Putnam
Federal
Income
Trust
SEMIANNUAL REPORT
April 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* According to Lipper Analytical Services, Putnam Federal Income
Trust's class A share total return for the year ended April 30, 1997,
ranked 14 out of 175 general U.S. government funds, placing the fund in
the top 8% of this category.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
18 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
4/30/97, class A shares ranked 45 out of 75 and 23 out of 48 funds for 5-
and 10-year performance, respectively; class B and class M shares ranked
41 and 16, respectively, out of 175 funds for 1-year performance. Class B
and class M shares were not ranked over longer periods. Past performance
is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Managing a portfolio of fixed-income securities has become increasingly
complex in recent years. The variety of available investments has proliferated
and U.S. investors are increasingly looking for opportunities beyond this
country's borders.
As a result, the managers of Putnam Federal Income Trust now find themselves
not only surveying interest rates and maturities, but concerning themselves
with such strategies as credit management, hedging non-U.S. currencies against
the dollar, and readjusting the weightings of various types of securities in
the fund's portfolio.
To help them with this process, fund managers Kenneth Taubes and Max Senter
are able to call on Putnam's extensive fixed-income research and analysis
capability. In the following report, Ken and Max discuss your fund's
performance during the first half of fiscal 1997 and look at prospects for the
second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 18, 1997
Report from the Fund Managers
Kenneth J. Taubes
Max S. Senter
The Federal Reserve Board's preemptive strike against inflation in late March
capped off a challenging semiannual period for shareholders of Putnam Federal
Income Trust. Over the six months ended April 30, 1997, bond investors reacted
- -- and, in some cases, overreacted -- to a flood of data that suggested the
economy was overheating. Their fears were far from unfounded: the economy grew
around a 5.6% annual rate in the first quarter of 1997, while unemployment
dropped to its lowest level since 1973. Fortunately, your fund steered a
successful course through the resulting market volatility, reaching the
midpoint of its 1997 fiscal year with a small but positive total return.
Complete performance information for the fund appears on pages 9 and 10.
* SECTOR POSITIONING PROVES EFFECTIVE
In its search for income, Putnam Federal Income Trust primarily invests in a
variety of high-quality bonds, including U.S. and foreign government bonds,
mortgage-backed investments, and bonds issued by creditworthy corporations.
The percentage of assets in each sector of these markets is adjusted in
response to our outlook for the economy and interest rates. This flexibility
proved invaluable during the first half of the fund's 1997 fiscal year. As
sectors rotated in and out of favor with investors, we successfully positioned
the portfolio to benefit from changing sentiments.
We began the period with a relatively heavy weighting in corporate bonds
(11.0% of portfolio holdings). Strong economic growth after years of
aggressive cost cutting had put many companies on solid financial footing. As
a result, 1996 was a banner year for corporate profits. According to one
survey in The Wall Street Journal, corporate profits gained a remarkable 61%
in the fourth quarter of 1996, compared with the fourth quarter of 1995. The
result of these gains, leading to credit-rating upgrades and higher bond
prices, was readily apparent in your fund's performance.
By February 1997, however, we were concerned that the situation was ripe for
correction. As a prelude to the federal funds rate increase in late March,
Federal Reserve Chairman Greenspan remarked to Congress that the current low
level of inflation at a time of sustained economic growth appeared to be
temporary, and more ominously, that "excessive optimism sows the seeds of its
own reversal." Fearing the impact of higher rates on the fund's corporate bond
holdings, we reduced the portfolio's position, eliminating first the
lower-credit-quality bonds we considered most sensitive to changes in interest
rates. Shortly thereafter, corporate bonds did suffer a downturn and we
believe our move helped protect the portfolio's value.
* INCREASE IN ALLOCATION TO MORTGAGE-BACKED SECURITIES CONTRIBUTES TO POSITIVE
RESULTS
Another plus for performance was our decision to increase the fund's holdings
in mortgage-backed securities. We had concluded that their callability had
become less onerous at their higher yield levels. Furthermore, supply/demand
technical factors were, and remain, excellent. Finally, these securities were
available at attractive prices on a relative value basis and we did not
believe they would be too sensitive to any further increase in the federal
funds rate.
