PUTNAM
FEDERAL
INCOME
TRUST
ANNUAL REPORT
October 31, 1995
[LOGO]
BOSTON * LONDON * TOKYO
<PAGE>
FUND HIGHLIGHTS
According to Lipper Analytical Services, Putnam Federal Income Trust's
class A share total return ranked 38 out of 163 general U.S.
government funds for the 12 months ended October 31, 1995, placing it
in the top 24% of funds in this category.*
Funds in [the government bond] group have bounced back nicely from
1994's troubles, with the most interest-rate sensitive of the lot
turning in gains that even come close to those of stock funds. As this
performance suggests, duration has largely determined funds' relative
status this year. Since early this summer, Treasury yields have stayed
[below] 7%. Thus funds with above-average durations -- five years or
more -- have generally been the year's leaders."
-- Morningstar Mutual Funds, October 13, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
15 Financial statements
* Lipper Analytical Services, an independent research organization,
ranks funds according to total-return performance. Their rankings
vary over time and do not reflect the effects of sales charges.
For periods ended 10/31/95, the fund's class A shares ranked 38
out of 163 and 46 out of 74 general U.S. government funds for 1-
and 5-year performance, respectively. The fund's class B shares
ranked 63 out of 163 funds for 1-year performance. Past
performance is not indicative of future results.
<PAGE>
FROM THE CHAIRMAN
[PHOTO OF GEORGE PUTNAM]
(C) KARSH, OTTAWA
DEAR SHAREHOLDER:
PUTNAM FEDERAL INCOME TRUST CLOSED THE BOOKS ON AN EVENTFUL 12-MONTH
PERIOD THAT BEGAN AT THE TAG END OF ONE OF THE SHARPEST BOND MARKET
DECLINES ON RECORD AND ENDED IN THE MIDST OF ONE OF THE MARKET'S
STRONGEST RALLIES. AS FUND MANAGERS KENNETH TAUBES AND MAX SENTER
RELATE IN THE REPORT THAT FOLLOWS, RESULTS FOR THE FISCAL YEAR THAT
ENDED ON OCTOBER 31, 1995, WERE GRATIFYING, ESPECIALLY IN CONTRAST TO
LAST YEAR'S CHALLENGES.
MOREOVER, KEN AND MAX SEE EVIDENCE SUGGESTING THAT THE CURRENT
ENVIRONMENT, WHICH HAS BEEN SO AMENABLE TO FIXED- INCOME INVESTMENTS,
WILL CONTINUE IN THE MONTHS AHEAD. AMONG THE FAVORABLE FACTORS ARE
PROSPECTS FOR A SUSTAINABLE PACE OF ECONOMIC GROWTH AND CONTINUED LOW
INFLATION.
ANOTHER CUT IN SHORT-TERM INTEREST RATES BY THE FEDERAL RESERVE BOARD
AND AGREEMENT BY CONGRESS AND THE PRESIDENT ON A FEDERAL BUDGET THAT
REDUCES THE NATIONAL DEFICIT APPEAR TO BE REASONABLE PROSPECTS. BOTH
WOULD BE GREETED WARMLY BY THE BOND MARKET AS YOUR FUND ENTERS FISCAL
1996.
RESPECTFULLY YOURS,
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
DECEMBER 20, 1995
<PAGE>
REPORT FROM THE FUND MANAGERS
KENNETH J. TAUBES
MAX S. SENTER
Bolstered by a bond-market rally that began in November 1994, Putnam
Federal Income Trust delivered solid total returns for the fiscal year
ended October 31, 1995. Throughout the fiscal period, the U.S.
economy's growth rate continued to slow toward the noninflationary
pace targeted by the Federal Reserve Board. At the same time,
investors' concerns about inflation gradually subsided, driving down
the yield on the benchmark 30-year Treasury bond to 6.33% on October
31, 1995.
For the fiscal year, your fund's class A shares returned 15.97% at net
asset value (NAV), outpacing the Lehman Brothers Government Bond
Index's 15.38% return over the same period. The fund's class B shares
posted a solid 15.09% total return at NAV. While the current bond-
market surge contributed to your fund's solid performance, the
diversified investment strategy that enables your fund to capitalize
on profitable sectors of the market proved equally important. Over the
fiscal year, your fund employed this approach effectively to derive
benefit from U.S. Treasury securities, mortgage-backed securities, and
corporate and international bonds.
EXTENDED DURATION AIDS PERFORMANCE AS INTEREST RATES DECLINE
The fund's diversified strategy adds an additional dimension to our
ability to manage the portfolio's duration. Duration is a measure of
the price sensitivity of a portfolio of bonds to changes in interest
rates. Like maturity, with which it is often confused, duration is
measured in years.
Early in the fund's fiscal year, we kept the portfolio's duration
relatively short to protect the fund's value as long-term interest
rates continued to climb. As the current bond-market rally picked up
steam in response to slowing economic growth and moderate inflation,
investors' fears of inflation gradually dissipated. This, in turn,
pushed long-term interest rates lower. At the same time, we extended
the portfolio's duration in order to capitalize on the interest-rate
decline.
<PAGE>
Such a strategy does not come without risk: if interest rates had
risen, this longer duration might have adversely affected the fund's
performance. However, diversification of the portfolio among several
different fixed-income sectors -- including an allocation of nearly
10% to international bonds in core European markets -- offered a
greater degree of value protection in case domestic interest rates had
turned upward.
