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 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 Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1997,
with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information, or a paper copy of this prospectus, if you have
received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information, or make inquiries about the
Fund, contact the Fund at the address listed in the back of this prospectus.
The Statement of Additional Information, material incorporated by reference
into this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1997
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 11
Portfolio Turnover 11
Investment Limitations 11
Trust Information 12
Management of the Trust 12
Distribution of Institutional Service Shares 13
Administration of the Fund 13
Net Asset Value 14
Investing in Institutional Service Shares 14
Share Purchases 14
Exchange Privilege 14
Minimum Investment Required 14
What Shares Cost 14
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Redeeming Institutional Service Shares 15
Telephone Redemption 15
Redeeming Shares by Mail 15
Accounts with Low Balances 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 17
Financial Highlights -- Institutional Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
[CAPTION]
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering None
price)
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage None
of offering price)
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
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.37%
12b-1 Fee (after waiver)(2) 0.01%
Shareholder Services Fee (after waiver)(3) 0.24%
Total Other Expenses 0.43%
Total Operating Expenses (after waivers)(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 12b-1 Fee has been reduced to reflect the voluntary waiver of a
portion of the 12b-1 fee. The distributor can terminate the voluntary waiver
at any time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion. The
maximum shareholder services fee is 0.25%.
(4) The total operating expenses would have been 1.09% absent the voluntary
waivers of portions of the management fee, 12b-1 fee, and the shareholder
services 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 "Trust
Information" and "Investing in Institutional Service Shares."
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 CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
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.
1 Year $ 8
3 Years $ 26
5 Years $ 45
10 Years $100
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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 30.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized gain (loss) on -- 0.07 (0.24) (0.32) 0.19 (0.10)
investments
Total from investment operations 0.53 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 6.27% 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 5.96% 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/reimbursement(c) 0.28% 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $17,586 $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 55% 77% 38% 44% 62% 114%
</TABLE>
* Computed on an annualized basis.
(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 charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
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 ("NAV") without a
sales charge 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"),
Fitch Investors Service, Inc. ("Fitch"), or Duff & Phelps Rating Service
("Duff and Phelps"), 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 ("CCP") 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 ("ARMS"), collateralized mortgage obligations ("CMOs"), real
estate mortgage investment conduits ("REMICs"), 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 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 or Veterans
Administration, 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 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 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, ARMS
which use indices that lag changes in market rates should experience greater
price volatility than ARMS 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 CMOs 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 or the Savings Association Insurance Fund. 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, CCP 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 LIBOR 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 NAV 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 NAV 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
NAV 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 NAV, 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 NAV 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.
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. 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.
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 securites 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 NAV, 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 NAV.
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;
* 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.
TRUST INFORMATION
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 0.40%
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 at its sole discretion.
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 $110 billion invested across
more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1996, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more than
2,000 employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and through
4,500 financial institutions nationwide.
Randall S. Bauer has been the Fund's portfolio manager since October 1995.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's investment adviser since 1994. Mr. Bauer was an Assistant Vice
President of the Fund's investment adviser from 1989 to 1993. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from The
Pennsylvania State University.
Robert K. Kinsey will be a portfolio manager of the Fund effective July
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
since March 1997. From 1992 to 1995, he served as a Portfolio Manager for
Harris Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in
Finance from U.C.L.A.
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 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 PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940, (the "Plan") the distributor may be paid a
fee by the Fund in an amount, computed at an annual rate of 0.25% of the
average daily net assets of the Shares. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds,
investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or
customers.
The 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 Plan.
In addition, the Trust has entered into a Shareholder Services Agreement
with Federated Shareholder Services, a subsidiary of Federated Investors,
under which the Fund may make payments up to 0.25% of the average daily NAV
of Shares to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as
deemed appropriate, the amount stated above may be reduced voluntarily.
Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of substantial sales services,
distribution-related support services, or shareholder services. 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 Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services
Company provides these at an annual rate which relates to the average
aggregate daily net assets of all funds advised by affiliates of Federated
Investors as specified below:
MAXIMUM
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.
NET ASSET VALUE
The Fund's NAV per Share fluctuates. The NAV 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 by 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 Shareholder Services Company, c/o
State Street Bank and Trust Company, Boston, MA; 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. Shares cannot be purchased by wire on
holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the
telephone number listed on your account statement.
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 Shareholder Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered
received after payment by check is converted by the transfer agent's bank,
State Street Bank and Trust Company ("State Street Bank"), into federal
funds. This is normally the next business day after State Street Bank
receives the check.
EXCHANGE PRIVILEGE
Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their shares
for Institutional Shares of the Trust.
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 NAV next determined after an order is received.
There is no sales charge 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 NAV is determined as of the close of trading (normally 4:00 p.m. Eastern
time) on the New York Stock Exchange, Monday through Friday, except on: (i)
days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its NAV 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,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder 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 NAV. 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 NAV next determined after the Fund receives
the redemption request. Redemptions will be made on days on which the Fund
computes its NAV. 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. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative at
the telephone number listed on your account statement.
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 "Redeeming Shares
by Mail," should be considered.
REDEEMING SHARES BY MAIL
Shares may redeemed in any amount by mailing a written request to Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the Share class name;
the account name as registered with the Fund; the account number; and the
number of Shares to be redeemed or the dollar amount requested. All owners
of the account must sign the request exactly as the Shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting 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 commercial or savings bank, trust company or
savings association whose deposits are insured by an organization which is
administered by the Federal Deposit Insurance Corporation; a member firm of
a domestic stock exchange; 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.
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 NAV.
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 May 9, 1997, Trust
Company of St. Joseph, St. Joseph, MO, owned 39.35% of the voting securities
of the Fund's Institutional Service Shares, 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 shareholders at a special
meeting. A special meeting 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.
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.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly and Meck, counsel to the 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
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in 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 Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by Shares over a thirty-day period by
the maximum offering price per Share of 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 Shares and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
The Shares are sold without any sales charge or other similar non-recurring
charges other than a Rule 12b-1 fee.
Total return and yield will be calculated separately for 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.
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 NAV 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 1-800-341-7400.