[GRAPHIC OMITTED: horizontal bar chart BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/96-4/30/97
Index Total return
Lehman Brothers Mortgage-Backed Securities Index 2.64%
Lehman Brothers Corporate Bond Index 1.22%
Salomon Brothers World Government Bond Index -4.50%
Lehman Brothers Long-Term Treasury Bond Index -0.05%
Footnote reads:
*These indexes reflect the general performance of market sectors in which the
fund invests. The fund's performance will differ. Past performance is not
indicative of future results. The indexes may include bonds different from
those in the fund. It is not possible to invest directly in an index.
The fund typically holds a large number of mortgage-backed bonds in order to
benefit from their yield advantage over U.S. Treasuries (historically, a
difference of roughly one percentage point). These bonds carry higher yields
to compensate for their prepayment risk, which can dampen performance when
interest rates head lower.
Also beneficial to performance were the fund's holdings of so-called private
mortgages. Securitized by private lenders such as Chase Mortgage Finance Corp.
and Prudential Home Mortgage, these mortgages typically are too large (in
excess of about $210,000) to meet the standards of agencies such as the
Government National Mortgage Association (GNMA). The absence of a government
guarantee means private mortgages are somewhat less creditworthy than those
packaged by government agencies and therefore must pay more income to attract
investors. While these portfolio holdings, along with others discussed in this
report, were viewed favorably at the end of the fiscal period, all are subject
to review and adjustment in accordance with the fund's investment strategy and
may vary in the future.
Throughout the semiannual period, the U.S. dollar rose sharply against major
foreign currencies, eroding U.S. investors' returns on non-dollar-based
investments. For an investor in Italian government bonds, for example, a local
return of 1.45% became an almost 7% loss when translated into U.S. dollars,
according to J.P. Morgan. Because the fund began the period with a large
number of holdings hedged back to the dollar, the impact of the rising U.S.
currency was minimal. Furthermore, we reduced the international bond holdings
significantly, since we did not expect dramatic outperformance, especially
from European markets -- an opinion we still hold.
* SUBTLE SHIFT IN DURATION ADDS VALUE
As the period progressed, we became increasingly more cautious on the bond
market's prospects. In incremental adjustments, we gradually shifted the
portfolio's average duration from a relatively long position to a relatively
short one. The move proved well timed and added value to the fund's results.
By period's end, the move had resulted in a subtle shift from an essentially
neutral position to a mildly defensive one. An important tool for investment
professionals, duration measures a portfolio's sensitivity to changes in
interest rates and is expressed in years.
The shift was accomplished by lowering the portfolio's weighting in corporate
bonds and shifting the assets to mortgage-backed securities.
[GRAPHIC OMITTED: horizontal bar chart CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/96 4/30/97
Mortgage-backed securities 36.6% 45.3%
U.S. Treasury securities 35.7% 33.1%
Foreign bonds and notes 11.9% 3.8%
Corporate bonds 11.0% 9.1%
Collateralized mortgage obligations 8.1% 7.3%
Short-term investments 1.3% 4.0%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over time.
* "HISTORY COUNSELS CAUTION": ADVICE FOR BOND AND EQUITY INVESTORS
Federal Reserve Chairman Greenspan's call for prudence was directed at U.S.
equity investors but it may also be appropriate for those in the bond markets.
As this report was being written, the bond markets had recovered from their
late-March selloff, and a host of crucial economic reports suggested that
inflation was less of a threat than had earlier been predicted.
The Fed's decision to leave rates unchanged at its May meeting is no assurance
against future increases. In our view, in fact, the Fed's job is not finished,
and we believe it may find sufficient cause to raise rates again. We have
reached this conclusion because the U.S. economy's growth rate remains strong
and prospects of an upturn in foreign economies could lead the U.S. economy to
heat up further.
Going forward, therefore, we intend to keep the fund's duration neutral to
short, making the most of a flexible investment strategy by seeking income
where opportunities arise.
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 4/30/97, there is no guarantee the fund will continue to hold
these securities in the future.
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.