LONGER-TERM TREASURIES ADVANCE AS INFLATION CONCERNS SUBSIDE
Over the past fiscal year, as economic growth slowed steadily, the
Federal Reserve Board reduced the federal funds rate only once. The
federal funds rate is the rate at which banks offer overnight loans to
one another, and the Fed typically reduces it to stimulate the U.S.
economy when growth is stagnating. During the same 12-month period,
investors largely overcame their fears of inflation, and, as a result,
interest rates on longer- term Treasuries declined considerably.
For your fund, all of this compelled us to invest more aggressively in
Treasuries with maturities ranging between 10 and 30 years. Treasuries
typically perform well during bond- market rallies because their
values rise as interest rates drop. In the more recent stages of the
current rally, Treasuries with longer maturities fared particularly
well as long-term interest
CHANGES IN PORTFOLIO COMPOSITION*
[BAR CHART]
- ----------------------------------------------------------------------
Date 10/31/94 10/31/95
Mortgage-backed securities 37.5% 36.7%
U.S. Treasuries 26.0% 43.3%
Foreign bonds and notes 20.8% 9.8%
Corporate bonds 9.9% 8.1%
Collateralized Mortgage obligations 4.3% 8.4%
Short-term investments 0.3% 0.3%
- ----------------------------------------------------------------------
*Based on total net assets as of indicated date. Holdings will vary
over time.
<PAGE>
rates declined, and your portfolio's investments in these securities
aided performance substantially.
MORTGAGE SECURITIES AND CORPORATE BONDS BOOST PERFORMANCE
The fund benefited from its position in collateralized mortgage
obligations (CMOs), bonds backed by mortgage securities that split the
cash flows from pools of mortgage loans into various time frames and
payment structures. While CMOs provide attractive yield advantages
relative to Treasuries and can enhance the fund's dividend income,
they may be more difficult to sell than other mortgage-backed
securities. The portfolio's CMOs tend to perform well during bond-
market rallies, and we moderately increased the portfolio's allocation
to these securities during the fiscal year.
Although the pace of economic growth slowed during the fiscal year,
corporations continued to report solid earnings, aided by enhanced
productivity and effective cost-control measures. As a result, demand
for corporate bonds remained steady, and your fund's modest allocation
to this sector bolstered performance.
OUTLOOK: SLOW ECONOMIC GROWTH BODES WELL FOR BONDS
As the fund moves into fiscal 1996, both economic growth and inflation
seem to be headed for a decline. Congress and the Clinton
administration appear increasingly likely to approve a budget that
reduces the national deficit, and short-term interest rates remain
relatively high -- two factors that may constrict economic growth in
the coming months. In this environment, we believe the Fed may reduce
short-term interest rates in the near future to keep the economy
expanding at a productive pace. Although there can be no assurances,
all of this suggests a healthy environment for bonds in the near term.
If the Fed eases short-term interest rates and benign inflation
restrains long-term rates, we will likely maintain the portfolio's
longer duration to capitalize on the potential benefits. At the same
time, we will carefully monitor the level of prepayments in the
mortgage-backed securities market. Prepayments, which diminish the
value of mortgage-backed securities, can accelerate as mortgage
holders rush to refinance in response to
<PAGE>
LENGTHENING DURATION AS INTEREST RATES FALL
[LINE CHART]
DATE 30-YEAR TREASURY(%) PORTFOLIO DURATION(YEARS)
- ----------------------------------------------------------------------
10/94 7.97 4.78
11/94 8 4.78
12/94 7.88 4.72
1/95 7.7 4.5
2/95 7.44 5.19
3/95 7.43 5.25
4/95 7.33 5.49
5/95 6.65 5.84
6/95 6.62 5.6
7/95 6.84 5.89
8/95 6.65 6.18
9/95 6.5 6.21
10/95 6.33 6.19
- ----------------------------------------------------------------------
This graph illustrates that the fundOs managers lengthened the
portfolioOs average duration as the yield on the benchmark 30-year
Treasury bond declined. Lengthening duration often entails purchasing
longer-term bonds, which typically appreciate more than shorter-term
bonds as long-term yields fall. Although this investment strategy was
viewed favorably as of 10/31/95, there is no guarantee that this
strategy will be successful or that the fund will respond to each long-
term interest-rate shift in this fashion.
falling long-term interest rates. If this occurs, we may choose to
protect the portfolio's value by shifting to lower-coupon securities
or by reducing the fund's allocation to mortgage-backed securities.
We believe the current potency of the dollar relative to major foreign
currencies reflects its appropriate value, and that this strength will
be sustained. Consequently, we plan to maintain existing currency
hedges on the fund's international holdings to lock in attractive
exchange rates when converting these bonds back into dollars.
Going forward, we will keep abreast of changing market conditions to
identify the best value opportunities as we strive to maintain the
fund's competitive income and total return.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 10/31/95, there is no guarantee
the fund will continue to hold these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
PERFORMANCE SHOULD ALWAYS BE CONSIDERED IN LIGHT OF A FUND'S
INVESTMENT STRATEGY. PUTNAM FEDERAL INCOME TRUST IS DESIGNED FOR
INVESTORS SEEKING HIGH CURRENT INCOME CONSISTENT WITH PRESERVATION OF
CAPITAL PRIMARILY THROUGH U.S. GOVERNMENT SECURITIES.