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 30.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A) 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.54 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94
Net realized and
unrealized gain
(loss) on investments 0.01 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42)
Total from investment 0.55 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52
operations
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94)
Distributions in excess
of net
investment income(b) (0.01) -- -- -- -- (0.02) (0.01) -- -- --
Total distributions (0.55) (0.57) (0.54) (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94)
NET ASSET VALUE, END OF $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56
PERIOD
TOTAL RETURN(C) 6.53% 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50%
Net investment income 6.21% 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59%
Expense 0.28% 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59%
waiver/reimbursement(d)
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $214,438 $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581
Portfolio turnover 55% 77% 38% 44% 62% 114% 23% 34% 38% 77%
</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) Distributions in excess of net investment income for the years ended
April 30, 1997, 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, 1997, 1992 and
1991.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- 66.4%
AUTOMOTIVE -- 15.2%
$ 2,212,633 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 2,217,147
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,388,920
1,348,132 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 5/15/2002 1,347,862
3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 2,984,805
3,773,437 Honda Auto Receivables Grantor Trust 1995-A, Class A, 6.20%, 3,766,457
12/15/2000
6,000,000 Navistar Dealer Note Trust 1990-A, Class A-3, Floating Rate Pass Thru
Certificate,
6.548%, 1/25/2003 6,082,800
1,946,028 Navistar Financial Owner Trust 1995-A, Class B, 6.85%, 11/20/2001 1,953,384
4,860,885 Olympic Auto Receivables Trust 1995-B, Class A-2, 7.35%, 10/15/2001 4,910,369
5,000,000 Olympic Auto Receivables Trust 1996-C, Class A-5, 7.00%, 3/15/2004 5,047,350
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,958,030
2,655,000 (a)World Omni Auto Lease Securitization Trust 1996-A, Class A-1, 2,662,062
6.30%, 6/25/2002
Total 35,319,186
BANKING -- 9.9%
3,000,000 (b)Banco Nacional de Mexico S.A., Credit Card Merchant Voucher
Receivables Master Trust
1996-A, Class A-1, 6.25%, 12/1/2003 2,916,570
3,000,000 (a)BankAmerica Corp., FRN, 5.50%, 6/25/2003 2,921,250
2,083,333 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%, 2,088,708
5/15/2000
2,000,000 Chemical Master Credit Card Trust 1995-3, Class A, 6.23%, 4/15/2005 1,952,540
5,000,000 (a)Citicorp Sub., FRN, 5.538%, 10/25/2005 4,924,250
1,000,000 (a)J.P. Morgan & Co., Inc., FRN, 5.379%, 8/19/2002 979,400
3,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%, 11/7/2003 3,151,620
4,000,000 Toronto-Dominion Bank, Sub. Note, 7.875%, 8/15/2004 4,077,200
Total 23,011,538
FINANCE - COMMERICIAL -- 2.1%
5,000,000 CSXT Trade Receivables Master Trust 1993-1, Class A, 5.05%, 9/25/1999 4,921,950
FINANCE - RETAIL -- 13.0%
5,000,000 Bridgestone/Firestone Master Trust 1996-1, Class B, 6.49%, 7/1/2003 4,909,950
2,500,000 Dayton Hudson Credit Card Master Trust 1995-1, Class A, 6.10%, 2,500,325
2/25/2002
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,024,750
4,000,000 (a)First USA Credit Card Master Trust, 1994-3, Class B, 5.838%, 4,008,720
12/15/1999
4,000,000 Household Affinity Credit Card Master Trust 1993-1, Class B, 5.30%, 3,907,400
9/15/2000
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
FINANCE - RETAIL -- CONTINUED
$ 7,000,000 Household Private Label Credit Card Master Trust 1994-1, Class B, $ 7,009,170
7.55%, 6/20/2001
2,800,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 2,901,276
Total 30,261,591
GAS & ELECTRIC UTILITIES -- 2.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 9/15/2017 1,071,600
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 9.73%, 1,872,308
12/15/2017
2,000,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 2,125,380
1,300,000 Philadelphia Electric Co., 8.625%, 6/1/2022 1,349,478
Total 6,418,766
GOVERNMENT AGENCY -- 3.9%
5,000,000 Province of Manitoba, 9.50%, 10/1/2000 5,418,100
3,380,000 Swedish Export Credit Corp., 9.875%, 3/15/2038 3,632,317
Total 9,050,417
HOME EQUITY RECEIVABLES -- 6.8%
1,588,574 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 1,584,809
2,928,951 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 2,960,086
4,554,691 CWABS 1996-1, Class A-2, 6.525%, 2/25/2014 4,501,583
640,694 GE Capital Home Equity Loan Trust 1991-1, Class A, 7.20%, 9/15/2011 637,427
2,684,952 (a)Merril Lynch Home Equity Loan Trust 1991-2, Class B, 6.313%, 2,691,664
4/15/2006
3,316,806 (a)Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 6.50%, 3,340,355
2/15/2003
Total 15,715,924
INSURANCE -- 3.4%
4,000,000 American General Corp., 9.625%, 2/1/2018 4,340,120
3,346,000 American Reinsurance Corp., 10.875%, 9/15/2004 3,568,542
Total 7,908,662
MANUFACTURED HOUSING RECEIVABLES -- 6.6%
3,000,000 Associates Manufactured Housing Certificates 1996-1, Class A-2, 6.05%, 2,941,170
6/15/2027
3,750,000 Associates Manufactured Housing Certificates 1996-1, Class A-2, 6.70%, 3,762,675
3/15/2027
5,691,914 (b)Merrill Lynch Mortgage Investments, Inc. 1991-A, Class B, 9.25%, 5,688,385
5/15/2011
2,508,287 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 7.65%, 2,516,138
1/15/2012
373,501 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B, 8.50%, 382,910
4/15/2012
Total 15,291,278
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
RECREATIONAL VEHICLE RECEIVABLES -- 0.4%
$ 961,798 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 $ 960,173
TELECOMMUNICATIONS -- 2.3%
2,000,000 British Telecommunication Finance, PLC, 9.625%, 2/15/2019 2,172,100
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,168,450
Total 5,340,550
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES (IDENTIFIED COST 154,200,035
$155,407,412)
MORTGAGE-BACKED SECURITIES -- 26.9%
COMMERCIAL MORTGAGE BACKED SECURITIES -- 1.8%
4,000,000 (b)K Mart CMBS Financing, Inc., Series 1997-1, Class C, 6.075%, 4,007,520
2/1/2007
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 5.8%
2,591,980 GNMA Pool 354754, 7.50%, 2/15/2024 2,574,640
9,087,285 GNMA Pool 780360, 11.00%, 9/15/2015 10,186,301
50,071,857 Vendee Mortgage Trust 1995-1C, Class 3IO, .2925%, 2/15/2025 782,623
Total 13,543,564
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 19.3%
5,729,328 (b)C-BASS ABS, LLC, Series 1997-1, Class A-1, 7.05%, 2/1/2017 5,749,037
3,261,641 GE Capital Mortgage Services, Inc., 1995-7, Class A-1, 7.50%, 3,269,925
9/25/2025
1,496,100 (a)Glendale Federal Bank 1988-1, Class A, 7.402%, 11/25/2027 1,497,970
2,303,347 (a)(b)Greenwich Capital Acceptance 1991-4, Class B-1A, 8.478%, 2,306,940
7/1/2019
22,339,211 (a)Greenwich Capital Acceptance 1993-AFCI, Class B-1, 7.618%, 2,297,549
9/25/2023
3,264,921 (a)Greenwich Capital Acceptance 1993-LB2, Class A-1, 7.92%, 8/25/2023 3,274,096
1,669,486 Greenwich Capital Acceptance 1993-LB3, Class A-1, 7.68%, 1/25/2024 1,673,659
7,694,368 (a)Greenwich Capital Acceptance 1994-B, Class A, 7.72%, 7/1/2018 7,759,309
466,090 (b)Long Beach Federal Savings Bank 1992-3, Class A, 9.60%, 6/15/2022 471,477
2,500,000 Prudential Home Mortgage Securities, Inc., 1992-32, Class A-6, 7.50%, 2,503,175
10/25/2022
5,014,872 Prudential Home Mortgage Securities, Inc., 1992-5, Class A-6, 7.50%, 4,960,912
4/25/2007
4,039,443 Residential Accredit Loans, Inc., 1996-QS8, Class A-3, 7.05%, 3,996,544
12/25/2026
2,850,000 Residential Accredit Loans, Inc., 1997-QS2, Class A-3, 7.25%, 2,841,992
3/31/2027
194,480 Residential Funding Mortgage Securities, Inc., 1993-S18, Class A-2, 194,354
7.50%, 5/25/2023
2,000,018 (a)Resolution Trust Corp. 1992-12, Class B-3, 7.851%, 1/25/2025 1,983,458
Total 44,780,397
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $62,306,041) 62,331,481
</TABLE>
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(C)REPURCHASE AGREEMENT -- 6.4%
$ 14,860,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due 5/1/1997 (AT $ 14,860,000
AMORTIZED COST)
TOTAL INVESTMENTS (IDENTIFIED COST $232,573,453)(D) $ 231,391,516
</TABLE>
(a) Denotes variable rate and floating rate obligations for which the
current rate is shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At the end of the period, these securities
amounted to $21,139,929, which represents 9.1% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to
$232,573,453. The net unrealized depreciation of investments on a federal
tax basis amounts to $1,181,937 which is comprised of $795,349 appreciation
and $1,977,286 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($232,023,577) at April 30, 1997.
