address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Special Considerations 14
Portfolio Turnover 14
Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 15
- ------------------------------------------------------
Management of the Trust 15
Distribution of Institutional Service Shares 16
Administration of the Fund 17
NET ASSET VALUE 18
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 18
- ------------------------------------------------------
Share Purchases 18
Minimum Investment Required 19
What Shares Cost 19
Subaccounting Services 19
Certificates and Confirmations 19
Dividends 20
Capital Gains 20
REDEEMING INSTITUTIONAL SERVICE SHARES 20
- ------------------------------------------------------
Telephone Redemption 20
Written Requests 20
Accounts with Low Balances 21
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
Massachusetts Partnership Law 22
TAX INFORMATION 22
- ------------------------------------------------------
Federal Income Tax 22
Pennsylvania Corporate and Personal
Property Taxes 22
PERFORMANCE INFORMATION 23
- ------------------------------------------------------
OTHER CLASSES OF SHARES 23
- ------------------------------------------------------
FINANCIAL STATEMENTS 24
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
- ------------------------------------------------------
ADDRESSES 38
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................................ None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)........................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)...................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)........... None
Exchange Fee................................................................. None
INSTITUTIONAL SERVICE SHARES ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1)............................................. 0.37%
12b-1 Fee (after waiver)(2).................................................. 0.01%
Total Other Expenses......................................................... 0.43%
Shareholder Services Fee (after waiver)(3)................................. 0.24%
Total Institutional Service Shares Operating Expenses(4)................ 0.81%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary waiver
at any time at its sole discretion. The maximum management fee is 0.40%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum shareholder services fee is 0.25%.
(4) The Total Institutional Service Shares Operating Expenses in the table above
are based on expenses expected during the fiscal year ending April 30, 1996. The
Total Institutional Service Shares Operating Expenses were 0.81% for the fiscal
year ended April 30, 1995 and were 1.08% absent the voluntary waiver of a
portion of the management fee and a portion of the 12b-1 fee.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Service Shares of
the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Investing in Institutional
Service Shares" and "Federated Income Securities Trust Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales load permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period........... $ 8 $ 26 $ 45 $ 100
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 37.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------
1995 1994 1993 1992(A)
------ ------ ------ -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.85 $ 9.17 $ 8.98 $ 9.08
- --------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------
Net investment income 0.52 0.48 0.52 0.15
- --------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.24) (0.32) 0.19 (0.10 )
- -------------------------------------------------- ------ ------ ------ -------
Total from investment operations 0.28 0.16 0.71 0.05
- --------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------
Distributions from net investment income (0.52) (0.48) (0.52) (0.15 )
- -------------------------------------------------- ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 8.61 $ 8.85 $ 9.17 $ 8.98
- -------------------------------------------------- ------ ------ ------ -------
TOTAL RETURN (B) 3.29% 1.78% 8.12% 0.69 %
- --------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------
Expenses 0.81% 0.81% 0.76% 0.78 %(c)
- --------------------------------------------------
Net investment income 5.90% 5.30% 5.82% 6.37 %(c)
- --------------------------------------------------
Expense waiver/reimbursement (d) 0.27% 0.13% 0.45% 0.98 %(c)
- --------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------
Net assets, end of period (000 omitted) $17,091 $39,649 $15,673 $778
- --------------------------------------------------
Portfolio turnover 38% 44% 62% 114 %
- --------------------------------------------------
</TABLE>
(a) Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended April 30, 1995, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus the Board of Trustees ("Trustees") has
established two classes of shares, Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares of the Fund.
Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales load
imposed by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide current income. This
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
INVESTMENT POLICIES
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies regarding
the Fund's average dollar-weighted portfolio maturity and duration. This
investment policy may not be changed without the prior approval of the Fund's
shareholders. Unless indicated otherwise, the other investment policies
described in this prospectus may be changed by the Trustees without the approval
of the Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.
ACCEPTABLE INVESTMENTS. The high grade debt securities in which the Fund
invests include medium and long-term instruments rated by one or more nationally
recognized statistical rating organizations ("NRSROs") in one of their three
highest rating categories (e.g., AAA, AA or A by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's
Investors Service, Inc. ("Moody's") ) and short-term instruments rated by one or
more NRSROs in one of their two highest categories (e.g., A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). Although the Fund may
invest in unrated debt securities that are determined by the Fund's investment
adviser to be of comparable quality to instruments having such ratings, as a
matter of operating policy, the Fund will invest only in rated securities.
Downgraded securities will be evaluated
on a case by case basis by the adviser. The adviser will determine whether or
not the security continues to be an acceptable investment. If not, the security
will be sold.
Acceptable investments currently include the following:
- corporate debt obligations, including medium-term notes and variable rate
demand notes;
- asset-backed securities;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and
other deposit institutions ("Bank Instruments");
- medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
- interest rate swaps, caps and floors;
- auction rate securities (see below);
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term corporate
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Many variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days' prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features."
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related, private loans, receivables or other
lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Prepayments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people sell
their homes or elect to make unscheduled
payments on their mortgages. All asset-backed securities are subject to similar
prepayment risks, although they may be more or less sensitive to certain
factors. Depending upon market conditions, the yield that the Fund receives from
the reinvestment of such prepayments, or any scheduled principal payments, may
be lower than the yield on the original asset-backed security. As a consequence,
mortgage securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may also
have less potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders. The credit
characteristics of asset-backed securities also differ in a number of respects
from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement provided to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are:
(i) issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency
or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and principal. The interest portion of
these payments will be distributed by the Fund as income, and the capital
portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. Typically, the ARMS in which the Fund invests are
issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be
collateralized by whole loans or private pass-through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the
Federal Housing Administration ("FHA") or Veterans Administration ("VA"),
while those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and/or interest and
may receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed-income securities.
Like other fixed-income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but
may be collateralized by whole loans or private pass-through securities.
The CMOs in which the Fund may invest may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by
pools of mortgages without a government guarantee as to payment of
principal and interest, but which have some form of credit enhancement.
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs. Most of the CMOs in which the Fund invests use the
same basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of
securities: The first three (A, B, and C bonds) pay interest at their
stated rates beginning with the issue date; the final tranche (Z bond)
typically receives any excess income from the underlying investments
after payments are made to the other
tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A
bonds). When those securities are completely retired, all principal
payments are then directed to the next-shortest-maturity security
tranche (or B bond). This process continues until all of the tranches
have been completely retired.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more
of the tranches often bear interest at an adjustable rate. The interest
portion of these payments is distributed by the Fund as income, and the
principal portion is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of
the Internal Revenue Code, as amended. Issuers of REMICs may take several
forms, such as trusts, partnerships, corporations, associations, or
segregated pools of mortgages. Once REMIC status is elected and obtained,
the entity is not subject to federal income taxation. Instead, income is
passed through the entity and is taxed to the person or persons who hold
interests in the REMIC. A REMIC interest must consist of one or more
classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property.
RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and
REMICs in which the Fund may invest will be readjusted at intervals of one
year or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to have somewhat less volatile
interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMO's may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly
increased price volatility. In the event that the Fund purchases such
residual interest mortgage securities, it will factor in the increased
interest and price volatility of such securities when determining its
dollar-weighted average portfolio maturity and duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund may invest may be
affected if market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying residential
mortgages are adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in which the
Fund invests to be shorter than the maturities stated in the underlying
mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are structured similarly to collateralized
mortgage obligations and mortgage pass-through securities, which are
described above. Also, these securities may be issued either by
nongovernmental entities and carry no direct or indirect governmental
guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although
non-mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"). Bank Instruments may include Eurodollar Certificates of Deposit
("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time
Deposits ("ETDs").
FOREIGN INVESTMENTS. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper and
Europaper are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholdings or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing bank, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment. Revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term. As
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the facility. The Fund generally acquires a
participation interest in a revolving credit facility from a bank or other
financial institution. The terms of the participation require the Fund to make a
pro rata share of all loans extended to the borrower and entitles the Fund to a
pro rata share of all payments made by the
borrower. Demand notes and revolving facilities usually provide for floating or
variable rates of interest.
INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate on $10 million principal amount in exchange for the right to receive
the equivalent of a fixed rate of interest on $10 million principal amount.
Neither party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and the Fund will
segregate liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will segregate liquid
assets in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps,
caps or floors are determined by the investment adviser to be illiquid, they
will be included in the Fund's limitation on investments in illiquid securities.
To the extent the Fund sells caps and floors, it will maintain in a segregated
account cash and/or U.S. government securities having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of the portfolio
security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio securities.
The Fund may purchase and sell caps and floors without limitation, subject to
the segregated account requirement described above.
AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities (collectively, "auction rate
securities"). Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at par
value at specified intervals. The interest rate or dividend is reset by "Dutch"
auction in which bids are made by broker-dealers and other institutions for a
certain amount of securities at a specified minimum yield. The interest rate or
dividend rate set by the auction is the lowest interest or dividend rate that
covers all securities offered for sale. While this process is designed to permit
auction rate securities to be traded at par value, there is some risk that an
auction will fail due to insufficient demand for the securities. If so, the
securities may become illiquid and subject to the Fund's 15% limitation on
illiquid securities.
AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not maintain a
stable net asset value, the adviser will seek to limit, to the extent consistent
with the Fund's investment objective of current income, the magnitude of
fluctuations in the Fund's net asset value by limiting the dollar-weighted
average maturity and duration of the Fund's portfolio. Securities with shorter
maturities and durations generally have less volatile prices than securities of
comparable quality with longer maturities or durations. The Fund should be
expected to maintain a higher average maturity and duration during periods of
lower expected market volatility, and a lower average maturity and duration
during periods of higher expected market volatility. In any event, the Fund's
dollar-weighted average maturity will not exceed three years, and its
dollar-weighted average duration will not exceed three years.
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
and illiquid securities. Restricted securities are any securities in which the
Fund may otherwise invest pursuant to its investment objective and policies, but
which are subject to restriction on resale under federal securities law. The
Fund will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.
REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities in which the
Fund may invest to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse repurchase
agreements. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Fund will restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the reverse repurchase
agreements. This policy may not be changed without the approval of the Fund's
shareholders.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or both,
up to one-third of the value of its total assets, to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will limit the amount of
portfolio securities it may lend to not more than one-third of its total assets.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral equal
to at least 100% of the value of the securities loaned. This policy may not be
changed without the approval of the Fund's shareholders.
There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, the disposition of the securities may be delayed pending court
action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
value of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date. The Fund will limit its
purchase of securities on a when-issued or delayed delivery basis to no more
than 20% of the value of its total assets. This policy may not be changed
without the approval of the Fund's shareholders.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
PORTFOLIO TURNOVER
While the Fund does not intend to engage in substantial short-term trading, from
time to time it may sell portfolio securities for investment reasons without
considering how long they have been held. For example, the Fund would do this:
- to take advantage of short-term differentials in yields or market values;
- to take advantage of new investment opportunities;
- to respond to changes in the creditworthiness of an issuer; or
- to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Fund's investment objective.
INVESTMENT LIMITATIONS
The Fund will not:
- borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of its total assets to secure such borrowings;
- lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
- sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value
of its net assets is held as collateral for those positions;
- underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations;
- invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
- with respect to 75% of its assets, invest more than 5% of the value of
its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes the Fund takes all
common stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
- invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
FEDERATED INCOME SECURITIES TRUST INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .40 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Deborah A. Cunningham has been the Fund's portfolio manager since July
1991. Ms. Cunningham joined Federated Investors in 1981 and has been a Vice
President of the Fund's investment adviser since 1993. Ms. Cunningham
served as an Assistant Vice President of the investment adviser from 1989
until 1992, and from 1986 until 1989 she acted as an investment analyst.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the Fund may pay to the distributor an amount, computed at an annual rate of
0.25 of 1% of the average daily net assets of the Shares to finance any activity
which is principally intended to result in the sale of Shares subject to the
Distribution Plan. The distributor may select financial institutions such as
banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or
the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Fund Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
certain financial institutions may be compensated by the Adviser or its
affiliates for the continuing investment of customers' assets in certain funds,
including the Fund, advised by those entities. These payments will be made
directly by the distributor or Adviser from their assets, and will not be made
from the assets of the Fund or by the assessment of a sales load on Shares.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- ----------------------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
on assets in excess of $750
0.075 of 1% 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 Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for the shares of the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, One Oxford Centre, Pittsburgh, Pennsylvania.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding.
INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Short-Term Income Fund--Institutional Service Shares; Fund Number
(this number can be found on the account statement or by contacting the Fund);
Group Number or Order Number; Nominee or Institution Name; and ABA Number
011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Federated Short-Term Income Fund--Institutional Service Shares to: Federated
Services Company, c/o State Street Bank and Trust Company, P.O. Box 8602,
Boston, Massachusetts 02266-8602. Orders by mail are considered received after
payment by check is converted by the transfer agent's bank, State Street Bank,
into federal funds. This is normally the next business day after State Street
Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange each day the New York Stock
Exchange is open, except on: (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions 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 provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted upon instruction of
the transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional Shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his or her name, the Fund name and class
name, the shareholder's account number, and the share or dollar amount
requested. If Share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail to Federated
Services Company, 500 Victory Road - 2nd Floor, Quincy, Massachusetts 02171 with
the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request, provided that the transfer agent has received
payment for the Shares from the shareholder.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular Fund or class, only shares of that particular Fund
or class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees or by a
two-thirds vote of the shareholders at a special meeting. A special meeting of
shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Information on
the tax status of dividends and distributions is provided annually.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
- The Fund is not subject to Pennsylvania corporate or personal property
taxes; and
- Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to such
taxes if owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for
Institutional Service Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Service Shares after reinvesting all
income and capital gains distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period by
the maximum offering price per share of Institutional Service Shares on the last
day of the period. This number is then annualized using semi-annual compounding.
The yield does not necessarily reflect income actually earned by Institutional
Service Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The Institutional Service Shares are sold without any sales load or other
similar non-recurring charges other than a Rule 12b-1 fee.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Shares, which
are sold to banks and other institutions that hold assets as principals or in a
fiduciary capacity for individuals, trusts, estates or partnerships and are
subject to a minimum initial investment of $25,000. Institutional Shares are
sold at net asset value and are distributed without a Rule 12b-1 Plan.
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences, however, between Shares and Institutional Shares may affect
the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-235-4669 or contact their financial institution.
FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--59.5%
- -----------------------------------------------------------------------------------
AUTOMOTIVE--6.7%
----------------------------------------------------------------
$ 3,622,465 Capital Auto Receivables Asset Trust 1992-1, Class B, 6.20%,
12/15/1997 $ 3,601,890
----------------------------------------------------------------
1,110,779 Capital Auto Receivables Asset Trust 1993-1, Class B, 5.85%,
2/17/1998 1,091,540
----------------------------------------------------------------
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, 7.38%, 4/15/1999 5,021,100
----------------------------------------------------------------
1,000,000 General Motors Acceptance Corp., MTN, 7.63%, 3/9/1998 1,005,830
----------------------------------------------------------------
3,450,000 Navistar Financial Dealer Note 1990, Class A-3, 6.98%+,
1/25/2003 3,488,813
----------------------------------------------------------------
1,256,141 Premier Auto Trust 1993-1, Class B, 5.60%, 10/15/1998 1,224,060
----------------------------------------------------------------
571,402 Volvo Auto Trust 1991-A, 5.65%, 12/15/1998 569,557
---------------------------------------------------------------- ------------
Total 16,002,790
---------------------------------------------------------------- ------------
BANKING--12.6%
----------------------------------------------------------------
3,000,000 Bankamerica Corp., FRN, 6.69%+, 6/25/2003 2,812,500
----------------------------------------------------------------
3,000,000 Chase Manhattan Credit Card Master Trust 1991-1, Class A, 8.75%,
8/15/1999 3,081,270
----------------------------------------------------------------
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%,
5/15/2000 5,029,500
----------------------------------------------------------------
5,000,000 Chemical Bank, FRN, 7.25%+, 7/29/2003 4,850,000
----------------------------------------------------------------
4,000,000 Colonial Credit Card Trust 1991-B, Class B, 7.95%, 1/15/1998 4,025,920
----------------------------------------------------------------
4,000,000 First USA Credit Card Master Trust, Class B, FRN, 6.53%+,
12/15/1999 3,998,800
----------------------------------------------------------------
1,000,000 J.P. Morgan and Co., Inc., FRN, 6.13%+, 8/19/2002 960,000
----------------------------------------------------------------
1,000,000 PNC Bank Sub. Note, 7.88%, 4/15/2005 1,000,950
----------------------------------------------------------------
4,000,000 Toronto Dominion Bank Sub. Note, 7.88%, 8/15/2004 3,985,600
---------------------------------------------------------------- ------------
Total 29,744,540
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
FINANCE-RETAIL--14.7%
----------------------------------------------------------------
$ 5,000,000 Discover Credit Card Trust 1991-B, Class A, 8.625%, 7/15/1998 $ 5,103,500
----------------------------------------------------------------
2,500,000 Discover Credit Card Trust 1991-B, Class B, 8.85%, 7/15/1998 2,570,950
----------------------------------------------------------------
5,000,000 Discover Credit Card Trust 1992-B, Class 1, 6.80%, 6/16/2000 4,946,550
----------------------------------------------------------------
2,218,826 (a) Encyclopedia Britannica Dom. Funding Corp., Series 1994-1,
6.76%, 3/15/2000 2,189,704
----------------------------------------------------------------
4,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/1997 4,027,440
----------------------------------------------------------------
6,000,000 Household Credit Card Trust 1992-1, Class B, 6.25%, 12/15/1997 5,923,980
----------------------------------------------------------------
2,000,000 Household Private Label Credit Card 1994-1, Class B, 7.55%,
5/20/1997 2,020,625
----------------------------------------------------------------
8,000,000 Sears Credit Account Trust 1991-D, 7.75%, 9/15/1998 8,093,920
---------------------------------------------------------------- ------------
Total 34,876,669
---------------------------------------------------------------- ------------
HOME EQUITY RECEIVABLES--16.7%
----------------------------------------------------------------
5,292,164 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 5,274,330
----------------------------------------------------------------
2,307,967 Advanta Home Equity Loan Trust 1992-3, Class A-2, 6.00%,
8/25/2008 2,190,007
----------------------------------------------------------------
3,013,537 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 2,986,144
----------------------------------------------------------------
6,581,807 (a) Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2, 5.54%,
7/15/2020 6,110,352
----------------------------------------------------------------
2,000,000 (a) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3, 6.07%,
11/15/2013 1,871,120
----------------------------------------------------------------
4,245,628 (a) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 3,989,882
----------------------------------------------------------------
1,503,820 GE Capital Home Equity Loan, 1991-1, Class A, 7.20%, 9/15/2011 1,494,136
----------------------------------------------------------------
4,000,000 GE Capital Home Equity Loan, 1991-1, Class B, 8.70%, 9/15/2011 4,054,600
----------------------------------------------------------------
4,726,596 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, FRN,
7.12%+, 2/15/2003 4,760,674
----------------------------------------------------------------
6,775,595 TMS Home Equity Loan Trust 1992-D, Class A-3, 7.55%, 1/15/2018 6,705,671
---------------------------------------------------------------- ------------
Total 39,436,916
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
LEASING--0.2%
----------------------------------------------------------------
$ 483,951 (a) Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%,
1/20/1999 $ 474,891
---------------------------------------------------------------- ------------
MANUFACTURED HOUSING RECEIVABLES--8.6%
----------------------------------------------------------------
1,754,097 Fleetwood Credit Corp. 1992-1, Class A, 7.10%, 2/15/2007 1,748,028
----------------------------------------------------------------
6,695,709 Greentree Manufactured Housing 1992-1, Class A-5, 6.50%,
10/15/2017 6,300,595
----------------------------------------------------------------
4,963,664 Merrill Lynch Mortgage Investments, Inc., 1991-I, Class A,
7.65%, 1/15/2012 4,952,546
----------------------------------------------------------------
519,036 Merrill Lynch Mortgage Investments, Inc., 1992-B, Mfd. 8.50%,
4/15/2012 515,630
----------------------------------------------------------------
6,875,417 (a) Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B, 9.25%
5/15/2011 6,918,389
---------------------------------------------------------------- ------------
Total 20,435,188
---------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $147,120,768) 140,970,994
---------------------------------------------------------------- ------------
GOVERNMENT AGENCIES--2.1%
- -----------------------------------------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.84%, 4/26/2000 5,029,000
---------------------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $5,042,970) 5,029,000
---------------------------------------------------------------- ------------
MORTGAGE-BACKED SECURITIES--34.9%
- -----------------------------------------------------------------------------------
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES--34.9%
----------------------------------------------------------------
325,000 Citicorp Mortgage Securities, Inc., Series 1992-5, Class A-1,
8.00%, 9/25/2021 324,304
----------------------------------------------------------------
2,364,457 GCA 1993-AF1, Class B-1, FRN, 7.01%+, 9/25/2023 2,290,567
----------------------------------------------------------------
7,976,025 GCA 1993-LB2, Class A-1, FRN, 7.15%+, 8/25/2023 7,936,145
----------------------------------------------------------------
4,629,172 GCA 1993-LB3, Class A-1, FRN, 7.11%+, 1/25/2024 4,606,026
----------------------------------------------------------------
8,024,342 (a) GCA 1994-B, Class A, FRN, 6.54%+, 1/25/2018 7,969,175
----------------------------------------------------------------
16,930,000 GCA Long Beach Bank Mortgage PTC, Class A-2, FRN, 6.91%+,
7/25/2022 16,729,041
----------------------------------------------------------------
2,441,322 (a) GCA REMIC PTC, 1991-4, Class B-1A, FRN, 8.53%+, 7/1/2019 2,404,702
----------------------------------------------------------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
MORTGAGE-BACKED SECURITIES--CONTINUED
- -----------------------------------------------------------------------------------
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES--CONTINUED
----------------------------------------------------------------
$ 3,942,574 GCA REMIC Trust V, 1993-5, Class B, FRN, 6.13%+, 5/1/2020 $ 3,656,737
----------------------------------------------------------------
8,648,636 GE Capital Mortgage Services, Inc., 1993-9, Class A-1, 6.00%,
8/25/2008 7,565,048
----------------------------------------------------------------
2,175,619 Glendale Federal Bank, Series 1988-1A, FRN, 7.05%+, 11/25/2027 2,154,543
----------------------------------------------------------------
975,166 (a) Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2022 989,793
----------------------------------------------------------------
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 5,805,600
----------------------------------------------------------------
2,832,763 (a) Prudential Home Mortgage 1992-A, Class B1-1, 7.20%, 11/25/2022 2,721,351
----------------------------------------------------------------
618,193 Residential Funding Mortgage Securities, Inc., 1993-S18, Class
A-2, 7.50%, 5/25/2023 613,253
----------------------------------------------------------------
1,476,570 Residential Funding Mortgage Securities, Inc., 1992-S43, Class
A-4, 8.00%, 12/25/2022 1,473,129
----------------------------------------------------------------
2,000,000 Resolution Trust Corp., 1992-12, Class B-3, FRN, 7.27%+,
12/25/2025 1,958,760
----------------------------------------------------------------
2,000,125 Resolution Trust Corp., 1992-7, Class B-2B, 8.35%, 6/29/2029 1,991,385
----------------------------------------------------------------
12,000,000 Salomon Brothers Mortgage Securities VII, Inc., 1993-5, Class
A-3C, 7.44%, 10/25/2023 11,403,720
---------------------------------------------------------------- ------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $82,585,925) 82,593,279
---------------------------------------------------------------- ------------
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
*REPURCHASE AGREEMENT--3.2%
- -----------------------------------------------------------------------------------
$ 7,659,000 J.P. Morgan Securities, Inc., 5.97%, dated 4/28/1995, due
5/1/1995 $ 7,659,000
---------------------------------------------------------------- ------------
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 7,659,000
---------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST, $242,408,663)(B) $236,252,273
---------------------------------------------------------------- ------------
</TABLE>
(a) Denotes restricted securities which are subject to resale under Federal
Securities laws. These securities have been determined to be liquid under
criteria established by the Board of Trustees.