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, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/95
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CLASS A CLASS B CLASS M
(6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------
1 year 15.97% 10.51% 15.09% 10.09% -- --
5 years 48.26 41.26 -- -- -- --
Annual average 8.19 7.15 -- -- -- --
- ----------------------------------------------------------------------
Life of class 94.92 85.70 13.46 9.46 9.35% 5.81%
Annual average 7.34 6.79 9.44 6.67 -- --
- ----------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIOD ENDED 10/31/95
<TABLE><CAPTION>
<S> <C> <C>
LEHMAN BROS.
GOVERNMENT CONSUMER
BOND INDEX PRICE INDEX
- ----------------------------------------------------------------------
1 year 15.38% 2.81%
- ----------------------------------------------------------------------
5 years 57.67 15.13
Annual average 9.54 2.86
- ----------------------------------------------------------------------
Life of class A 123.14 41.14
Annual average 8.90 3.73
- ----------------------------------------------------------------------
Life of class B 15.52 4.20
Annual average 10.71 2.98
- ----------------------------------------------------------------------
Life of class M 9.73 1.52
- ----------------------------------------------------------------------
<FN>
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take
into account any adjustment for taxes payable on reinvested
distributions. Investment returns and principal value will fluctuate
so that an investor's shares, when sold, may be worth more or less
than their original cost. POP assumes 4.75% maximum sales charge for
class A shares and 3.25% for class M shares, which commenced
operations on 4/12/95. CDSC for class B shares assumes 5% maximum
contingent deferred sales charge.
<PAGE>
GROWTH OF A $10,000 INVESTMENT
[MOUNTAIN CHART]
FUNDOS CLASS CONSUMER LEHMAN BROS.
A SHARES AT PRICE INDEX GOVERNMENT
DATE POP (CPI) BOND INDEX
- ----------------------------------------------------------------------
6/2/86 $9,525 $10,000 $10,000
10/31/86 $9,955 $10,129 $10,672
10/31/87 $9,815 $10,588 $10,868
10/31/88 $10,763 $11,038 $11,925
10/31/89 $11,879 $11,534 $13,360
10/31/90 $12,525 $12,259 $14,152
10/31/91 $14,391 $12,617 $16,219
10/31/92 $15,507 $13,021 $17,894
10/31/93 $16,773 $13,379 $20,244
10/31/94 $16,012 $13,728 $19,339
10/31/95 $18,569 $14,114 $22,314
- ----------------------------------------------------------------------
Past performance is no assurance of future results. A $10,000
investment in the fundOs class B shares at inception on 6/6/94 would
have been valued at $11,346 on 10/31/95 ($10,946 with a redemption at
the end of the period). A $10,000 investment in the fundOs class M
shares at inception on 4/12/95 would have been valued at $10,935 at
net asset value, $10,581 assuming the maximum applicable 3.25% sales
charge.
PRICE AND DISTRIBUTION INFORMATION
(12 months ended 10/31/95)
</TABLE>
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS CLASS A CLASS B CLASS M
- ----------------------------------------------------------------------
Number 12 12 6
- ----------------------------------------------------------------------
Income $0.588 $0.521 $0.285
- ----------------------------------------------------------------------
Capital gains(1) -- -- --
- ----------------------------------------------------------------------
Total 0.588 0.521 0.285
- ----------------------------------------------------------------------
SHARE VALUE: NAV POP NAV NAV POP
- ----------------------------------------------------------------------
10/31/94 $9.32 $9.78 $9.30 -- --
- ----------------------------------------------------------------------
4/12/95 -- -- -- $9.57 $9.89
(inception of class M shares)
10/31/95 10.17 10.68 10.14 10.17 10.51
- ----------------------------------------------------------------------
CURRENT RETURN
- ----------------------------------------------------------------------
End of period
- ----------------------------------------------------------------------
Current dividend rate1 5.78% 5.51% 5.21% 5.55% 5.37%
Current 30-day
SEC yield2 5.84 5.56 5.10 5.56 5.38
- ----------------------------------------------------------------------
<FN>
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period. 2Based on investment income, calculated
using SEC guidelines.
</TABLE>
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 9/30/95
(most recent calendar quarter)
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CLASS A CLASS B CLASS M
(6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------
1 year 14.51% 9.03% 13.53% 8.53% -- --
- ----------------------------------------------------------------------
5 years 47.70 40.71 -- -- -- --
Annual average 8.11 7.07 -- -- -- --
- ----------------------------------------------------------------------
Life of class 92.07 82.98 11.74 7.74 7.67% 4.18%
Annual average 7.25 6.69 8.77 5.81 -- --
- ----------------------------------------------------------------------
<FN>
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take
into account any adjustment for taxes payable on reinvested
distributions. Investment returns and principal value will fluctuate
so that an investor's shares, when sold, may be worth more or less
than their original cost.
</TABLE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus
any liabilities, divided by the number of outstanding shares, not
including any initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual 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
for class A shares and 3.25% for class M shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the
time of the redemption of class B shares and assumes redemption at the
end of the period. Your fund's CDSC declines from a 5% maximum during
the first year to 1% during the sixth year. After the sixth year, the
CDSC no longer applies.
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 (excluding 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 index assumes reinvestment of all distributions and does not take
into account brokerage commissions or other costs. The fund's
portfolio contains securities that do not match those in the index. It
is not possible to invest directly in an index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
for the fiscal year ended October 31, 1995
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 October 31, 1995, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial
highlights for each of the periods indicated therein. 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
audit.