The following acronyms are used throughout this portfolio:
FRN -- Floating Rate Note
GNMA -- Government National Mortgage Association
LLC -- Limited Liability Company
MTN -- Medium Term Note
PLC -- Public Limited Corporation
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 231,391,516
$232,573,453)
Income receivable 1,732,136
Receivable for investments sold 118,827
Receivable for shares sold 424,844
Total assets $ 233,667,323
LIABILITIES:
Payable for shares redeemed $ 214,460
Income distribution payable 1,147,753
Payable to the Bank 251,955
Accrued expenses 29,578
Total liabilities 1,643,746
NET ASSETS for 26,717,976 shares outstanding $ 232,023,577
NET ASSETS CONSIST OF:
Paid-in capital $ 258,040,526
Net unrealized depreciation of investments (1,181,937)
Accumulated net realized loss on investments (24,605,883)
Distributions in excess of net investment income (229,129)
Total Net Assets $ 232,023,577
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$214,437,974 / 24,692,959 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$17,585,603 / 2,025,017 shares outstanding $8.68
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED SHORT-TERM INCOME FUND
YEAR ENDED APRIL 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $16,204,039
EXPENSES:
Investment advisory fee $ 957,140
Administrative personnel and services fee 180,791
Custodian fees 36,965
Transfer and dividend disbursing agent fees and expenses 64,903
Directors'/Trustees' fees 7,903
Auditing fees 17,478
Legal fees 3,997
Portfolio accounting fees 86,082
Distribution services fee -- Institutional Service Shares 40,701
Shareholder services fee -- Institutional Shares 557,524
Shareholder services fee -- Institutional Service Shares 40,704
Share registration costs 28,724
Printing and postage 23,097
Insurance premiums 4,859
Taxes 3,697
Miscellaneous 7,592
Total expenses 2,062,157
Waivers --
Waiver of investment advisory fee $ (72,703)
Waiver of distribution services fee -- Institutional (39,073)
Service Shares
Waiver of shareholder services fee -- Institutional (557,524)
Shares
Waiver of shareholder services fee -- Institutional (1,628)
Service Shares
Total waivers (670,928)
Net expenses 1,391,229
Net investment income 14,812,810
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (629,217)
Net change in unrealized depreciation of investments 928,955
Net realized and unrealized gain on investments 299,738
Change in net assets resulting from operations $15,112,548
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 14,812,810 $ 14,529,558
Net realized gain (loss) on investments ($1,566,031
net loss and $10,784,773 net loss,
respectively, as computed for federal tax purposes) (629,217) (2,061,785)
Net change in unrealized appreciation/depreciation 928,955 4,045,498
Change in net assets resulting from operations 15,112,548 16,513,271
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Institutional Shares (13,841,711) (13,302,550)
Institutional Service Shares (971,099) (1,227,008)
Distributions in excess of net investment income
Institutional Shares (229,129) --
Change in net assets resulting from distributions (15,041,939) (14,529,558)
to shareholders
SHARE TRANSACTIONS --
Proceeds from sale of shares 139,918,706 109,565,191
Net asset value of shares issued to shareholders in 3,262,307 2,706,717
payment of distributions declared
Cost of shares redeemed (144,248,869) (117,974,583)
Change in net assets resulting from share (1,067,856) (5,702,675)
transactions
Change in net assets (997,247) (3,718,962)
NET ASSETS:
Beginning of period 233,020,824 236,739,786
End of period $ 232,023,577 $ 233,020,824
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED SHORT-TERM INCOME FUND
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 are only those of
Federated Short-Term Income Fund (the "Fund"), a diversified portfolio. The
financial statements of the other portfolio 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 investment objective
of the Fund is to seek to provide current income. The Fund offers two
classes of shares: Institutional Shares and Institutional Service Shares.
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, listed corporate bonds, other fixed income and
asset-backed securities, unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked
price as furnished by an independent pricing service. Short-term securities
are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or
less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
expiring capital loss carryforwards. The following reclassifications have
been made to the financial statements.
INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS
($3,077,752) $3,077,752
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $24,147,796, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 316,627
1999 1,132,354
2000 4,105,766
2002 669,532
2003 5,572,713
2004 10,784,773
2005 1,566,031
Additionally, net capital losses of $458,087 attributable to security
transactions incurred after October 31, 1996 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
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 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 market or, if no market prices are available, at
the fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at April 30, 1997 is
as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Banco Nacional de Mexico, 1996-A 1/9/1997 $2,935,781
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 5,781,739
K Mart CMBS Financing, Inc., Series 1997-1 2/27/1997 4,000,000
C-BASS ABS, LLC, Series 1997-1 2/25/1997 5,752,603
Greenwich Capital Acceptance 1991-4, Class B-1A 1/7/1993 2,338,480
Long Beach Federal Savings Bank Series 1992-3, Class A 6/29/1992 717,099
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SHARES AMOUNT SHARES AMOUNT SHARES
<S> <C> <C> <C> <C>
Shares sold 15,252,983 $ 132,739,529 10,873,366 $ 95,413,085
Shares issued 321,221 2,792,262 238,773 2,094,178
to shareholders
in payment of
distributions
declared Shares (15,832,329) (137,838,962) (11,665,688) (102,282,720)
redeemed
Net change (258,125) $ (2,307,171) (553,549) $ (4,775,457)
resulting from
Institutional
Shares transactions
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 825,563 $ 7,179,177 1,615,112 $ 14,152,106
Shares issued 54,067 470,045 69,892 612,539
to shareholders
in payment of
distributions
declared Shares (736,958) (6,409,907) (1,787,163) (15,691,863)
redeemed
Net change
resulting from
Institutional
Service Shares
transactions 142,672 $ 1,239,315 (102,159) $ (927,218)
Net change (115,453) $ (1,067,856) (655,708) $ (5,702,675)
resulting from Fund
share transactions
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser, (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.40%
of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% of the average daily net assets of
Instutional Service Shares annually, to compensate FSC. The distributor may
voluntarily choose to waive any 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 0.25% of daily
average net assets of the Fund shares for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1997, were as follows:
PURCHASES $125,993,771
SALES $130,814,892
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,
including the portfolio of investments, of Federated Short-Term Income Fund
(one of the portfolios comprising Federated Income Securities Trust), as of
April 30, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights (see pages 2 and 18 of
this prospectus) for the periods presented. 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, 1997, 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, a portfolio of Federated Income Securities
Trust, at April 30, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 13, 1997
NOTES
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Service Shares
PROSPECTUS
JUNE 30, 1997
A Diversified Portfolio of Federated Income Securities Trust, an Open-End,
Management Investment Company
FEDERATED SHORT-TERM INCOME FUND
Institutional Service Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securites Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company
Federated Investors Tower
Pittsburgh, PA 15222-3779
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Securities Corp., Distributor
Cusip 31420C308
1111903A-SS (6/97)
[Graphic]
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 Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1997,
with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information, or a paper copy of this prospectus, if you have
received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information, or make inquiries about the
Fund, contact the Fund at the address listed in the back of this prospectus.
The Statement of Additional Information, material incorporated by reference
into this document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated June 30, 1997
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 11
Portfolio Turnover 11
Investment Limitations 11
Trust Information 12
Management of the Trust 12
Distribution of Institutional Shares 13
Administration of the Fund 13
Net Asset Value 13
Investing in Institutional Shares 13
Share Purchases 13
Minimum Investment Required 14
What Shares Cost 14
Certificates and Confirmations 14
Dividends 14
Capital Gains 14
Redeeming Institutional Shares 14
Telephone Redemption 14
Redeeming Shares by Mail 15
Accounts with Low Balances 15
Shareholder Information 15
Voting Rights 15
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 16
Financial Highlights -- Institutional Service Shares 17
Financial Statements 18
Report of Ernst & Young LLP,
Independent Auditors Inside Back Cover
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <S>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge 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
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.37%
12b-1 Fee None
Shareholder Services Fee (after waiver)(2) 0.00%
Total Other Expenses 0.19%
Total Operating Expenses (after waivers)(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 shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider
can terminate this voluntary waiver at any time at its sole discretion. The
maximum shareholder services fee is 0.25%.
(3) The total operating expenses would have been 0.84% absent the voluntary
waivers of a portion of the management fee and the shareholder services
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 "Trust Information" and
"Investing in Institutional Shares." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
EXAMPLE
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.
1 Year $ 6
3 Years $18
5 Years $31
10 Years $70
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors,
on the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A) 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment income 0.54 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94
Net realized and
unrealized gain
(loss) on investments 0.01 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42)
Total from investment 0.55 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52
operations
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94)
Distributions in excess
of net
investment income(b) (0.01) -- -- -- -- (0.02) (0.01) -- -- --
Total distributions (0.55) (0.57) (0.54) (0.51) (0.55) (0.62) (0.84) (0.93) (0.94) (0.94)
NET ASSET VALUE, $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $9.56
END OF PERIOD
TOTAL RETURN(C) 6.53% 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43%
RATIOS TO AVERAGE
NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50%
Net investment income 6.21% 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59%
Expense 0.28% 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59%
waiver/reimbursement(d)
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $214,438 $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581
Portfolio turnover 55% 77% 38% 44% 62% 114% 23% 34% 38% 77%
</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) Distributions in excess of net investment income for the years ended
April 30, 1997, 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, 1997, 1992 and
1991.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
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 Shares and Institutional Service Shares. This prospectus
relates only to Institutional Shares of the Fund.