(b) The cost of investments for federal tax purposes amounts to $242,408,663.
The net unrealized depreciation of investments on a federal tax cost basis
amounts to $6,156,390, which is comprised of $917,394 appreciation and
$7,073,784 depreciation at April 30, 1995.
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
+ Denotes variable rate and floating rate obligations for which the current
yield is shown.
The following abbreviations are used in this portfolio:
<TABLE>
<S> <C>
FRN --Floating Rate Note
MTN --Medium Term Note
PTC --Pass Through Certificate
REMIC --Real Estate Mortgage Investment Conduit
</TABLE>
Note: The categories of investments are shown as a percentage of net assets
($236,739,786) at April 30, 1995.
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $242,408,663) $236,252,273
- --------------------------------------------------------------------------------
Income receivable 1,738,408
- --------------------------------------------------------------------------------
Receivable for investments sold 87,717
- --------------------------------------------------------------------------------
Receivable for shares sold 53,606
- -------------------------------------------------------------------------------- ------------
Total assets 238,132,004
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Income distribution payable $1,266,907
- -------------------------------------------------------------------
Payable for shares redeemed 80,771
- -------------------------------------------------------------------
Payable to bank 445
- -------------------------------------------------------------------
Accrued expenses 44,095
- ------------------------------------------------------------------- ----------
Total liabilities 1,392,218
- -------------------------------------------------------------------------------- ------------
NET ASSETS for 27,489,137 shares outstanding $236,739,786
- -------------------------------------------------------------------------------- ------------
NET ASSETS CONSISTS OF:
- --------------------------------------------------------------------------------
Paid in capital $268,680,167
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (6,156,390)
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (25,783,991)
- -------------------------------------------------------------------------------- ------------
Total Net Assets $236,739,786
- -------------------------------------------------------------------------------- ------------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
Institutional Shares ($219,648,540 / 25,504,633 shares outstanding) $ 8.61
- -------------------------------------------------------------------------------- ------------
Institutional Service Shares ($17,091,246 / 1,984,504 shares outstanding) $ 8.61
- -------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------
Interest $ 20,540,470
- ---------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------
Investment advisory fee $1,212,210
- -------------------------------------------------------------------------
Administrative personnel and services fee 229,413
- -------------------------------------------------------------------------
Custodian fees 137,357
- -------------------------------------------------------------------------
Transfer agent and dividend disbursing agent fees and expenses 32,833
- -------------------------------------------------------------------------
Directors'/Trustees' fees 7,271
- -------------------------------------------------------------------------
Auditing fees 20,213
- -------------------------------------------------------------------------
Legal fees 13,694
- -------------------------------------------------------------------------
Portfolio accounting fees 32,159
- -------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 62,175
- -------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 59,688
- -------------------------------------------------------------------------
Share registration costs 39,134
- -------------------------------------------------------------------------
Printing and postage 35,701
- -------------------------------------------------------------------------
Insurance premiums 10,342
- -------------------------------------------------------------------------
Taxes 4,320
- -------------------------------------------------------------------------
Miscellaneous 7,247
- ------------------------------------------------------------------------- ----------
Total expenses 1,903,757
- -------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------
Waiver of investment advisory fee $84,776
- ---------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares 59,688 144,464
- --------------------------------------------------------------- ------- ----------
Net expenses 1,759,293
- --------------------------------------------------------------------------------------- ------------
Net investment income 18,781,177
- --------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on investments (13,861,223)
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 4,124,069
- --------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (9,737,154)
- --------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 9,044,023
- --------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------
OPERATIONS--
- ---------------------------------------------------------------
Net investment income $ 18,781,177 $ 17,557,868
- ---------------------------------------------------------------
Net realized gain (loss) on investments ($5,572,713 and
$669,532 net loss, respectively, as computed for federal
income tax purposes) (13,861,223) (2,324,205)
- ---------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of
investments 4,124,069 (11,254,546)
- --------------------------------------------------------------- ------------- -------------
Change in assets resulting from operations 9,044,023 3,979,117
- --------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ---------------------------------------------------------------
Distributions from net investment income:
- ---------------------------------------------------------------
Institutional Shares (17,312,790) (16,047,919)
- ---------------------------------------------------------------
Institutional Service Shares (1,468,387) (1,509,949)
- --------------------------------------------------------------- ------------- -------------
Change in net assets resulting from distributions to
shareholders (18,781,177) (17,557,868)
- ---------------------------------------------------------------
SHARE TRANSACTIONS--
- ---------------------------------------------------------------
Proceeds from sale of Shares 62,830,948 513,518,367
- ---------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of
distributions declared 3,515,879 3,669,215
- ---------------------------------------------------------------
Cost of Shares redeemed (212,625,473) (270,654,913)
- --------------------------------------------------------------- ------------- -------------
Change in net assets resulting from Share transactions (146,278,646) 246,532,669
- --------------------------------------------------------------- ------------- -------------
Change in net assets (156,015,800) 232,953,918
- ---------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------
Beginning of period 392,755,586 159,801,668
- --------------------------------------------------------------- ------------- -------------
End of period $ 236,739,786 $ 392,755,586
- --------------------------------------------------------------- ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of two, diversified
portfolios. The financial statements included herein present only those of
Federated Short-Term Income Fund (the "Fund"). The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government securities are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Listed corporate bonds (and other fixed
income and asset-backed securities), unlisted securities (and other
fixed-income and asset-backed securities and/or private placements), and
short-term securities are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees ("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
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
Revenue Code, as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At April 30, 1995, the Fund, for federal tax purposes, had a capital loss
carry forward of ($15,666,103), which will reduce the Fund taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carry forward will expire in 1996, ($791,359), 1997, ($3,077,752), 1998,
($316,627), 1999, ($1,132,354), 2000, ($4,105,766), 2002, ($669,532), 2003,
($5,572,713).
Additionally, net capital losses of $10,117,888 attributable to security
transactions incurred after October 31, 1994 are treated as arising on May
1, 1995, 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.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under the criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
market or, if no market prices are available, at the fair value determined
by the Fund's pricing committee. Additional information on each restricted
security held at April 30, 1995 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
---------------------------------------------------------- ----------- -----------
<S> <C> <C>
Encyclopedia Britannica Dom. Funding Corp Series 1994-1 3/21/94 $2,218,826
Conti Mortgage Home Equity Loan Trust 1993-3, Class A-2 9/16/93 6,581,186
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3 2/18/94 1,999,719
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5 2/18/94 4,244,717
Concord Leasing Grantor Trust 1992-C, Class A-1 8/14/92 481,696
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/94 6,983,920
GCA 1994-B, Class A 12/13/94 7,887,678
GCA REMIC PTC, 1991-4, Class B-1A 1/7/93 2,457,343
Long Beach Bank Mortgage Series 1992-3, Class A 6/29/92 1,033,066
Prudential Home Mortgage 1992-A, Class B1-1 10/22/92 2,817,714
</TABLE>
RECLASSIFICATION--During the year ended April 30, 1995, the Fund adopted
Statement of Position 93-2 Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. ("SOP 93-2"). Accordingly, permanent
book and tax differences have been reclassified to paid-in capital. These
differences are primarily due to differing treatments for expiring capital
loss carry forwards. Amounts as of April 30, 1995, have been reclassified
to reflect a decrease in paid-in capital and a decrease in accumulated net
realized loss of $156,518. Net investment income, net realized gains, and
net assets were not affected by this change.
OTHER--Investment transactions are accounted for on the trade date.
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------
1994
----------------------------
SHARES
-----------
1995
----------------------------
INSTITUTIONAL SHARES AMOUNT AMOUNT
- ------------------------------------- ------------- -------------
SHARES
-----------
<S> <C> <C> <C> <C>
Shares Sold 6,446,211 $ 55,884,659 50,506,612 $ 459,763,632
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 317,004 2,739,906 307,713 2,782,792
- -------------------------------------
Shares redeemed (21,161,903) (183,228,360) (26,635,056) (241,204,503)
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Shares transactions (14,398,688) ($124,603,795) 24,179,269 $ 221,341,921
- ------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------
1994
----------------------------
SHARES
-----------
1995
----------------------------
INSTITUTIONAL SERVICE SHARES AMOUNT AMOUNT
- ------------------------------------- ------------- -------------
SHARES
-----------
<S> <C> <C> <C> <C>
Shares Sold 801,654 $ 6,946,289 5,927,113 $ 53,754,735
- -------------------------------------
Shares issued to shareholders in
payment of distributions declared 89,844 775,973 97,795 886,423
- -------------------------------------
Shares redeemed (3,388,048) (29,397,113) (3,253,210) (29,450,410)
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from
Institutional Service Shares
transactions (2,496,550) ($ 21,674,851) 2,771,698 $ 25,190,748
- ------------------------------------- ----------- ------------- ----------- -------------
Net change resulting from Fund
share transactions (16,895,238) ($146,278,646) 26,950,967 $ 246,532,669
- ------------------------------------- ----------- ------------- ----------- -------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .40 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
level of average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least $125,000
per portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. The distributor
may voluntarily choose to waive a portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain the shareholder accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ") serves as transfer and dividend disbursing agent for the Fund.
This fee is based on the size, type, and number of accounts and transactions
made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average daily net assets for the period plus, out-of-pocket expenses.
INTERFUND TRANSACTIONS--During the year ended April 30, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser (or affiliated investment advisers), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $67,348,780 and $70,715,829,
respectively.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended April 30, 1995, were as follows:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
Purchases $113,085,347
- ------------------------------------------------------------------------------ ------------
Sales $228,009,681
- ------------------------------------------------------------------------------ ------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
FEDERATED SHORT-TERM INCOME FUND:
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities of the
Federated Short-Term Income Fund (a portfolio of Federated Income Securities
Trust), including the portfolio of investments, as of April 30, 1995, and the
related statement of operations for the year then ended, and the statements of
changes in net assets, and financial highlights (see page 2 of this prospectus)
for each of the two 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 audits 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 April
30, 1995, by correspondence with the custodian and brokers. 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 Short-Term Income Fund at April 30, 1995, the results of its
operations for the year then ended, and the changes in its net assets, and
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 9, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Short-Term Income Fund
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ------------------------------------------------------------------------------------------------
Transfer Agent, and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
FEDERATED SHORT-TERM
INCOME FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1995
FEDERATED SECURITIES CORP.
(LOGO)
- ---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
31420C308
1111903A-SS (6/95)
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
Institutional Service Shares
Combined Statement of Additional Information
The Institutional Shares and Institutional Service Shares of Federated
Short-Term Income Fund (the "Fund") represent interests in a diversified
investment portfolio in Federated Income Securities Trust (the "Trust").
This Combined Statement of Additional Information should be read with
the respective prospectus for either class of shares dated June 30,
1995. This Statement is not a prospectus itself. To receive a copy of
either prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated June 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
U.S. Government Securities 1
Weighted Average Portfolio
Maturity 1
Weighted Average Portfolio
Duration 2
When-Issued and Delayed Delivery
Transactions 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Privately Issued Mortgage-Related
Securities 2
Portfolio Turnover 3
Investment Limitations 3
TRUST MANAGEMENT 5
Officers and Trustees 5
Fund Ownership 9
Trustee's Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Other Advisory Services 10
Other Related Services 10
ADMINISTRATIVE SERVICES 10
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 11
PURCHASING SHARES 11
Distribution Plan (Institutional
Service Shares only) and
Shareholder Services Plan 11
Other Payments to Financial
Institutions 12
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
Determining Value of Securities 12
REDEEMING SHARES 12
Redemption in Kind 12
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
YIELD 14
PERFORMANCE COMPARISONS 14
ABOUT FEDERATED INVESTORS 15
Mutual Fund Market 15
APPENDIX 16
General Information About the Fund
The Fund is a portfolio of Federated Income Securities Trust (the "Trust"),
which was established as a Massachusetts business trust under a Declaration of
Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer one or more separate series and classes of shares
and to change the name of the Trust from "Federated Floating Rate Trust" to
"Federated Income Securities Trust."
Shares of the Fund are offered in two classes, Institutional Shares and
Institutional Service Shares (individually and collectively referred to as the
"Shares"). This Combined Statement of Additional Information relates to both
classes of shares of the Fund.
Investment Objective and Policies
The Fund's investment objective is to seek to provide current income. The Fund
will pursue this objective by investing primarily in a diversified portfolio
of short and medium-term high grade debt securities. The foregoing investment
objective and policy may not be changed without the prior approval of the
Fund's shareholders.
U.S. Government Securities
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by U.S.
government agencies or instrumentalities. These securities may be backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
o Federal Home Loan Banks;
o The Student Loan Marketing Association;
o Federal Home Loan Mortgage Corporation; and
o Federal National Mortgage Association.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the
entire portfolio. The remaining maturity of each portfolio security is then
multiplied by its weight, and the results are added together to determine the
weighted average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-
backed securities as having a maturity equal to their estimated weighted-
average maturity and (b) variable and floating rate instruments as having a
remaining maturity commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate. The average maturity
of asset-backed securities will be calculated based upon assumptions
established by the investment adviser as to the probable amount of the
principal prepayments weighted by the period until such prepayments are
expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be treated
as floating or variable rate securities based upon the interest rate index of
the swap or cap; floating and variable rate securities hedged with interest
rate swaps or floors will be treated as having a maturity equal to the term of
the swap or floor. In the event that the Fund holds an interest rate swap, cap
or floor that is not hedging another portfolio security, the swap, cap or
floor will be treated as having a maturity equal to its term and a weight
equal to its notional principal amount for such term.
Weighted Average Portfolio Duration
Duration is a commonly used measure of the potential volatility of the price
of a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change
in the price of a debt security relative to a given change in the market rate
of interest. The duration of a debt security depends upon three primary
variables: the security's coupon rate, maturity date and the level of market
interest rates for similar debt securities. Generally, debt securities with
lower coupons or longer maturities will have a longer duration than securities
with higher coupons or shorter maturities. For purposes of calculating its
dollar-weighted average portfolio duration, the Fund will treat variable and
floating rate instruments as having a remaining duration commensurate with the
period remaining until the next scheduled adjustment to the instrument's
interest rate.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and
interest payments, by the sum of the present values of the cash flows. Certain
debt securities, such as asset-backed securities, may be subject to prepayment
at irregular intervals. The duration of these instruments will be calculated
based upon assumptions established by the investment adviser as to the
probable amount and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps, caps
and floors, is calculated in the same manner as other securities. However,
certain interest rate agreements have negative durations, which the Fund may
use to reduce its weighted average portfolio duration.
When-Issued and Delayed Delivery Transactions
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's
investment objective and policies, not for investment leverage. These
transactions are made to secure what is considered to be an advantageous price
or yield for the Fund. Settlement dates may be a month or more after entering
into these transactions, and the market values of the securities purchased may
vary from the purchase prices. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the
Fund's records at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled. The Fund may engage in
when-issued and delayed delivery transactions to an extent that would cause
the segregation of an amount up to 20% of the total value of its assets.
Repurchase Agreements
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Board of Trustees ("Trustees").
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
Reverse Repurchase Agreements
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
Privately Issued Mortgage-Related Securities
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those
issued by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for
such mortgage-related securities has expanded considerably since its
inception. The size of the primary issuance market and the active
participation in the secondary market by securities dealers and other
investors makes government-related and non-government related pools highly
liquid.
Portfolio Turnover
For the fiscal years ended April 30, 1995, and 1994, the portfolio turnover
rates were 38% and 44%, respectively.
Investment Limitations
Concentration of Investments
The Fund will not purchase securities if as a result of such purchase
25% or more of the value of its total assets would be invested in any
one industry.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity contracts,
including futures contracts.
Investing in Real Estate
The Fund will not purchase or sell real estate including limited
partnership interests in real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
Buying on Margin
The Fund will not purchase any securities on margin but may obtain such
short-term credits as are necessary for the clearance of transactions.
Selling Short
The Fund will not sell securities short unless:
o during the time the short position is open, it owns an equal amount
of the securities sold or securities readily and freely convertible
into or exchangeable, without payment of additional consideration,
for securities of the same issue as, and equal in amount to, the
securities sold short; and
o not more than 10% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
borrowings, other than reverse repurchase agreements, are outstanding.
Lending Cash or Securities
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent
the purchase or holding of corporate bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by the
Fund's investment objective and policies or its Declaration of Trust.
Underwriting
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been
in operation for less than three years. With respect to asset-backed
securities, the Fund will treat the originator of the asset pool as the
company issuing the security for purposes of determining compliance with
this limitation.
Investing in Issuers Whose Securities Are Owned By Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Diversification of Investments
The Fund will not, with respect to 75% of its assets, invest more than
5% of the value of its total assets in securities of one issuer (except
U.S. government obligations), or purchase more than 10% of the
outstanding voting securities in any one issuer.
Acquiring Securities
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of total assets at the time of the borrowing.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in this limitation becomes effective.