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 from 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 October 31, 1995, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Federal Income Trust as of October 31,
1995, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended and the financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 14, 1995
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
October 31, 1995
<TABLE><CAPTION>
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (80.0%)*
PRINCIPAL AMOUNT VALUE
COLLATERALIZED MORTGAGE OBLIGATIONS (1.8%)
- ----------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
$3,527,265 Ser. 40 E, 10s, June 15, 2019 $3,629,776
1,358,639 Ser. 43 C, 10s, June 15, 2019 1,404,493
Federal National Mortgage Association
2,500,000 (Ser. 89-23 D,) 10.2s, due date
September 25, 2018 2,633,594
------------
7,667,863
U.S. AGENCY MORTGAGE PASS-THROUGHS (34.9%)
- ----------------------------------------------------------------------
Federal National Mortgage Association
14,551,945 7 1/2s, with various due dates to
June 01, 2025 14,701,975
11,421,631 6s, Dwarfs, with various due dates to
October 1, 2010 11,146,714
Government National Mortgage Association
524,385 11 1/2s, with various due dates to
February 15, 2019 595,148
1,848,391 10s, with various due dates to October
15, 2020 2,022,251
8,599,264 9s, with various due dates to February
15, 2010 9,160,978
7,130,324 8 1/2s, with various due dates to
October 15, 2009 7,521,949
20,578,929 8s, with various due dates to April 15,
2008 21,597,693
6,828,596 7 1/2s, with various due dates to September 15,
2023 6,954,652
21,710,616 7s, with various due dates to September 15,
2025 21,393,100
22,210,000 6 1/2s, TBA, November 14, 2025( ) 21,599,225
20,621,457 6 1/2s, with various due dates to October 15,
2025 21,708,853
5,470,791 6 1/2s, Midgets, with various due dates to
December 15, 2008 5,451,974
5,684,087 6s, Midgets, with various due dates to
May 15, 2009 5,565,060
------------
149,419,572
U.S. TREASURY OBLIGATIONS (43.3%)
- ----------------------------------------------------------------------
15,800,000 U.S. Treasury Bonds 11 5/8s, November 15, 2004 21,858,352
5,195,000 U.S. Treasury Bonds 8 7/8s, August 15, 2017 6,676,406
19,500,000 U.S. Treasury Bonds 8 1/8s, August 15, 2019 23,473,125
22,025,000 U.S. Treasury Bonds 7 1/2s, November 15, 2024 25,163,563
50,000,000 U.S. Treasury Notes 6 3/8s, August 15, 2002 51,289,000
31,000,000 U.S. Treasury Notes 6 1/4s, February 15, 2003 31,547,460
44,100,000 U.S. Treasury Strip zero %, November 15, 2004 25,474,365
------------
185,482,271
- ----------------------------------------------------------------------
TOTAL U. S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $330,364,229) $342,569,706
- ----------------------------------------------------------------------
<PAGE>
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (6.6%)*
PRINCIPAL AMOUNT VALUE
Chase Manhattan Mortgage Finance Corp. Sub. Mtge.
$ 970,497 Ser. 1993-3, CL B 6, 7.46s, October 29, 2024 $ 951,032
4,146,270 Ser. 1993-3, CL B 7, 7.46s, October 29, 2024 4,063,108
1,196,229 CMC Securities Corporation, Ser. 1994-F
CL B 2, 6 1/4s, May 25, 2014 1,105,417
2,979,054 Housing Securities, Inc., Mtge. Pass Thru
Certificate, Ser. 1993 J, 6.66s,
January 25, 2009 2,903,193
Prudential Home Mortgage Securities,
2,745,466 Ser. 1994-28, CL B 2, 6.803s, 144A,
September 25, 2001 2,621,495
5,050,992 Ser. 1994-D, CL 3 B, 6.3118s, 144A,
August 28, 2009 4,626,935
3,742,046 Ser. 1993-31, CL B 2, 6s, August 25, 2000 3,553,660
Residential Funding Mortgage Securities,
Mtge. Pass Thru Certificates,
1,077,936 Ser. 1993-S17, CL M 3, 7s, May 25, 2008 1,034,987
4,748,343 Ser. 1993-MZ3, CL A 1, 6.97s, August 28, 2023 4,681,905
838,753 Ser. 1993-S23, CL M 3, 6 1/2s, June 25, 2008 783,316
1,891,388 Securitized Asset Sales, Inc., Mtge.
Pass Thru Certificate, Ser. 1994-3,
CL B 1, 6.11s, February 25, 1999 1,812,311
- ----------------------------------------------------------------------
TOTAL NON-AGENCY COLLATERALIZED
Mortgage Obligations (cost $26,148,281) $28,137,359
- ----------------------------------------------------------------------
CORPORATE BONDS AND NOTES (8.1%)*
PRINCIPAL AMOUNT VALUE
$15,444,000 Citizens Utilities Co. deb., 7.68s, 2034 $17,691,720
2,500,000 K Mart Corp. pass thru certificates,
8.54s, 2015 2,256,250
3,620,000 Parker & Parsley Petro sr. notes, 8 7/8s, 2005 3,975,158
7,000,000 Procter & Gamble Co. deb., 8s, 2029 7,959,980
2,495,000 Time Warner Inc . deb., 9 1/8, 2013 2,703,856
- ----------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(cost $31,491,864) $34,586,964
- ----------------------------------------------------------------------
FOREIGN BONDS AND NOTES (9.8%)*
PRINCIPAL AMOUNT VALUE
DEM 16,400,000 Treuhandanstalt (Government of Germany)
Bonds, 7 1/8s, 2003 $12,231,594
DEM 10,750,000 Treuhandanstalt (Government of Germany)
Bonds, 8 1/4s, 2001 8,513,756
GBP 12,159,000 United Kingdom Treasury Notes, 9.75s, 200221,247,790
- ----------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES
(cost $40,848,237) $41,993,140
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENTS (0.3%)*
PRINCIPAL AMOUNT VALUE
$1,225,000 Interest in $357,916,000 joint repurchase
agreement dated October 31, 1995 with Lehman
Brothers Inc., due November 1, 1995 with respect
to various U.S. Treasury obligations--
maturity value of $1,225,199 for an effective yield
of 5.86% $1,255,199
- ----------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (cost $1,255,199) $1,255,199
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (cost $430,107,810)*** $448,542,368
- ----------------------------------------------------------------------
<PAGE>
<FN>
NOTES
* Percentages indicated are based on net assets of $428,272,413.