TOTAL RETURN FOR PERIODS ENDED 4/30/97
Class A Class B Class M
(inception date) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 1.82% -3.02% 1.46% -3.48% 1.71% -1.63%
- ------------------------------------------------------------------------------
1 year 7.01 1.92 6.37 1.37 6.86 3.39
- ------------------------------------------------------------------------------
5 years 33.77 27.39 -- -- -- --
Annual average 5.99 4.96 -- -- -- --
- ------------------------------------------------------------------------------
10 years 103.13 93.44 -- -- -- --
Annual average 7.34 6.82 -- -- -- --
- ------------------------------------------------------------------------------
Life of fund -- -- 19.42 16.42 15.90 12.15
Annual average -- -- 6.31 5.38 7.46 5.75
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/97
Lehman Bros.
Government Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 1.32% 1.20%
- ------------------------------------------------------------------------------
1 year 6.48 2.50
- ------------------------------------------------------------------------------
5 years 41.91 14.84
Annual average 7.25 2.81
- ------------------------------------------------------------------------------
10 years 122.69 42.15
Annual average 8.33 3.58
- ------------------------------------------------------------------------------
Life of class B 23.04 8.61
Annual average 7.37 2.89
- ------------------------------------------------------------------------------
Life of class M 16.87 5.81
Annual average 7.77 2.79
- ------------------------------------------------------------------------------
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 or,
for class A shares, distribution fees prior to implementation of the class
A distribution plan in 1990. 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. CDSC for class B shares
assumes the applicable sales charge, with the maximum being 5%.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.31 $0.274 $0.299
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.31 $0.274 $0.299
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/96 $10.01 $10.51 $9.98 $10.01 $10.35
- ------------------------------------------------------------------------------
4/30/97 9.88 10.37 9.85 9.88 10.21
- ------------------------------------------------------------------------------
Current return (end of
period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.44% 6.13% 5.73% 6.19% 5.99%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.58 6.27 5.86 6.42 6.21
- ------------------------------------------------------------------------------
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.
TOTAL RETURN FOR PERIODS ENDED 3/31/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 2.82% -2.06% 2.35% -2.63% 2.81 -0.53%
- ------------------------------------------------------------------------------
1 year 5.02 0.08 4.18 -0.76 4.78 1.41
- ------------------------------------------------------------------------------
5 years 33.00 26.64 -- -- -- --
Annual average 5.87 4.84 -- -- -- --
- ------------------------------------------------------------------------------
10 years 91.68 82.50 -- -- -- --
Annual average 6.72 6.20 -- -- -- --
- ------------------------------------------------------------------------------
Life of fund -- -- 17.76 14.76 14.36 10.66
Annual average -- -- 5.97 5.00 7.05 5.28
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. 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.
TERMS AND DEFINITIONS
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.
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 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.
Lehman Brothers Corporate Bond Index* is an unmanaged list of publicly
issued, fixed-rate non-convertible investment-grade domestic corporate
debt securities frequently used as a general measure of the performance of
fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10
years of greater.
Lehman Brothers Mortgage-Backed Securities Index* is an unmanaged list of
GNMA bonds.
Salomon Brothers World Government Bond Index* is a market-capitalization
weighted benchmark that tracks the performance of government-bond markets
in 14 countries.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
WELCOME TO
www.putnaminv.com
Now you can get up-to-date information about your funds, learn more
about investing and retirement planning, and access market news and an
economic outlook from Putnam experts -- with just a few clicks of the
mouse!
VISIT PUTNAM'S NEW SITE ON THE WORLD WIDE WEB TO FIND OUT:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* daily fund pricing and long-term fund performance
* how to tell if your retirement savings plan is on track
* how quickly money can accumulate in a tax-deferred investment
You can also read Dr. Robert Goodman's economic commentary and Putnam's
Capital Markets Forum outlook, search for a particular Putnam fund by
name or objective . . . and much more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape and an independent Internet service
provider.
New features will be added to the site on an ongoing basis. So, visit us
at http://www.putnaminv.com -- often!
