Putnam
Federal
Income
Trust
ANNUAL REPORT
October 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Demonstrating above-average performance in a challenging market,
Putnam Federal Income Trust's class A share total return for the year
ended October 31, 1997, ranked 43 out of 179 general U.S. government
funds, according to Lipper Analytical Services, placing the fund in the
top 24% of its category.*
* "The high level of volatility we've witnessed in the world's stock
markets in late October has prompted what investors term a flight to
quality. This phenomenon can benefit the high-quality fixed-income
securities your fund owns."
-- Kenneth J. Taubes, fund manager
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 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 10/31/97, class A shares ranked 41 out of 78
and 28 out of 48 for 5- and 10-year performance, respectively;
class B and class M shares ranked 113 and 62, respectively, out
of 179 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:
Astute portfolio maneuvers, coupled with well-timed defensive strategies,
helped Putnam Federal Income Trust deliver a competitive total return during
the fiscal year that ended on October 31, 1997. To achieve this positive
result, fund managers Kenneth Taubes and Max Senter skillfully adjusted both
the portfolio's average duration and its mix of securities throughout the year
in response to a continuing stream of changing conditions.
Nevertheless, an underlying current of nervousness prevailed throughout the
period as both the Federal Reserve Board and investors kept a close watch on
inflation, fearing that the still robust economy might ignite it at any
moment. The Fed's preemptive thrust in March with a quarter-point increase in
short-term interest rates seemed to do the trick without extinguishing the
economy's long-standing growth cycle.
Plenty of challenges remain as your fund embarks on a new fiscal year. In the
following report, Ken and Max discuss performance in the year just ended and
take a look at prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 17, 1997
Report from the Fund Managers
Kenneth J. Taubes
Max S. Senter
Considering the winter bear market, the summer rally, and the turmoil in
emerging markets this fall, Putnam Federal Income Trust's 1997 fiscal year was
anything but dull. Although fixed-income investors had their share of ups and
downs, your fund's flexible investment strategy enabled it to complete the
12-month period ended October 31, 1997, with an 8.41% class A share return at
net asset value. At public offering price, class A shares returned 3.25%. For
more performance information, including the results for other share classes,
please see pages 8, 9, and 10.
* INVESTORS ADJUST TO GROWTH WITHOUT INFLATION
Economic activity in the first half of the fund's fiscal year was vigorous and
widespread. Consumer spending rose, unemployment fell, sales of new homes set
records, and manufacturing capacity became increasingly strained. Anticipating
a potential spike in inflation, the Federal Reserve Board raised short-term
interest rates by a quarter of a percentage point in late March. Bonds and
bond funds most sensitive to changing interest rates suffered the greatest
price declines, but returns among fixed-income investments in general were
lackluster over the first half of the fiscal year. Having become more cautious
about the bond market's prospects, we gradually reduced the portfolio's
sensitivity to changes in interest rates by shortening its duration. The move
proved well timed and boosted the fund's performance in the first half.
The fiscal year's second half brought a decidedly more upbeat mood to the
market. Economic activity tapered off in a manner that persuaded the Fed to
leave interest rates unchanged. Despite a continued strong employment picture,
retail sales declined and manufacturers slowed production. Although the
country's gross domestic product (GDP) measured growth at more than 4% in the
first six months of the period (4.9% in the first quarter of 1997), growth in
the second half remained much closer to 3%. By June, as reports of moderating
economic growth mounted, many market watchers had ruled out any further 1997
rate increases. This new landscape proved a welcome change for fixed-income
investors: bond prices rose throughout the spring and summer and yields fell.
Although encouraged, we remained cautious about lengthening portfolio duration
too much during this period -- and, consequently, increasing the fund's
interest-rate exposure -- suspecting that the Fed's concern over unsustainably
high economic growth might eventually prompt additional tightening of
short-term interest rates. Instead, we chose to focus on altering the fund's
mix of investments, including applying greater resources to the
mortgage-backed segment of the fixed-income market.