TBAs are mortgage-backed securities traded under delayed delivery
commitments settling after October 31, 1995. Although the unit
price for the trades has been established, the principal value
has not been finalized. However, the amount of the commitments
will not fluctuate more than 2.0% from the principal amount. The
cost of TBA purchases held at October 31, 1995 was $21,614,841.
*** The aggregate identified cost for federal income tax purposes is
$430,121,047, resulting in gross unrealized appreciation and
depreciation of $21,675,864 and $3,254,543, respectively, or net
unrealized appreciation of $18,421,321.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
FORWARD CURRENCY CONTRACTS TO SELL OUTSTANDING at October 31, 1995
</TABLE>
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------
MARKET AGGREGATE DELIVERY UNREALIZED
VALUE FACE VALUE DATE DEPRECIATION
- ----------------------------------------------------------------------
British Pounds$16,008,341 $15,698,972 12/13/95 $(309,369)
British Pounds 4,023,113 3,998,853 12/13/95 (24,260)
Deutschemarks 8,493,602 8,336,974 12/13/95 (156,628)
Deutschemarks 11,403,831 10,919,036 12/13/95 (484,795)
- ----------------------------------------------------------------------
$39,928,887 $38,953,835 $(975,052)
- ----------------------------------------------------------------------
TBA SALE COMMITMENTS at October 31, 1995 (proceeds receivable
$21,624,861)
- ----------------------------------------------------------------------
PRINCIPAL DELIVERY COUPON MARKET
AGENCY AMOUNT MONTH RATE VALUE
- ----------------------------------------------------------------------
FNMA $14,551,000 November 7.50% $14,701,021
GNMA 6,827,000 November 7.50% 6,916,571
- ----------------------------------------------------------------------
$21,617,592
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C>
ASSETS
- ----------------------------------------------------------------------
Investments in securities, at value
(identified cost $430,107,810) (Note 1) $448,542,368
- ----------------------------------------------------------------------
Cash 441
Interest receivable 5,027,261
- ----------------------------------------------------------------------
Receivable for shares of the fund sold 21,171
- ----------------------------------------------------------------------
Receivable for securities sold 21,326,090
- ----------------------------------------------------------------------
Receivable for closed currency contracts 3,298,343
- ----------------------------------------------------------------------
TOTAL ASSETS $478,215,674
LIABILITIES
- ----------------------------------------------------------------------
Payable for securities purchased 21,691,034
- ----------------------------------------------------------------------
Distributions payable to shareholders 1,420
- ----------------------------------------------------------------------
Payable for shares of the fund repurchased 556,165
- ----------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 668,666
- ----------------------------------------------------------------------
Payable for administrative services (Note 2) 2,379
- ----------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 115
- ----------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 162,583
- ----------------------------------------------------------------------
Payable for distribution fees (Note 2) 92,211
- ----------------------------------------------------------------------
Other accrued expenses and other liabilities 91,247
- ----------------------------------------------------------------------
Payable for open forward currency contracts 975,052
- ----------------------------------------------------------------------
Payable for closed forward currency contracts 4,084,797
TBA sale commitment at value (proceeds receivable
$21,624,861) 21,617,592
- ----------------------------------------------------------------------
TOTAL LIABILITIES 49,943,261
- ----------------------------------------------------------------------
NET ASSETS $428,272,413
- ----------------------------------------------------------------------
REPRESENTED BY
- ----------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 647,303,690
- ----------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,489,733
- ----------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (240,064,823)
- ----------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currency 17,543,813
- ----------------------------------------------------------------------
TOTAL--REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES
OUTSTANDING $428,272,413
- ----------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- ----------------------------------------------------------------------
Net asset value and redemption price of class
- ----------------------------------------------------------------------
A shares ($426,252,312 divided by 41,903,276 shares) $10.17
- ----------------------------------------------------------------------
Offering price per class A share (100/95.25 of $10.17)* $10.68
- ----------------------------------------------------------------------
Net asset value and offering price of class B shares
- ----------------------------------------------------------------------
($1,834,545 divided by 180,996 shares)( ) $10.14
- ----------------------------------------------------------------------
Net asset value and redemption price of class M shares
($185,556 divided by 18,250 shares) $10.17
- ----------------------------------------------------------------------
Offering price per class M share (100/96.75 of $10.17)* $10.51
- ----------------------------------------------------------------------
<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.
( ) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Year ended October 31, 1995
<TABLE>
<S> <C>
INTEREST INCOME $31,609,618
- ----------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------
Compensation of Manager (Note 2) 2,680,908
- ----------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 815,630
- ----------------------------------------------------------------------
Reports to shareholders 47,387
- ----------------------------------------------------------------------
Compensation of Trustees (Note 2) 17,186
- ----------------------------------------------------------------------
Auditing 48,387
- ----------------------------------------------------------------------
Legal 15,462
- ----------------------------------------------------------------------
Postage 83,944
- ----------------------------------------------------------------------
Administrative services (Note 2) 9,706
- ----------------------------------------------------------------------
Distribution fees -- class A (Note 2) 1,079,383
- ----------------------------------------------------------------------
Distribution fees -- class B (Note 2) 10,628
- ----------------------------------------------------------------------
Distribution fees -- class M (Note 2) 250
- ----------------------------------------------------------------------
Other 24,316
- ----------------------------------------------------------------------
TOTAL EXPENSES 4,833,187
- ----------------------------------------------------------------------
Expense reduction (Note 2) (123,414)
- ----------------------------------------------------------------------
NET EXPENSES 4,709,773
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 26,899,845
- ----------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 11,152,406
- ----------------------------------------------------------------------
Net realized gain on forward currency contracts (Note 1) 3,298,206
- ----------------------------------------------------------------------
Net unrealized appreciation of forward currency contracts
(Note 1) 494,319
- ----------------------------------------------------------------------
Net unrealized appreciation of investments and TBA sale commitments
during the year 22,260,018
- ----------------------------------------------------------------------
NET GAIN ON INVESTMENT TRANSACTIONS 37,204,949
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 64,104,794
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
<S> <C> <C>
YEAR ENDED OCTOBER 31
- ----------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------
DECREASE IN NET ASSETS
- ----------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------
Net investment income $26,899,845 $35,547,108
- ----------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions 14,450,612 (57,345,780)
- ----------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments and
assets and liabilities in foreign currencies 22,754,337 (3,636,389)
- ----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 64,104,794 (25,435,061)
- ----------------------------------------------------------------------
Distributions to shareholders from:
- ----------------------------------------------------------------------
Net investment income
- ----------------------------------------------------------------------
Class A (26,249,604) (35,082,377)
- ----------------------------------------------------------------------
Class B (56,929) (4,735)
- ----------------------------------------------------------------------
Class M (2,393) --
- ----------------------------------------------------------------------
Tax return of capital
- ----------------------------------------------------------------------
Class A -- (1,704,645)
- ----------------------------------------------------------------------
Class B -- (170)
- ----------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (59,501,922) (87,976,030)
- ----------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (21,706,054) (150,203,018)
NET ASSETS
- ----------------------------------------------------------------------
Beginning of year 449,978,467 600,181,485
- ----------------------------------------------------------------------
END OF YEAR (including undistributed net investment
income and distributions in excess of net investment
income of $3,489,733 and
$625,970, respectively) $428,272,413 $449,978,467
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE><CAPTION>
<S> <C> <C> <C>
FOR THE PERIOD FOR THE PERIOD
APRIL 12, 1995 JUNE 6, 1994
(COMMENCEMENT YEAR (COMMENCEMENT
OF OPERATIONS) TO ENDED OF OPERATIONS) TO
OCTOBER 31 OCTOBER 31 OCTOBER 31
- ----------------------------------------------------------------------
1995* 1995 1994
Class M Class B
- ----------------------------------------------------------------------
Net asset value, beginning of period$9.57 $9.30 $9.68
- ----------------------------------------------------------------------
Investment operations
Net investment income .29 .52 .18
Net realized and unrealized gain
(loss) on investments .60 .84 (.32)
- ----------------------------------------------------------------------
Total from investment operations .89 1.36 (.14)
- ----------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (.29) (.52) (.23)
Net realized gain on investments -- -- --
Tax return of capital -- -- (.01)
- ----------------------------------------------------------------------
Total distributions (.29) (.52) (.24)
- ----------------------------------------------------------------------
Net asset value, end of period $10.17 $10.14 $9.30
- ----------------------------------------------------------------------
Total investment return at net
asset value (%)(a) 9.35(b) 15.09 (1.42)(b)
- ----------------------------------------------------------------------
Net assets, end of period
(in thousands) $186 $1,835 $498
- ----------------------------------------------------------------------
Ratio of expenses to average
net assets (%)(c) .71(b) 1.85 0.72(b)
- ----------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 3.15(b) 5.42 2.34(b)
- ----------------------------------------------------------------------
Portfolio turnover (%) 234.95 234.95 317.91
- ----------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS continued
Year ended October 31
- ----------------------------------------------------------------------
- -
<C> <C> <C> <C> <C>
- ----------------------------------------------------------------------
- -
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------
$9.32 $10.47 $10.47 $10.52 $9.90
- ----------------------------------------------------------------------
.60 .61 .83 .84 .80
.84 (1.07) -- (.05) .62
- ----------------------------------------------------------------------
1.44 (.46) .83 .79 1.42
- ----------------------------------------------------------------------
(.59) (.66) (.83) (.72) (.80)
-- -- -- (.12) --
- ----------------------------------------------------------------------
-- (.03) -- -- --
- ----------------------------------------------------------------------
(.59) (.69) (.83) (.84) (.80)
- ----------------------------------------------------------------------
$10.17 $9.32 $10.47 $10.47 $10.52
- ----------------------------------------------------------------------
15.97 (4.54) 8.17 7.75 14.90
- ----------------------------------------------------------------------
$426,252 $449,480 $600,181 $655,656 $730,319
- ----------------------------------------------------------------------
1.12 1.06 1.05 1.11 1.17
- ----------------------------------------------------------------------
6.22 6.91 7.81 6.83 7.90
- ----------------------------------------------------------------------
234.95 317.91 150.05 248.37 215.17
- ----------------------------------------------------------------------
<FN>
* Per share net investment income for the period ended October 31,
1995 for class M has been determined on the basis of the weighted
average number of shares outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does
not reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the periods ended
October 31, 1995 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts (See Note
2).
