Putnam
Federal
Income
Trust
[Artwork]
SEMIANNUAL REPORT
April 30, 1994
[Putnam Logo]
Boston * London * Tokyo
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PERFORMANCE HIGHLIGHTS
"This fund's flexible strategy enables it to invest in several sectors of the
fixed income market, providing greater investment opportunities than the average
U.S. government fund."
- - Max Senter, Fund Manager
Performance should always be considered in light of a fund's investment strate-
gy. Putnam Federal Income Trust is designed for investors seeking high current
income consistent with preservation of capital primarily through U.S. government
securities.
SEMIANNUAL RESULTS AT A GLANCE
Six months ended 4/30/94
Total return: NAV POP
- -----------------------------------------------------------------------
(change in value plus reinvested earnings) -4.19% -8.72%
Current return:
(end of period:)
Current dividend rate (1) 6.70% 6.38%
Current 30-day SEC yield (2) 5.54 5.28
Share value:
10/31/93 $10.47 $10.99
4/30/94 $ 9.67 10.15
Distributions: Income Capital gains Total
$0.372 ___ $0.372
- -----------------------------------------------------------------------
Performance data represent past results. For performance over long periods,
see pages 8 and 9. POP assumes 4.75% maximum sales charge.
(1) Income portion of most recent distribution, divided by NAV or POP at
end of period.
(2) Based only on investment income, calculated per SEC guidelines.
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FROM THE CHAIRMAN [Photograph of George Putnam]
*(C) Karsh, Ottowa
Dear Shareholder:
Many shareholders have been asking us whether we think the volatility that hit
the securities markets in February and March was a prelude to further decline
during the rest of 1994. We have been pointing out that the recent adjustments
in the markets are a natural occurrence at this stage of the economic recovery.
Some volatility will likely continue for a while as investors digest new reali-
ties in areas such as interest rates, inflation, and the pace of the recovery.
But the economy is still strong, interest rates remain historically low, and
inflation appears under control. In our view, overall prospects for the long
term are still positive.
Seasoned investors know there will occasionally be periods of rough going. But
experience has also taught them that long-term investment programs should rarely
be altered in response to short-term events.
In the report that follows, fund managers Ken Taubes and Max Senter discuss the
performance of Putnam Federal Income Trust in this market environment.
Respectfully yours,
George Putnam
June 15, 1994
* (C) Copyright.
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REPORT FROM THE FUND MANAGERS
KENNETH J. TAUBES, LEAD MANAGER
MAX S. SENTER
The period in which we now write is indeed a challenging one. In early February,
after almost five years of declining short-term interest rates, the Federal Re-
serve Board raised the federal funds rate by a quarter of a percentage point.
Rates rose twice more before the close of Putnam Federal Income Trust's semi-
annual period on April 30, 1994.
The first two increases had a negative effect on the bond markets, culminating
in a complete reversal of investor psychology. However we believe that a certain
amount of volatility is natural at this stage in the economic cycle. After
years of steadily declining interest rates, investors are now adjusting to a
whole new playing field with a new set of realities. In the current environment,
we should expect higher short-term interest rates as the Fed continues its cru-
sade against inflation.
Given market conditions, your Fund's results for the semiannual period were un-
derstandable, although dissapointing. The fund posted a total return of -4.19%
at net asset value and -8.72% at the maximum public offering price for the pe-
riod. This performance, while negative, should be taken in the context of a wi-
de-scale bond market decline. For more complete details, please turn to the Per-
formance summary and charts on page 8.
DEFENSIVE POSTURE PRESERVES VALUE
Although the general reaction to the Fed tightening was one of surprise, we had,
in fact, anticipated such a move as early as the fourth quarter of 1993. At that
time, short-term rates were practically zero when adjusted for inflation. While
it was not possible to predict exactly when these rates would pick up again, it
was obvious that they would fairly soon. In anticipation, we made certain de-
fensive changes to the portfolio. The chart on page 5 shows portfolio alloca-
tions at the beginning and at the end of the period.
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The most significant decision we made in recent months, however, was not to
change a strategy, but to retain one. We opted to continue the barbell strategy
we had put in place earlier. As we have noted in previous reports, a barbell
strategy is one in which assets are concentrated in both long-term and short-
term investments. If the yield curve flattens because long-term bond prices ri-
se, pushing down yields, we benefit from enhanced prices. If short-term rates
rise, we benefit from increasing levels of income.
Our barbell position was instituted to maximize the fund's total-return poten-
tial, given our anticipation of a flattening yield curve. During the semiannual
period, this strategy was particularly defensive and enabled the fund to out-
perform intermediate-term Treasuries.
INCREASED EMPHASIS ON INTERNATIONAL HOLDINGS
In early 1994, as we grew more pessimistic about prospects for the U.S. bond
market, we began building up an overseas position in markets that we felt had
stronger potential. Many countries outside the United States are still in the
sluggish phase of their economic cycles. These periods are generally rewarding
for bondholders as central banks lower interest rates
(Bar chart)
PORTFOLIO COMPOSITION*
10/31/93 4/30/94
U.S. Treasuries 50.4% 50.6%
Mortgage-related 44.7 32.9
Corporate Notes and Bonds 3.0 6.1
Foreign Bond and Notes 0.0 10.4
Short-term Investments 0.8 0.0
* Based on net assets.