Institutional Shares ("Shares") are sold primarily to accounts for which
financial institutions act in a fiduciary or agency capacity, or other
accounts where the financial institution maintains master accounts with an
aggregate investment of at least $400 million in certain funds which are
advised or distributed by affiliates of Federated Investors. Shares are also
made available to financial intermediaries, and public and private
organizations. An investment in the Fund serves as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio
of corporate debt 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 ("NAV") without a
sales charge 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"),
Fitch Investors Service, Inc. ("Fitch"), or Duff & Phelps Rating Service
("Duff & Phelps"), 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 ("CCP") 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 ("ARMS"), collateralized mortgage obligations ("CMOs"), real
estate mortgage investment conduits ("REMICs"), 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 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 or Veterans
Administration, 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 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 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 ARMS will tend to be
less sensitive to interest rate changes than a fixed rate debt security of
the same stated maturity. Hence, ARMS which use indices that lag changes in
market rates should experience greater price volatility than ARMS 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 CMOs 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 or the Savings Association Insurance Fund. 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, CCP 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 LIBOR 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 NAV 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 NAV 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
NAV 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 NAV, 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 NAV 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.
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. 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.
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 securites 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 NAV, 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 NAV.
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;
* 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.
TRUST INFORMATION
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 0.40%
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 at its sole discretion.
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 $110 billion invested across
more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1996, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more than
2,000 employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and through
4,500 financial institutions nationwide.
Randall S. Bauer has been the Fund's portfolio manager since October 1995.
Mr. Bauer joined Federated Investors in 1989 and has been a Vice President
of the Fund's investment adviser since 1994. Mr. Bauer was an Assistant Vice
President of the Fund's investment adviser from 1989 to 1993. Mr. Bauer is a
Chartered Financial Analyst and received his M.B.A. in Finance from The
Pennsylvania State University.
Robert K. Kinsey will be a portfolio manager of the Fund effective July
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
since March 1997. From 1992 to 1995, he served as a Portfolio Manager for
Harris Investment Management Co., Inc. Mr. Kinsey received his M.B.A. in
Finance from U.C.L.A.
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 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 Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services
Company provides these at an annual rate which relates to the average
aggregate daily net assets of all funds advised by affiliates of Federated
Investors as specified below:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.
SHAREHOLDER SERVICES
The Trust has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the
Trust may make payments up to 0.25% of the average daily NAV of Shares,
computed at an annual rate, to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, 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.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their
own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. 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 Adviser or its affiliates.
NET ASSET VALUE
The Fund's NAV per Share fluctuates. The NAV 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
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open. Shares
may be purchased either by wire or by 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 Shareholder Services Company, c/o
State Street Bank and Trust Company, Boston, MA; 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. Shares cannot be purchased by wire on holidays when
wire transfers are restricted. Questions on wire purchases should be
directed to your shareholder services representative at the telephone number
listed on your account statement.
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
Shareholder Services Company, c/o State Street Bank and Trust Company, P.O.
Box 8600, Boston, MA 02266-8600. Orders by mail are considered received
after payment by check is converted by the transfer agent's bank, State
Street Bank and Trust Company ("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 financial
intermediary'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 financial
intermediary may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their NAV next determined after an order is received.
There is no sales charge imposed by the Fund. Investors who purchase Shares
through a financial intermediary may be charged a service fee by that
financial intermediary.
The NAV is determined as of the close of trading (normally 4:00 p.m. Eastern
time) on the New York Stock Exchange, Monday through Friday, except on: (i)
days on which there are not sufficient changes in the value of the Fund's
portfolio securities that its NAV 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,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder 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 NAV. 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
The Fund redeems Shares at their NAV next determined after the Fund receives
the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its NAV.
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. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative at
the telephone number listed on your account statement.
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 "Redeeming Shares
by Mail," should be considered.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.
The written request should state: the Fund name and Share class name; the
account name as registered with the Fund; the account number; and the number
of Shares to be redeemed or the dollar amount requested. All owners of the
account must sign the request exactly as the Shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting 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 their signatures guaranteed by a
commercial or savings bank, trust company or savings association whose
deposits are insured by an organization which is administered by the Federal
Deposit Insurance Corporation; a member firm of a domestic stock exchange;
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.
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 NAV.
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 May 9, 1997, Trust
Company of St. Joseph, St. Joseph, MO, owned 39.35% of the voting securities
of the Fund's Institutional Service Shares, 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 shareholders at a special
meeting. A special meeting 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.
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.
STATE AND LOCAL TAXES
In the opinion of Houston, Donnelly and Meck, counsel to the 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
Shares.
Total return represents the change, over a specified period of time, in the
value of an investment in 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 Shares is calculated by dividing the net investment income per
Share (as defined by the SEC) earned by Shares over a thirty-day period by
the NAV per Share of 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 Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
The Shares are sold without any sales charge or other similar non-recurring
charges.
Total return and yield will be calculated separately for 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.
Institutional Service Shares are sold primarily to banks and other
institutions that hold assets in an agency capacity. Institutional Service
Shares are sold at NAV and are subject to a minimum initial investment of
$25,000.
Shares and Institutional Service Shares are subject to certain of the same
expenses; however, Institutional Service Shares are distributed under a
12b-1 Plan adopted by the Trust. Expense differences, 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 1-800-341-7400.
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 the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.53 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized gain (loss) on -- 0.07 (0.24) (0.32) 0.19 (0.10)
investments
Total from investment operations 0.53 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net investment income (0.53) (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 6.27% 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 5.96% 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/reimbursement(c) 0.28% 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $17,586 $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 55% 77% 38% 44% 62% 114%
</TABLE>
* Computed on an annualized basis.