Portfolio of investments owned
April 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (78.4%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (45.3%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$ 18,523,391 8 1/2s, with due dates from June 1, 2026 to January 1, 2027 $ 19,119,476
9,701,045 5 1/2s, with due dates from March 1, 2011 to April 1, 2011 9,034,098
11,700,000 Federal National Mortgage Association 7s,
TBA, June 16, 2027 11,334,375
44,332,549 Federal National Mortgage Association 7s,
with due dates from October 1, 2017 to January 1, 2027 42,947,184
Government National Mortgage Association
16,089,966 8s, with due dates from January 15, 2001 to June 15, 2023 16,613,603
37,801,291 7 1/2s, with due dates from January 15, 2023
to April 15, 2026 37,614,332
10,503,998 7s, with due dates from January 15, 2027 to April 15, 2027 10,159,259
19,736,510 6 1/2s, with due dates from April 15, 2023
to November 15, 2025 18,573,935
--------------
165,396,262
U.S. Treasury Obligations (33.1%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
13,940,000 11 5/8s, November 15, 2004 17,938,968
8,005,000 8 1/8s, August 15, 2019 8,956,875
22,880,000 7 1/2s, November 15, 2024 24,170,661
1,870,000 6 1/2s, November 15, 2026 1,756,341
U.S. Treasury Notes
21,575,000 11 7/8s, November 15, 2003 # 27,460,876
11,375,000 6 7/8s, May 15, 2006 11,471,005
26,350,000 6 3/8s, April 30, 1999 26,399,275
2,695,000 6 1/4s, February 15, 2007 2,607,413
--------------
120,761,414
--------------
Total U.S. Government and Agency Obligations
(cost $289,124,172) $ 286,157,676
CORPORATE BONDS AND NOTES (9.1%) *
PRINCIPAL AMOUNT VALUE
Entertainment (0.8%)
- ------------------------------------------------------------------------------------------------------------
$ 2,835,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 $ 2,743,288
Insurance and Finance (1.6%)
- ------------------------------------------------------------------------------------------------------------
3,925,000 Advanta National Bank sr. notes 7.02s, 2001 3,816,513
2,010,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 2,057,336
--------------
5,873,849
Metals and Mining (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,770,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 1,914,839
Publishing (0.7%)
- ------------------------------------------------------------------------------------------------------------
1,705,000 News America Holdings, Inc. deb. 7 3/4s, 2045 1,540,416
1,070,000 News America Holdings, Inc. deb. 7.7s, 2025 981,575
--------------
2,521,991
Real Estate (1.8%)
- ------------------------------------------------------------------------------------------------------------
1,270,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 (R) 1,184,859
3,335,000 Meditrust med. term notes 7.3s, 2006 (R) 3,246,389
2,020,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 2,044,624
--------------
6,475,872
Tobacco (0.8%)
- ------------------------------------------------------------------------------------------------------------
2,910,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006(Indonesia) 2,940,235
Utilities (2.9%)
- ------------------------------------------------------------------------------------------------------------
9,944,000 Citizens Utilities Co. bonds 7.68s, 2034 10,717,643
--------------
Total Corporate Bonds and Notes (cost $32,425,972) $ 33,187,717
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (7.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp.
$ 1,318,064 Ser. 1994-G, Class B3, 7s, April 25, 2025 $ 1,237,333
936,188 Collateral Interest Strip Ser. 1993-3, Class B6, 7.46s,
October 29, 2024 891,427
4,016,524 Collateral Interest Strip Ser. 1993-3, Class B7, 7.46s,
October 29, 2024 3,824,484
1,106,298 CMC Securities Corp. III Ser. 1994-F, Class B2, 6 1/4s,
May 25, 2014 1,032,833
2,755,005 Housing Securities Inc. Ser. 1993-J, Class J2, 6.66s,
January 25, 2009 2,609,507
2,694,084 Prudential Home Mortgage Securities Ser. 1994-28,
Class B2, 6.803s, September 25, 2001 2,586,322
Prudential Home Mortgage Securities 144A
4,709,262 Ser. 94-D, Class 3B, 6.311s, August 28, 2009 4,372,256
3,690,743 Ser. 93-31, Class B1, 6s, August 25, 2000 3,517,740
Residential Funding Mortgage Securities
988,706 Ser. 93-S17, Class M3, 7s, May 25, 2008 937,109
753,933 Ser. 93-S23, Class M3, 6 1/2s, June 25, 2008 696,682
Securitized Asset Sales, Inc.