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1995
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 current income,
consistent with preservation of capital, through investments primarily
in U.S. government securities.
The following is a summary of significant accounting policies
consistently followed 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 available are stated at market value, which is determined
using the last reported sale price, or, if no sales are reported -- as
in the case of some securities traded over-the-counter -- the last
reported bid price, except that certain U.S. government 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.
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 companies managed by Putnam Investment
Management, Inc. (Putnam Management), the fund's Manager, a wholly-
owned subsidiary of Putnam Investments, Inc. and certain other
accounts. These balances may be invested in one or more repurchase
agreements and/or short- term money market instruments.
C FORWARD CURRENCY CONTRACTS The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a
decline in value relative to the U.S. dollar of the currencies in
which its portfolio securities are denominated or quoted (or an
increase in the value of a currency in which securities a fund intends
to buy are denominated, when a fund holds cash reserves and short-
term investments). The U.S. dollar value of forward currency contracts
is determined using forward currency exchange rates supplied by a
quotation service. The market value of the contract will fluctuate
with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded 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 the time it
was closed. The maximum potential loss from forward currency contracts
is the aggregate face value in U.S. dollars at the time the contract
was opened. The fund could be exposed to risk if the value of the
currency changes unfavorably, if the counterparties to the contracts
are unable to meet the terms of their contracts or if the fund is
unable to enter into a closing position.
D REPURCHASE AGREEMENTS The fund, or any 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 102% of the resale price, including
accrued interest. Putnam Management is responsible for determining
that the value of these underlying securities is at all times at least
equal to the resale price, including accrued interest.
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 are accreted according to the
effective yield method. Foreign currency denominated receivables and
payables are "marked-to-market" using the current exchange rate.
F FUTURES AND OPTIONS CONTRACTS The fund may use futures and options
contracts to hedge against changes in the values of securities the
fund owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded
options are valued at the last sale price, or if no sales are
reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the- counter are valued
using prices supplied by dealers.
G FEDERAL TAXES It is the policy of the fund to distribute all of
its taxable income within the prescribed time and otherwise comply
with the provisions of the Internal 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.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for
excise tax on income and capital gains.
At October 31, 1995 the fund had a capital loss carryover of
approximately $240,052,000 which may be available to offset future net
capital gains, if any. The amount of the carryover and the expiration
date are:
<TABLE><CAPTION>
<S> <C>
LOSS CARRYOVER EXPIRATION
- ------------------------------------------
$52,679,000 10/31/96
$118,265,000 10/31/97
$15,005,000 10/31/98
$54,103,000 10/31/2002
- ------------------------------------------
</TABLE>
<PAGE>
H DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from
net investment income are recorded by the fund on the ex-dividend
date. At certain times, the fund may pay distributions at a level rate
even though, as a result of market conditions or investment decisions,
the fund may not achieve projected investment results for a given
period. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These
differences include treatment of realized and unrealized gains and
losses on foreign forward currency contracts, paydown gains and losses
on mortgage- backed securities and market discount. Reclassifications
are made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers)
under income tax regulations.
For the year ended October 31, 1995, the fund reclassified $3,524,784
to increase undistributed net investment income and $3,524,784 to
increase accumulated net realized losses. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
I FOREIGN CURRENCY TRANSLATION The accounting records of the fund
are maintained in U.S. dollars. The market values of foreign
securities, currency holdings, other assets and liabilities are
recorded in the books and records of the fund after translation to
U.S. dollars based on the exchange rates on that day. The cost of each
security is determined using historical exchange rates. Income and
withholding taxes are translated at prevailing exchange rates when
accrued or incurred. The fund does not isolate that portion of
realized or unrealized gains or losses resulting from changes in the
foreign exchange rate on investments from fluctuations arising from
changes in the market price of the securities. Such fluctuations are
included with the net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains or losses on closed forward
currency contracts, disposition of foreign currencies and the
difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized gains and
losses on foreign currency transactions arise from changes in the
value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in
the exchange rate.
J TBA PURCHASE COMMITMENTS The fund, may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed
unit price at a future date beyond customary settlement time. Although
the unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than 2.0% from the principal amount. The fund holds, and
maintains until settlement date, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or the fund may
enter into offsetting contracts for the forward sale of other
securities it owns. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in the value of the
fund's other assets.
<PAGE>
Unsettled TBA purchase commitments are valued at the current market
value of the underlying securities, generally according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for its portfolio or for
delivery pursuant to options contracts it has entered into, the fund
may dispose of a commitment prior to settlement if Putnam Management
deem it appropriate to do so.
K TBA sale commitments The fund may enter into TBA sale commitments
to hedge its portfolio positions or to sell mortgage-backed securities
it owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value
of the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is "marked-to-
market" daily and the change in market value is recorded by a fund as
an unrealized gain or loss. If the TBA sale commitment is closed
through the acquisition of an offsetting purchase commitment, a fund
realizes a gain or loss on the underlying security. If the fund
delivers securities under the commitment, the fund realizes a gain or
a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management and investment
advisory services, is paid quarterly based on the average net 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 reduction 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 transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
<PAGE>
Trustees of the fund receive an annual Trustee's fee of $980, and an
additional fee for each Trustees' meeting attended. Trustees who are
not interested persons of Putnam Management and who serve on
committees of the Trustees receive additional fees for attendance at
certain committee meetings.