(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 charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
PORTFOLIO OF INVESTMENTS
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- 66.4%
AUTOMOTIVE -- 15.2%
<C> <S> <C>
$ 2,212,633 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 2,217,147
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,388,920
1,348,132 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 1,347,862
5/15/2002
3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 2,984,805
3,773,437 Honda Auto Receivables Grantor Trust 1995-A, Class A, 3,766,457
6.20%, 12/15/2000
6,000,000 Navistar Dealer Note Trust 1990-A, Class A-3, Floating Rate
Pass Thru Certificate,
6.548%, 1/25/2003 6,082,800
1,946,028 Navistar Financial Owner Trust 1995-A, Class B, 6.85%, 1,953,384
11/20/2001
4,860,885 Olympic Auto Receivables Trust 1995-B, Class A-2, 7.35%, 4,910,369
10/15/2001
5,000,000 Olympic Auto Receivables Trust 1996-C, Class A-5, 7.00%, 5,047,350
3/15/2004
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,958,030
2,655,000 (a)World Omni Auto Lease Securitization Trust 1996-A, Class 2,662,062
A-1, 6.30%, 6/25/2002
Total 35,319,186
BANKING -- 9.9%
3,000,000 (b)Banco Nacional de Mexico S.A., Credit Card Merchant
Voucher Receivables Master Trust
1996-A, Class A-1, 6.25%, 12/1/2003 2,916,570
3,000,000 (a)BankAmerica Corp., FRN, 5.50%, 6/25/2003 2,921,250
2,083,333 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 2,088,708
7.40%, 5/15/2000
2,000,000 Chemical Master Credit Card Trust 1995-3, Class A, 6.23%, 1,952,540
4/15/2005
5,000,000 (a)Citicorp Sub., FRN, 5.538%, 10/25/2005 4,924,250
1,000,000 (a)J.P. Morgan & Co., Inc., FRN, 5.379%, 8/19/2002 979,400
3,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%, 3,151,620
11/7/2003
4,000,000 Toronto-Dominion Bank, Sub. Note, 7.875%, 8/15/2004 4,077,200
Total 23,011,538
FINANCE - COMMERICIAL -- 2.1%
5,000,000 CSXT Trade Receivables Master Trust 1993-1, Class A, 5.05%, 4,921,950
9/25/1999
FINANCE - RETAIL -- 13.0%
5,000,000 Bridgestone/Firestone Master Trust 1996-1, Class B, 6.49%, 4,909,950
7/1/2003
2,500,000 Dayton Hudson Credit Card Master Trust 1995-1, Class A, 2,500,325
6.10%, 2/25/2002
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 5,024,750
6/16/2000
4,000,000 (a)First USA Credit Card Master Trust, 1994-3, Class B, 4,008,720
5.838%, 12/15/1999
4,000,000 Household Affinity Credit Card Master Trust 1993-1, Class 3,907,400
B, 5.30%, 9/15/2000
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
FINANCE - RETAIL -- CONTINUED
<C> <S> <C>
$ 7,000,000 Household Private Label Credit Card Master Trust 1994-1, $ 7,009,170
Class B, 7.55%, 6/20/2001
2,800,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 2,901,276
Total 30,261,591
GAS & ELECTRIC UTILITIES -- 2.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 1,071,600
9/15/2017
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 1,872,308
9.73%, 12/15/2017
2,000,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 2,125,380
1,300,000 Philadelphia Electric Co., 8.625%, 6/1/2022 1,349,478
Total 6,418,766
GOVERNMENT AGENCY -- 3.9%
5,000,000 Province of Manitoba, 9.50%, 10/1/2000 5,418,100
3,380,000 Swedish Export Credit Corp., 9.875%, 3/15/2038 3,632,317
Total 9,050,417
HOME EQUITY RECEIVABLES -- 6.8%
1,588,574 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 1,584,809
8/15/2007
2,928,951 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 2,960,086
9/25/2008
4,554,691 CWABS 1996-1, Class A-2, 6.525%, 2/25/2014 4,501,583
640,694 GE Capital Home Equity Loan Trust 1991-1, Class A, 7.20%, 637,427
9/15/2011
2,684,952 (a)Merril Lynch Home Equity Loan Trust 1991-2, Class B, 2,691,664
6.313%, 4/15/2006
3,316,806 (a)Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 3,340,355
6.50%, 2/15/2003
Total 15,715,924
INSURANCE -- 3.4%
4,000,000 American General Corp., 9.625%, 2/1/2018 4,340,120
3,346,000 American Reinsurance Corp., 10.875%, 9/15/2004 3,568,542
Total 7,908,662
MANUFACTURED HOUSING RECEIVABLES -- 6.6%
3,000,000 Associates Manufactured Housing Certificates 1996-1, Class 2,941,170
A-2, 6.05%, 6/15/2027
3,750,000 Associates Manufactured Housing Certificates 1996-1, Class 3,762,675
A-2, 6.70%, 3/15/2027
5,691,914 (b)Merrill Lynch Mortgage Investments, Inc. 1991-A, Class 5,688,385
B, 9.25%, 5/15/2011
2,508,287 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 2,516,138
7.65%, 1/15/2012
373,501 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B, 382,910
8.50%, 4/15/2012
Total 15,291,278
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS/ASSET-BACKED SECURITIES -- CONTINUED
RECREATIONAL VEHICLE RECEIVABLES -- 0.4%
<C> <S> <C>
$ 961,798 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 $ 960,173
TELECOMMUNICATIONS -- 2.3%
2,000,000 British Telecommunication Finance, PLC, 9.625%, 2/15/2019 2,172,100
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,168,450
Total 5,340,550
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $155,407,412) 154,200,035
MORTGAGE-BACKED SECURITIES -- 26.9%
COMMERCIAL MORTGAGE BACKED SECURITIES -- 1.8%
4,000,000 (b)K Mart CMBS Financing, Inc., Series 1997-1, Class C, 4,007,520
6.075%, 2/1/2007
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 5.8%
2,591,980 GNMA Pool 354754, 7.50%, 2/15/2024 2,574,640
9,087,285 GNMA Pool 780360, 11.00%, 9/15/2015 10,186,301
50,071,857 Vendee Mortgage Trust 1995-1C, Class 3IO, .2925%, 2/15/2025 782,623
Total 13,543,564
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES -- 19.3%
5,729,328 (b)C-BASS ABS, LLC, Series 1997-1, Class A-1, 7.05%, 5,749,037
2/1/2017
3,261,641 GE Capital Mortgage Services, Inc., 1995-7, Class A-1, 3,269,925
7.50%, 9/25/2025
1,496,100 (a)Glendale Federal Bank 1988-1, Class A, 7.402%, 1,497,970
11/25/2027
2,303,347 (a)(b)Greenwich Capital Acceptance 1991-4, Class B-1A, 2,306,940
8.478%, 7/1/2019
22,339,211 (a)Greenwich Capital Acceptance 1993-AFCI, Class B-1, 2,297,549
7.618%, 9/25/2023
3,264,921 (a)Greenwich Capital Acceptance 1993-LB2, Class A-1, 7.92%, 3,274,096
8/25/2023
1,669,486 Greenwich Capital Acceptance 1993-LB3, Class A-1, 7.68%, 1,673,659
1/25/2024
7,694,368 (a)Greenwich Capital Acceptance 1994-B, Class A, 7.72%, 7,759,309
7/1/2018
466,090 (b)Long Beach Federal Savings Bank 1992-3, Class A, 9.60%, 471,477
6/15/2022
2,500,000 Prudential Home Mortgage Securities, Inc., 1992-32, Class 2,503,175
A-6, 7.50%, 10/25/2022
5,014,872 Prudential Home Mortgage Securities, Inc., 1992-5, Class 4,960,912
A-6, 7.50%, 4/25/2007
4,039,443 Residential Accredit Loans, Inc., 1996-QS8, Class A-3, 3,996,544
7.05%, 12/25/2026
2,850,000 Residential Accredit Loans, Inc., 1997-QS2, Class A-3, 2,841,992
7.25%, 3/31/2027
194,480 Residential Funding Mortgage Securities, Inc., 1993-S18, 194,354
Class A-2, 7.50%, 5/25/2023
2,000,018 (a)Resolution Trust Corp. 1992-12, Class B-3, 7.851%, 1,983,458
1/25/2025
Total 44,780,397
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST 62,331,481
$62,306,041)
</TABLE>
Federated Short-Term Income Fund
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(C)REPURCHASE AGREEMENT -- 6.4%
<C> <S> <C>
$14,860,000 BT Securities Corporation, 5.43%, dated 4/30/1997, due $ 14,860,000
5/1/1997 (AT AMORTIZED COST)
TOTAL INVESTMENTS (IDENTIFIED COST $232,573,453)(D) $ 231,391,516
</TABLE>
(a) Denotes variable rate and floating rate obligations for which the
current rate is shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At the end of the period, these securities
amounted to $21,139,929, which represents 9.1% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to
$232,573,453. The net unrealized depreciation of investments on a federal
tax basis amounts to $1,181,937 which is comprised of $795,349 appreciation
and $1,977,286 depreciation at April 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($232,023,577) at April 30, 1997.