3,362,224 Ser. 93-J, Class 2B, 6.807s 3,138,952
1,846,832 Mtge. Pass Thru Certificates Ser. 1994-3, Class B1, 6.11s,
February 25, 1999 1,792,004
--------------
Total Non-Agency Collateralized Mortgage Obligations
(cost $25,019,937) $ 26,636,649
FOREIGN GOVERNMENT BONDS AND NOTES (3.8%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 8,420,000 Australia (Government of) notes 8 3/4s, 2001 $ 6,929,086
ZAR 7,870,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 1,570,814
GBP 3,300,000 United Kingdom Treasury bonds 7 1/2s, 2006 5,378,026
--------------
Total Foreign Government Bonds and Notes
(cost $14,063,706) $ 13,877,926
PURCHASED OPTION OUTSTANDING (--%)* (cost $158,045)
CONTRACT EXPIRATION DATE/
AMOUNT STRIKE PRICE VALUE
- ------------------------------------------------------------------------------------------------------------
$ 7,300,000 U.S. Dollar in exchange for Deutschemark (Call) May 97 /
DEM 1.692 $ 165,710
SHORT-TERM INVESTMENT (4.0%) * (cost $14,682,214)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$14,680,000 Interest in $492,645,000 joint repurchase agreement
April 30, 1997 with Morgan (J.P.) & Co., Inc. due
May 1, 1997 with respect to various U.S. Treasury
obligations -- maturity value of $14,682,214 for an
effective yield of 5.43% $ 14,682,214
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $375,474,046) *** $ 374,707,892
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $364,944,370.
*** The aggregate identified cost on a tax basis is $376,874,368,
resulting in gross unrealized appreciation and depreciation of
$2,942,698 and $5,109,174, respectively, or net unrealized depreciation
of $2,166,476.
# A portion of this security was pledged and segregated with
the custodian to cover margin requirements for futures contracts at
April 30, 1997.
(R) Real Estate Investment Trust.
TBA after the name of a security represents to be announced
securities (Note 1).
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.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1997
Aggregate Face Expiration Unrealized
Market Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Notes 10 year
(Short) $ 9,627,188 $ 9,658,125 Jun-97 $30,937
US Treasury Bonds 20 year
(Short) 12,348,781 12,574,906 Jun-97 226,125
US Treasury Notes 5 year
(Short) 25,583,344 25,803,563 Jun-97 220,219
- ----------------------------------------------------------------------------------------
$477,281
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at April 30, 1997
(aggregate face value $1,263,807)
Aggregate Face Delivery Unrealized
Market Value Value Date Depreciation
- ----------------------------------------------------------------------------------------
Australian Dollars $ 481,701 $ 481,730 6/18/97 $ (29)
Canadian Dollars 71,811 73,855 6/18/97 (2,044)
Deutschemarks 193,528 198,194 6/18/97 (4,666)
Thai Baht 509,698 510,028 6/18/97 (330)
- ----------------------------------------------------------------------------------------
$ (7,069)
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at April 30, 1997
(aggregate face value $13,026,921)
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- ----------------------------------------------------------------------------------------
British Pounds $ 5,625,408 $5,675,046 6/18/97 $ 49,638
Japenese Yen 7,234,446 7,351875 6/18/97 117,429
- ----------------------------------------------------------------------------------------
$167,067
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $375,474,046) (Note 1) $ 374,707,892
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 5,434,755
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 132,390
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 15,863,186
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 167,067
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 61,111
- ---------------------------------------------------------------------------------------------------
Total assets 396,366,401
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 415,364
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 140,938
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 63,287
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 29,667,020
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 218,147
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 568,157
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 76,048
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,353
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 641
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 80,814
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 7,069
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 76,923
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 100,270
- ---------------------------------------------------------------------------------------------------
Total liabilities 31,422,031
- ---------------------------------------------------------------------------------------------------
Net assets $ 364,944,370
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $ 548,000,966
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,968,626
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (186,897,607)
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and assets and
liabilities in foreign currencies (127,615)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $ 364,944,370
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($353,993,558 divided by 35,812,034 shares) $9.88
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.88)* $10.37
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($10,010,731 divided by 1,016,520 shares)** $9.85
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($940,081 divided by 95,104 shares) $9.88
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.88)*
- ---------------------------------------------------------------------------------------------------
* 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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1997 (Unaudited)
<S> <C>
Interest income: $13,856,601
Expenses:
Compensation of Manager (Note 2) 1,174,471
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 325,950
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,714