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to help accelerate economic activity - precisely what happened in the United
States during the market rise of 1990-1993.
Despite divergent economic situations, bond markets around the world declined
alongside the U.S. bond market in the first quarter of 1994, although to a le-
sser degree. While this attests to the increasing interrelatedness of the glo-
bal economy, we believe that these foreign markets will soon break away from
the U.S. market and once again react to their own economic activity. In antici-
pation, we have added a 5% position in Japanese government securities and a
2.5% position in both France and the United Kingdom.
NEW ALLOCATIONS IN MORTGAGE-BACKED HOLDINGS
The performance of the your fund's mortgage-backed holdings has been somewhat
mixed. At the start of the period, with interest rates still historically low,
investors anticipated continued high refinancing activity and sold mortgage-
backed securities accordingly. The value of these holdings suffered. Later in
the period, however, refinancing activity declined, and the fund's collaterali-
zed mortgage obligations (CMOs), outperformed relative to treasuries.
In January, we reduced the fund's CMO position to just 1.2%, from about 24% at
the start of the period. We believed that, given the prevailing level of inte-
rest rates, investors had overreacted to the slowdown in prepayments and bid
the value of these securities up too high. We reinvested the proceeds in inter-
national and corporate securities.
OUTLOOK
During the next several months, we expect short-term rates to continue to rise
and the yield curve to flatten, but at a much slower pace than that of the past
three months. It is likely that we will shift portfolio assets from the current
barbell to a
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(Line chart)
BOND PRICES FALL AMID RISING RATES
Lehman Bros. Federal
Govt. Bond Funds
Index Rate
10/31/93 0.00% 3.125%
11/30/93 -1.10 3.125
12/31/93 -0.71 3.000
1/31/94 0.64 3.500
2/28/94 -1.49 3.500
3/31/94 -3.70 4.500
4/30/94 -4.46 4.000
The chart illustrates the inverse relationship between in-
terest rates and bond prices. As short-term rates (represen-
ted here by the federal funds rate) rose during the fund's
semiannual period, returns on government securities (Lehman
Brothers Government Bond Index) declined. Federal funds rate
shown at months' end. Index represents monthly total returns
since 10/31/93.
strategy that concentrates on intermediate-term securities. In an environment
of decreased volatility, we expect a concentration of investments in these se-
curities to outperform our current strategy by providing higher levels of in-
come.
In addition, we will maintain the current 29% weighting in pass-through mort-
gage-backed securities, which we now believe represent fair value. And while
the short-term prospects for the U.S. Treasury market remain less than desira-
ble, your fund has the flexibility to take advantage of investment opportunities
elsewhere, - a feature not found in the typical U.S. government fund investment.
In particular, we will continue to seek opportunities in the foreign and corpo-
rate bond sectors of the fixed income market.
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PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time, assum-
ing you held the shares through the entire period and reinvested all distribu-
tions back into the fund.
We show total return in two ways: On a cumulative long-term basis and how the
fund might have grown each year, on average, over varying periods (see the ta-
bles below).
We provide total returns for varying lengths of time ending on April 30, 1994,
the close of the fiscal period covered in this report. To make comparisons with
other investments easier, we also provide data for periods ending on March 31,
1994, the most recent calendar quarter. Finally, we have provided terms and de-
finitions as they apply to your fund.
TOTAL RETURN FOR PERIODS ENDING 4/30/94*
Lehman Bros.
Fund Government Bond
NAV POP Index CPI
- ---------------------------------------------------------------------------
6 months -4.19% -8.72% -4.46% 1.17%
- ---------------------------------------------------------------------------
1 year -1.43 -6.13 1.10 2.36
- ---------------------------------------------------------------------------
5 years 48.27 41.28 58.39 19.74
Annual average 8.20 7.16 9.63 3.67
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Life od fund + 68.69 60.71 93.41 35.35
Annual average 6.83 6.18 8.69 3.90
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TOTAL RETURN FOR PERIODS ENDING 3/31/94*
(most recent calendar quarter)
Fund
NAV POP
- ---------------------------------------------------------------------------
6 months -3.10% -7.66%
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1 year -0.18 -4.93
- ---------------------------------------------------------------------------
5 years 52.67 45.39
Annual average 8.83 7.77
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Life of fund + 70.36 62.30
Annual average 7.04 6.38
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+ The fund began operations on June 2, 1986.
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TERMS AND DEFINITIONS
NET ASSET VALUE (NAV) is the value of all fund assets, minus liabilities, divi-
ded by the number of outstanding shares. It does not include any initial or con-
tingent deferred sales charges.