The following acronyms are used throughout this portfolio:
FRN -- Floating Rate Note
GNMA -- Government National Mortgage Association
LLC -- Limited Liability Company
MTN -- Medium Term Note
PLC -- Public Limited Corporation
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED SHORT-TERM INCOME FUND
APRIL 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 231,391,516
$232,573,453)
Income receivable 1,732,136
Receivable for investments sold 118,827
Receivable for shares sold 424,844
Total assets $ 233,667,323
LIABILITIES:
Payable for shares redeemed $ 214,460
Income distribution payable 1,147,753
Payable to the Bank 251,955
Accrued expenses 29,578
Total liabilities 1,643,746
NET ASSETS for 26,717,976 shares outstanding $ 232,023,577
NET ASSETS CONSIST OF:
Paid-in capital $ 258,040,526
Net unrealized depreciation of investments (1,181,937)
Accumulated net realized loss on investments (24,605,883)
Distributions in excess of net investment income (229,129)
Total Net Assets $ 232,023,577
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$214,437,974 / 24,692,959 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$17,585,603 / 2,025,017 shares outstanding $8.68
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED SHORT-TERM INCOME FUND
YEAR ENDED APRIL 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $16,204,039
EXPENSES:
Investment advisory fee $ 957,140
Administrative personnel and services fee 180,791
Custodian fees 36,965
Transfer and dividend disbursing agent fees and expenses 64,903
Directors'/Trustees' fees 7,903
Auditing fees 17,478
Legal fees 3,997
Portfolio accounting fees 86,082
Distribution services fee -- Institutional Service Shares 40,701
Shareholder services fee -- Institutional Shares 557,524
Shareholder services fee -- Institutional Service Shares 40,704
Share registration costs 28,724
Printing and postage 23,097
Insurance premiums 4,859
Taxes 3,697
Miscellaneous 7,592
Total expenses 2,062,157
Waivers --
Waiver of investment advisory fee $ (72,703)
Waiver of distribution services fee -- Institutional (39,073)
Service Shares
Waiver of shareholder services fee -- Institutional (557,524)
Shares
Waiver of shareholder services fee -- Institutional (1,628)
Service Shares
Total waivers (670,928)
Net expenses 1,391,229
Net investment income 14,812,810
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (629,217)
Net change in unrealized depreciation of investments 928,955
Net realized and unrealized gain on investments 299,738
Change in net assets resulting from operations $15,112,548
</TABLE>
(See Notes which are an integral part of the Financial Statements)
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 14,812,810 $ 14,529,558
Net realized gain (loss) on investments ($1,566,031 net
loss and $10,784,773 net loss,
respectively, as computed for federal tax purposes) (629,217) (2,061,785)
Net change in unrealized appreciation/depreciation 928,955 4,045,498
Change in net assets resulting from operations 15,112,548 16,513,271
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Institutional Shares (13,841,711) (13,302,550)
Institutional Service Shares (971,099) (1,227,008)
Distributions in excess of net investment income
Institutional Shares (229,129) --
Change in net assets resulting from distributions to (15,041,939) (14,529,558)
shareholders
SHARE TRANSACTIONS --
Proceeds from sale of shares 139,918,706 109,565,191
Net asset value of shares issued to shareholders in 3,262,307 2,706,717
payment of distributions declared
Cost of shares redeemed (144,248,869) (117,974,583)
Change in net assets resulting from share transactions (1,067,856) (5,702,675)
Change in net assets (997,247) (3,718,962)
NET ASSETS:
Beginning of period 233,020,824 236,739,786
End of period $ 232,023,577 $ 233,020,824
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED SHORT-TERM INCOME FUND
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 are only those of
Federated Short-Term Income Fund (the "Fund"), a diversified portfolio. The
financial statements of the other portfolio 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 investment objective
of the Fund is to seek to provide current income. The Fund offers two
classes of shares: Institutional Shares and Institutional Service Shares.
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, listed corporate bonds, other fixed income and
asset-backed securities, unlisted securities and private placement
securities are generally valued at the mean of the latest bid and asked
price as furnished by an independent pricing service. Short-term securities
are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days or
less at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of 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.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
expiring capital loss carryforwards. The following reclassifications have
been made to the financial statements.
INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS
($3,077,752) $3,077,752
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $24,147,796, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 316,627
1999 1,132,354
2000 4,105,766
2002 669,532
2003 5,572,713
2004 10,784,773
2005 1,566,031
Additionally, net capital losses of $458,087 attributable to security
transactions incurred after October 31, 1996 are treated as arising on the
first day of the Fund's next taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
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 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 market or, if no market prices are available, at
the fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at April 30, 1997 is
as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Banco Nacional de Mexico, 1996-A 1/9/1997 $ 2,935,781
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 5,781,739
K Mart CMBS Financing, Inc., Series 1997-1 2/27/1997 4,000,000
C-BASS ABS, LLC, Series 1997-1 2/25/1997 5,752,603
Greenwich Capital Acceptance 1991-4, Class B-1A 1/7/1993 2,338,480
Long Beach Federal Savings Bank Series 1992-3, Class A 6/29/1992 717,099
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 15,252,983 $ 132,739,529 10,873,366 $ 95,413,085
Shares issued to 321,221 2,792,262 238,773 2,094,178
shareholders in payment
of distributions
declared
Shares redeemed (15,832,329) (137,838,962) (11,665,688) (102,282,720)
Net change resulting (258,125) $ (2,307,171) (553,549) $ (4,775,457)
from Institutional
Shares transactions
<CAPTION>
YEAR ENDED APRIL 30,
1997 1996
INSTITUTIONAL SERVICE SHARES AMOUNT SHARES AMOUNT
SHARES
<S> <C> <C> <C> <C>
Shares sold 825,563 $ 7,179,177 1,615,112 $ 14,152,106
Shares issued to 54,067 470,045 69,892 612,539
shareholders in payment
of distributions
declared
Shares redeemed (736,958) (6,409,907) (1,787,163) (15,691,863)
Net change resulting
from Institutional
Service Shares
transactions 142,672 $ 1,239,315 (102,159) $ (927,218)
Net change resulting (115,453) $ (1,067,856) (655,708) $ (5,702,675)
from Fund share
transactions
</TABLE>
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser, (the "Adviser"),
receives for its services an annual investment advisory fee equal to 0.40%
of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The
fee paid to FServ is based on the level of average aggregate daily net
assets of all funds advised by subsidiaries of Federated Investors for the
period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate
Federated Securities Corp. ("FSC"), the principal distributor, from the net
assets of the Fund to finance activities intended to result in the sale of
the Fund's Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% of the average daily net assets of
Instutional Service Shares annually, to compensate FSC. The distributor may
voluntarily choose to waive any 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 0.25% of daily
average net assets of the Fund shares for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES
FServ, through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Fund. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Fund are Officers and Directors
or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1997, were as follows:
PURCHASES $125,993,771
SALES $130,814,892
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,
including the portfolio of investments, of Federated Short-Term Income Fund
(one of the portfolios comprising Federated Income Securities Trust), as of
April 30, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights (see page 2 and 17 of
this prospectus) for the periods presented. 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, 1997, 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, a portfolio of Federated Income Securities
Trust, at April 30, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and financial highlights for the periods presented, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 13, 1997
[Graphic]Federated Investors
Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Shares
PROSPECTUS
JUNE 30, 1997
A Diversified Portfolio of Federated Income Securities Trust, an Open-End,
Management Investment Company
FEDERATED SHORT-TERM INCOME FUND
Institutional Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR
Federated Securites Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779
CUSTODIAN
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
Federated Investors Tower
Pittsburgh, PA 15222-3779
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Cusip 31420C209
1111903A-IS (6/97)[Graphic]
Federated Short-Term Income Fund
Annual Report For Fiscal Year Ended April 30, 1997
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 two years or less.
The fund invests its assets primarily in a broad range of investment grade
securities rated A or better, or of comparable quality. These include fixed
and floating rate corporate bonds, asset-backed securities, and 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
instrumentalities. Fund shares, however, are not guaranteed by the U.S.
government.
The total returns for the one-year period ended April 30, 1997, for the
fund's Institutional Share and Institutional Service Share classes, based on
net asset value, were 6.53% and 6.27%, respectively.* The net asset value of
the fund remained unchanged at $8.68. The net assets of the fund decreased
from $233.0 million to $232.0 million. As of April 30, 1997, the 30-day net
distribution rate for Institutional Shares of the fund decreased from 6.63%
to 6.19%. The 30-day net distribution rate for Institutional Service Shares
of the fund decreased from 6.38% to 5.94% as of April 30, 1997.* As of April
30, 1997, the 30-day SEC yields for Institutional Shares and Institutional
Service Shares were 6.45% and 6.20%, respectively.* The effective modified
duration of the fund at April 30, 1997 was 1.4 years, slightly to the
negative side of the fund's 1.0 to 2.0 year specified duration range.
Concerns over economic growth have undermined bond market performance during
the past year. Each time the market starts to believe that the six-year
economic expansion may finally be nearing its conclusion, new data emerges
which shows that growth is still above the "comfort zone" of most
fixed-income investors, and yields back up. A recent example of this was the
bond market's negative reaction to the above trend increase in gross
domestic product for the first quarter of 1997. Over the course of the year,
these "on-again, off-again" movements in market psychology had the net
effect of increasing yields by approximately 0.25% in the part of the yield
curve in which the fund generally invests. Yield change is measured by the
yield change on the 2-year U.S. Treasury note within the reporting period.