Investing in Illiquid Securities
The Fund will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, interest rate swaps, caps and
floors determined by the investment adviser to be illiquid, and
repurchase agreements providing for settlement in more than seven days
after notice, to 15% of its net assets.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
During the fiscal year ended April 30, 1995, the Fund did not borrow money,
invest in reverse repurchase agreements or sell securities short in excess of
5% of the value of its net assets. The Fund does not intend to borrow money,
invest in reverse repurchase agreements, or sell securities short in excess of
5% of the value of its net assets during the coming year.
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales
loads of less than 1.00% of the offering price of such securities. The Fund
will purchase securities of closed-end investment companies only in open
market transactions involving any customary brokers' commissions. However,
these limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acquisition of assets. While it is a
policy to waive advisory fees on Fund assets invested in securities of other
open-end investment companies, it should be noted that investment companies
incur certain expenses such as custodian and transfer agency fees and,
therefore, any investment by the Fund in shares of another investment company
would be subject to such duplicate expenses.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having capital surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
Trust Management
Officers and Trustees
Officers and Trustees are listed with their addresses, principal occupations
during the past five years, birthdates and present positions, including any
affiliation with Federated Management, Federated Investors, Federated
Securities Corp., Federated Services Company, Federated Administrative
Services, Federated Shareholder Services, and the Funds (as defined below).
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life and Casualty
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue,
Vice President of the Company.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer & Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer & Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President
Emeritus, University of Pittsburgh; founding Chairman, National Advisory
Council for Environmental Policy and Technology and Federal Emergency
Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp. and Federated Administrative
Services.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Director of the Company.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President
or Vice President of some of the Funds; Director or Trustee of some of the
Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services; Trustee or Director
of some of the Funds; Vice President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Secretary and Trustee, Federated Shareholder
Services; Executive Vice President and Director, Federated Securities Corp.;
Vice President and Secretary of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Cash Management Trust; Automated Government Money
Trust; California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; 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: 3-5 Years; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for
U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust;; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust For Government Cash Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 6, 1995, the following shareholders of record owned 5% or more of
the outstanding Institutional Service Shares of the Fund: Heritage Trust
Company, Grand Junction, Colorado, owned approximately 400,333 shares
(21.40%); Charles Schwab & Co., Inc., San Francisco, California, owned
approximately 487,529 shares (26.07%); Moce & Co., Mattoon, Illinois, owned
approximately 367,348 shares (19.64%). As of June 6, 1995, the following
shareholder of record owned 5% or more of the outstanding Institutional Shares
of the Fund: State Street Bank and Trust, North Quincy, Massachusetts owned
approximately 1,397,112 shares (5.58%).
Trustee's Compensation
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST *# FROM FUND COMPLEX +
John F. Donahue $ 0 $ 0 for the Trust and
Trustee 68 other investment companies
in the Fund Complex
John T. Conroy, Jr. $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
William J. Copeland $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
James E. Dowd $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Lawrence D. Ellis, M.D. $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Edward L. Flaherty, Jr. $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Peter E. Madden $ 1,162 $ 90,563 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Gregor F. Meyer $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
John E. Murray, Jr. $ 464 $ 0 for the Trust and
Trustee 0 other investment companies
in the Fund Complex
Wesley W. Posvar $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Marjorie P. Smuts $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
*Information is furnished for the fiscal year ended April 30, 1995.
#The aggregate compensation is provided for the Trust which is comprised of
two portfolios.
+The information is provided for the last calendar year.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund 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
Trust.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus. During the fiscal years
ended April 30, 1995, 1994, and 1993, the Fund's Adviser earned
$1,212,210, $1,269,273, and $395,758, respectively. Fees of $84,776,
$259,625 and $395,758, respectively for 1995, 1994 and 1993, were waived
because of undertakings to limit the Fund's expenses.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Other Advisory Services
Federated Research Corp. receives fees from certain depository institutions
for providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may advise
such clients to purchase or redeem shares of investment companies, such as the
Fund, which are managed, for a fee, by Federated Research Corp. or other
affiliates of Federated Investors, such as the Adviser, and may advise such
clients to purchase and sell securities in the direct markets. Further,
Federated Research Corp., and other affiliates of the Adviser, may, from time
to time, provide certain consulting services and equipment to depository
institutions in order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
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 shares of funds offered by Federated Securities Corp.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in each prospectus. Prior to March 1, 1994, Federated Administrative
Services, Inc., also a subsidiary of Federated Investors, served as the Fund's
administrator. (For purposes of this Combined Statement of Additional
Information, Federated Administrative Services and Federated Administrative
Services, Inc., may hereinafter collectively be referred to as the
"Administrators.') For the fiscal year ended April 30, 1995, Federated
Administrative Services earned $229,413. For the fiscal year ended April 30,
1994, the Administrators earned $383,643. For the fiscal year ended April 30,
1993, Federated Administrative Services, Inc. earned $292,200.
Dr. Henry J. Gailliot, an officer of Federated Management, the adviser to the
Fund, holds approximately 20% of the outstanding common stock and serves as a
Director of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting records. The
fee paid for this service is based upon the level of the Fund's average net
assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage
and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant services
for which the Adviser or its affiliates might otherwise have paid, it would
tend to reduce their expenses.
Purchasing Shares
Shares are sold at their net asset value without a sales load on days on which
the New York Stock Exchange is open for business. The procedure for purchasing
Shares of the Fund is explained in the respective prospectus under "Investing
in Institutional Shares" and "Investing in Institutional Service Shares."
Distribution Plan (Institutional Service Shares only) and Shareholder Services
Plan
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and
assisting clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan (Institutional Service Shares only), the
Board of Trustees expects that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal period ended April 30, 1995, no payments were made pursuant to
either the Distribution Plan or the Shareholder Services Plan.
The Trustees expect that the adoption of the Distribution Plan will result in
the sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund
in seeking to achieve its investment objective.
Other Payments to Financial Institutions
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory, and
computer personnel as is necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such
other services as the Fund may reasonably request.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
Determining Value of Securities
The values of the Fund's portfolio securities are determined as follows:
o according to prices provided by independent pricing services, which may
be determined without exclusive reliance on quoted prices from dealers
but which use market prices when most representative, and which may take
into account appropriate factors such as yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data
employed in determining valuations for such securities; or
o for short-term obligations with remaining maturities of 60 days or less
at the time of purchase, at amortized cost unless the Trustees determine
that particular circumstances of the security indicate otherwise.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Institutional Service Shares" and "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the Fund's portfolio. 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 their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid
by the Fund is expected to be eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital gains,
are taxable as ordinary income.
Capital Gains
Fixed income securities offering the current income sought by the Fund
are often purchased at a discount from par value. Because the total
yield on such securities when held to maturity and retired may include
an element of capital gain, the Fund may achieve capital gains. However,
the Fund will not hold securities to maturity for the purpose of
realizing capital gains unless current yields on those securities remain
attractive.
Capital gains or losses may also be realized on the sale of securities.
Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time
the shareholder has owned the Shares.
Total Return
The Fund's average annual total returns for the one-year period ended April
30, 1995, and for the period from January 24, 1992 (date of initial public
offering) to April 30, 1995, were 3.29% and 4.21%, respectively, for
Institutional Service Shares. The Fund's average annual total returns for the
one-year and five year periods ended April 30, 1995, and for the period from
July 1, 1986 (date of initial public investment) to April 30, 1995 were 3.55%,
5.71%, and 6.52%, respectively, for the Institutional Shares.
The average annual total return for both classes of shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that investment.
The ending redeemable value is computed by multiplying the number of shares
owned at the end of the period by the net asset value per share at the end of
the period. The number of shares owned at the end of the period is based on
the number of shares purchased at the beginning of the period with $1,000,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
Yield
The Fund's yield for the thirty-day period ended April 30, 1995, was 6.59% and
6.33% for Institutional Shares and Institutional Service Shares, respectively.
The yield for both classes of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of shares over a thirty-day period by the
maximum offering price per share of either class of shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
The performance of both classes of shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or either class of share's expenses; and
o various other factors.
Either class of share's performance fluctuates on a daily basis largely
because net earnings and the maximum offering price per share fluctuate daily.
Both net earnings and offering price per share are factors in the computation
of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
o 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 "short-term investment grade debt funds" category
in advertising and sales literature.
o Merrill Lynch Total Return Investment Grade Corporate Index (Short-Term
1-2.99 years) is comprised of over 400 issues of investment grade
corporate debt securities with remaining maturities from 1 to 2.99
years.
o Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an investment
in the either class of shares based on monthly reinvestment of dividends over
a specified period of time.
About Federated Investors
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands
of clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the corporate bond sector, as of December 31, 1994, Federated managed 8
money market funds, 5 investment grade and 4 high yield bond funds with assets
approximating $7.4 billion, $.9 billion and $.8 billion, respectively.
Federated's corporate bond decision making based on intensive, diligent
credit analysis is backed by over 20 years of experience in the corporate
bond sector. In 1972, Federated introduced one of the first high-yield bond
funds in the industry. In 17 years ending December 1994, Federated's high-
yield portfolios experienced a default rate of just 1.86%, versus 3.10% for
the market as a whole. In 1983, Federated was one of the first fund managers
to participate in the asset-backed securities market, a market totalling more
than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
Mutual Fund Market
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment
and financial advisors. The marketing effort to these institutional
clients is headed by John B. Fisher, President, Institutional Sales
Division.
Trust Organizations
Other institutional clients include close relationships with more than
1,500 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 Mark R. Gensheimer, Executive Vice President, Bank Marketing &
Sales.
Broker/dealers and bank broker/dealer subsidiaries
Federated mutual funds are available to consumers through major
brokerage firms nationwide including 200 New York Stock Exchange firms
supported by more wholesalers than any other mutual fund distributor.
The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Division.
Appendix
Standard & Poor's Ratings Group ("S&P") Long term Debt Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Fitch Investors Service, Inc. Long-Term Debt Ratings
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.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: conservative capitalization structures with moderate reliance
on debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; well established access
to a range of financial markets and assured sources of alternative liquidity;
high rates of return on funds employed; and leading market positions in well
established industries.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Standard & Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch Investors Service, Inc. Commercial Paper Ratings Definitions
F-1--(Very Strong Credit Quality) Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated F-
1+.
F-2--(Good Credit Quality) Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
Cusip 31420C209IS
Cusip 31420C308SS
G00181-04 (6/95)
FEDERATED SHORT-TERM INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED APRIL 30, 1995
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
The investment objective of the Fund is to seek to provide current
income. To the extent consistent with this objective, the Fund will strive
to minimize fluctuation in principal value through a portfolio with an
effective modified duration of no greater than three years, but generally
two years or less.
The Fund invests its assets primarily in a broad range of corporate
debt/high grade securities rated A or better or of comparable quality.
These include fixed and floating rate corporate debt obligations and
asset-backed securities. The Fund also may purchase U.S. government backed
securities which are guaranteed as to the timely payment of principal and
interest by the U.S. government, its agencies or its instrumentalities.
Throughout the past year, the Fund has been in a neutral position with
its average duration approximating 1.5 years. This duration has been
accomplished using a barbelled structure with approximately 35-40% in
floating rate securities and the remainder invested in the 2-5 year fixed
rate security market. This neutral average maturity position utilizing
floating rate securities benefited the Fund's performance versus the
indices. However, the average annual total returns for Institutional Shares
and Institutional Service Shares of 3.55% and 3.29%, respectively, compared
unfavorably with the 6.57% and 4.78% returns realized by the comparative
indices of Merrill Lynch Short-Term Investment Grade Corporate Bond Index
and the Lipper Short-Investment Grade Debt Index, respectively.*+
The main reason for the underperformance by the Fund relative to its
indices is the prepayment spread widening in two key asset classes of the
Fund's portfolio investments, namely fixed rate whole loan mortgage-backed
securities and manufactured housing asset-backed securities. The Fund held
approximately 30% in these asset classes versus less than 1% by the
indices. Both of these asset classes are sensitive to changes in prepayment
spreads affected by an altered interest rate environment. Given the drastic
increase in short-term rates through December 1994 exemplified by the
2-year Treasury yield increasing by 189 basis points through December 1994,
investors expressed concern about slowing prepayment spreads by lowering
the price paid for such instruments. So far in 1995, however, short-term
rates have declined, the 2-year Treasury specifically has decreased 110
basis points, and prepayment spreads have contracted somewhat.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's share, when
redeemed, may be worth more or less than their original cost.
+ Indices, unlike mutual funds, are unmanaged.
FEDERATED SHORT-TERM INCOME FUND
(INSTITUTIONAL SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $25,000 INVESTED IN FEDERATED SHORT-TERM INCOME FUND
(INSTITUTIONAL SHARES)
The graph below illustrates the hypothetical investment of $25,000 in the
Federated Short-Term Income Fund (Institutional Shares) (the "Fund") from July
1, 1986 (start of performance) to April 30, 1995 compared to the Merrill Lynch
Total Return Investment Grade Corporates Index (Short-Term 1-2.99 Years)
(MLTRIGCI)+ and the Lipper Short Investment Grade Debt Funds Average
(LSIGDFA).++
Graphic representation omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN** FOR THE
PERIODS ENDED APRIL 30, 1995
1 Year.............................................................. 3.55%
5 Year.............................................................. 5.71%
Start of Performance (July 1, 1986)................................. 6.52%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JUNE
30, 1995, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN, CONSTITUTES
THE FUND'S ANNUAL REPORT.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The MLTRIGCI and the LSIGDFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
** Total return quoted reflects all applicable sales loads and contingent
deferred sales charges.
+ The MLTRIGCI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.
++ The LSIGDFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales loads. However,
these total returns are reported net of expenses or other fees that the SEC
requires to be reflected in a fund's performance.
FEDERATED SHORT-TERM INCOME FUND
(INSTITUTIONAL SERVICE SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $25,000 INVESTED IN FEDERATED SHORT-TERM INCOME FUND
(INSTITUTIONAL SERVICE SHARES)
The graph below illustrates the hypothetical investment of $25,000 in the
Federated Short-Term Income Fund (Institutional Service Shares) (the "Fund")
from January 24, 1992 (start of performance) to April 30, 1995 compared to the
Merrill Lynch Total Return Investment Grade Corporates Index (Short-Term 1-2.99
Years) (MLTRIGCI)+ and the Lipper Short Investment Grade Debt Funds Average
(LSIGDFA).++
Graphic representation omitted. See Appendix.
AVERAGE ANNUAL TOTAL RETURN** FOR THE
PERIODS ENDED APRIL 30, 1995
1 Year............................................................. 3.29%
Start of Performance (January 24, 1992)............................ 4.21%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS DATED JUNE
30, 1995, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN, CONSTITUTES
THE FUND'S ANNUAL REPORT.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The MLTRIGCI and the LSIGDFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.
** Total return quoted reflects all applicable sales loads and contingent
deferred sales charges.
+ The MLTRIGCI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.
++ The LSIGDFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales loads. However,
these total returns are reported net of expenses or other fees that the SEC
requires to be reflected in a fund's performance.
FEDERATED SECURITIES CORP.
(LOGO)
- --------------------------------------------------------------------------------
Distributor
31420C209
31420C308
1111903ARS (6/95)
INTERMEDIATE INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares of Intermediate Income Fund (the "Fund") offered by
this prospectus represent interests in a diversified portfolio of securities
which is an investment portfolio in Federated Income Securities Trust (the
"Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Combined Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1995, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information, which is in paper form only, or a paper copy of this prospectus, if
you have received it electronically, free of charge by calling 1-800-235-4669.
To obtain other information, or to make inquiries about the Fund, contact the
Fund at the address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Special Considerations 15
Weighted Average Portfolio Duration 15
Investment Limitations 15
FEDERATED INCOME SECURITIES TRUST INFORMATION 16
- ------------------------------------------------------
Management of the Trust 16
Distribution of Institutional Shares 17
Administration of the Fund 17
NET ASSET VALUE 19
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SHARES 19
- ------------------------------------------------------
Share Purchases 19
Minimum Investment Required 19
What Shares Cost 19
Exchanging Securities for Fund Shares 20
Subaccounting Services 20
Exchange Privilege 20
Certificates and Confirmations 21
Dividends 21
Capital Gains 21
REDEEMING INSTITUTIONAL SHARES 21
- ------------------------------------------------------
Telephone Redemption 21
Written Requests 22
Accounts with Low Balances 22
SHAREHOLDER INFORMATION 23
- ------------------------------------------------------
Voting Rights 23
Massachusetts Partnership Law 23
TAX INFORMATION 23
- ------------------------------------------------------
Federal Income Tax 23
Pennsylvania Corporate and Personal
Property Taxes 24
PERFORMANCE INFORMATION 24
- ------------------------------------------------------
OTHER CLASSES OF SHARES 25
- ------------------------------------------------------
FINANCIAL STATEMENTS 26
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)...................................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable).................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)......................................... None
Exchange Fee............................................................................................... None
INSTITUTIONAL SHARES ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1).......................................................................... 0.00%
12b-1 Fee.................................................................................................. None
Total Other Expenses (after expense reimbursement)......................................................... 0.55%
Shareholder Services Fee (after waiver) (2)................................................... 0.00%
Total Institutional Shares Operating Expenses (3)................................................. 0.55%
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.50%.
(2) The maximum shareholder services fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses in the table above are
based on expenses expected during the fiscal year ending April 30, 1996. The
Total Institutional Shares Operating Expenses were 0.48% for the fiscal year
ended April 30, 1995 and were 1.70% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain other operating
expenses.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in Institutional Shares" and "Federated Income
Securities Trust Information." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $6 $18 $31 $69
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 37.
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
----------------------
1995 1994(A)
<S> <C> <C>
- -------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $ 10.00
- --------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------
Net investment income 0.66 0.23
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02 (0.47)
- -------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.68 (0.24)
- -------------------------------------------------------------------------------------------- --------- -----------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------------
Distributions from net investment income (0.66) (0.23)
- -------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.53
- -------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN(B) 7.53% (2.48%)
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------------
Expenses 0.48% 0.00%(c)
- --------------------------------------------------------------------------------------------
Net investment income 7.12% 6.36%(c)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 1.22% 1.40%(c)
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $32,508 $17,702
- --------------------------------------------------------------------------------------------
Portfolio turnover 88% 0 %
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1995, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. The Trust may offer separate series of shares
of beneficial interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate classes.
As of the date of this prospectus the Board of Trustees ("Trustees") offers two
classes of shares of Intermediate Income Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to Institutional
Shares of the Fund.
Institutional Shares ("Shares") are designed primarily for retail and private
banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales load
imposed by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income. This investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio of high grade debt securities, which are securities rated in one of
the three highest categories (A or better) by a nationally recognized
statistical rating organization ("NRSRO") (for example, rated Aaa, Aa, or A by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch")) or if unrated,
of comparable quality as determined by the Fund's adviser. If a security is
subsequently downgraded, the adviser will determine whether it continues to be
an acceptable investment; if not, the security will be sold. A description of
the rating categories is contained in the Appendix to the Combined Statement of
Additional Information. Under normal market conditions, the dollar-weighted
average portfolio maturity of the Fund will be between three and ten years, and
the Fund's average-weighted duration will be between three and seven years.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of U.S. government obligations, corporate debt
obligations, and asset-backed
securities. The Fund may also invest in derivative instruments of such
securities, including instruments with demand features or credit enhancement, as
well as money market instruments.
The securities in which the Fund invests are:
obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S.
government agencies or instrumentalities, such as the: Farm Credit
System, including the National Bank for Cooperatives, Farm Credit Banks
and Banks for Cooperatives; Federal Home Loan Banks; Federal Home Loan
Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; Export-Import Bank of the United States;
Commodity Credit Corporation; Federal Financing Bank; The Student Loan
Marketing Association; National Credit Union Administration; and
Tennessee Valley Authority.
domestic and foreign issues of corporate debt obligations (including
Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed
rates of interest;
asset-backed securities, including mortgage-related securities;
commercial paper (including Europaper and Canadian Commercial Paper)
which matures in 270 days or less so long as at least two ratings are
high quality ratings by an NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by S&P's, or F-1 or F-2 by Fitch;
foreign currency transactions (including spot, futures, options and
swaps);
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) in commercial or savings banks whose
accounts are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by
the Federal Deposit Insurance Corporation ("FDIC"), including
certificates of deposit issued by and other time deposits in foreign
branches of FDIC insured banks or who have at least $100,000,000 in
capital; and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in which
the Fund may invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury Bills, notes, and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These securities
may be backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
Federal Home Loan Banks;
The Student Loan Marketing Association;
Federal Home Loan Mortgage Corporation; and
Federal National Mortgage Association.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating rate
corporate debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities is
then reset periodically (commonly every 90 days) to an increment over some
predetermined interest rate index. Commonly utilized indices include the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, the one-month or
three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S. Treasury
securities.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings and
loans and collateralized by adjustable rate mortgage loans, also known as
collateralized thrift notes. Many of these collateralized thrift notes have
received AAA ratings from recognized rating agencies. Collateralized thrift
notes differ from traditional "pass through" certificates in which payments made
are linked to monthly payments made by individual borrowers net of any fees paid
to the issuer or guarantor of such securities. Collateralized thrift notes pay a
floating interest rate which is tied to a predetermined index, such as the
180-day Treasury Bill rate. Floating rate corporate debt obligations also
include securities issued to fund commercial real estate construction.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed rate
securities, including fixed rate securities with short-term characteristics.