PUBLIC OFFERING PRICE (POP) is the price of a fund share plus the maximum sales
charge levied at the time of purchase. POP performance figures shown here assume
the maximum 4.75% sales charge.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS GOVERNMENT BOND INDEX is an unmanaged list of publicly issued
U.S. Treasury obligations and debt obligations of U.S. government agencies (ex-
cluding mortgage-backed securities). The average quality of bonds included in
the index may be higher than the average quality of those bonds in which the
fund customarily invests. The fund's securities will not match those in the in-
dex.
CONSUMER PRICE INDEX is a commonly used measure of inflation. It does not repre-
sent an investment return.
* Performance data shown on page 8 represent past results. Investment returns
and principal value of the fund will fluctuate so an investor's shares, when
sold, may be worth more or less than their original cost. Fund performance
data do not take into account any adjustment for taxes payable on reinvested
distributions.
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LIFE CYCLE INVESTING
As we move through life, our investment needs change. As these needs change, so
does the way we allocate our assets. Here are some basic rules for setting up
and maintaining an investment program and some examples of how assets might be
allocated.
DETERMINE YOUR INVESTMENT OBJECTIVES.
Objectives may include a new home, college education expenses, or retirement.
EVALUATE YOUR RISK TOLERANCE.
Generally, risk tolerance is higher for younger investors with longer timelines
and lower for older investors who may depend on their investment for current
income.
ALLOCATE YOUR INVESTABLE SAVINGS.
Your investment advisor will help you determine how much of your investable do-
llars should be allocated to each investment category.
CHOOSE THE APPROPRIATE PUTNAM FUNDS.
Using Putnam's free exchange privilege, you can adjust your own Putnam portfo-
lio of funds as your financial needs change - without a service fee.*
Look at the facing page for some ways you can allocate your assets, then turn
the page to see how the Putnam Fund Selector (TM)** can help you make your
choices.
* Putnam reserves the right to change or terminate the exchange privilege. In
some cases, a sales charge may apply. See prospectus for details.
** (TM) Trademark.
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FOUR WAYS TO ALLOCATE ASSETS
(4 Pie charts)
SEEKING MAXIMUM GROWTH
Risk tolerance:
Generally investors with a higher risk tolerance (often in their 20 and early
30s.)
(chart values)
30%-40% Growth and Income .............. 38%
40%-50% Growth ......................... 48%
5%-20% Income or tax-free income ...... 14%
SEEKING GROWTH AND SOME INCOME
Risk tolerance:
Generally investors with a high to moderate risk tolerance (often in their late
30s and early 40s)
(chart values)
40%-50% Growth and Income .............. 40%
30%-40% Growth ......................... 30%
10%-30% Income or tax-free income ...... 30%
SEEKING INCOME AND SOME GROWTH WITH PROTECTION AGAINST INFLATION
Risk tolerance:
Generally investors with a moderate risk tolerance (often in their late 40s and
50s.)
(chart values)
30%-40% Growth and Income .............. 35%
10%-20% Growth ......................... 15%
25%-60% Income or tax-free income ...... 50%
SEEKING HIGH CURRENT INCOME AND PROTECTION AGAINST INFLATION
Risk tolerance:
Generally investors with a moderate to low risk tolerance (often over 60 and
retired)
(chart values)
20%-30% Growth and Income .............. 26%
5%-10% Growth ......................... 8%
40%-70% Income or tax-free income ...... 66%
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THE PUTNAM FUND SELECTOR (TM)*
The Putnam Fund Selector shows the many opportunities for investors within every
investment strategy. All investors should first accumulate a base of conservati-
ve, cash-equivalent investments. Then, with the help of your investment advisor,
diversify your portfolio by investing in the Putnam Family of Funds.
(Pyramid graphic)
Risk/Reward
PUTNAM GROWTH FUNDS
PUTNAM GRAOWTH AND INCOME FUNDS
PUTNAM INCOME OR TAX-FREE INCOME FUNDS
MOST CONSERVATIVE INVESTMENTS
* (TM) Trademark.
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<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund Diversify Equity Trust
Energy-Resources Trust Europe Growth Fund
Global Growth Fund Health Sciences Trust
Investors Fund New Opportunities Fund
OTC Emerging Growth Fund Overseas Growth Fund
Vista Fund Voyager Fund
PUTNAM GROWTH AND INCOME FUNDS
Convertible Income-Growth Trust Dividend Growth Fund
Equity Income Fund The George Putnam Fund of Boston
The Putnam Fund for Growth and Income Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund American Government Income Fund
Balanced Government Fund Corporate Asset Trust
Diversified Income Trust Federal Income Trust
Global Governmental Income Trust High Yield Advantage Fund
High Yield Trust Income Fund
Managed Income Trust U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Intermediate Tax Exempt Fund Municipal Income Fund
Tax Exempt Income Fund Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
MOST CONSERVATIVE INVESTMENTS +
Money market funds:
Putnam Daily Dividend Trust
Putnam Tax Exempt Money Market Fund
CDs and savings accounts +
LIFESTAGE (SM) FUNDS
Putnam Asset Allocation Funds - three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments to help
maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Growth Portfolio
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
* Not available in all states.