During the year ended October 31, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "plan") which allows the Trustees to defer the
receipt of all or a portion of Trustees Fees payable on or after July
1, 1995. The deferred fees remain in the fund and are invested in the
fund or in other Putnam funds until distribution in accordance with
the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended October 31, 1995, fund expenses were reduced by
$123,414 under expense offset arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested the assets
utilized in connection with the expense offset arrangments in an
income-producing asset if it had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A shares, class B and class M shares pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans 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 Plans provide for
payment by the fund to Putnam Mutual Funds Corp. at an annual rate up
to 0.35%, 1.00% and 1.00% of the average net assets attributable to
class A, class B and class M shares, respectively. The Trustees have
approved payment by the fund at an annual rate of 0.25%, 1.00% and
0.50% of the average net assets attributable to class A, class B and
class M shares respectively.
For the year ended October 31, 1995 Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $17,306 from the sale of
class A shares, $1,461 in contingent deferred sales charges from
redemptions of class B shares, and net commissions of $411 from the
sale of class M shares. A deferred sales charge of up to 1.00% is
assessed on certain redemptions of class A shares. For the year ended
October 31, 1995, Putnam Mutual Funds Corp., acting as underwriter
received no monies on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES During the year ended October 31,
1995 purchases and sales of investment securities other than U.S.
government obligations and short-term investments aggregated
$149,525,381 and $254,867,892, respectively. Purchases and sales of
U.S. government obligations aggregated $884,514,651 and $875,542,407,
respectively. In determining the net gain or loss on securities sold,
the cost of securities has been determined on the identified cost
basis.
<PAGE>
NOTE 4
CAPITAL SHARES
At October 31, 1995, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
<TABLE><CAPTION>
<S> <C> <C>
YEAR ENDED OCTOBER 31
- ----------------------------------------------------------------------
1995
- ----------------------------------------------------------------------
CLASS A SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 1,000,695 $9,647,859
Shares issued in connection with
reinvestment of distributions 1,396,135 13,441,981
- ----------------------------------------------------------------------
2,396,830 23,089,840
- ----------------------------------------------------------------------
Shares repurchased (8,733,361) (84,013,840)
- ----------------------------------------------------------------------
NET DECREASE (6,336,531) $(60,924,000)
- ----------------------------------------------------------------------
YEAR ENDED OCTOBER 31
- ----------------------------------------------------------------------
1994
- ----------------------------------------------------------------------
CLASS A SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 2,036,223 $20,180,628
Shares issued in connection
with reinvestment of distributions 1,818,844 17,818,233
- ----------------------------------------------------------------------
3,855,067 37,998,861
Shares repurchased (12,947,301) (126,479,041)
- ----------------------------------------------------------------------
NET DECREASE (9,092,234) $(88,480,180)
- ----------------------------------------------------------------------
YEAR ENDED OCTOBER 31
- ----------------------------------------------------------------------
1995
- ----------------------------------------------------------------------
CLASS B SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 229,692 $2,219,468
Shares issued in connection with
reinvestment of distributions 4,496 43,550
- ----------------------------------------------------------------------
234,188 2,263,018
- ----------------------------------------------------------------------
Shares repurchased (106,780) (1,019,887)
- ----------------------------------------------------------------------
NET INCREASE 127,408 $1,243,131
- ----------------------------------------------------------------------
JUNE 6, 1994
(COMMENCEMENT
OF OPERATIONS)
TO OCTOBER 31
- ----------------------------------------------------------------------
1994
- ----------------------------------------------------------------------
CLASS B SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 55,736 $524,009
Shares issued in connection with
reinvestment of distributions 223 2,077
- ----------------------------------------------------------------------
55,959 526,086
- ----------------------------------------------------------------------
Shares repurchased (2,371) (21,936)
- ----------------------------------------------------------------------
NET INCREASE 53,588 $504,150
- ----------------------------------------------------------------------
APRIL 12, 1995
(COMMENCEMENT
OF OPERATIONS)
TO OCTOBER 31
- ----------------------------------------------------------------------
1995
- ----------------------------------------------------------------------
CLASS M SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 18,625 $182,753
Shares issued in connection with
reinvestment of distributions 155 1,550
- ----------------------------------------------------------------------
18,780 184,303
- ----------------------------------------------------------------------
Shares repurchased (530) (5,356)
- ----------------------------------------------------------------------
NET INCREASE 18,250 $178,947
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
FEDERAL TAX INFORMATION
(Unaudited)
The Form 1099 you receive in January 1996 will show the tax status of
all distributions paid to your account in calendar 1995.
<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 L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary Coburn
Vice President
Kenneth Taubes
Vice President and Fund Manager
Max S. Senter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
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,
and the most recent copy of Putnam's Quarterly Performance Summary.
For more information, or to request a prospectus, call toll free: 1-
800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
21705-039/334/878 12/95
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Italic typefaces is displayed in normal type.
(3) Boldface type is displayed in capital letters.
(4) Headers (e.g. the names of the fund) and footers (e.g. page
numbers and OThe accompanying notes are an integral part of these
financial statementsO) are omitted.
(5) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(6) Bullet points and similar graphic symbols are omitted.
(7) Page numbering is different.