Fixed rate securities with short-term characteristics are long-term debt
obligations but are treated in the market as having short maturities because
call features of the securities may make them callable within a short period of
time. A fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a fixed income
security approaching maturity, where the expectation of call or redemption is
high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days' prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features."
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon
demand by either party. The notice period for demand typically ranges from
one to seven days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower
during a specified term. As the borrower repays the loan, an amount equal
to the repayment may be borrowed again during the term of the facility. The
Fund generally acquires a participation interest in a revolving credit
facility from a bank or other financial institution. The terms of the
participation require the Fund to make a pro rata share of all loans
extended to the borrower and entitles the Fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving facilities
usually provide for floating or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Payments on mortgage-backed securities are also affected by
other factors,
such as the frequency with which people sell their homes or elect to make
unscheduled payments on their mortgages. All asset-backed securities are subject
to similar prepayment risks, although they may be more or less sensitive to
certain factors. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage security. As a
consequence, mortgage securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranche of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are:
(i) issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency
or instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and principal. The interest portion of
these payments will be distributed by the Fund as income, and the capital
portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages.
Typically, the ARMS in which the Fund may invest are issued by GNMA, FNMA,
and FHLMC and are actively traded. ARMS may be collateralized by whole
loans or private pass-through securities. The underlying mortgages which
collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and/or interest and
may receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed-income securities.
Like other fixed-income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but
may be collateralized by whole loans or private pass-through securities.
The CMOs in which the Fund may invest may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by
pools of mortgages without a government guarantee as to payment of
principal and interest, but which have some form of credit enhancement.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest are offerings of multiple class real estate mortgage-backed
securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code, as
amended. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages.
Once REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity and
is taxed to the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests," some
of which may offer adjustable rates of interest, and a single class of
"residual interests." To qualify as a REMIC, substantially all the assets
of the entity must be in assets directly or indirectly secured principally
by real property.
RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and
REMICs in which the Fund may invest will be readjusted at intervals of one
year or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month LIBOR, the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others tend to lag changes in market rate levels and
tend to have somewhat less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event that the Fund purchases such residual interest mortgage
securities, it will factor in the increased interest and price volatility
of such securities when determining its dollar-weighted average portfolio
maturity and duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund may invest will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund may invest may be
affected if market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying residential
mortgages are adjustable, amortization and prepayments may occur, thereby
causing the effective maturities of the mortgage securities in which the
Fund invests to be shorter than the maturities stated in the underlying
mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card and accounts receivable and motor
vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are structured similarly to collateralized
mortgage obligations and mortgage pass-through securities, which are
described above. Also, these securities may be issued either by
non-governmental entities and carry no direct or indirect governmental
guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although non-
mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that
recoveries on repossessed collateral may not, in some cases, be available
to support payments on these securities.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by BIF or SAIF. Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar
Time Deposits ("ETDs").
FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper,
Eurobonds and Europaper are subject to somewhat different risks than domestic
obligations of domestic issuers. Examples of these risks include international,
economic and political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign withholdings or
other taxes on interest income, difficulties in obtaining or enforcing a
judgment against the issuing bank, and the possible impact of interruptions of
the flow of international currency transactions. Different risks may also exist
for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or
their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan requirements, loan limitations, examinations, accounting,
auditing, and record keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate on $10 million principal amount in exchange for the right to receive
the equivalent of a fixed rate of interest on $10 million principal amount.
Neither party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The
Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and the Fund will
segregate liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into an
interest rate swap on other than a net basis, the Fund will segregate liquid
assets in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps, caps or floors are determined by the investment
adviser to be illiquid, they will be included in the Fund's limitation on
investments in illiquid securities. To the extent the Fund sells caps and
floors, it will maintain in a segregated account cash and/or U.S. government
securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of the portfolio
security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio securities.
The Fund may purchase and sell caps and floors without limitation, subject to
the segregated account requirement described above.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities that
incorporate the performance characteristics of these contracts are also referred
to as "derivatives." The term has also been applied to securities "derived" from
cash flows from underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including CMOs, it will only do so in a manner
consistent with its investment objectives, policies and limitations.
REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may
be purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. The Fund or its custodian will take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, certain interest rate swaps, caps and floors determined by the Fund's
investment adviser to be illiquid, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of the value of its net
assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis, or
both, up to one-third of the value of its total assets to broker/dealers, banks,
or other institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees. In these loan arrangements, the Fund will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and
the market values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a remaining duration commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest rate.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the
value of its total assets to secure such borrowings;
with respect to 75% of its assets, invest more than 5% of the value of
its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitation however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
FEDERATED INCOME SECURITIES TRUST INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising all
the Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .50 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With
over $72 billion invested across more than 260 funds under management
and/or administration by its subsidiaries, as of December 31, 1994,
Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues
to be led by the management who founded the company in 1955. Federated
funds are presently at work in and through 4,000 financial institutions
nationwide. More than 100,000 investment professionals have selected
Federated funds for their clients.
Joseph M. Balestrino has been the Fund's portfolio manager since January,
1994. Mr Balestrino joined Federated Investors in 1986 and has been an
Assistant Vice President of the Fund's investment adviser since 1991. Mr.
Balestrino served as an Investment Analyst of the investment adviser from
1989 until 1991, and from 1986 until 1989 he acted as Project Manager in
the Product Development Department. Mr. Balestrino is a Chartered Financial
Analyst and received his Masters in Urban and Regional Planning from the
University of Pittsburgh.
Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since January, 1993. Ms. Nason
served as an Assistant Vice President of the investment adviser from 1990
until 1992, and from 1987 until 1990 she acted as an investment analyst.
Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in
Finance from Carnegie Mellon University.
Both the Trust and the Adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 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 Administrative Services may choose voluntarily to waive a portion of
its fee.
SHAREHOLDER SERVICES PLAN. The Trust has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments up to 0.25 of 1% of the
average daily net asset value of Fund Shares to obtain certain personal services
for shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Shareholder Services Plan, certain financial
institutions may be compensated by the Adviser or its affiliates for the
continuing investment of customers' assets in certain funds, including the Fund,
advised by those entities. These payments will be made directly by the
distributor or Adviser from their assets, and will not be made from the assets
of the Fund or by the assessment of a sales load on Shares.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, a subsidiary of Federated Investors, is transfer agent
for the Shares of the Fund and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding.
INVESTING IN INSTITUTIONAL SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Intermediate Income Fund--Institutional Shares; Fund Number (this number can be
found on the account statement or by contacting the Fund); Group Number or Order
Number; Nominee or Institution Name; ABA Number 011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Intermediate Income Fund--Institutional Shares to: Federated Services Company,
c/o State Street Bank and Trust Company, P.O. Box 8602, Boston, Massachusetts
02266-8602. Orders by mail are considered received after payment by check is
converted by the transfer agent's bank, State Street Bank, into federal funds.
This is normally the next business day after State Street Bank receives the
check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares is $25,000 plus any non-affiliated bank
or broker's fee. However, an account may be opened with a smaller amount as long
as the $25,000 minimum is reached within 90 days. An institutional investor's
minimum investment will be calculated by combining all accounts it maintains
with the Fund. Accounts established through a non-affiliated bank or broker may
be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange each day the New York Stock
Exchange is open, except on: (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions 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 provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset value
(plus a sales load, if applicable). The
ability to exchange shares is available to shareholders residing in any state in
which the shares being acquired may be legally sold and the exchange is subject
to any initial or subsequent investment amounts of the fund being acquired.
Prior to any exchange, the shareholder must receive a copy of the current
prospectus of the fund or class thereof into which an exchange is to be
effected. A shareholder may obtain further information on the exchange privilege
by calling Federated Securities Corp. or the shareholder's financial
institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted upon instruction of
the transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional Shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SHARES
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The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by
the Fund, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. In the event of drastic economic or market changes, a
shareholder may experience difficulty in redeeming by telephone. If such a case
should occur, another method of redemption, such as "Written Requests," should
be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his or her name, the Fund name and class
name, the shareholder's account number, and the share or dollar amount
requested. If Share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail to Federated
Services Company, 500 Victory Road--2nd Floor, Quincy, Massachusetts 02171 with
the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request, provided that the transfer agent has received
payment for the Shares from the shareholder.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular fund or class, only shares of that particular Fund
or class are entitled to vote. As of June 6, 1995, First National Bank & Trust,
Escanaba, Michigan, owned 25.15% of the Institutional Shares of the Fund, and,
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or by a two-thirds vote of the
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of the Trust's outstanding shares of all portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Information on
the tax status of dividends and distributions is provided annually.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
The Trust is not subject to Pennsylvania corporate or personal property
taxes; and
Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to such
taxes if owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for
Institutional Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.
The yield of Institutional Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by Institutional Shares over a thirty-day period by the maximum offering price
per share of Institutional Shares on the last day of the period. This number is
then annualized using semi-annual compounding. The yield does not necessarily
reflect income actually earned by Institutional Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers one other class of shares called Institutional Service
Shares.
Institutional Service Shares are sold primarily to banks and other institutions
that hold assets in an agency capacity. Institutional Service Shares are sold at
net asset value and are subject to a minimum initial investment of $25,000.
Institutional Service Shares are distributed pursuant to a 12b-1 Plan adopted by
the Trust.
Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences, however, between Shares and Institutional Service
Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call
1-800-235-4669 or contact their financial institution.
INTERMEDIATE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
ASSET-BACKED SECURITIES--8.5%
- ---------------------------------------------------------------------------------------------------
AUTOMOTIVE RECEIVABLES--1.6%
-------------------------------------------------------------------------------------
$ 211,527 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/1997 $ 210,243
-------------------------------------------------------------------------------------
315,561 Premier Auto Trust 1992-3, Class B, 6.25%, 11/15/1997 314,981
------------------------------------------------------------------------------------- -------------
Total 525,224
------------------------------------------------------------------------------------- -------------
HOME EQUITY RECEIVABLES--0.6%
-------------------------------------------------------------------------------------
209,748 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 204,450
------------------------------------------------------------------------------------- -------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3%
-------------------------------------------------------------------------------------
400,000 Prudential Bache, Series 8, Class F, 7.965%, 3/1/2019 405,508
-------------------------------------------------------------------------------------
1,000,000 Prudential Home Mortgage 1992-32, Class A6, 7.50%, 10/25/2022 959,375
-------------------------------------------------------------------------------------
500,000 Residential Funding Mortgage Corp. 1993-S26, Class A10, 7.50%,
7/25/2023 449,740
-------------------------------------------------------------------------------------
300,000 Residential Funding Mortgage Corp. 1993-S31, Class A7, 7.00%,
9/25/2023 255,281
------------------------------------------------------------------------------------- -------------
Total 2,069,904
------------------------------------------------------------------------------------- -------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,919,671) 2,799,578
------------------------------------------------------------------------------------- -------------
MORTGAGE-BACKED SECURITIES--6.5%
- ---------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--6.5%
-------------------------------------------------------------------------------------
978,323 Government National Mortgage Association, Pool 369457, 8.00%,
9/15/2024 978,313
-------------------------------------------------------------------------------------
1,172,029 Government National Mortgage Association, Pool 379983, 7.50%,
2/15/2024 1,143,443
------------------------------------------------------------------------------------- -------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,030,051) 2,121,756
------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--73.2%
- ---------------------------------------------------------------------------------------------------
AUTOMOTIVE--3.2%
-------------------------------------------------------------------------------------
1,000,000 General Motors Corp., Deb., 9.125%, 7/15/2001 1,067,000
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--CONTINUED
- ---------------------------------------------------------------------------------------------------
BANKING--11.7%
-------------------------------------------------------------------------------------
$ 1,000,000 Banco Santander, Bank Guarantee, 7.875%, 4/15/2005 $ 998,030
-------------------------------------------------------------------------------------
1,000,000 Bank of Montreal, Sub. Note, 7.80%, 4/1/2007 997,300
-------------------------------------------------------------------------------------
500,000 Bank One, Milwaukee, WI N.A., Sub. Note, 6.625%, 4/15/2003 471,595
-------------------------------------------------------------------------------------
1,000,000 National Bank of Canada, Montreal, Sub. Note, 8.125%, 8/15/2004 1,012,560
-------------------------------------------------------------------------------------
400,000 PNC Funding Corp., Sub. Note, 6.875%, 3/1/2003 377,096
------------------------------------------------------------------------------------- -------------
Total 3,856,581
------------------------------------------------------------------------------------- -------------
EDUCATION--3.2%
-------------------------------------------------------------------------------------
1,000,000 Columbia University, Medium Term Note, 8.62%, 2/21/2001 1,057,940
------------------------------------------------------------------------------------- -------------
FINANCE--AUTOMOTIVE--3.8%
-------------------------------------------------------------------------------------
1,000,000 Ford Capital BV, Deb., 9.00%, 8/15/1998 1,048,450
-------------------------------------------------------------------------------------
200,000 General Motors Acceptance Corp., Medium Term Note, 9.40%,
5/18/1995 200,458
------------------------------------------------------------------------------------- -------------
Total 1,248,908
------------------------------------------------------------------------------------- -------------
FINANCE--RETAIL--3.3%
-------------------------------------------------------------------------------------
1,000,000 Commercial Credit Co., Note, 6.00%, 4/15/2000 942,340
-------------------------------------------------------------------------------------
140,000 Household Finance Corp., Deb., 8.95%, 9/15/1999 148,135
------------------------------------------------------------------------------------- -------------
Total 1,090,475
------------------------------------------------------------------------------------- -------------
FINANCIAL INTERMEDIARIES--9.4%
-------------------------------------------------------------------------------------
1,000,000 Equitable Cos., Inc., Sr. Note, 9.00%, 12/15/2004 1,052,370
-------------------------------------------------------------------------------------
1,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 994,850
-------------------------------------------------------------------------------------
1,000,000 Norwest Corp., Deb., 9.25%, 5/1/1997 1,040,860
------------------------------------------------------------------------------------- -------------
Total 3,088,080
------------------------------------------------------------------------------------- -------------
FOOD PRODUCTS--3.0%
-------------------------------------------------------------------------------------
1,000,000 Grand Metropolitan Investment Corp., Company Guaranty, 7.00%,
6/15/1999 987,280
------------------------------------------------------------------------------------- -------------
HEALTH SERVICES--3.2%
-------------------------------------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp., Medium Term Note, 8.70%, 2/10/2010 1,061,910
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--CONTINUED
- ---------------------------------------------------------------------------------------------------
INSURANCE--4.0%
-------------------------------------------------------------------------------------
$ 1,000,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 $ 834,130
-------------------------------------------------------------------------------------
500,000 Sunamerica, Inc., Medium Term Note, 6.58%, 1/15/2002 465,510
------------------------------------------------------------------------------------- -------------
Total 1,299,640
------------------------------------------------------------------------------------- -------------
METALS & MINING--3.2%
-------------------------------------------------------------------------------------
1,000,000 Alcan Aluminum Ltd., Deb., 9.20%, 3/15/2001 1,048,780
------------------------------------------------------------------------------------- -------------
MUNICIPAL SERVICES--3.3%
-------------------------------------------------------------------------------------
1,000,000 Pittsburgh, PA Urban Redevelopment Authority, 9.07%, 9/1/2014 1,073,840
------------------------------------------------------------------------------------- -------------
RAIL INDUSTRY--0.8%
-------------------------------------------------------------------------------------
250,000 CSX Corp., Deb., 9.50%, 11/15/1995 254,068
------------------------------------------------------------------------------------- -------------
RETAILERS--3.6%
-------------------------------------------------------------------------------------
1,070,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,167,006
------------------------------------------------------------------------------------- -------------
SOVEREIGN GOVERNMENT--9.2%
-------------------------------------------------------------------------------------
1,000,000 Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 952,320
-------------------------------------------------------------------------------------
1,000,000 Hydro-Quebec, Deb., 8.05%, 7/7/2024 1,017,990
-------------------------------------------------------------------------------------
1,000,000 Victoria Public Authority, Local Gov't. Guarantee, 8.25%, 1/15/2002 1,034,375
------------------------------------------------------------------------------------- -------------
Total 3,004,685
------------------------------------------------------------------------------------- -------------
TELECOMMUNICATIONS & CELLULAR--2.6%
-------------------------------------------------------------------------------------
800,000 New England Telephone & Telegraph, Deb., 8.625%, 8/1/2001 849,488
------------------------------------------------------------------------------------- -------------
UTILITIES--5.7%
-------------------------------------------------------------------------------------
400,000 Duke Power Co., Medium Term Note, 5.78%, 7/8/1999 379,612
-------------------------------------------------------------------------------------
180,000 Minnesota Power and Light Co., 1st Mortgage Bond, 7.75%, 6/1/2007 180,337
-------------------------------------------------------------------------------------
750,000 Pedernales Electric Coop, 10.875%, 9/1/2017 834,375
-------------------------------------------------------------------------------------
500,000 Wisconsin Telephone Co., Deb., 6.25%, 8/1/2004 458,120
------------------------------------------------------------------------------------- -------------
Total 1,852,444
------------------------------------------------------------------------------------- -------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $23,860,657) 24,008,125
------------------------------------------------------------------------------------- -------------
FEDERAL HOME LOAN MORTGAGE CORP.--3.0%
- ---------------------------------------------------------------------------------------------------
1,000,000 7.61%, 9/1/2004 (IDENTIFIED COST $943,060) 985,280
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
*REPURCHASE AGREEMENT--9.6%
- ---------------------------------------------------------------------------------------------------
$ 3,163,000 J.P. Morgan Securities, Inc., 5.97%, dated 4/28/1995, due 5/1/1995
(AT AMORTIZED COST) $ 3,163,000
------------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $32,916,439) $ 33,077,739+
------------------------------------------------------------------------------------- -------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated Funds.
+ The cost of investments for federal tax purposes amounts to $32,916,439. The
net unrealized appreciation on a federal tax cost basis amounts to $161,300,
which is comprised of $504,002 appreciation and $342,702 depreciation at April
30, 1995.
Note: The categories of investments are shown as a percentage of net assets
($32,784,148) at
April 30, 1995.