+ Certificates of deposit offer a fixed rate of return and may be insured, up
to certain limits, by federal/state agencies. Savings accounts may also be
insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus for
any Putnam fund. It contains more complete information, including charges
and expenses. Please read it carefully before you invest or send money.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the six months ended April 30, 1994
To the Trustees and Shareholders of
Putnam Federal Income Trust
We have audited the accompanying statement of assets and liabilities of Putnam
Federal Income Trust, including the portfolio of investments owned, as of April
30, 1994, the related statement of operations for the six months then ended, the
statement of changes in net assets for the six months then ended and for the
year ended October 31, 1993, and the "Financial Highlights" for the six months
then ended, for each of the six years in the period ended October 31, 1993,
for the eleven months ended October 31, 1987 and for the period June 2, 1986
(commencement of operations) to November 30, 1986. These financial statements
and "Financial Highlights" are the responsibility of the Trust'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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and "Financial Hi-
ghlights" 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, 1994 by correspondence with the custodian and brokers. An audit also inclu-
des 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 Putnam
Federal Income Trust as of April 30, 1994, the results of its operations for
the six months then ended, the changes in its net assets for the six months then
ended and for the year ended October 31, 1993, and the "Financial Highlights"
for the six months ended April 30, 1994, for each of the six years in the period
ended October 31, 1993, for the eleven months ended October 31, 1987 and for the
period June 2, 1986 (commencement of operations) to November 30, 1986, in con-
formity with generally accepted accounting principles.
Coopers & Lybrand
Boston, Massachusetts
June 13, 1994
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PORTFOLIO OF INVESTMENTS OWNED
April 30, 1994
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (79.9%)(a)
Principal Amount Value
$ 24,048,000 Federal Home Loan Mortgage Corporation, 10s
with various due dates to June 15, 2020 $ 25,539,337
Federal National Mortgage Association
2,500,000 10.2s, September 25, 2018 2,648,438
FEDERAL NATIONAL MORTGAGE ASSOCIATION
INTEREST ONLY STRIPS
2,020,570 8 1/2s, August 25, 2022 (b) 545,565
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
863,518 11 1/2s, with various due dates to August 15, 2013 995,204
2,952,544 10s, with various due dates to October 15, 2020 3,183,211
11,048,749 9s, with various due dates to June 15, 2009 11,552,848
8,956,265 8 1/2s, with various due dates to August 15, 2008 9,168,976
26,126,741 8s, with various due dates to April 15, 2008 26,192,058
10,045,568 7 1/2s, with various due dates to August 15, 2007 10,042,429
40,265,676 7s, with various due dates April 15, 2024 38,216,351
36,030,643 6 1/2s, with various due dates to February 15, 2024 32,607,732
67,800,000 U.S. Treasury Bonds 8 1/4s, August 15, 2009 72,720,154
27,000,000 U.S. Treasury Notes 11 5/8s, November 15, 1994 27,995,625
12,100,000 U.S. Treasury Notes 11 1/4s, February 15, 1995 12,682,313
41,900,000 U.S. Treasury Notes 9 1/8s, May 15, 1999 46,372,706
12,000,000 U.S. Treasury Notes 7 7/8s, April 15, 1998 12,573,750
4,800,000 U.S. Treasury Notes 5 7/8s, February 15, 2004 4,404,000
58,000,000 U.S. Treasury Notes 5 1/2s, February 28, 1999 55,335,625
18,035,000 U.S. Treasury Notes 5s, January 31, 1999 16,868,361
---------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $422,663,194) $409,644,683
COLLATERALIZED MORTGAGE OBLIGATIONS (1.2%)(a)
Principal Amount Value
2,445,662 Homestead Mortgage Acceptance Corp. Ser. E,
11.2s, November 1, 2015 2,537,374
3,809,326 Prudential Home Private 6s, August 25, 2000 3,426,010
---------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $5,233,174) $ 5,963,384
FOREIGN BONDS AND NOTES (11.3%)(a)(c)
Principal Amount Value
A$ 5,000,000 Australia (Government of) bonds 6 1/4s 4,515,625
FF 1,000,000 France (Government of) OAT 8 1/2s, 2000 11,856,875
Y 6,568,000 Japan (Government of) bonds 5 1/2s, 2002 28,809,675
L 7,800,000 United Kingdom Treasury notes 9s, 2000 12,523,875
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TOTAL FOREIGN BONDS AND NOTES
(cost $57,442,269) $ 57,706,050
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CORPORATE BONDS AND NOTES (6.6%)(a)
Principal Amount Value
$ 10,900,000 Chrysler Corp. 5 5/8s, 1999 $ 10,164,250
15,300,000 New England Telephone & Telegraph Co.,
deb. 7 7/8s, 2029 16,012,406
7,000,000 Procter & Gamble 8s, 1996 7,455,000
---------------
TOTAL CORPORATE BONDS AND NOTES
(cost $35,791,624) $ 33,631,656
SHORT-TERM INVESTMENTS (-%)(a)(cost $237,070)
Principal Amount Value
$ 237,000 Interest in $504,971,000 repurchase
agreement dated April 29, 1994 with
Kidder Peabody & Co. Inc. due May 4, 1994
with respect to various U.S. Treasury
obligations--maturity value of
$237,070 for an effective yield of 3.55% $ 237,070
---------------
TOTAL INVESTMENTS
(cost $521,367,331)(d) $507,182,843
(a) Percentages indicated are based on total net assets of $512,490,951 which
correspond to a net asset value per share of $9.67.