* MORTGAGES FAVORED THROUGHOUT YEAR
In its search for income, your fund invests in a variety of high-quality
bonds, including U.S. and foreign government bonds, mortgage-backed
securities, and bonds issued by creditworthy corporations. Because these
investments vary in their sensitivity to interest rates and changes in the
economy, the percentage of assets in each sector is adjusted regularly to
reflect our outlook.
For example, throughout the first half of the fiscal year, we considered that
mortgage-backed securities provided a distinct advantage over U.S. Treasuries
of comparable maturity and therefore weighted them heavily in the portfolio.
As we began the fiscal year, mortgages constituted 45% of net assets; this
level rose to 58.8% this past spring and stayed constant through the end of
October. Mortgage-backed securities generally offer higher yields than
Treasuries in order to compensate investors for the risk of prepayment.
However, prepayment risk was not an issue for a large part of the year, since
economic growth was generally strong and interest rates appeared more likely
to rise than fall. Only during the summer did Treasuries gain the upper hand.
Their sensitivity to changing interest rates translated into relatively
greater price appreciation as the market rallied and rates moved lower.
[GRAPHIC OMITTED: horizontal bar chart TOP BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Lehman Brothers Mortgage-Backed Securities Index 9.12%
Lehman Brothers Corporate Bond Index 9.26%
Salomon Brothers World Government Bond Index 2.61%
Lehman Brothers Long-Term Treasury Bond Index 12.62%
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.
* FOREIGN AND CORPORATE BOND HOLDINGS REDUCED
To finance the additional investment in mortgage-backed securities, we scaled
back the fund's corporate and foreign bond holdings, having begun the period
with a relatively heavy weighting in corporate bonds. Corporate profits had a
banner year in 1996 and the subsequent credit-rating upgrades and higher bond
prices benefited your fund's performance.
By early 1997, however, we believed that the seeds of higher interest rates
had been sown and that an increase in rates would dampen performance of the
fund's corporate bond holdings. We first eliminated the lower-credit-quality
bonds we considered most sensitive to changes in interest rates. The move
proved timely, as higher-yielding corporate bonds did suffer a downturn
shortly thereafter.
Later in the year, as events in Southeast Asia were heating up, high-grade
corporate bonds suffered a setback on the grounds that weaker currencies in
Asian export countries would cut into U.S. corporate profits.
Throughout the first half of fiscal 1997, the U.S. dollar rose sharply against
major foreign currencies, eroding U.S. investors' returns on nondollar-based
investments. We reduced the fund's foreign holdings dramatically in early
1997, concluding that domestic bonds were more likely to outperform their
foreign counterparts, particularly in European markets.
[GRAPHIC OMITTED: Vertical bar chart COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
10/31/96 10/31/97
Mortage-backed securities 36.6% 51.2%
U.S. Treasury securities 35.8% 29.8%
Foreign bonds and notes 11.9% 6.4%
Corporate bonds 11.0% 8.6%
Collateralized mortage obligations 8.1% 7.6%
Short-term investments 1.3% 1.0%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over time.
*CAUTION PREVAILS FOR COMING MONTHS
Whether the Fed will raise rates in the coming year remains an important
question for fixed-income investors. Unemployment remains low and industrial
capacity tight. Consumer spending, which had lagged income growth in the first
half of the year, posted sharp increases in the third quarter as measured by
rising retail sales. Stronger foreign economies, particularly in Europe, have
fueled U.S. export growth of late. The U.S. economy has registered four
calendar quarters of GDP growth above 3%, and yet the Fed maintains that
noninflationary growth is something more on the order of 2.5%. In light of
these factors and considering that the summer's bond market rally may have
been overdone, we currently intend to keep the fund's slightly defensive
duration stance in the coming months, making the most of a flexible investment
strategy by seeking income wherever 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 10/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 10/31/97
Class A Class B Class M
(inception date) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.41% 3.25% 7.55% 2.55% 8.16% 4.61%
- ------------------------------------------------------------------------------
5 years 35.60 29.18 30.44 28.53 33.86 29.56
Annual average 6.28 5.25 5.46 5.15 6.01 5.32
- ------------------------------------------------------------------------------
10 years 114.22 104.08 96.88 96.88 107.30 100.50
Annual average 7.92 7.39 7.01 7.01 7.56 7.20
- ------------------------------------------------------------------------------
Life of fund 120.72 110.28 100.06 100.06 112.17 105.23
Annual average 7.19 6.73 6.27 6.27 6.81 6.50
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS
ENDED 10/31/97
Lehman Bros.