(See Notes which are an integral part of the Financial Statements)
INTERMEDIATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $32,916,439) $ 33,077,739
- ---------------------------------------------------------------------------------------------------
Cash 35,229
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 917,890
- ---------------------------------------------------------------------------------------------------
Income receivable 560,867
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 89,665
- ---------------------------------------------------------------------------------------------------
Deferred expenses 23,185
- --------------------------------------------------------------------------------------------------- -------------
Total assets 34,704,575
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased $ 1,721,187
- -------------------------------------------------------------------------------------
Dividends payable 159,071
- -------------------------------------------------------------------------------------
Payable for shares redeemed 5,479
- -------------------------------------------------------------------------------------
Accrued expenses 34,690
- ------------------------------------------------------------------------------------- ------------
Total liabilities 1,920,427
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 3,432,765 shares outstanding $ 32,784,148
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 33,157,755
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 161,300
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (534,907)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 32,784,148
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
- ---------------------------------------------------------------------------------------------------
Institutional Shares ($32,507,679 / 3,403,817 shares outstanding) $9.55
- --------------------------------------------------------------------------------------------------- -------------
Institutional Service Shares ($276,469 / 28,948 shares oustanding) $9.55
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest $ 2,047,927
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 134,734
- ---------------------------------------------------------------------------------------
Administrative personnel and services fee 141,836
- ---------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 75,105
- ---------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 24,796
- ---------------------------------------------------------------------------------------
Fund share registration costs 26,253
- ---------------------------------------------------------------------------------------
Legal fees 1,114
- ---------------------------------------------------------------------------------------
Printing and postage 18,107
- ---------------------------------------------------------------------------------------
Directors'/Trustees' fees 3,444
- ---------------------------------------------------------------------------------------
Auditing fees 15,216
- ---------------------------------------------------------------------------------------
Insurance premiums 5,164
- ---------------------------------------------------------------------------------------
Organizational expense 4,528
- ---------------------------------------------------------------------------------------
Distribution service fee--Institutional Service Shares 84
- ---------------------------------------------------------------------------------------
Shareholder service fee--Institutional Service Shares 489
- ---------------------------------------------------------------------------------------
Miscellaneous 5,436
- --------------------------------------------------------------------------------------- ----------
Total expenses 456,306
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 134,734
- ---------------------------------------------------------------------------
Reimbursement of other operating expenses 192,851 327,585
- --------------------------------------------------------------------------- ---------- ----------
Net expenses 128,721
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 1,919,206
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (527,053)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 848,090
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments 321,037
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 2,240,243
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 1,919,206 $ 279,816
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($380,818 net loss and $0, respectively,
as computed for federal income tax purposes) (527,053) (7,854)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 848,090 (686,790)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations 2,240,243 (414,828)
- -------------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Distributions from net investment income:
- --------------------------------------------------------------------------------
Institutional Shares (1,903,482) (276,248)
- --------------------------------------------------------------------------------
Institutional Service Shares (15,724) (3,568)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (1,919,206) (279,816)
- -------------------------------------------------------------------------------- ------------- -------------
SHARE TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of Shares 21,784,834 25,769,938
- --------------------------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of distributions
declared 238,460 11,515
- --------------------------------------------------------------------------------
Cost of Shares redeemed (7,487,433) (7,159,559)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets from fund share transactions 14,535,861 18,621,894
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets 14,856,898 17,927,250
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 17,927,250 0
- -------------------------------------------------------------------------------- ------------- -------------
End of period $ 32,784,148 $ 17,927,250
- -------------------------------------------------------------------------------- ------------- -------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of two, diversified
portfolios. The financial statements included herein present only those of
Intermediate Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Listed corporate bonds and other fixed
income and asset-backed securities, unlisted securities and other
fixed-income and asset-backed securities and/or private placements and
short-term securities are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal
Revenue Code as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. At April 30, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $380,818 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 distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax. Pursuant to
the Code, such capital loss carryforward will expire in 2003 ($380,818).
Additionally, net capital losses of $154,089 attributable to security
transactions incurred after October 31, 1994, are treated as arising on May
1, 1995, 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.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Shares sold 2,305,891 $ 21,616,701 2,565,565 $ 25,464,130
- ---------------------------------------------------------
Shares issued to shareholders in
payment of distributions declared 25,256 236,376 1,194 11,509
- ---------------------------------------------------------
Shares redeemed (785,508) (7,366,801) (708,581) (7,091,038)
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Institutional Shares
transactions 1,545,639 $ 14,486,276 1,858,178 $ 18,384,601
- --------------------------------------------------------- ---------- ------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Shares sold 17,937 $ 168,133 30,700 $ 305,815
- ---------------------------------------------------------
Shares issued to shareholders in
payment of distributions declared 223 2,084 -- --
- ---------------------------------------------------------
Shares redeemed (12,830) (120,632) (7,082) (68,522)
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Institutional
Service Shares transactions 5,330 49,585 23,618 $ 237,293
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Fund share
transactions 1,550,969 $ 14,535,861 1,881,796 $ 18,621,894
- --------------------------------------------------------- ---------- ------------- ---------- -------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. The Adviser can modify or terminate this voluntary waiver
and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors for
the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. The distributor
may voluntarily choose to waive a portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain the shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
INTERFUND TRANSACTIONS--During the year ended April 30, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser (or affiliated investment advisers), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $67,348,780 and $70,715,829,
respectively.
ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up
administrative service expenses ($38,751) were borne initially by Adviser. The
Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following December
15, 1993 (date the Fund first became effective). For the period ended April 30,
1995, the Fund paid $4,528 and $3,660, respectively, pursuant to this agreement.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended
April 30, 1995, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 39,464,031
- --------------------------------------------------------------------------------------------------- -------------
Sales $ 22,003,763
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
INTERMEDIATE INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Intermediate Income Fund (one of the portfolios
comprising Federated Income Securities Trust), as of April 30, 1995, and the
related statement of operations for the year then ended, and the statement of
changes in net assets and financial highlights (see page 2 of this prospectus)
for each of the two 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 April
30, 1995, by correspondence with the custodian and brokers. 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
Intermediate Income Fund at April 30, 1995, and the results of its operations
for the year ended and the changes in its net assets and financial highlights
for each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 9, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Intermediate Income Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
INTERMEDIATE
INCOME
FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
31420C407
3090804A-IS (6/95)
INTERMEDIATE INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares of Intermediate Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities Trust
(the "Trust"), an open-end, management investment company (a mutual fund).
The investment objective of the Fund is current income.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Combined Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1995, with
the Securities and Exchange Commission. The information contained in the
Combined Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Combined Statement of Additional
Information, which is in paper form only, or a paper copy of this prospectus, if
you have received it electronically, free of charge by calling 1-800-235-4669.
To obtain other information or to make inquiries about the Fund, contact the
Fund at the address listed in the back of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated June 30, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--INSTITUTIONAL
SERVICE SHARES 2
- ------------------------------------------------------
GENERAL INFORMATION 3
- ------------------------------------------------------
INVESTMENT INFORMATION 3
- ------------------------------------------------------
Investment Objective 3
Investment Policies 3
Special Considerations 15
Weighted Average Portfolio Duration 15
Investment Limitations 15
FEDERATED INCOME SECURITIES TRUST
INFORMATION 16
- ------------------------------------------------------
Management of the Trust 16
Distribution of Institutional
Service Shares 17
Administration of the Fund 18
NET ASSET VALUE 19
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 19
- ------------------------------------------------------
Share Purchases 19
Minimum Investment Required 20
What Shares Cost 20
Exchanging Securities for Fund Shares 20
Subaccounting Services 21
Exchange Privilege 21
Certificates and Confirmations 21
Dividends 21
Capital Gains 22
REDEEMING INSTITUTIONAL SERVICE SHARES 22
- ------------------------------------------------------
Telephone Redemption 22
Written Requests 22
Accounts with Low Balances 23
SHAREHOLDER INFORMATION 23
- ------------------------------------------------------
Voting Rights 23
Massachusetts Partnership Law 23
TAX INFORMATION 24
- ------------------------------------------------------
Federal Income Tax 24
Pennsylvania Corporate and
Personal Property Taxes 24
PERFORMANCE INFORMATION 25
- ------------------------------------------------------
OTHER CLASSES OF SHARES 25
- ------------------------------------------------------
FINANCIAL STATEMENTS 26
- ------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 37
- ------------------------------------------------------
ADDRESSES Inside Back Cover
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES--
INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)...................................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable).................................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)......................................... None
Exchange Fee............................................................................................... None
INSTITUTIONAL SERVICE SHARES ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1).......................................................................... 0.00%
12b-1 Fee (after waiver) (2)............................................................................... 0.20%
Total Other Expenses (after expense reimbursement)......................................................... 0.60%
Shareholder Services Fee (after waiver) (3)................................................... 0.05%
Total Institutional Service Shares Operating Expenses (4)......................................... 0.80%
</TABLE>
- ---------
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.50%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum shareholder services fee is 0.25%
(4) The Total Institutional Service Shares Operating Expenses in the table above
are based on expenses expected during the fiscal year ending April 30, 1996.
The Total Institutional Service Shares Operating Expenses were 0.72% for the
fiscal year ended April 30, 1995 and were 1.94% absent the voluntary waiver
of the management fee and the voluntary reimbursement of certain other
operating expenses.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in Institutional Shares" and "Federated Income
Securities Trust Information." Wire-transferred redemptions of less than $5,000
may be subject to additional fees.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales load permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period....... $8 $26 $44 $99
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 37.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------
1995 1994(A)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $ 10.00
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.64 0.22
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02 (0.47)
- ---------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.66 (0.25)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------
Distributions from net investment income (0.64) (0.22)
- ---------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.53
- ---------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN(B) 7.27% (2.57%)
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 0.72% 0.25%(c)
- ----------------------------------------------------------------------------------------------
Net investment income 6.85% 6.12%(c)
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 1.22% 1.40%(c)
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $276 $225
- ----------------------------------------------------------------------------------------------
Portfolio turnover 88% 0%
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from December 15, 1993 (date of initial
public offering) to April 30, 1994.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1995, which can be obtained
free of charge.
(See Notes which are an integral part of the Financial Statements)
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. The Trust may offer separate series of shares
of beneficial interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate classes.
As of the date of this prospectus, the Board of Trustees ("Trustees") offers two
classes of shares of Intermediate Income Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares of the Fund. A minimum initial investment of $25,000 over a 90-day period
is required.
Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales load
imposed by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is current income. This investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing in a diversified
portfolio of high grade debt securities, which are securities rated in one of
the three highest categories (A or better) by a nationally recognized
statistical rating organization ("NRSRO") (for example, rated Aaa, Aa, or A by
Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch")) or if unrated,
of comparable quality as determined by the Fund's adviser. If a security is
subsequently downgraded, the adviser will determine whether it continues to be
an acceptable investment; if not, the security will be sold. A description of
the rating categories is contained in the Appendix to the Combined Statement of
Additional Information. Under normal market conditions, the dollar-weighted
average portfolio maturity of the Fund will be between three and ten years, and
the Fund's average-weighted duration will be between three and seven years.
Unless indicated otherwise, the investment policies may be changed by the Board
of Trustees without the approval of shareholders. Shareholders will be notified
before any material change in these investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally managed,
diversified portfolio consisting of U.S. government obligations, corporate debt
obligations, and asset-backed securities. The Fund may also invest in derivative
instruments of such securities, including instruments with demand features or
credit enhancement, as well as money market instruments.
The securities in which the Fund invests are:
obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S.
government agencies or instrumentalities, such as the: Farm Credit
System, including the National Bank for Cooperatives, Farm Credit Banks
and Banks for Cooperatives; Federal Home Loan Banks; Federal Home Loan
Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; Export-Import Bank of the United States;
Commodity Credit Corporation; Federal Financing Bank; The Student Loan
Marketing Association; National Credit Union Administration; and
Tennessee Valley Authority.
domestic and foreign issues of corporate debt obligations (including
Eurobonds, Medium Term Notes and Deposit Notes) having floating or fixed
rates of interest;
asset-backed securities, including mortgage-related securities;
commercial paper (including Europaper and Canadian Commercial Paper)
which matures in 270 days or less so long as at least two ratings are
high quality ratings by an NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
foreign currency transactions (including spot, futures, options and
swaps);
time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) in commercial or savings banks whose
accounts are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by
the Federal Deposit Insurance Corporation ("FDIC"), including
certificates of deposit issued by and other time deposits in foreign
branches of FDIC insured banks or who have at least $100,000,000 in
capital; and
repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in which
the Fund may invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury Bills, notes, and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These securities
may be backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
Federal Home Loan Banks;
The Student Loan Marketing Association;
Federal Home Loan Mortgage Corporation; and
Federal National Mortgage Association.
CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating rate
corporate debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities is
then reset periodically (commonly every 90 days) to an increment over some
predetermined interest rate index. Commonly utilized indices include the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, the one-month or
three-month London Interbank Offered Rate ("LIBOR"), the prime rate of a bank,
the commercial paper rates, or the longer-term rates on U.S. Treasury
securities.
Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings and
loans and collateralized by adjustable rate mortgage loans, also known as
collateralized thrift notes. Many of these collateralized thrift notes have
received AAA ratings from recognized rating agencies. Collateralized thrift
notes differ from traditional "pass through" certificates in which payments made
are linked to monthly payments made by individual borrowers net of any fees paid
to the issuer or guarantor of such securities. Collateralized thrift notes pay a
floating interest rate which is tied to a predetermined index, such as the
180-day Treasury Bill rate. Floating rate corporate debt obligations also
include securities issued to fund commercial real estate construction.
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an initial
interest rate which is at or above prevailing market rates. Interest rates are
reset periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issue's prospectus.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed rate
securities, including fixed rate securities with short-term characteristics.
Fixed rate securities with short-term characteristics are long-term debt
obligations but are treated in the market as having short maturities because
call features of the securities may make them callable within a short period of
time. A fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a fixed income
security approaching maturity, where the expectation of call or redemption is
high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days' prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features."
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon
demand by either party. The notice period for demand typically ranges from
one to seven days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower
during a specified term. As the borrower repays the loan, an amount equal
to the repayment may be borrowed again during the term of the facility. The
Fund generally acquires a participation interest in a revolving credit
facility from a bank or other financial institution. The terms of the
participation require the Fund to make a pro rata share of all loans
extended to the borrower and entitles the Fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving facilities
usually provide for floating or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Fund
receives from the
reinvestment of such prepayments, or any scheduled principal payments, may be
lower than the yield on the original mortgage security. As a consequence,
mortgage securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may also
have less potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
amount. Conversely, the prepayment of mortgage securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Mortgage securities are:
(i) issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or
one of its agencies or instrumentalities; (iii) those issued by private
issuers that represent an interest in or are collateralized by whole loans
or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency
of instrumentality of the U.S. government.
The privately issued mortgage-related securities provide for a periodic
payment consisting of both interest and principal. The interest portion of
these payments will be distributed by the Fund as income, and the capital
portion will be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. Typically, the ARMS in which the Fund may invest
are issued by GNMA, FNMA, and FHLMC and are actively traded. ARMS may be
collateralized by whole loans or private pass-through securities. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration
("VA"), while those collateralizing ARMS issued by FHLMC or FNMA are
typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and/or interest and
may receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed-income securities.
Like other fixed-income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but
may be collateralized by whole loans or private pass-through securities.
The CMOs in which the Fund may invest may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by
pools of mortgages without a government guarantee as to payment of
principal and interest, but which have some form of credit enhancement.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which the
Fund may invest are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of
the Internal Revenue Code, as amended. Issuers of REMICs may take several
forms, such as trusts, partnerships, corporations, associations, or
segregated pools of mortgages. Once REMIC status is elected and obtained,
the entity is not subject to federal income taxation. Instead, income is
passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which
may offer adjustable rates of interest, and a single class of "residual
interests." To qualify as a REMIC, substantially all the assets of the
entity must be in assets directly or indirectly secured principally by real
property.
RESETS OF INTEREST. The interest rates paid on some of the ARMS, CMOs, and
REMICs in which the Fund may invest will be readjusted at intervals of one
year or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year and five-year constant maturity Treasury Note
rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate,
rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month LIBOR, the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others tend to lag changes in market rate levels and
tend to have somewhat less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual
interest tranches of CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event that the Fund purchases such residual interest mortgage
securities, it will factor in the increased interest and price volatility
of such securities when determining its dollar-weighted average portfolio
maturity and duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund may invest will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected
if market interest rates rise or fall faster and farther than the allowable
caps or floors on the underlying residential mortgage loans. Additionally,
even though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests
to be shorter than the maturities stated in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in pools
of receivables, such as credit card
and accounts receivable and motor vehicle and other installment purchase
obligations and leases. These securities may be in the form of pass-through
instruments or asset-backed obligations. The securities are structured
similarly to collateralized mortgage obligations and mortgage pass-through
securities, which are described above. Also, these securities may be issued
either by non-governmental entities and carry no direct or indirect
governmental guarantees, or by governmental entities (i.e., Small Business
Administration) and carry varying degrees of governmental support.
Non-mortgage related asset backed securities have structural
characteristics similar to mortgage-related asset-backed securities but
have underlying assets that are not mortgage loans or interests in mortgage
loans. The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card receivables.
These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities are issued by non-governmental entities
and carry no direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Although non-
mortgage related asset-backed securities generally are less likely to
experience substantial prepayments than are mortgage-related asset-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.
Non-mortgage related asset-backed securities present certain risks that are
not presented by mortgage-related asset-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then reregistered because the owner and obligor moves to another
state, such registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by an
institution having capital, surplus and undivided profits over $100 million or
insured by BIF or SAIF. Bank
Instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits ("ETDs").
FOREIGN SECURITIES. ECDs, ETDs, Yankee CDs, Canadian Commercial Paper, Eurobonds
and Europaper are subject to somewhat different risks than domestic obligations
of domestic issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholdings or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing bank, and the possible impact of interruptions of the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
requirements, loan limitations, examinations, accounting, auditing, and record
keeping and the public availability of information. These factors will be
carefully considered by the Fund's adviser in selecting investments for the
Fund.
INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed-rate payments) on a notional principal amount. The
principal amount of an interest rate swap is notional in that it only provides
the basis for determining the amount of interest payments under the swap
agreement, and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London Interbank
Offer Rate on $10 million principal amount in exchange for the right to receive
the equivalent of a fixed rate of interest on $10 million principal amount.
Neither party to the swap would actually advance $10 million to the other.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
the amount of excess interest on a notional principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of the amount of the interest shortfall on a
notional principal amount from the party selling the interest rate floor.
The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest based
on a market index. Interest accrued on the hedged note would then equal or
exceed the Fund's obligations under the swap, while changes in the market value
of the swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a return or
spread on a portfolio security. The Fund does not intend to use these
transactions in a speculative manner.
The Fund will usually enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out), with the Fund receiving or paying, as the
case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis, and the Fund will segregate liquid assets in an aggregate net asset
value at least equal to the accrued excess, if any, on each business day. If the
Fund enters into an interest rate swap on other than a net basis, the Fund will
segregate liquid assets in the full amount accrued on a daily basis of the
Fund's obligations with respect to the swap. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to
the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps, caps or floors are determined by the investment
adviser to be illiquid, they will be included in the Fund's limitation on
investments in illiquid securities. To the extent the Fund sells caps and
floors, it will maintain in a segregated account cash and/or U.S. government
securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps or floors.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Fund's investment adviser is incorrect
in its forecasts of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not utilized. Moreover, even
if the Fund's investment adviser is correct in its forecasts, there is a risk
that the swap position may correlate imperfectly with the price of the portfolio
security being hedged.
There is no limit on the amount of interest rate swap transactions that may be
entered into by the Fund. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to a default on an interest rate swap is limited to the net
asset value of the swap together with the net amount of interest payments owed
to the Fund by the defaulting party. A default on a portfolio security hedged by
an interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio securities.
The Fund may purchase and sell caps and floors without limitation, subject to
the segregated account requirement described above.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities that
incorporate the performance characteristics of these contracts are also referred
to as "derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, such as asset-backed securities and
mortgage-backed securities, including CMOs, it will only do so in a manner
consistent with its investment objectives, policies and limitations.
REPURCHASE AGREEMENTS. Certain of the securities in which the Fund invests may
be purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. The Fund or its custodian will take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, certain interest rate swaps, caps and
floors determined by the Fund's investment adviser to be illiquid, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, the Fund intends to not subject such
paper to the limitation applicable to restricted securities.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis, or
both, up to one-third of the value of its total assets to broker/dealers, banks,
or other institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Trustees. In these loan arrangements, the Fund will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Fund to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter into transactions to sell
its purchase commitments to third
parties at current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize short-term
profits or losses upon the sale of such commitments.
SPECIAL CONSIDERATIONS
In the debt market, prices move inversely to interest rates. A decline in market
interest rates results in a rise in the market prices of outstanding debt
obligations. Conversely, an increase in market interest rates results in a
decline in market prices of outstanding debt obligations. In either case, the
amount of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt obligations:
the debt obligations with the longest maturities will experience the greatest
market price changes.
The market value of debt obligations, and therefore the Fund's net asset value,
will fluctuate due to changes in economic conditions and other market factors
such as interest rates which are beyond the control of the Fund's investment
adviser. The Fund's investment adviser could be incorrect in its expectations
about the direction or extent of these market factors. Although debt obligations
with longer maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the Fund is
significantly invested in debt obligations with longer maturities, there is a
greater possibility of fluctuation in the Fund's net asset value.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. For purposes of calculating its dollar-weighted
average portfolio duration, the Fund will treat variable and floating rate
instruments as having a remaining duration commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest rate.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the
value of its total assets to secure such borrowings;
with respect to 75% of its assets, invest more than 5% of the value of
its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Fund will not:
invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.
FEDERATED INCOME SECURITIES TRUST INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase or sale of portfolio instruments, for which
it receives an annual fee from the Fund.