(b) Interest Only (I0) Strip represents the right to receive the monthly inte-
rest payments on an underlying pool of morgage loans. Payments of principal
on the pool reduce the nominal value of the IO holding.
(c) Foreign currency-denominated. Market value is translated at the current ex-
change rate.
(d) The aggregate identified cost on a tax basis is $521,921,607, resulting in
gross unrealized appreciation and depreciation of $11,858,724 and
$26,597,488, respectively, or net unrealized depreciation of $14,738,764.
<TABLE>
<CAPTION>
Forward Currency Contracts Outstanding at April 30, 1994
----------------------------------------------------------------------------------------------
Unrealized
Market Aggregate Delivery Appreciation/
Value Face Value Date (Depreciation)
<S> <C> <C> <C> <C>
British Pounds (Sell) $2,643,894 $ 2,582,583 6/3/94 $ (61,311)
British Pounds (Sell) 6,553,457 6,433,001 6/3/94 (120,456)
British Pounds (Sell) 3,965,841 3,884,064 6/3/94 (81,777)
French Francs (Sell) 2,643,478 2,557,366 6/3/94 (86,112)
French Francs (Sell) 3,965,217 3,828,206 6/3/94 (137,011)
French Francs (Sell) 6,352,993 6,154,608 6/3/94 (198,385)
Japanese Yen (Sell) 29,329,136 28,812,490 7/27/94 (516,646)
Japanese Yen (Buy) (9,776,381) (9,604,164) 7/27/94 172,217
----------------------------------------------------------------------------------------------
$(1,029,481)
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1994
<S> <C>
ASSETS
Investments in securities, at value
(identified cost $521,367,331) (Note 1) $507,182,843
Cash 5,828,021
Interest receivable 7,954,232
Receivable for shares of the Fund sold 37,603
Receivable for securities sold 28,332,768
Receivable for open forward currency contracts 172,217
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TOTAL ASSETS $549,507,684
LIABILITIES
Payable for securities purchased $ 33,828,618
Payable for shares of the Fund repurchased 693,724
Payable for compensation of Manager (Note 2) 787,969
Payable for administrative services (Note 2) 5,300
Payable for compensation of Trustees (Note 2) 195
Payable for investor servicing and custodian fees (Note 2) 141,533
Payable for distribution fees (Note 2) 106,296
Other accrued expenses 136,415
Payable for open forward currency contracts 1,201,698
Payable for closed forward currency contracts 114,985
----------------------------------------------------------------------------------------
TOTAL LIABILITIES 37,016,733
----------------------------------------------------------------------------------------
NET ASSETS $512,490,951
REPRESENTED BY
Paid-in capital (Notes 1, 4 and 5) $753,223,372
Undistributed net investment income 2,913,163
Accumulated net realized loss on investment transactions (228,431,615)
Net unrealized depreciation of investments (15,213,969)
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Total - Representing net assets
applicable to capital shares outstanding $512,490,951
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
----------------------------------------------------------------------------------------
Net asset value and redemption price per share
($512,490,951 divided by 53,024,289 shares) $9.67
----------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $9.67)* $10.15
----------------------------------------------------------------------------------------
<FN>
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended April 30, 1994
<S> <C>
INTEREST INCOME $ 22,418,746
EXPENSES:
----------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,651,648
----------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 335,385
----------------------------------------------------------------------------------------
Reports to shareholders 21,094
----------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,233
----------------------------------------------------------------------------------------
Auditing 26,599
----------------------------------------------------------------------------------------
Legal 8,364
----------------------------------------------------------------------------------------
Postage 102,831
----------------------------------------------------------------------------------------
Administrative services (Note 2) 7,752
----------------------------------------------------------------------------------------
Distribution fees (Note 2) 693,263
----------------------------------------------------------------------------------------
Registration fees 442
----------------------------------------------------------------------------------------
Other 21,107
----------------------------------------------------------------------------------------
Total Expenses 2,879,718
----------------------------------------------------------------------------------------
Net Investment Income 19,539,028
----------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (28,375,439)
----------------------------------------------------------------------------------------
Net realized loss on forward currency contracts (Notes 1 and 3) (1,235,728)
----------------------------------------------------------------------------------------
Net unrealized depreciation of investments, and
forward currency contracts during the period (13,639,834)
----------------------------------------------------------------------------------------
Net loss on investment transactions (43,251,001)
----------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (23,711,973)
----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
April 30 October 31
1994 1993
DECREASE IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $19,539,028 $50,224,400
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (28,375,439) 10,697,716