Despite the increase in rates, the fund managed to post a return which was
significantly better than that of the Lipper Institutional Money Market
Fund** category average for the reporting period, which returned 5.14%. The
fund also bested the average return of its own peer group, the Lipper Short
Investment Grade debt category, which returned 5.80%.
Fund Management believes that while the economy does not appear ready to
falter anytime soon, current interest rate levels would appear to have more
than accounted for any uptick in inflationary pressures. Real interest rates,
interest rates which are adjusted for inflation, are currently high by
historical standards. This means that either the market believes inflation
could be increasing, or that absolute interest rates should eventually decline.
Fund management anticipates that inflation will not increase materially over
the intermediate term, thus implying lower interest rates down the road.
Continued economic growth would not be bad for bonds unless it is accompanied
by a commensurate increase in inflation, which would erode the value of
fixed-income investments.
* Performance quoted represents past performance and is not indicative of
future results. 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.
** 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. Unlike the fund, money market funds seek to maintain a stable net
asset value of $1.00 per share.
The negative bias with regard to duration, as noted above, might appear to
belie fund management's fundamentally constructive view on the bond market
in general. The reason for the apparent conflict is that while bond yields
are still expected to fall over the intermediate term, the decision of the
Federal Reserve Board (the "Fed") not to increase short-term interest rates
in May 1997 leaves the short part of the yield curve vulnerable in the event
that the Fed does decide to notch rates upward. Fund management believes that
an ever-vigilant Fed may try to stay ahead of the inflation curve. With
America's "economic machine" humming along, it would not be unreasonable to
expect the Fed to increase rates to provide an "insurance chip" against any
resurgence of inflation. If the Fed moves, or if economic activity slows in
any pronounced fashion, fund management's bias would be to extend duration
toward a neutral position.
The asset mix of the fund should continue to consist of traditional
corporate, mortgage-backed and asset-backed securities, with the largest
concentration in the latter category. With yields not expected to increase
or decrease precipitously in the near to intermediate term, asset- and
mortgage-backed securities, which offer high quality with a yield advantage
over Treasury securities, would appear to offer value despite the fact that
the current yield advantage is low by historical standards. With regard to
traditional corporate securities given the "steady-as-she-goes" economic
scenario depicted above, these securities do not appear poised to
underperform treasuries anytime soon, although corporate securities, like
most asset- and mortgage-backed securities, would also be considered "tight
to treasuries" by historical standards. With regard to overall credit
quality, the fund's portfolio solidly remains investment grade, with over
60% of fund assets rated "AAA" at the current fiscal year-end, and no
securities rated below "A", or of comparable quality.
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
April 30, 1987 to April 30, 1997, 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 "A" 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, 1997, 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.
** 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.
+ The MLTRIGCI is not adjusted to reflect sales charges, 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 charges.
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, 1997, compared to
the Merrill Lynch Total Return Investment Grade Corporate Index (Short-Term
1-2.99 Years)("MLTRIGCI")+ and the Lipper Short Investment Grade Debt Funds
Average ("LSIGDFA")++.
[Graphic representation "B" 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, 1997, 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.
+ The MLTRIGCI is not adjusted to reflect sales charges, 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 charges.
However, these total returns are reported net of expenses or other fees that
the SEC requires to be reflected in a fund's performance.
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Cusip 31420C209
Cusip 31420C308
1111903ARS (6/97)
[Graphic]
FEDERATED SHORT-TERM INCOME FUND
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectuses of Federated Short-Term Income Fund (the "Fund"), a portfolio
of Federated Income Securities Trust (the "Trust") dated June 30, 1997. This
Statement is not a prospectus. You may request a copy of a prospectus or a
paper copy of this Statement, if you have received it electronically, free
of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1997
[Graphic]Federated Investors
Federated Securities Corp., Distributor
Cusip 31420C209
Cusip 31420C308
1111903B (6/97) [Graphic]
TABLE OF CONTENTS
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 3
Reverse Repurchase Agreements 3
Privately Issued Mortgage-Related Securities 3
Portfolio Turnover 3
Investment Limitations 3
FEDERATED INCOME SECURITIES TRUST MANAGEMENT 5
Fund Ownership 9
Trustee Compensation 9
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
BROKERAGE TRANSACTIONS 10
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 11
Transfer Agent 11
Independent Auditors 11
PURCHASING SHARES 11
Distribution Plan (Institutional Service Shares only) and Shareholder
Services 11
Conversion to Federal Funds 11
DETERMINING NET ASSET VALUE 11
Determining Value of Securities 12
REDEEMING SHARES 12
Redemption in Kind 12
TAX STATUS 12
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 13
YIELD 13
PERFORMANCE COMPARISONS 13
Ecomonic and Market Information 14
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 15
Institutional Clients 15
Bank Marketing 15
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 15
APPENDIX 16
Standard & Poor's Ratings Group ("S&P")
Long-Term Debt Rating Definitions 16
Moody's Investors Service, Inc.
Corporate Bond Rating Definitions 16
Fitch Investors Service, Inc.
Long-Term Debt Ratings 16
Moody's Investors Service, Inc.
Commercial Paper Ratings 16
Standard & Poor's Ratings Group
Commercial Paper Ratings 16
Fitch Investors Service, Inc.
Commercial Paper Ratings Definitions 17
Duff & Phelps Rating Service
(Duff & Pehlps) Long-Term Debt Ratings 17
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Federated Income Securities 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.
Shares of the Fund are offered in two classes, Institutional Shares and
Institutional Service Shares (individually and collectively referred to as
"Shares"). This 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:
* 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.
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.
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.
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
Certain debt securities, such as mortgage-backed and 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. Duration calculated in this manner, commonly
referred to as "effective duration," allows for changing prepayment rates as
interest rates change and expected future cash flows are affected. The
calculation of effective duration will depend upon the investment adviser's
assumed prepayment rate.
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. 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.
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, 1997, and 1996, the portfolio turnover
rates were 55% and 77%, 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: 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 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. 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.
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.
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 Declaration of Trust. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which
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.
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.
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 Fund or its investment adviser owning
individually more than 0.5% of the issuer's securities together own more
than 5% of the issuer's securities.
DIVERSIFICATION OF INVESTMENTS
The Fund will not purchase the securities of any one issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments secured
by the securities of such issuers, such as repurchase agreements) if, as a
result, more than 5% of the value of its assets would be invested in the
securities of such issuer with respect to 75% of its total assets, or
acquire more than 10% of any class of voting securities of any 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.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
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, 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, 1997, 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.
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 association having capital surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
"cash items."
FEDERATED INCOME SECURITIES TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Income Securities Trust, and principal occupations.
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. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, University of Pittsburgh; Director or Trustee of the
Funds.
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; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
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.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, 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
or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
203 Kensington Court
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Former Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee
of the Funds.
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; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public Relations/Marketing/Conference Planning; Director or Trustee 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.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and Secretary
of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Bay Funds; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated
Investment Portfolios; Federated Investment Trust; Federated Master Trust;
Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities
Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty U.S. Government Money Market Trust; Liquid
Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Obligations
Trust II; Money Market Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Biltmore
Funds; The Biltmore Municipal Funds; The Monitor Funds; The Planters Funds;
The Starburst Funds; The Starburst Funds II; The Virtus Funds; Tower Mutual
Funds; Trust for Financial Institutions; Trust for Government Cash Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury
Obligations; Vision Group of Funds, Inc.; Wesmark Funds; and World
Investment Series, Inc.
Federated Securities Corp. also acts as principal underwrite for the
following closed-end investment company: Liberty Term Trust, Inc. -- 1999.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of June 9, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: First Federal Savings &
Loan, Defiance, Ohio, owned approximately 1,720,183 shares (7.29%); Charles
Schwab & Co., Inc., San Francisco, California, owned approximately 1,776,499
shares (7.53%). As of May 9, 1997, 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
116,255 shares (5.63%); A. Martin Johnson, Bloomfield Hills, Michigan, owned
approximately 116,447 shares (5.64%); Balsa & Co., New York, New York, owned
approximately 144,945 shares (7.02%); Charles Schwab & Co., Inc., San
Francisco, California, owned approximately 160,013 shares (7.75%); Moce &
Co., Mattoon, Illinois, owned approximately 200,459 shares (9.71%); and
Trust Company of St. Joseph, St. Joseph, Missouri, owned approximately
811,975 shares (39.35%).
TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue $0 $ 0 for the Trust and
Chairman and Trustee 56 other investment companies in the Fund Complex
Thomas G. Bigley $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
James E. Dowd $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $783.58 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr. $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts $712.24 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for the fiscal year ended April 30, 1997.
# 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, 1997, 1996, and 1995, the Fund's Adviser earned $957,140,
$907,666, and $1,212,210, respectively. Fees of $72,703, $82,939 and
$84,776, respectively for 1997, 1996 and 1995, were waived because of
undertakings to limit the Fund's 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 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: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and dealers 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. 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. During the fiscal years ended April 30, 1997,
1996, and 1995, no brokerage commissions were paid by the Fund.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the Adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and
one or more other accounts managed by the Adviser are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund. In other cases, however, it is believed
that coordination and the ability to participate in volume transactions will
be to the benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
each prospectus. From March 1, 1994 to March 1, 1996, Federated
Administrative Services, a subsidiary of Federated Investors, served as the
Fund's Administrator. For purposes of this Statement of Additional
Information, Federated Services Company and Federated Administrative
Services may hereinafter collectively be referred to as the
"Administrators." For the fiscal years ended April 30, 1997, 1996, and 1995,
the Administrators earned $180,791, $171,686, and $229,413, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company ("State Street Bank"), Boston, MA, is
custodian for the securities and cash of the Trust. Federated Services
Company, Pittsburgh, PA, provides certain accounting and recordkeeping
services with respect to the Trust's portfolio investments. The fee paid for
this service is based upon the level of the Trust's average net assets for
the period plus out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based upon the level of
the Trust's average net assets for the period plus out-of-pocket expenses.
INDEPENDENT AUDITORS
The independent auditors for the Trust are Ernst and Young LLP.
PURCHASING SHARES
Shares are sold at their net asset value ("NAV") 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
prospectus under "Investing in Institutional Shares" and "Investing in
Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
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 Plan (Institutional Service Shares only), the Trustees
expect 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 year ended April 30, 1997, payments in the amount of $40,701
were made pursuant to the Distribution Plan (Institutional Service Shares
only), all of which was paid to financial institutions. In addition, for
this period, the Trust paid shareholder service fees in the amount of
$557,524 (Institutional Shares) and $40,704 (Institutional Service Shares)
of which $557,524 (Institutional Shares) and $1,628 (Institutional Service
Shares) were waived.
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
NAV generally changes each day. The days on which the NAV 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:
* 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
* 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 NAV 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 ("SEC") rules, taking such securities at the same value
employed in determining NAV 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' NAV 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:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
* invest in securities within certain statutory limits; and
* 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:
* the availability of higher relative yields;
* differentials in market values;
* new investment opportunities;
* changes in creditworthiness of an issuer; 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, five-year, and
ten-year periods ended April 30, 1997 were 6.53%, 5.58%, and 6.42%,
respectively, for Institutional Shares. The Fund's average annual total
returns for the one-year and five-year periods ended April 30, 1997, and for
the period from January 24, 1992 (start of performance) to April 30, 1997,
were 6.27%, 5.31% and 5.17%, respectively, for Institutional Service 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 NAV per Share at the end of the
period. The number of Shares owned at the end of the period is based on the
number of Shares purchased at the beginning of the period with $1,000,
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, 1997, was 6.45%
and 6.20% 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 SEC)
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
SEC 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:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the Fund's or either class of Share's expenses; and
* various other factors.
Either class of Shares 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:
* 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 NAV 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.
* 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.
* 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.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which
it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how
such developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the
mutual fund industry, including the growth of the industry, from sources
such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS
Federated Investors 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. These traders handle
trillions of dollars in annual trading volume.
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds, and 17 bond funds with assets approximating
$17.2 billion, and $4.0 billion, respectively. Federated's corporate bond
decision making -- based on intensive, diligent credit analysis -- is backed
by over 21 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the industry.
In 1983, Federated was one of the first fund managers to participate in the
asset-backed securities market, a market totaling more than $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 and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors 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.
BANK MARKETING
Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by 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 -- we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed
by James F. Getz, President, Federated Securities Corp.
* 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: 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.
DUFF & PHELPS RATING SERVICE (DUFF & PHELPS) LONG-TERM DEBT RATINGS
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for U.S. Treasury debt.
AA -- High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A -- Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB -- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category.
Appendix
A. The graphic presentation here displayed consists of a legend in the
upper left quadrant indicating the components of the corresponding line graph.
Federated Short-Term Income Fund (Institutional Shares) (the "Fund") is
represented by a solid line. The Merrill Lynch Total Return Investment Grade
Corporate Index (Short-Term 1-2.99 Years) ("MLTRIGCI") is represented by a
broken line. The Lipper Short Investment Grade Debt Funds Average ("LSIGDFA") is
represented by a dashed line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $25,000 investment in the Fund,
MLTRIGCI, and LSIGDFA. The "y" axis reflects the cost of the investment. The "x"
axis reflects annual computation periods from April 30, 1987, through April 30,
1997. The right margin reflects the ending value of the hypothetical investment
in the Fund as compared to MLTRIGCI and LSIGDFA; the ending values are $46,570,
$54,648, and $48,359, respectively. There is also a legend in the bottom center
of the graphic presentation which indicates the Average Annual Total Return for
the period ended April 30, 1997, beginning with the one-, five-, and ten-year
periods, and the inception date; the Average Annual Total Returns are 6.53%,
5.58%, 6.42%, and 6.61%, respectively.
B. The graphic presentation here displayed consists of a legend in the
upper left quadrant indicating the components of the corresponding line graph.
Federated Short-Term Income Fund (Institutional Service Shares) (the "Fund") is
represented by a solid line. The Merrill Lynch Total Return Investment Grade
Corporate Index (Short-Term 1-2.99 Years) ("MLTRIGCI") is represented by a
broken line. The Lipper Short Investment Grade Debt Funds Average ("LSIGDFA") is
represented by a dashed line. The line graph is a visual representation of a
comparison of change in value of a hypothetical $25,000 investment in the Fund,
MLTRIGCI, and LSIGDFA. The "y" axis reflects the cost of the investment. The "x"
axis reflects annual computation periods from the Fund's start of business,
January 24 , 1992, through April 30, 1997. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to MLTRIGCI and
LSIGDFA; the ending values are $32,611, $35,105, and $32,933, respectively.
There is also a legend in the bottom center of the graphic presentation which
indicates the Average Annual Total Return for the period ended April 30, 1997,
beginning with the one-, and five-year periods, and the inception date; the
Average Annual Total Returns are 6.27%, 5.31%, and 5.17%, respectively.
FEDERATED INCOME SECURITIES TRUST
Federated Investors
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(412) 288-1900
June 30, 1997
EDGAR Operations Branch
Securities and Exchange Commission
Division of Investment Management
450 Fifth Street, Northwest
Washington, DC 20549
Dear Sir or Madam:
RE: FEDERATED INCOME SECURITIES TRUST (the "Trust")
Federated Short-Term Income Fund (the "Fund")
1933 Act File No. 33-3164
1940 Act File No. 811-4577
The annual report of Federated Short-Term Income Fund, a portfolio of
the above-referenced Trust, is hereby electronically transmitted pursuant to
Section 30(b)(2) of the Investment Company Act of 1940 and Rule 30b2-1
thereunder. The annual report information (excluding the line graph information
and the Management Discussion and Analysis (the "MD&A")is contained in Part
A/Prospectuses, dated June 30, 1997, of this filing and does not pertain to Part
B/Statement of Additional Information. However, the line graphs and MD&A's with
respect to the Fund are included in the electronic filing as part of the Fund's
annual report. Please note that the line graphs are included by use of a
narrative description in an appendix to this filing.
If you have any questions regarding this filing, please call me at
(412) 288-1940.
Very truly yours,
/s/ Amy B. Gotz
Amy B. Gotz
Compliance Analyst
Enclosures