ADVISORY FEES. The Fund's Adviser receives an annual investment advisory
fee equal to .50 of 1% of the Fund's average daily net assets. Under the
investment advisory contract, the Adviser may voluntarily reimburse some of
the operating expenses of the Fund. The Adviser can terminate this
voluntary reimbursement of expenses at any time in its sole discretion. The
Adviser has also undertaken to reimburse the Fund for operating expenses in
excess of limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services
to a number of investment companies. With over $72 billion invested across
more than 260 funds under management and/or administration by its
subsidiaries, as of December 31, 1994, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,750 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Joseph M. Balestrino has been the Fund's portfolio manager since January,
1994. Mr. Balestrino joined Federated Investors in 1986 and has been an
Assistant Vice President of the Fund's investment adviser since 1991. Mr.
Balestrino served as an Investment Analyst of the investment adviser from
1989 until 1991, and from 1986 until 1989 he acted as Project Manager in
the Product Development Department. Mr. Balestrino is a Chartered Financial
Analyst and received his Masters in Urban and Regional Planning from the
University of Pittsburgh.
Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a Vice
President of the Fund's investment adviser since January, 1993. Ms. Nason
served as an Assistant Vice President of the investment adviser from 1990
until 1992, and from 1987 until 1990 she acted as an investment analyst.
Ms. Nason is a Chartered Financial Analyst and received her M.B.A. in
Finance from Carnegie Mellon University.
Both the Trust and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests of
shareholders ahead of the employees' own interest. Among other things, the
codes: require preclearance and periodic reporting of personal securities
transactions; prohibit personal transactions in securities being purchased
or sold, or being considered for purchase or sale, by the Fund; prohibit
purchasing securities in initial public offerings; and prohibit taking
profits on securities held for less than sixty days. Violations of the
codes are subject to review by the Board of Trustees, and could result in
severe penalties.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS. Under a distribution plan adopted
in accordance with the Investment Company Act Rule 12b-1 (the "Distribution
Plan"), the Fund may pay to the distributor an amount, computed at an annual
rate of 0.25 of 1% of the average daily net asset value of Shares to finance any
activity which is principally intended to result in the sale of Shares subject
to the Distribution Plan. The distributor may select financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales support services as agents for their clients or
customers.
The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor expect as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amount or may earn a profit from future payments made by the Fund
under the Distribution Plan.
In addition, the Trust has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of the Fund Shares to obtain certain personal services for
shareholders and the maintenance of shareholder accounts ("shareholder
services"). The Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
Federated Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Trust and Federated Shareholder
Services.
The Glass-Steagall Act limits the ability of a depository institution (such as a
commercial bank or a savings and loan association) to become an underwriter or
distributor of securities. In the event the Glass-Steagall Act is deemed to
prohibit depository institutions from acting in the capacities described above
or should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to periodic payments to
financial institutions under the Distribution and Shareholder Services Plans,
certain financial institutions may be compensated by the adviser or its
affiliates for the continuing investment of customers' assets in certain funds,
including the Fund, advised by those entities. These payments will be made
directly by the distributor or adviser from their assets, and will not be made
from the assets of the Fund or by the assessment of a sales load on Shares.
Furthermore, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 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 Administrative Services may choose voluntarily to waive a portion of
its fee.
CUSTODIAN. State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Boston, Massachusetts, a subsidiary of Federated Investors, is transfer agent
for the Shares of the Fund, and dividend disbursing agent for the Fund.
INDEPENDENT AUDITORS. The independent auditors for the Fund are Ernst & Young
LLP, Pittsburgh, Pennsylvania.
NET ASSET VALUE
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The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of the Shares in the market value of all
securities and other assets of the Fund, subtracting the interest of the Shares
in the liabilities of the Fund and those attributable to Shares, and dividing
the remainder by the total number of Shares outstanding.
INVESTING IN INSTITUTIONAL SERVICE SHARES
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SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased either by wire or mail.
To purchase Shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Intermediate Income Fund--Institutional Service Shares; Fund Number (this number
can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; ABA Number 011000028.
BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Intermediate Income Fund--Institutional Service Shares to: Federated Services
Company, c/o State Street Bank and Trust Company, P.O. Box 8602, Boston,
Massachusetts 02266-8602. Orders by mail are considered received after payment
by check is converted by the transfer agent's bank, State Street Bank, into
federal funds. This is normally the next business day after State Street Bank
receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $25,000 plus any non-affiliated bank
or broker's fee. However, an account may be opened with a smaller amount as long
as the $25,000 minimum is reached within 90 days. An institutional investor's
minimum investment will be calculated by combining all accounts it maintains
with the Fund. Accounts established through a non-affiliated bank or broker may
be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales load imposed by the Fund. Investors who purchase
Shares through a non-affiliated bank or broker may be charged an additional
service fee by that bank or broker.
The net asset value is determined as of the close of trading (normally 4:00 p.m.
Eastern time) on the New York Stock Exchange each day the New York Stock
Exchange is open, except on: (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts. However, certain
institutions may wish to use the transfer agent's subaccounting system to
minimize their internal recordkeeping requirements. The transfer agent charges a
fee based on the level of subaccounting services rendered. Institutions 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 provided which may be
related to the ownership of Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution with regard
to the services provided, the fees charged for those services, and any
restrictions and limitations imposed.
EXCHANGE PRIVILEGE
Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset value
(plus a sales load, if applicable). The ability to exchange shares is available
to shareholders residing in any state in which the shares being acquired may be
legally sold and the exchange is subject to any minimum initial or subsequent
investment amounts of the fund being acquired. Prior to any exchange, the
shareholder must receive a copy of the current prospectus of the fund or class
thereof into which an exchange is to be effected. A shareholder may obtain
further information on the exchange privilege by calling Federated Securities
Corp. or the shareholder's financial institution.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Services Company maintains a Share
account for each shareholder. Share certificates are not issued unless requested
by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just prior
to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on the
business day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin earning
dividends on the business day after the check is converted upon instruction of
the transfer agent into federal funds. Dividends are automatically reinvested on
payment dates in additional Shares of the Fund unless cash payments are
requested by contacting the Fund.
CAPITAL GAINS
Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. If at any time
the Fund shall determine it is necessary to terminate or modify this method of
redemption, shareholders would be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
be recorded. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may also be redeemed by sending a written request to the Fund. Call the
Fund for specific instructions before redeeming by letter. The shareholder will
be asked to provide in the request his or her name, the Fund name and class
name, the shareholder's account number, and the share or dollar amount
requested. If Share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail to Federated
Services Company, 500 Victory Road--2nd Floor, Quincy, Massachusetts, 02171 with
the written request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record with
the Fund, or a redemption payable other than to the shareholder of record must
have signatures on written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request, provided that the transfer agent has received
payment for the Shares from the shareholder.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders of the Trust for vote. All shares of
each portfolio in the Trust have equal voting rights, except that, in matters
affecting only a particular fund or class, only shares of that particular fund
or class are entitled to vote. As of June 6, 1995, Green Mountain Bank, Rutland,
Vermont owned 45.10% of the voting securities of the Fund, and, therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by Trustees or by a two-thirds vote of the shareholders
at a special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
Trust's outstanding shares of all portfolios entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for acts or obligations of
the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Trust.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares. Information on
the tax status of dividends and distributions is provided annually.
There are tax uncertainties with respect to whether increasing rate securities
will be treated as having an original issue discount. If it is determined that
the increasing rate securities have original issue discount, a holder will be
required to include as income in each taxable year, in addition to interest paid
on the security for that year, an amount equal to the sum of the daily portions
of original issue discount for each day during the taxable year that such holder
holds the security. There may also be tax uncertainties with respect to whether
an extension of maturity on an increasing rate note will be treated as a taxable
exchange. In the event it is determined that an extension of maturity is a
taxable exchange, a holder will recognize a taxable gain or loss, which will be
a short-term capital gain or loss if he holds the security as a capital asset,
to the extent that the value of the security with an extended maturity differs
from the adjusted basis of the security deemed exchanged therefor.
PENNSYLVANIA CORPORATE AND PERSONAL PROPERTY TAXES
In the opinion of Houston, Houston & Donnelly, counsel to the Trust:
The Trust is not subject to Pennsylvania corporate or personal property
taxes; and
Fund shares may be subject to personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania to the
extent that the portfolio securities in the Fund would be subject to such
taxes if owned directly by residents of those jurisdictions.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund advertises its total return and yield for
Institutional Service Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in Institutional Service Shares after reinvesting all
income and capital gains distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period by
the maximum offering price per share of Institutional Service Shares on the last
day of the period. This number is then annualized using semi-annual compounding.
The yield does not necessarily reflect income actually earned by Institutional
Service Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The Institutional Service Shares are sold without any sales load or other
similar non-recurring charges other than a Rule 12b-1 fee.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers one other class of shares called Institutional Shares.
Institutional Shares are sold to banks and other institutions that hold assets
as principals or in a fiduciary capacity for individuals, trusts, estates or
partnerships and are subject to a minimum initial investment of $25,000.
Institutional Shares are sold at net asset value and are distributed without a
Rule 12b-1 Plan.
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences, however, between Shares and Institutional Shares may affect
the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-235-4669 or contact their financial institution.
INTERMEDIATE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
ASSET-BACKED SECURITIES--8.5%
- ---------------------------------------------------------------------------------------------------
AUTOMOTIVE RECEIVABLES--1.6%
-------------------------------------------------------------------------------------
$ 211,527 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/1997 $ 210,243
-------------------------------------------------------------------------------------
315,561 Premier Auto Trust 1992-3, Class B, 6.25%, 11/15/1997 314,981
------------------------------------------------------------------------------------- -------------
Total 525,224
------------------------------------------------------------------------------------- -------------
HOME EQUITY RECEIVABLES--0.6%
-------------------------------------------------------------------------------------
209,748 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 204,450
------------------------------------------------------------------------------------- -------------
NON-GOVERNMENT AGENCY--MORTGAGE-BACKED SECURITIES--6.3%
-------------------------------------------------------------------------------------
400,000 Prudential Bache, Series 8, Class F, 7.965%, 3/1/2019 405,508
-------------------------------------------------------------------------------------
1,000,000 Prudential Home Mortgage 1992-32, Class A6, 7.50%, 10/25/2022 959,375
-------------------------------------------------------------------------------------
500,000 Residential Funding Mortgage Corp. 1993-S26, Class A10, 7.50%,
7/25/2023 449,740
-------------------------------------------------------------------------------------
300,000 Residential Funding Mortgage Corp. 1993-S31, Class A7, 7.00%,
9/25/2023 255,281
------------------------------------------------------------------------------------- -------------
Total 2,069,904
------------------------------------------------------------------------------------- -------------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $2,919,671) 2,799,578
------------------------------------------------------------------------------------- -------------
MORTGAGE-BACKED SECURITIES--6.5%
- ---------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--6.5%
-------------------------------------------------------------------------------------
978,323 Government National Mortgage Association, Pool 369457, 8.00%,
9/15/2024 978,313
-------------------------------------------------------------------------------------
1,172,029 Government National Mortgage Association, Pool 379983, 7.50%,
2/15/2024 1,143,443
------------------------------------------------------------------------------------- -------------
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,030,051) 2,121,756
------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--73.2%
- ---------------------------------------------------------------------------------------------------
AUTOMOTIVE--3.2%
-------------------------------------------------------------------------------------
1,000,000 General Motors Corp., Deb., 9.125%, 7/15/2001 1,067,000
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--CONTINUED
- ---------------------------------------------------------------------------------------------------
BANKING--11.7%
-------------------------------------------------------------------------------------
$ 1,000,000 Banco Santander, Bank Guarantee, 7.875%, 4/15/2005 $ 998,030
-------------------------------------------------------------------------------------
1,000,000 Bank of Montreal, Sub. Note, 7.80%, 4/1/2007 997,300
-------------------------------------------------------------------------------------
500,000 Bank One, Milwaukee, WI N.A., Sub. Note, 6.625%, 4/15/2003 471,595
-------------------------------------------------------------------------------------
1,000,000 National Bank of Canada, Montreal, Sub. Note, 8.125%, 8/15/2004 1,012,560
-------------------------------------------------------------------------------------
400,000 PNC Funding Corp., Sub. Note, 6.875%, 3/1/2003 377,096
------------------------------------------------------------------------------------- -------------
Total 3,856,581
------------------------------------------------------------------------------------- -------------
EDUCATION--3.2%
-------------------------------------------------------------------------------------
1,000,000 Columbia University, Medium Term Note, 8.62%, 2/21/2001 1,057,940
------------------------------------------------------------------------------------- -------------
FINANCE--AUTOMOTIVE--3.8%
-------------------------------------------------------------------------------------
1,000,000 Ford Capital BV, Deb., 9.00%, 8/15/1998 1,048,450
-------------------------------------------------------------------------------------
200,000 General Motors Acceptance Corp., Medium Term Note, 9.40%,
5/18/1995 200,458
------------------------------------------------------------------------------------- -------------
Total 1,248,908
------------------------------------------------------------------------------------- -------------
FINANCE--RETAIL--3.3%
-------------------------------------------------------------------------------------
1,000,000 Commercial Credit Co., Note, 6.00%, 4/15/2000 942,340
-------------------------------------------------------------------------------------
140,000 Household Finance Corp., Deb., 8.95%, 9/15/1999 148,135
------------------------------------------------------------------------------------- -------------
Total 1,090,475
------------------------------------------------------------------------------------- -------------
FINANCIAL INTERMEDIARIES--9.4%
-------------------------------------------------------------------------------------
1,000,000 Equitable Cos., Inc., Sr. Note, 9.00%, 12/15/2004 1,052,370
-------------------------------------------------------------------------------------
1,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 994,850
-------------------------------------------------------------------------------------
1,000,000 Norwest Corp., Deb., 9.25%, 5/1/1997 1,040,860
------------------------------------------------------------------------------------- -------------
Total 3,088,080
------------------------------------------------------------------------------------- -------------
FOOD PRODUCTS--3.0%
-------------------------------------------------------------------------------------
1,000,000 Grand Metropolitan Investment Corp., Company Guaranty, 7.00%,
6/15/1999 987,280
------------------------------------------------------------------------------------- -------------
HEALTH SERVICES--3.2%
-------------------------------------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp., Medium Term Note, 8.70%, 2/10/2010 1,061,910
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
CORPORATE BONDS--CONTINUED
- ---------------------------------------------------------------------------------------------------
INSURANCE--4.0%
-------------------------------------------------------------------------------------
$ 1,000,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 $ 834,130
-------------------------------------------------------------------------------------
500,000 Sunamerica, Inc., Medium Term Note, 6.58%, 1/15/2002 465,510
------------------------------------------------------------------------------------- -------------
Total 1,299,640
------------------------------------------------------------------------------------- -------------
METALS & MINING--3.2%
-------------------------------------------------------------------------------------
1,000,000 Alcan Aluminum Ltd., Deb., 9.20%, 3/15/2001 1,048,780
------------------------------------------------------------------------------------- -------------
MUNICIPAL SERVICES--3.3%
-------------------------------------------------------------------------------------
1,000,000 Pittsburgh, PA Urban Redevelopment Authority, 9.07%, 9/1/2014 1,073,840
------------------------------------------------------------------------------------- -------------
RAIL INDUSTRY--0.8%
-------------------------------------------------------------------------------------
250,000 CSX Corp., Deb., 9.50%, 11/15/1995 254,068
------------------------------------------------------------------------------------- -------------
RETAILERS--3.6%
-------------------------------------------------------------------------------------
1,070,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,167,006
------------------------------------------------------------------------------------- -------------
SOVEREIGN GOVERNMENT--9.2%
-------------------------------------------------------------------------------------
1,000,000 Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 952,320
-------------------------------------------------------------------------------------
1,000,000 Hydro-Quebec, Deb., 8.05%, 7/7/2024 1,017,990
-------------------------------------------------------------------------------------
1,000,000 Victoria Public Authority, Local Gov't. Guarantee, 8.25%, 1/15/2002 1,034,375
------------------------------------------------------------------------------------- -------------
Total 3,004,685
------------------------------------------------------------------------------------- -------------
TELECOMMUNICATIONS & CELLULAR--2.6%
-------------------------------------------------------------------------------------
800,000 New England Telephone & Telegraph, Deb., 8.625%, 8/1/2001 849,488
------------------------------------------------------------------------------------- -------------
UTILITIES--5.7%
-------------------------------------------------------------------------------------
400,000 Duke Power Co., Medium Term Note, 5.78%, 7/8/1999 379,612
-------------------------------------------------------------------------------------
180,000 Minnesota Power and Light Co., 1st Mortgage Bond, 7.75%, 6/1/2007 180,337
-------------------------------------------------------------------------------------
750,000 Pedernales Electric Coop, 10.875%, 9/1/2017 834,375
-------------------------------------------------------------------------------------
500,000 Wisconsin Telephone Co., Deb., 6.25%, 8/1/2004 458,120
------------------------------------------------------------------------------------- -------------
Total 1,852,444
------------------------------------------------------------------------------------- -------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $23,860,657) 24,008,125
------------------------------------------------------------------------------------- -------------
FEDERAL HOME LOAN MORTGAGE CORP.--3.0%
- ---------------------------------------------------------------------------------------------------
1,000,000 7.61%, 9/1/2004 (IDENTIFIED COST $943,060) 985,280
------------------------------------------------------------------------------------- -------------
</TABLE>
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------- -------------
*REPURCHASE AGREEMENT--9.6%
- ---------------------------------------------------------------------------------------------------
$ 3,163,000 J.P. Morgan Securities, Inc., 5.97%, dated 4/28/1995, due 5/1/1995
(AT AMORTIZED COST) $ 3,163,000
------------------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $32,916,439) $ 33,077,739+
------------------------------------------------------------------------------------- -------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations. The investment in the repurchase agreement is through
participation in a joint account with other Federated Funds.
+ The cost of investments for federal tax purposes amounts to $32,916,439. The
net unrealized appreciation on a federal tax cost basis amounts to $161,300,
which is comprised of $504,002 appreciation and $342,702 depreciation at April
30, 1995.
Note: The categories of investments are shown as a percentage of net assets
($32,784,148) at
April 30, 1995.
(See Notes which are an integral part of the Financial Statements)
INTERMEDIATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost $32,916,439) $ 33,077,739
- ---------------------------------------------------------------------------------------------------
Cash 35,229
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 917,890
- ---------------------------------------------------------------------------------------------------
Income receivable 560,867
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 89,665
- ---------------------------------------------------------------------------------------------------
Deferred expenses 23,185
- --------------------------------------------------------------------------------------------------- -------------
Total assets 34,704,575
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased $ 1,721,187
- -------------------------------------------------------------------------------------
Dividends payable 159,071
- -------------------------------------------------------------------------------------
Payable for shares redeemed 5,479
- -------------------------------------------------------------------------------------
Accrued expenses 34,690
- ------------------------------------------------------------------------------------- ------------
Total liabilities 1,920,427
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 3,432,765 shares outstanding $ 32,784,148
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 33,157,755
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 161,300
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (534,907)
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 32,784,148
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE, Offering Price and Redemption Proceeds Per Share:
- ---------------------------------------------------------------------------------------------------
Institutional Shares ($32,507,679 / 3,403,817 shares outstanding) $9.55
- --------------------------------------------------------------------------------------------------- -------------
Institutional Service Shares ($276,469 / 28,948 shares oustanding) $9.55
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------
Interest $ 2,047,927
- ---------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------
Investment advisory fee $ 134,734
- ---------------------------------------------------------------------------------------
Administrative personnel and services fee 141,836
- ---------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 75,105
- ---------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 24,796
- ---------------------------------------------------------------------------------------
Fund share registration costs 26,253
- ---------------------------------------------------------------------------------------
Legal fees 1,114
- ---------------------------------------------------------------------------------------
Printing and postage 18,107
- ---------------------------------------------------------------------------------------
Directors'/Trustees' fees 3,444
- ---------------------------------------------------------------------------------------
Auditing fees 15,216
- ---------------------------------------------------------------------------------------
Insurance premiums 5,164
- ---------------------------------------------------------------------------------------
Organizational expense 4,528
- ---------------------------------------------------------------------------------------
Distribution service fee--Institutional Service Shares 84
- ---------------------------------------------------------------------------------------
Shareholder service fee--Institutional Service Shares 489
- ---------------------------------------------------------------------------------------
Miscellaneous 5,436
- --------------------------------------------------------------------------------------- ----------
Total expenses 456,306
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee $ 134,734
- ---------------------------------------------------------------------------
Reimbursement of other operating expenses 192,851 327,585
- --------------------------------------------------------------------------- ---------- ----------
Net expenses 128,721
- --------------------------------------------------------------------------------------------------- ------------
Net investment income 1,919,206
- --------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (527,053)
- ---------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 848,090
- --------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments 321,037
- --------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 2,240,243
- --------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------
Net investment income $ 1,919,206 $ 279,816
- --------------------------------------------------------------------------------
Net realized gain (loss) on investments ($380,818 net loss and $0, respectively,
as computed for federal income tax purposes) (527,053) (7,854)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 848,090 (686,790)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets resulting from operations 2,240,243 (414,828)
- -------------------------------------------------------------------------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------
Distributions from net investment income:
- --------------------------------------------------------------------------------
Institutional Shares (1,903,482) (276,248)
- --------------------------------------------------------------------------------
Institutional Service Shares (15,724) (3,568)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets from distributions to shareholders (1,919,206) (279,816)
- -------------------------------------------------------------------------------- ------------- -------------
SHARE TRANSACTIONS--
- --------------------------------------------------------------------------------
Proceeds from sale of Shares 21,784,834 25,769,938
- --------------------------------------------------------------------------------
Net asset value of Shares issued to shareholders in payment of distributions
declared 238,460 11,515
- --------------------------------------------------------------------------------
Cost of Shares redeemed (7,487,433) (7,159,559)
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets from fund share transactions 14,535,861 18,621,894
- -------------------------------------------------------------------------------- ------------- -------------
Change in net assets 14,856,898 17,927,250
- --------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------
Beginning of period 17,927,250 0
- -------------------------------------------------------------------------------- ------------- -------------
End of period $ 32,784,148 $ 17,927,250
- -------------------------------------------------------------------------------- ------------- -------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(See Notes which are an integral part of the Financial Statements).
INTERMEDIATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of two, diversified
portfolios. The financial statements included herein present only those of
Intermediate Income Fund (the "Fund"). The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by
an independent pricing service. Listed corporate bonds and other fixed
income and asset-backed securities, unlisted securities and other
fixed-income and asset-backed securities and/or private placements and
short-term securities are valued at the prices provided by an independent
pricing service. Short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the Internal
Revenue Code as amended (the "Code"). Distributions to shareholders are
recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary. At April 30, 1995, the Fund, for
federal tax purposes, had a capital loss carryforward of $380,818 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 distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax. Pursuant to
the Code, such capital loss carryforward will expire in 2003 ($380,818).
Additionally, net capital losses of $154,089 attributable to security
transactions incurred after October 31, 1994, are treated as arising on May
1, 1995, 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.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized using the straight-line method not to exceed a period of five
years from the Fund's commencement date.
OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Shares sold 2,305,891 $ 21,616,701 2,565,565 $ 25,464,130
- ---------------------------------------------------------
Shares issued to shareholders in
payment of distributions declared 25,256 236,376 1,194 11,509
- ---------------------------------------------------------
Shares redeemed (785,508) (7,366,801) (708,581) (7,091,038)
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Institutional Shares
transactions 1,545,639 $ 14,486,276 1,858,178 $ 18,384,601
- --------------------------------------------------------- ---------- ------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1995 1994*
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Shares sold 17,937 $ 168,133 30,700 $ 305,815
- ---------------------------------------------------------
Shares issued to shareholders in
payment of distributions declared 223 2,084 -- --
- ---------------------------------------------------------
Shares redeemed (12,830) (120,632) (7,082) (68,522)
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Institutional
Service Shares transactions 5,330 49,585 23,618 $ 237,293
- --------------------------------------------------------- ---------- ------------- ---------- -------------
Net change resulting from Fund share
transactions 1,550,969 $ 14,535,861 1,881,796 $ 18,621,894
- --------------------------------------------------------- ---------- ------------- ---------- -------------
</TABLE>
*For the period from December 15, 1993 (date of initial public offering) to
April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. The Adviser can modify or terminate this voluntary waiver
and reimbursement at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The FAS fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors for
the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. The distributor
may voluntarily choose to waive a portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average daily net assets of the Fund for the period. This fee is to obtain
certain services for shareholders and to maintain the shareholder accounts.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. This fee is based on the size, type, and number of accounts and
transactions made by shareholders.
INTERFUND TRANSACTIONS--During the year ended April 30, 1995, the Fund engaged
in purchase and sale transactions with funds that have a common investment
adviser (or affiliated investment advisers), common Directors/Trustees, and/or
common Officers. These transactions were made at current market value pursuant
to Rule 17a-7 under the Act amounting to $67,348,780 and $70,715,829,
respectively.
ORGANIZATIONAL EXPENSES--Organizational expenses ($47,948) and start-up
administrative service expenses ($38,751) were borne initially by Adviser. The
Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five year period following December
15, 1993 (date the Fund first became effective). For the period ended April 30,
1995, the Fund paid $4,528 and $3,660, respectively, pursuant to this agreement.
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended
April 30, 1995, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchases $ 39,464,031
- --------------------------------------------------------------------------------------------------- -------------
Sales $ 22,003,763
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
INTERMEDIATE INCOME FUND
(a portfolio of Federated Income Securities Trust):
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Intermediate Income Fund (one of the portfolios
comprising Federated Income Securities Trust), as of April 30, 1995, and the
related statement of operations for the year then ended, and the statement of
changes in net assets and financial highlights (see page 2 of this prospectus)
for each of the two 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 April
30, 1995, by correspondence with the custodian and brokers. 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
Intermediate Income Fund at April 30, 1995, and the results of its operations
for the year ended, and the changes in its net assets and financial highlights
for each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 9, 1995
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Intermediate Income Fund
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and P.O. Box 8602
Trust Company Boston, Massachusetts 02266-8602
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Agent
Federated Shareholder Services Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
INTERMEDIATE
INCOME
FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company
June 30, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
31420C506
3090804A-SS (6/95)
Intermediate Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
Institutional Service Shares
Combined Statement of Additional Information
The Institutional Shares and Institutional Service Shares of
Intermediate Income Fund (the "Fund") represent interests in a
diversified investment portfolio in Federated Income Securities Trust
(the "Trust").
This Combined Statement of Additional Information should be read with
the respective prospectus for either class of shares dated June 30,
1995. This Statement is not a prospectus itself. To receive a copy of
either prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated June 30, 1995
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Collateralized Mortgage
Obligations 1
Medium Term Notes and Deposit
Notes 1
Average Life 1
Weighted Average Portfolio
Maturity 1
Weighted Average Portfolio
Duration 2
When-Issued and Delayed Delivery
Transactions 2
Foreign Currency Transactions 2
Lending of Portfolio Securities 4
Restricted and Illiquid Securities 4
Repurchase Agreements 4
Portfolio Turnover 5
Reverse Repurchase Agreements 5
Investment Limitations 5
TRUST MANAGEMENT 7
Officers and Trustees 7
Fund Ownership 12
Trustee's Compensation 12
Trustee Liability 13
INVESTMENT ADVISORY SERVICES 13
Adviser to the Fund 13
Other Advisory Services 13
Other Related Services 13
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 14
BROKERAGE TRANSACTIONS 14
PURCHASING SHARES 14
Distribution Plan (Institutional
Service Shares only) and
Shareholder Services Plan 14
Other Payments to Financial
Institutions 15
DETERMINING NET ASSET VALUE 15
Determining Value of Securities 15
REDEEMING SHARES 15
Redemption in Kind 15
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 16
YIELD 17
PERFORMANCE COMPARISONS 17
ABOUT FEDERATED INVESTORS 18
Mutual Fund Market 18
APPENDIX 19
General Information About the Fund
The Fund is a portfolio of Federated Income Securities Trust (the "Trust"),
which was established as a Massachusetts business trust under a Declaration of
Trust dated January 24, 1986. On December 31, 1991, the shareholders voted to
permit the Trust to offer one or more separate series and classes of shares
and to change the name of the Trust from "Federated Floating Rate Trust" to
"Federated Income Securities Trust."
Shares of the Fund are offered in two classes: Institutional Shares and
Institutional Service Shares. This Combined Statement of Additional
Information relates to the Institutional Shares and Institutional Service
Shares (individually and collectively referred to as the "Shares") of the
Fund.
Investment Objective and Policies
The Fund's investment objective is to provide current income. The investment
objective may not be changed without the prior approval of the Fund's
shareholders. The policies described below may be changed by the Board of
Trustees without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective.
Collateralized Mortgage Obligations
The following example illustrates how mortgage cash flows are prioritized in
the case of CMOs. Most of the CMOs in which the Fund may invest use the same
basic structure.
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four tranches of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final tranche (Z bond) typically
receives any excess income from the underlying investments after payments
are made to the other tranches and receives no principal or interest
payments until the shorter maturity tranches have been retired, but then
receives all remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity tranche (or A bonds).
When those securities are completely retired, all principal payments are
then directed to the next-shortest-maturity security tranche (or B bond).
This process continues until all of the tranches have been completely
retired.
Because the cash flow is distributed sequentially instead of pro rata, as with
pass-through securities, the cash flows and average lives of CMOs are more
predictable, and there is a period of time during which the investors in the
longer-maturity classes receive no principal paydowns. One or more of the
tranches often bear interest at an adjustable rate. The interest portion of
these payments is distributed by the Fund as income, and the principal portion
is reinvested.
Medium Term Notes and Deposit Notes
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the respective prospectuses. MTNs and Deposit
Notes trade like commercial paper, but may have maturities from 9 months to
ten years and are rated like corporate debt obligations.
Average Life
Average life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance.
Weighted Average Portfolio Maturity
The Fund will determine its dollar-weighted present average portfolio maturity
by assigning a "weight" to each portfolio security based upon the pro rata
market value of such portfolio security in comparison to the market value of
the entire portfolio. The remaining maturity of each portfolio security is
then multiplied by its weight, and the results are added together to determine
the weighted average maturity of the portfolio. For purposes of calculating
its dollar-weighted average portfolio maturity, the Fund will treat (a) asset-
backed securities as having a maturity equal to their estimated weighted-
average maturity and (b) variable and floating rate instruments as having a
remaining maturity commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate. The average maturity
of asset-backed securities will be calculated based upon assumptions
established by the investment adviser as to the probable amount of principal
prepayments weighted by the period until such prepayments are expected to be
removed.
Fixed rate securities hedged with interest rate swaps or caps will be treated
as floating or variable rate securities based upon the interest rate index of
the swap or cap; floating and variable rate securities hedged with interest
rate swaps or floors will be treated as having a maturity equal to the term of
the swap or floor. In the event that the Fund holds an interest rate swap, cap
or floor that is not hedging another portfolio security, the swap, cap or
floor will be treated as having a maturity equal to its term and a weight
equal to its notional principal amount for such term.
Weighted Average Portfolio Duration
Duration is calculated by dividing the sum of the time-weighted present values
of cash flows of a security or portfolio of securities, including principal
and interest payments, by the sum of the present values of the cash flows.
Certain debt securities, such as asset-backed securities, may be subject to
prepayment at irregular intervals. The duration of these instruments will be
calculated based upon assumptions established by the investment adviser as to
the probable amount and sequence of principal prepayments.
Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) +
PVCF3(3) + . . . . . . . . + PVCFn(n)
PVTCF PVTCF
PVCTF PVCTF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity
The duration of interest rate agreements, such as interest rate swaps, caps
and floors, is calculated in the same manner as other securities. However,
certain interest rate agreements have negative durations, which the Fund may
use to reduce its weighted average portfolio duration.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the
Fund's records at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
Foreign Currency Transactions
When the Fund invests in foreign securities, such securities may be
denominated in foreign currency, and the Fund may temporarily hold funds in
foreign currencies. Thus, the value of the Fund's shares can be affected by
changes in currency exchange rates. The value of the Fund's investments
denominated in foreign currencies and any cash it holds in foreign currencies
will depend on the relative strength of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between foreign currencies and the
U.S. dollar. The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign exchange
market as well as by political factors. Changes in the foreign currency
exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
and gains, if any, to be distributed to shareholders by the Fund. Accordingly,
the Fund's ability to achieve its investment objective will depend, to a
certain extent, on favorable exchange rates.
Subject to certain percentage limitations, the Fund may engage in foreign
currency exchange transactions to protect against uncertainty in the level of
future exchange rates. The Fund expects to engage in foreign currency exchange
transactions in connection with the purchase and sale of portfolio securities
("transaction hedging"), and to protect the value of specific portfolio
positions ("position hedging").
The Fund may engage in "transaction hedging" to protect against a change in
the foreign currency exchange rate between the date on which the Fund
contracts to purchase or sell the security and the settlement date, or to
"lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. For that purpose, the Fund may purchase or sell a foreign
currency on a spot (or cash) basis at the prevailing spot rate in connection
with the settlement of transactions in portfolio securities denominated in
that foreign currency.
If conditions warrant, the Fund may also enter into contracts to purchase or
sell foreign currencies at a future date ("forward contracts") and purchase
and sell foreign currency futures contracts as a hedge against changes in
foreign currency exchange rates between the trade and settlement dates on
particular transactions and not for speculation. A foreign currency forward
contract is a negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate. Foreign currency
futures contracts are standardized exchange-traded contracts and have margin
requirements.
For transaction hedging purposes, the Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures
contracts and on foreign currencies.
The Fund may engage in "position hedging" to protect against the decline in
the value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of currency
or securities which the Fund intends to buy, when the Fund holds cash reserves
and short-term investments). For position hedging purposes, the Fund may
purchase or sell foreign currency futures contracts and foreign currency
forward contracts, and may purchase put or call options on foreign currency
futures contracts and on foreign currencies on domestic and foreign exchanges
or over-the-counter markets. In connection with position hedging, the Fund may
also purchase or sell foreign currency on a spot basis.
The Fund may write covered call options on foreign currencies to offset some
of the costs of hedging those currencies. Over-the-counter transactions are
less liquid than exchange-traded transactions, and are subject to the Fund's
15% limitation on illiquid investments. The Fund will engage in over-the-
counter transactions only when appropriate exchange-traded transactions are
unavailable and when, in the opinion of the Fund's investment adviser, the
pricing mechanism and liquidity are satisfactory and the participants are
responsible parties likely to meet their contractual obligations. The Fund's
ability to engage in hedging and related option transactions may be limited by
tax considerations.
Hedging transactions involve costs and may result in losses. Unlike entering
directly into a foreign currency futures contract or directly purchasing
foreign currencies, which require the purchaser to buy the security on a set
date at a specified price, the purchase of a put option entitles, but does not
obligate, its purchaser to decide, on or before a future date, whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related foreign currency futures contract will also
decrease in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the Fund
for the original option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the position.
To do so, it would simultaneously enter into the futures contract of the type
underlying the option (for a price less than the strike price of the option)
and exercise the option. The Fund would then deliver the foreign currency
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the date
provided in the option contract, and only the premium paid for the contract
will be lost.
When the Fund writes a call option on foreign currency, it is undertaking the
obligation of assuming a short position (i.e., selling a foreign currency) at
the fixed strike price at any time during the life of the option if the option
is exercised. As currency exchange rates fall, the Fund's obligation under a
call option on foreign currencies costs less to fulfill, causing the value of
the Fund's call option position to increase.
In other words, as the exchange rate goes down below the strike price, the
buyer of the option has no reason to exercise the call, so that the Fund keeps
the premium received for the option. This premium can offset some or all of
the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option. If
the hedge is successful, the cost of the second option will be less than the
premium received by the Fund for the initial option. The net premium income of
the Fund will then offset some or all of the decrease in value of the hedged
currencies.
The Fund will not maintain open positions in foreign currency futures
contracts it has sold or call options it has written on foreign currencies if,
in the aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the futures contracts. If this
limitation is exceeded at any time, the Fund will take prompt action to close
out a sufficient number of open contracts to bring its open futures and
options positions within this limitation.
Risks. When the Fund invests in foreign currency futures contracts and
foreign currency forward contracts, and options thereon as hedging
devices, there is a risk that the prices of the securities subject to
the futures contract, forward contract, or option thereon may not
correlate perfectly with the prices of the securities in the Fund's
portfolio. This may cause the futures contract, forward contract, and
any related options to react differently than the portfolio securities
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors, such as interest rate or currency exchange rate movements. In
these events, the Fund may lose money on the futures contract, forward
contract or option. With respect to futures contracts, the Fund may be
unable to anticipate the extent of its losses.
It is not certain that a secondary market for positions in futures
contracts, forward contracts or for options will exist at all times.
Although the investment adviser will consider liquidity before entering
into such transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular futures contract,
forward contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this
secondary market.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
Restricted and Illiquid Securities
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
Rule 144A. The Fund believes that the Staff of the SEC has left the question
of determining the liquidity of all restricted securities eligible for resale
under Rule 144A to the Trustees. The Trustees consider the following criteria
in determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements, and these securities are marked to market daily. To
the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor
of the Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Trustees.
Portfolio Turnover
While the Fund does not intend to engage in substantial short-term trading,
from time to time it may sell portfolio securities for investment reasons
without considering how long they have been held. For example, the Fund would
do this:
o to take advantage of short-term differentials in yields or market
values;
o to take advantage of new investment opportunities;
o to respond to changes in the creditworthiness of an issuer; or
o to try to preserve gains or limit losses.
Any such trading would increase the Fund's portfolio turnover and its
transaction costs. The Fund will not attempt to set or meet any arbitrary
portfolio turnover rate since turnover is incidental to transactions
considered necessary to achieve the Fund's investment objective. However, it
is expected that the portfolio turnover rate generally will not exceed 100%.
For the fiscal years ended April 30,1995 and April 30, 1994, the portfolio
turnover rates were 88% and 0%, respectively.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Investment Limitations
Selling Short and Buying On Margin
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of the Fund's total assets are
outstanding.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the time
of the borrowing. For purposes of this limitation, the following are not
deemed to be pledges: margin deposits for the purchase and sale of
futures contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the purchase
of securities on a when-issued basis.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
Investing in Commodities
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving futures contracts and related options.
Underwriting
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
Lending Cash or Securities
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent
the Fund from purchasing or holding U.S. government obligations, money
market instruments, variable rate demand notes, bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by the Fund's investment objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees.
Investing in Illiquid Securities
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits with maturities over seven days, interest rate swaps, caps and
floors determined by the investment adviser to be illiquid, and certain
securities not determined to be liquid under guidelines established by
the Trustees.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may
purchase the securities of issuers which invest in or sponsor such
programs.
Investing in New Issuers
The Fund will not invest more than 5% of the value of its total assets
in portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
the Trust
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser
owning, individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
Investing in Put Options
The Fund will not purchase put options on foreign currency futures and
foreign currencies, unless the underlying securities are held in the
Fund's portfolio and not more than 5% of the value of the Fund's total
assets would be invested in premiums on open put options.
Writing Covered Call Options
The Fund will not write call options on securities unless the underlying
securities are held in a Fund's portfolio, or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Fund will not
write call options in excess of 25% of the value of its net assets.
Investing in Warrants
The Fund will not invest more than 5% of its assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on nationally recognized stock
exchanges to 2% of its total assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general.
Purchasing Securities to Exercise Control
The Fund will not purchase securities of a company for purposes of
exercising control or management.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items. '
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales
loads of less than 1.00% of the offering price of such securities. The Fund
will purchase securities of closed-end investment companies only in open
market transactions involving any customary brokers' commissions. However,
these limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acquisition of assets. While it is a
policy to waive advisory fees on Fund assets invested in securities of other
open-end investment companies, it should be noted that investment companies
incur certain expenses such as custodian and transfer agency fees and,
therefore, any investment by the Fund in shares of another investment company
would be subject to such duplicate expenses.
The Fund has not borrowed money or invested in reverse repurchase agreements
during the last fiscal year and has no present intent to do so in the coming
fiscal year.
Trust Management
Officers and Trustees
Officers and Trustees are listed with their addresses, principal occupations
during the past five years, birthdates and present positions, including any
affiliation with Federated Management, Federated Investors, Federated
Securities Corp., Federated Services Company, Federated Administrative
Services, Federated Shareholder Services, and the Funds (as defined below).
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Com
Company; Chief Executive Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J. Christopher Donahue,
Vice President of the Company.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds;
formerly, President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director, Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer & Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer & Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.
Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Trustee
Consultant; State Representative, Commonwealth of Massachusetts; Director,
Trustee, or Managing General Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston Corporation.
Gregor F. Meyer
Henny, Kochuba, Meyer & Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney-at-law; Partner, Henny, Kochuba, Meyer & Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director, Trustee or Managing General Partner of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President
Emeritus, University of Pittsburgh; founding Chairman, National Advisory
Council for Environmental Policy and Technology and Federal Emergency
Management Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
st
staff member, Federated Securities Corp. and Federated Administrative
Services.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee, Federated Administrative
Services, Federated Services Company, and Federated Shareholder Services;
President or Vice President of the Funds; Director, Trustee, or Managing
General Partner of some of the Funds. Mr. Donahue is the son of John F.