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on forward currency contracts (1,235,728) (528,884)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments,
forward currency contracts options and TBA sale commitments (13,639,834) (9,085,741)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (23,711,973) 51,307,491
- ---------------------------------------------------------------------------------------------------------------
Undistributed net investment income included
in price of shares sold and repurchased, net (Note 1) --- (7,932)
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (20,715,476) (50,490,037)
- ---------------------------------------------------------------------------------------------------------------
Net realized gains on investments --- ---
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (43,263,085) (56,283,990)
- ---------------------------------------------------------------------------------------------------------------
Total Decrease in Net Assets (87,690,534) (55,474,468)
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 600,181,485 655,655,953
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed
net investment income and distributions
in excess of net investment income of
$2,913,163 and $273,569 respectively) $512,490,951 $600,181,485
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS*
(For a share outstanding throughout the period)
For the period
Eleven June 2, 1986
months (commencemet
Six Months ended ended of operations)
April 30 Year ended October 31 October31 to November 30
1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.47 $10.47 $10.52 $ 9.90 $10.21 $10.07 $10.04 $11.46 $11.45
Investment Operations
Net Investment Income .35 .83 .84 .80 .82 .84 .83 .76 .41
Net Realized and
Unrealized Gain
(Loss) on Investments (.78) -- (.05) .62 (.29) .14 .10 (1.05) .23
Total from
Investment Operations (.43) (.83) .79 1.42 .53 .98 .93 (.29) .64
Less Distributions(a):
From Net Investment
Income (.37) (.83) (.72) (.80) (.82) (.84) (.81) (.77) (.42)
From Net Realized
Gain on Investments -- -- (.12) -- -- -- -- (.17) (.19)
Paid-In Capital -- -- -- -- (.02) -- (.09) (.19) (.02)
Total Distributions (.37) (.83) (.84) (.80) (.84) (.84) (.90) (1.13) (.63)
Net Asset Value,
End of Period $9.67 $10.47 $10.47 $10.52 $ 9.90 $10.21 $10.07 $10.04 $11.46
Total Investment
Return at
Net Asset Value (%) (b) (8.38)(c) 8.17 7.75 14.90 5.44 10.37 9.66 (2.75)(c) 11.44(c)
Net Assets,
End of Period
(in thousands) $512,491 $600,181 $655,656 $730,319 $807,890 $1,002,508 $1,345,223 $2,087,744 $ 997,390
Expenses to Average
Net Assets (c) 1.03(c) 1.05 1.11 1.17 1.13 1.09 1.01 1.00(c) 1.10(c)
Ratio of Net
Investment Income to
Average Net Assets (%) 6.99(c) 7.81 6.83 7.90 8.17 8.55 8.46 7.57(c) 6.68(c)
Portfolio Turnover (%) 199.79(d) 150.05 248.37 215.17 269.04 241.99 24.71 130.14(d) 149.84(d)
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Financial Highlights for periods ended through October 31, 1992 have been restated to conform with requirements issued by the
SEC in April, 1993. As of November, 1993, the Fund discontinued the use of equalization accounting (see note 1 to Notes to
Financial Statements).
(a) See Note 1 to the financial statements. Under the Fund's prior policy, distributions were based on projections of its estimated
net investment income and net realized short-term gain. This distribution policy may at times have resulted in a return of ca-
pital to shareholders.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Annualized.
(d) Not annualized.
</TABLE>
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
April 30, 1994
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The Fund seeks high cu-
rrent income, consistent with preservation of capital, through investments pri-
marily in U.S. government securities.
The following is a summary of significant accounting policies consistently fo-
llowed by the Fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
A) SECURITY VALUATION Investments for which market quotations are readily avail-
able are stated at market value, which is determined using the last reported sa-
le price, or, if no sales are reported - as in the case of some securities tra-
ded over-the-counter - the last reported bid price, except that certain U.S. go-
vernment obligations are stated at the mean between the bid and asked prices.
Short-term investments having remaining maturities of 60 days or less are stated
at amortized cost, which approximates market value, and other investments are
stated at fair value following procedures approved by the Trustees.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange ra-
tes are not segregated from gains and losses that arise from changes in market
prices of investments. The effects on net investment income arising from changes
in exchange rates are also not segregated.
B) JOINT TRADING ACCOUNT Pursuant to an exemptive order issued by the Securities
and Exchange Commission, the Fund may transfer uninvested cash balances into a
joint trading account, along with the cash of other registered investment com-
panies managed by Putnam Investment Management, Inc., (Putnam Management) the
Fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and cer-
tain other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C) REPURCHASE AGREEMENTS The Fund, or any other joint trading account, through
its custodian, receives delivery of the underlying securities, the market value
of which at the time of purchase is required to be in an amount at least equal
to the resale price, including accrued interest. The Fund's Manager is responsi-
ble for determining that the value of these underlying securities is at all ti-
mes at least equal to the resale price, including accrued interest.