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,693
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 454,190
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 49,559
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,010
- --------------------------------------------------------------------------------------------------
Reports to shareholders 34,725
- --------------------------------------------------------------------------------------------------
Registration fees 100
- --------------------------------------------------------------------------------------------------
Auditing 28,905
- --------------------------------------------------------------------------------------------------
Legal 3,872
- --------------------------------------------------------------------------------------------------
Other 27,037
- --------------------------------------------------------------------------------------------------
Total expenses 2,112,226
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (89,475)
- --------------------------------------------------------------------------------------------------
Net expenses 2,022,751
- --------------------------------------------------------------------------------------------------
Net investment income 11,833,850
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 819,526
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 246,178
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 630,311
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 507,816
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments futures, and TBA sales,
during the period (7,191,779)
- --------------------------------------------------------------------------------------------------
Net loss on investments (4,987,948)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 6,845,902
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 11,833,850 $ 24,690,591
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 1,696,015 3,459,579
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (6,683,963) (10,987,465)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,845,902 17,162,705
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (11,415,514) (23,678,859)
- ----------------------------------------------------------------------------------------------------------------------
Class B (240,190) (243,839)
- ----------------------------------------------------------------------------------------------------------------------
Class M (24,553) (19,056)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (18,224,654) (33,489,985)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (23,059,009) (40,269,034)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 388,003,379 428,272,413
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $3,968,626 and $3,815,033, respectively) $364,944,370 $ 388,003,379
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.01 $10.17 $9.32 $10.47 $10.47 $10.52
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .32 .61 (b) .60 .61 .83 .84
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.14) (.18) .84 (1.07) -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .18 .43 1.44 (.46) .83 .79
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.59) (.59) (.66) (.83) (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.59) (.59) (.69) (.83) (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.88 $10.01 $10.17 $9.32 $10.47 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.82* 4.45 15.97 (4.54) 8.17 7.75
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $353,994 $379,929 $426,252 $449,480 $600,181 $655,656
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .55* 1.16 1.12 1.06 1.05 1.11
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.16* 6.12 6.22 6.91 7.81 6.83
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.14 297.30 234.95 317.91 150.05 248.37
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Per share net investment income has been determined on the basis the weighted average number
of shares outstanding during the period.
(c) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 June 6, 1994+
operating performance (Unaudited) Year ended Oct. 31 to Oct. 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.98 $10.14 $9.30 $9.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .26 .54 (b) .52 .18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.12) (.18) .84 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .14 .36 1.36 (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.52) (.52) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.52) (.52) (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.85 $9.98 $10.14 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.46* 3.74 15.09 (1.42)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,011 $7,535 $1,835 $498
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .93* 1.93 1.85 .72*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.70* 5.44 5.42 2.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.14 297.30 234.95 317.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Per share net investment income has been determined on the basis the weighted average number
of shares outstanding during the period.
(c) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended Year For the period
Per-share April 30 ended April 12, 1995+
operating performance (Unaudited) Oct. 31 to Oct 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $10.01 $10.17 $9.57
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .30 (b) .59 (b) .29 (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.13) (.18) .60
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .17 .41 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.88 $10.01 $10.17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.71* 4.20 9.35*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $940 $539 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .68* 1.43 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.95* 5.90 3.15*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 126.14 297.30 234.95
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Per share net investment income has been determined on the basis the weighted average number
of shares outstanding during the period.