Donahue, Chairman and Director of the Company.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director, Federated
Research Corp.; Chairman and Director, Federated Securities Corp.; President
or Vice President of some of the Funds; Director or Trustee of some of the
Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice President
and Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice
President, Treasurer, and Director, Federated Securities Corp.; Trustee,
Federated Services Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative Services; Trustee or Director
of some of the Funds; Vice President and Treasurer of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated Investors;
Vice President, Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and Secretary, Federated
Research Corp. and Passport Research, Ltd.; Trustee, Federated Services
Company; Executive Vice President, Secretary, and Trustee, Federated
Administrative Services; Secretary and Trustee, Federated Shareholder
Services; Executive Vice President and Director, Federated Securities Corp.;
Vice President and Secretary of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Cash Management Trust; Automated Government Money
Trust; California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA
Trust; Federated Government Trust; Federated Growth Trust; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; 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: 3-5 Years; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for
U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust;; Insurance Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money Market
Trust; Liberty Term Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran Funds; Peachtree
Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star
Funds; The Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust For Government Cash Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; The Virtus Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees as a group own less than 1% of the Fund's outstanding
shares.
As of June 6, 1995, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: First National Bank & Trust
Escanaba, Michigan, owned approximately 866,968 shares (25.15%); First
Commonwealth Trust Company, Indiana, Pennsylvania, owned approximately 327,018
shares (9.49%); The Sunburst Bank, Jackson, Mississippi, owned approximately
469,535 shares (13.62%); First American Bank Kane County, Dundee, Illinois,
owned approximately 284,029 shares (8.24%); Sunburst Bank, Baton Rouge,
Louisiana, owned approximately 259,703 shares (7.53%); Federated Investors
Employees Profit Sharing/401K Plan, Pittsburgh, Pennsylvania, owned
approximately 229,754 shares (6.67%).
As of June 6, 1995, the following shareholders of record owned 5% or more of
the outstanding Institutional Service Shares of the Fund: Green Mountain Bank,
Rutland, Vermont, owned approximately 13,411 shares (45.10%); First United
National Bank & Trust Co., Great Bend, Kansas, owned approximately 6,326
shares (21.27%); Towne and Country Racquet Club, Great Bend, Kansas, owned
approximately 1,562 shares (5.25%); SEC Corp., Jersey City, New Jersey, owned
approximately 4,187 shares (14.08%).
Trustee's Compensation
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST *# FROM FUND COMPLEX +
John F. Donahue $ 0 $ 0 for the Trust and
Trustee 68 other investment companies
in the Fund Complex
John T. Conroy, Jr. $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
William J. Copeland $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
James E. Dowd $ 1,508 $117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Lawrence D. Ellis, M.D. $ 1,371 $106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Edward L. Flaherty, Jr. $ 1,508 $ 117,202 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Peter E. Madden $ 1,162 $ 90,563 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Gregor F. Meyer $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
John E. Murray, Jr. $ 464 $ 0 for the Trust and
Trustee 0 other investment companies
in the Fund Complex
Wesley W. Posvar $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
Marjorie P. Smuts $ 1,371 $ 106,460 for the Trust and
Trustee 64 other investment companies
in the Fund Complex
*Information is furnished for the fiscal year ended April 30, 1995.
#The aggregate compensation is provided for the Trust which is comprised of
two portfolios.
+The information is provided for the last calendar year.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All of the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder of
the Fund 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
Trust.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus. For the fiscal year ended
April 30, 1995 and for the period from December 15, 1993 (date of
initial public offering) to April 30, 1994, the Fund's Adviser earned
$134,734 and $22,003, respectively, all of which was waived because of
undertakings to limit the Fund's expenses. In addition, the Adviser
reimbursed other operating expenses of $192,851 and $39,355,
respectively, for the same periods.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, the Adviser will reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
Other Advisory Services
Federated Research Corp. receives fees from certain depository institutions
for providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may advise
such clients to purchase or redeem shares of investment companies, such as the
Fund, which are managed, for a fee, by Federated Research Corp. or other
affiliates of Federated Investors, such as the Adviser, and may advise such
clients to purchase and sell securities in the direct markets. Further,
Federated Research Corp., and other affiliates of the Adviser, may, from time
to time, provide certain consulting services and equipment to depository
institutions in order to facilitate the purchase of shares of funds offered by
Federated Securities Corp.
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 shares of funds offered by Federated Securities Corp.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in each prospectus. Prior to March 1, 1994, Federated Administrative
Services Inc., also a subsidiary of Federated Investors, served as the Fund's
administrator. (For purposes of this Statement of Additional Information,
Federated Administrative Services and Federated Administrative Services, Inc.,
may hereinafter collectively be referred to as the "Administrators".) For the
fiscal year ended April 30, 1995, Federated Administrative Services earned
$141,836. For the fiscal year ended April 30, 1994, the Administrators,
collectively earned $1,077. Dr. Henry J. Gailliot, an officer of Federated
Management, the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a Director of Commercial Data Services,
Inc. a company which provides computer processing services to Federated
Administrative Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Trust's accounting records. The
fee paid for this service is based upon the level of the Fund's average net
assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser
and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage
and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising other accounts. To the extent
that receipt of these services may supplant services for which the Adviser or
its affiliates might otherwise have paid, it would tend to reduce their
expenses.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days on
which the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Fund is explained in the respective prospectuses
under "Investing in Institutional Shares" and "Investing in Institutional
Service Shares."
Distribution Plan (Institutional Service Shares only) and Shareholder Services
Plan
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities,
and various clerical, supervisory, computer, and other personnel as necessary
or beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and
assisting clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan (Institutional Service Shares only), the
Board of Trustees expects that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objective. By identifying potential investors whose
needs are served by the Fund's objective, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal period ended April 30, 1995, payments in the amount of $84 were
made pursuant to the Distribution Plan (Institutional Service Shares only),
all of which was paid to financial institutions. In addition, for this period,
payments in the amount of $489 were made pursuant to the Shareholder Services
Plan (Institutional Service Shares only).
The Trustees expect that the adoption of the Distribution Plan will result in
the sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. It is also anticipated that an increase in the size of the
Fund will facilitate more efficient portfolio management and assist the Fund
in seeking to achieve its investment objective.
Other Payments to Financial Institutions
The administrative services for which the distributor will pay financial
institutions include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory, and
computer personnel as is necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding the Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such
other services as the Fund may reasonably request.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the respective prospectuses.
Determining Value of Securities
The values of the Fund's portfolio securities are determined as follows:
o according to prices provided by independent pricing services, which may
be determined without exclusive reliance on quoted prices from dealers
but which use market prices when most representative, and which may take
into account appropriate factors such as yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data
employed in determining valuations for such securities; or
o for short-term obligations with remaining maturities of 60 days or less
at the time of purchase, at amortized cost unless the Trustees determine
that particular circumstances of the security indicate otherwise.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectuses under "Redeeming Institutional Shares" and "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the Fund's portfolio. 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 their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
No portion of any income dividend paid by the Fund is expected to be eligible
for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
Capital Gains
Fixed income securities offering the current income sought by the Fund
are often purchased at a discount from par value. Because the total
yield on such securities when held to maturity and retired may include
an element of capital gain, the Fund may achieve capital gains. However,
the Fund will not hold securities to maturity for the purpose of
realizing capital gains unless current yields on those securities remain
attractive.
Capital gains or losses may also be realized on the sale of securities.
Sales would generally be made because of:
o the availability of higher relative yields; differentials in market
values;
o new investment opportunities;
o changes in creditworthiness of an issuer;
o or an attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time
the shareholder has owned the Shares.
Total Return
The Fund's average annual total returns for the one-year period ended April
30, 1995, and for the period from December 15, 1993 (date of initial public
offering) to April 30, 1995, were 7.53% and 3.54%, respectively, for
Institutional Shares, and 7.27% and 3.28%, respectively, for Institutional
Service Shares.
The average annual total return for Shares of the Fund is the average
compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of shares owned
at the end of the period by the net asset value per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
Yield
The Fund's yield for the thirty-day period ended April 30, 1995 was 7.22% and
6.97% for Institutional Shares and Institutional Service Shares, respectively.
The yield for both classes of Shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by either class of Shares over a thirty-day period by the
maximum offering price per share of either class of Shares on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, performance will be reduced for those shareholders paying
those fees.
Performance Comparisons
The performance of both classes of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or either class of Share's expenses; and
o various other factors.
Either class of share's performance fluctuates on a daily basis largely
because net earnings and the maximum offering price per share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation
of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
o 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 "intermediate-term investment grade debt funds" or
"corporate debt funds A rated" category in advertising and sales
literature.
o Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds
guaranteed by the U.S. government and quasi-federal corporations; and
publicly issued, fixed rate, non-convertible domestic bonds of companies
in industry, public utilities, and finance. The average maturity of
these bonds approximates nine years. Tracked by Lehman Brothers, the
index calculates total returns for one-month, three- month, twelve-
month, and ten-year periods and year-to-date.
o Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertisements and other sales literature for Shares may quote total returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in either
class of Shares based on monthly reinvestment of dividends over a specified
period of time.
About Federated Investors
Federated is dedicated to meeting investor needs which is reflected in its
investment decision making structured, straightforward, and consistent. This
has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands
of clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the corporate bond sector, as of December 31, 1994, Federated managed 8
money market funds, 5 investment grade and 4 high yield funds with assets
approximating $7.4 billion, $.9 billion and $.8 billion, respectively.
Federated's corporate bond decision making based on intensive, diligent
credit analysis is backed by over 20 years of experience in the corporate
bond sector. In 1972, Federated introduced one of the first high-yield bond
funds in the industry. In 17 years ending December 1994, Federated's high-
yield portfolios experienced a default rate of just 1.86%, versus 3.10% for
the market as a whole. In 1983, Federated was one of the first fund managers
to participate in the asset-backed securities market, a market totalling more
than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
Mutual Fund Market
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
Institutional
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment
and financial advisors. The marketing effort to these institutional
clients is headed by John B. Fisher, President, Institutional Sales
Division.
Trust Organizations
Other institutional clients include close relationships with more than
1,500 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 Mark R. Gensheimer, Executive Vice President, Bank Marketing &
Sales.
Broker/dealers and bank broker/dealer subsidiaries
Federated mutual funds are available to consumers through major
brokerage firms nationwide including 200 New York Stock Exchange firms
supported by more wholesalers than any other mutual fund distributor.
The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Division.
* SOURCE: Investment Company Institute
Appendix
Standard & Poor's Ratings Group ("S&P") Long Term Debt Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Moody's Investors Service, Inc. Corporate Bond Rating Definitions
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade Bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Fitch Investors Service, Inc. Long-Term Debt Ratings
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.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Standard & Poor's Ratings Group Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch Investors Service, Inc. Commercial Paper Ratings Definitions
F-1--(Very Strong Credit Quality) Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated F-
1+.
F-2--(Good Credit Quality) Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
Cusip 31420C407
Cusip 31420C506
3090804B (6/95)
INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR FISCAL YEAR ENDED APRIL 30, 1995
MANAGEMENT DISCUSSION AND ANALYSIS
---------------------------------------------------------------------------
Intermediate Income Fund (the "Fund") invests primarily in high
quality corporate debt securities rated in one of the three highest
categories (A or better) by a nationally recognized statistical rating
organization or of comparable quality. The Fund may also invest in other
high quality government and asset-backed securities. The Fund duration is
managed within a range of three to seven years.
The Fund's fiscal year ended April 30, 1995, can be characterized by
two distinctly different interest rate environments. For the first half of
the fiscal year ended October 31, 1994, the economic expansion gathered
steam and interest rates rose across the entire yield curve. As reference
points, the 2-year Treasury, 5-year Treasury, and 10-year Treasury rose
110, 85, and 77 basis points, respectively. The second half of the Fund's
fiscal year saw slower economic activity accompanied by lower interest
rates, a far more positive fixed income environment. The same referenced
Treasury securities declined in yield by 24, 61, and 75 basis points,
respectively.
In general, fundamental credit conditions continued to improve over
the entire fiscal year. Thus, the Fund benefited from its concentration in
high-quality corporate securities. Relative to duration, the Fund was
purposely positioned shorter than the benchmark index, the Lehman Brothers
Government/Corporate Total Index, over the first six months, changing to a
neutral duration position over the latter six months. As a result, the
Fund's total return performance over the entire fiscal year compared very
favorably to appropriate comparable indices due to both sector allocation
(corporates outperformed Treasuries and mortgages) and duration position
(short as rates rose and neutral as rates fell). For the fiscal year ended
April 30, 1995, Intermediate Income Fund generated a 7.53% average annual
total return for Institutional Shares and a 7.27% average annual total
return for Institutional Service Shares relative to 6.92% for the Lehman
Brothers Government/Corporate Total Index and 6.01% for the Lipper
Intermediate-Term Investment Grade Debt Funds average.*+
In recognition of the fact that the domestic economic recovery is now
over four years in length, Fund management will be closely monitoring
economic developments for signs of further slowing growth characteristics
(i.e., housing, auto sales, etc.). Should it become apparent that the
growth cycle is peaking, the Fund will move to a more neutral-to-positive
position by gradually lengthening the overall duration by purchasing longer
dated, high quality securities.
* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
+ Indices, unlike mutual funds, are unmanaged.
INTERMEDIATE INCOME FUND
(INSTITUTIONAL SERVICE SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $25,000 INVESTED IN INTERMEDIATE INCOME FUND
(INSTITUTIONAL SERVICE SHARES)
The graph below illustrates the hypothetical investment of $25,000 in the
Intermediate Income Fund (Institutional Service Shares) (the "Fund") from
December 20, 1993 (start of performance) to April 30, 1995, compared to the
Lehman Brothers Government/Corporate Total Index (LBGCTI)+, the Lipper
Intermediate-Term Investment Grade Debt Funds Average (LIIGDFA)+ and the Lipper
Corporate Debt Funds A Rated Average (LCDARA)+.
Graphic representation omitted. See Appendix.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated June
30, 1995, and, together with the financial statements contained therein,
constitutes the Fund's annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBGCTI, the LIIGDFA and the LCDARA have been adjusted to
reflect reinvestment of dividends on securities in the index and averages.
** Total return quoted reflects all applicable sales loads and contingent
deferred sales charges.
+ The LBGCTI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be be reflected in the Fund's performance. This
index is unmanaged.
+ The LIIGDFA and the LCDARA represent the average of the total returns reported
by all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective categories, and are not adjusted to reflect any
sales loads. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance. In
1995, Lipper Analytical Services, Inc. placed the Fund in the LIIGDFA
category. Prior to 1995, the Fund's comparative average was the LCDARA
category.
INTERMEDIATE INCOME FUND
(INSTITUTIONAL SHARES)
- --------------------------------------------------------------------------------
GROWTH OF $25,000 INVESTED IN INTERMEDIATE INCOME FUND
(INSTITUTIONAL SHARES)
The graph below illustrates the hypothetical investment of $25,000 in the
Intermediate Income Fund (Institutional Shares) (the "Fund") from December 20,
1993 (start of performance) to April 30, 1995, compared to the Lehman Brothers
Government/Corporate Total Index (LBGCTI)+, the Lipper Intermediate-Term
Investment Grade Debt Funds Average (LIIGDFA)+ and the Lipper Corporate Debt
Funds A Rated Average (LCDARA)+.
Graphic representation omitted. See Appendix
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
This report must be preceded or accompanied by the Fund's prospectus dated June
30, 1995, and, together with the financial statements contained therein,
constitutes the Fund's annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBGCTI, the LIIGDFA and the LCDARA have been adjusted to
reflect reinvestment of dividends on securities in the index and averages.
** Total return quoted reflects all applicable sales loads and contingent
deferred sales charges.
+ The LBGCTI is not adjusted to reflect sales loads, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index
is unmanaged.
+ The LIIGDFA and the LCDARA represent the average of the total returns reported
by all of the mutual funds designated by Lipper Analytical Services, Inc. as
falling into the respective categories, and are not adjusted to reflect any
sales loads. However, these total returns are reported net of expenses or
other fees that the SEC requires to be reflected in a fund's performance. In
1995, Lipper Analytical Services, Inc. placed the Fund in the LIIGDFA
category. Prior to 1995, the Fund's comparative average was the LCDARA
category.
[LOGO] FEDERATED SECURITIES CORP.
------------------------------------------------------------------------
Distributor
31420C407
31420C506
3090804ARS (6/95)
APPENDIX
A1. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in "Federated Short-Term Income Fund
(Institutional Shares)." The corresponding components of the line graph are
listed underneath. The Federated Short-Term Income Fund (Institutional
Shares) (the "Fund") is represented by a solid line. The Merrill Lynch Total
Return Investment Grade Corporates Index (the "MLTRIGCI") is represented by a
dotted line. The Lipper Short Investment Grade Debt Funds Average ("LSIGDFA")
is represented by a broken line. The line graph is a visual representation of
a comparison of change in value of a hypothetical $25,000 investment in the
Fund and the MLTRIGCI and LSIGDFA. The "x" axis reflects computation periods
from the start of performance (July 1, 1986) to April 30, 1995. The "y" axis
reflects the cost of the investment, ranging from $20,000 to $55,000. The
right margin reflects the ending value of the hypothetical investment in the
Fund as compared to the MLTRIGCI and LSIGDFA. The ending values are $43,666,
$50,459 and $45,090, respectively.
A2. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in"Federated Short-Term Income Fund (Institutional
Service Shares)." The corresponding components of the line graph are listed
underneath. The Federated Short-Term Income Fund (Institutional Service
Shares) (the "Fund") is represented by a solid line. The Merrill Lynch Total
Return Investment Grade Corporates Index (the "MLTRIGCI") is represented by a
dotted line. The Lipper Short Investment Grade Debt Funds Average ("LSIGDFA")
is represented by a broken line. The line graph is a visual representation of
a comparison of change in value of a hypothetical $25,000 investment in the
Fund and the MLTRIGCI and LSIGDFA. The "x" axis reflects computation periods
from the start of performance (January 24, 1992) to April 30, 1995. The "y"
axis reflects the cost of the investment, ranging from $20,000 to $35,000.
The right margin reflects the ending value of the hypothetical investment in
the Fund as compared to the MLTRIGCI and LSIGDFA. The ending values are
$28,613, $30,548 and $29,239, respectively.
A3. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in"Intermediate Income Fund (Institutional
Shares)." The corresponding components of the line graph are listed
underneath. The Intermediate Income Fund (Institutional Shares) (the "Fund")
is represented by a solid line. The Lehman Brothers Government/Corporate
Total Index (LBGCTI) is represented by a dotted line. The Lipper Corporate
Debt Funds A Rated Average ("LCDARA") is represented by a broken line. The
Lipper Intermediate-Term Investment Grade Debt Funds Average ("LIIGDFA") is
represented by a dot/dash broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical $25,000
investment in the Fund and the LBGCTI, LCDARA and LIIGDFA. The "x" axis
reflects computation periods from the start of performance (December 20, 1993)
to April 30, 1995. The "y" axis reflects the cost of the investment, ranging
from $20,000 to $30,000. The right margin reflects the ending value of the
hypothetical investment in the Fund as compared to the LBGCTI, LCDARA and
LIIGDFA. The ending values are $26,215, $25,673, $25,310 and $25,555,
respectively.
A4. The graphic presentation here displayed consists of a line graph titled
"Growth of $25,000 Invested in"Intermediate Income Fund (Institutional Service
Shares)." The corresponding components of the line graph are listed
underneath. The Intermediate Income Fund (Institutional Service Shares) (the
"Fund") is represented by a solid line. The Lehman Brothers
Government/Corporate Total Index (LBGCTI) is represented by a dotted line. The
Lipper Corporate Debt Funds A Rated Average ("LCDARA") is represented by a
broken line. The Lipper Intermediate-Term Investment Grade Debt Funds Average
("LIIGDFA") is represented by a dot/dash broken line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$25,000 investment in the Fund and the LBGCTI, LCDARA and LIIGDFA. The "x"
axis reflects computation periods from the start of performance (December 20,
1993) to April 30, 1995. The "y" axis reflects the cost of the investment,
ranging from $20,000 to $30,000. The right margin reflects the ending value
of the hypothetical investment in the Fund as compared to the LBGCTI, LCDARA
and LIIGDFA. The ending values are $26,128, $25,673, $25,555 and $25,310,
respectively.
_______________________________
* SOURCE: Investment Company Institute.