D) FORDWARD CURRENCY CONTRACTS A forward currency contract is an agreement be-
tween two parties to buy and sell a currency at a set price on a future date.
The market value of the contract will fluctuate with changes in currency exchan-
ge rates. The contract is "marked-to-market" daily and the change in market va-
lue is recorded by the Fund as an unrealized gain or loss. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at time it was
closed. The maximum potential loss from forward currency contracts is the aggre-
gate face value in U.S.
<PAGE>
<PAGE>
dollars at time the contract was opened; however, management believes the like-
lihood of such a loss to be remote.
E) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis. Discount on zero coupon bonds
is amortized according to the effective yield method.
F) FEDERAL TAXES It is the policy of the Fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the In-
ternal Revenue Code applicable to regulated investment companies. It is also the
intention of the Fund to distribute an amount sufficient to avoid imposition of
any excise tax under Section 4982 of the Internal Revenue Code of 1986. There-
fore, no provision has been made for federal taxes on income, capital gains or
unrealized appreciation of securities held and excise tax on income and capital
gains.
At October 31, 1993, the Fund had a capital loss carryover of approximately
$196,887,000. Of this amount, $63,617,000, $118,265,000 and $15,0005,000 will
expire October 31, 1996, 1997 and 1998 respectively. In order to provide more
level daily distributions, the Fund may at times pay taxable distributions from
net realized short-term gains that could have been retained by the Fund and off-
set by the capital loss carryover. In such circumstances, the Fund would lose
the benefit of the carryover.
G) DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded by
the Fund on the ex-dividend date. Distributions are declared from net investment
income based on projections of the net investment income that the Fund is likely
to earn over the longer term. At certain times, the Fund may continue to pay
monthly distributions at a level rate even though, as a result of market condi-
tions or investment decisions, the Fund may not achieve projected investment re-
sults for a given period.
H) EQUALIZATION Prior to November 1, 1993, the Fund used the accounting practice
known as equalization to keep a continuing shareholder's per share interest in
undistributed net investment income unaffected by sales or repurchases of Fund
shares. This was accomplished by allocating a per share portion of the proceeds
from sales and the costs of repurchases of shares to undistributed net invest-
ment income.
As of November 1, 1993, the Fund discontinued using equalization. This change
has no effect on the Fund's total net assets, net asset value per share, or its
net increase (decrease) in net assets from operations. Discontinuing the use of
equalization will result in simpler financial statements. The cumulative effect
of the change was to increase undistributed net investment income and decrease
paid-in-capital previously reported through October 31, 1993 by $32,765.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management and investment advisory servi-
ces, is paid quarterly based on the average net
<PAGE>
<PAGE>
assets of the Fund for the quarter. Such fee is based on the following annual
rates: 0.75% of the first $100 million of average net assets, 0.65% of the next
$100 million, 0.55% of the next $300 million, 0.45% of the next $500 million,
and 0.4% of any amount over $1 billion, subject, under current law, to reduc-
tion in any year to the extent that expenses (exclusive of distribution fees,
brokerage, interest and taxes) of the Fund exceed 2.5% of the first $30 million
of average net assets, 2% of the next $70 million, and 1.5% of any excess over
$100 million and by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of the Manager on the Fund's portfolio tran-
sactions.
The Fund also reimburses the Manager for the compensation and related expenses
of certain officers of the Fund and their staff who provide administrative ser-
vices to the Fund. The aggregate amount of all such reimbursements is determined
annually by the Trustees. For the six months ended April 30, 1994, the Fund paid
$7,752 for these services.
Trustees of the Fund receive an annual Trustee's fee of $1,500 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the Fund are provided by Putnam Fiduciary Trust Company
(PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent func-
tions are provided by Putnam Investor Services, a division of PFTC. Fees paid
for these investor servicing and custodial functions for the six months ended
April 30, 1994 amounted to $335,385. Investor servicing and custodian fees re-
ported in the Statement of operations for the six months ended April 30, 1994
have been reduced by credits allowed by PFTC.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the In-
vestment Company Act of 1940. The purpose of the Plan is to compensate Putnam
Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc., for
services provided and expenses incurred by it in distributing shares of the
Fund. The Trustees have approved payment by the Fund to Putnam Mutual Funds
Corp. at an annual rate of up to 0.25% of the Fund's average net assets. For the
six months ended April 30, 1994 , the Fund paid $693,263 in distribution fees.