(c) The ratio of expenses to average net assets for periods ended October 31, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2).
</TABLE>
Notes to financial statements
April 30, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Federal Income Trust (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 fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
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. Securities
quoted in foreign currencies are translated into U.S. dollars at the current
exchange rate. 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. Market quotations are not considered to be readily available for
long-term corporate bonds and notes; such investments are stated at fair value
on the basis of valuations furnished by a pricing service, approved by the
Trustees, which determines valuations for normal, institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders.
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 and certain other accounts managed by Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc.. 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 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. 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.
D) 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.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value 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 prices 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.
F) 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 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.
G) 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.
H) 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 1.0% 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. Income on the securities will not be earned until
settlement date. 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. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, 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 their 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 deems it appropriate to do so.
I) 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, the 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.
J) 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
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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At October 31, 1996, the fund had a capital loss carryover of approximately
$187,373,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- ---------------------------------------------------
$118,265,000 October 31, 1997
15,005,000 October 31, 1998
54,103,000 October 31, 2002
K) Distributions to shareholders Distributions to shareholders 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. 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.
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. 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 0.40% of any amount over $1
billion.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At April 30, 1997, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
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.
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 six months ended April 30, 1997, fund expenses were reduced by $89,475
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 a portion of these assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the fund receive an annual Trustees fee of $750 and an additional
fee for each Trustee's 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.
The fund has 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.
The fund has adopted an unfunded noncontributory defined benefit pension plan
covering all Trustees of the Fund who have served as Trustee for at least five
years. Benefits under the plan are equal to 50% of the Trustee's average total
retainer and meeting fees for the three years preceding retirement. Pension
expense for the fund is included in Trustee fees in the Statement of
operations. Accrued pension liability is included in Payable for compensation
of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, 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 payments 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 six months ended April 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $27,899 and $178 from the sale of
class A and class M shares, respectively and received $16,759 in contingent
deferred sales charges from redemptions of class B shares. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares. For
the six months ended April 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended April 30, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $87,515,297 and $112,783,528, respectively. Purchases and sales of
U.S. government obligations aggregated $377,628,638 and $367,043,391,
respectively. In determining the net gain or loss on securities sold, the cost
of securities has been determined on the identified cost basis.
Note 4
Capital shares
At April 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
April 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,031,872 $ 10,240,133
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 621,854 6,176,325
- ------------------------------------------------------------
1,653,726 16,416,458
Shares
repurchased (3,779,618) (37,645,826)
- ------------------------------------------------------------
Net decrease (2,125,892) $(21,229,368)
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,938,500 $ 19,364,523
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,266,547 12,588,121
- ------------------------------------------------------------
3,205,047 31,952,644
Shares
repurchased (7,170,397) (71,497,032)
- ------------------------------------------------------------
Net decrease (3,965,350) $(39,544,388)
- ------------------------------------------------------------
Six months ended
April 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 612,448 $6,077,676
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 21,511 212,892
- ------------------------------------------------------------
633,959 6,290,568
Shares
repurchased (372,136) (3,695,565)
- ------------------------------------------------------------
Net increase 261,823 $2,595,003
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 884,580 $8,771,380
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 21,682 213,062
- ------------------------------------------------------------
906,262 8,984,442
Shares
repurchased (332,561) (3,281,315)
- ------------------------------------------------------------
Net increase 573,701 $5,703,127
- ------------------------------------------------------------
Six months ended
April 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 91,938 910,584
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,673 16,575
- ------------------------------------------------------------
93,611 927,159
Shares
repurchased (52,360) (517,448)
- ------------------------------------------------------------
Net increase 41,251 409,711
- ------------------------------------------------------------
Year ended
October 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 39,320 $387,633
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 987 9,769
- ------------------------------------------------------------
40,307 397,402
Shares
repurchased (4,704) (46,126)
- ------------------------------------------------------------
Net increase 35,603 $351,276
- ------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. DAGGERS]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
[2 DBL. DAGGERS] Not offered by Putnam Investments. 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 at 1-800-225-1581
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.
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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Kenneth J. 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
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. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
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.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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33889-039/334/878 6/97