During the six months ended April 30, 1994, Putnam Mutual Funds Corp., acting as
an underwriter, received net commissions of $22,364 from the sale of shares of
the Fund.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the six months ended April 30, 1994 , purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $183,913,784 and $48,718,891, respectively. Purchases and sales of
U.S. government obligations aggregated $904,360,173 and $1,079,421,015, res-
pectively. In determining the net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
<PAGE>
<PAGE>
The following is a summary of forward currency contracts activity during the
period:
Sales of forward
currency contracts
Aggregate
Face Value
- -------------------------------------------
Contracts opened $91,414,970
- -------------------------------------------
Contracts closed (37,162,652)
- -------------------------------------------
Opened at end of period $54,252,318
- -------------------------------------------
Purchases of forward
currency contracts
Aggregate
Face Value
- -------------------------------------------
Contracts opened $9,604,164
- -------------------------------------------
Contracts closed ---
- -------------------------------------------
Opened at end of period $9,604,164
- -------------------------------------------
NOTE 4
CAPITAL SHARES
At April 30, 1994, there was an unlimited number of shares of beneficial in-
terest authorized. Transactions in capital shares were as follows:
SIX MONTHS ENDED APRIL 30, 1994
SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,472,934 $ 14,844,090
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 978,261 $ 9,895,581
- -------------------------------------------------------------------------------
2,451,195 $ 24,739,671
- -------------------------------------------------------------------------------
Shares repurchased (6,758,947) $ (68,002,756)
- -------------------------------------------------------------------------------
Portion represented by
undistributed net investment income --- ---
- -------------------------------------------------------------------------------
NET DECREASE (4,307,752) $ (43,263,085)
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1993
SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,965,135 $ 20,804,701
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 2,283,992 $ 24,132,161
- -------------------------------------------------------------------------------
4,249,127 $ 44,936,862
- -------------------------------------------------------------------------------
Shares repurchased (9,565,597) $(101,228,784)
- -------------------------------------------------------------------------------
Portion represented by
undistributed net investment income --- $7,932
- -------------------------------------------------------------------------------
NET DECREASE (5,316,470) $ (56,283,990)
- -------------------------------------------------------------------------------
NOTE 5
RECLASSIFICATION OF CAPITAL ACCOUNTS
Effective November 1, 1993, Putnam Federal Income Trust has adopted the provi-
sions of Statement of Position 93-2 "Determination, Disclosure and Financial
Statement Presentation of Income, Capital Gain and Return of Capital distribu-
tions by Investment Companies (SOP). The SOP requires the Fund to report the
undistributed net investment income (accumulated loss) and accumulated net rea-
lized gain (loss) accounts in such a manner as to approximate amounts available
for future tax distributions (or to offset future realized capital gains). In
implementing the SOP the Fund has reclassified $42,747,626 to decrease accumula-
ted net realized loss, $4,330,415, to increase undistributions net investment
income, with a decrease of $(47,078,041) to additional paid-in-capital. These
adjustments represent the cumulative amounts necessary to report these balances
on a tax basis though October 31, 1993. These reclassifications, which have no
impact on the total net asset value of the Fund, are primarily attributable to
differences in the computation of distributable income and capital gains under
federal income tax rules and regulations versus generally accepted accounting
principles.
<PAGE>
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal every
year since the award's 1990 inception. DALBAR, an independent research firm, ran
more than 10,000 tests of 38 shareholder service components. In every category,
Putnam outperformed the industry standard.
HELP YOUR INVESTMENT GROW.
You can set up a regular program for investing with as little as $25 a month
from a Putnam money market fund or your own bank account.*
SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or termination.)
ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the then-
current net asset value, which may be more or less than their original cost.
For details about any of these or other services, contact your financial advisor
or call the toll-free number shown below and speak with a helpful Putnam repre-
sentative.
To make an additional investment in this or any other Putnam fund, contact your
financial advisor or call our toll-free number:
1-800-225-1581.
* Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market. Investors should consider their ability to con-
tinue purchasing shares during periods of low price levels.
<PAGE>
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand
TRUSTEES
George Putnam, Chairman William Pounds, Vice Chairman
Jameson Adkins Baxter Hans H. Estin
John A. Hill Elizabeth T. Kennan
Lawrence J. Lasser Donald S. Perkins
Robert E. Patterson George Putnam, III
A.J.C. Smith W. Nicholas Thorndike
OFFICERS
George Putnam Charles E. Porter
President Executive Vice President
Patricia C. Flaherty Lawrence J. Lasser
Senior Vice President Vice President
Gordon H. Silver Gary N. Coburn
Vice President Vice President
Alan J. Bankart Kenneth J. Taubes
Vice President Vice President and Fund Manager
William N. Shiebler John R. Verani
Vice President Vice President
Paul O'Neil John D. Hughes
Vice President Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Federal Income
Trust. It may also be used as sales literature when preceded or accompanied
by the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund.
<PAGE>
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, MA 02109
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
039-12453
<PAGE>
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:
(1) Boldface typeface is displayed with capital letters, italic typeface is
displayed in normal type.
(2) Because the printed page breaks are not reflected, certain tabular and
columnar headings and symbols are displayed differently in this filing.
(3) Bullet points and similar graphic signals are omitted.
(4) Page numbering has been omitted.
(5) The trademark symbol has been replaced by (TM).
(6) The copyright symbol has been replaced by (C).
(7) The dagger symbol has been replaced by (+).