Government Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 8.66% 2.08%
- ------------------------------------------------------------------------------
5 years 42.43 13.96
Annual average 7.33 2.65
- ------------------------------------------------------------------------------
10 years 134.51 40.16
Annual average 8.90 3.43
- ------------------------------------------------------------------------------
Life of fund 154.87 48.39
Annual average 8.54 3.52
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share returns for
the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5% in the
first year, declines to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class B and class M shares for periods prior
to their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and, in the case of class B and class M
shares, the higher operating expenses applicable to such shares. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
[GRAPHIC OMITTED: GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/31/87
Fund's Class A
shares Lehman Bros. Consumer Price
Date/year at POP Govt. Bond Index Index
10/31/87 9525 10000 10000
10/31/88 10445 10973 10425
10/31/89 11528 12293 10893
10/31/90 12156 13022 11578
10/31/91 13966 14923 11917
10/31/92 15049 16465 12298
10/31/93 16278 18627 12637
10/31/94 15539 17794 12966
10/31/95 18021 20531 13330
10/31/96 18823 21582 13729
10/31/97 20408 23451 14016
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $19,688 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $20,730 ($20,050 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.628 $0.556 $0.605
- ------------------------------------------------------------------------------
Total 0.628 $0.556 $0.605
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/96 $10.01 $10.51 $9.98 $10.01 $10.35
- ------------------------------------------------------------------------------
10/31/97 10.19 10.70 10.15 10.19 10.53
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate 6.24% 5.94% 5.56% 6.01% 5.81%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 6.01 5.72 5.26 5.71 5.52
- ------------------------------------------------------------------------------
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 9/30/97
(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
- ------------------------------------------------------------------------------
1 year 9.63% 4.42% 8.76% 3.76% 9.49% 5.93%
- ------------------------------------------------------------------------------
5 years 31.83 25.61 26.81 24.95 30.19 25.99
Annual average 5.68 4.67 4.87 4.56 5.42 4.73
- ------------------------------------------------------------------------------
10 years 120.27 109.74 102.42 102.42 113.26 106.25
Annual average 8.22 7.69 7.31 7.31 7.87 7.51
- ------------------------------------------------------------------------------
Life of fund 118.06 107.75 97.75 97.75 109.65 102.80
Annual average 7.12 6.67 6.20 6.20 6.75 6.44
- ------------------------------------------------------------------------------
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. See first page of
performance section for performance calculation method.
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 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.
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 or 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.
Report of independent accountants
For the fiscal year ended October 31, 1997
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, 1997, and the related statement of operations for the year then
ended and 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
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of October 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Federal Income Trust as of October 31, 1997, the results of its
operations for the year then ended and 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 10, 1997
Portfolio of investments owned
October 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (81.0%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (51.2%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 9,259,470 Federal Home Loan Mortgage Corp. 5 1/2s, with
due dates from March 1, 2011 to April 1, 2011 $ 8,935,389
Federal National Mortgage Association
36,435,505 7s, with due dates from January 1, 2026
to June 15, 2027 36,549,205
8,485,824 6 1/2s, with due dates from July 1, 2025
to September 1, 2027 8,342,592
Government National Mortgage Association
19,431,555 8 1/2s, with due dates from January 15, 2026
to October 15, 2027 20,372,645
14,474,768 8s, with due dates from January 15, 2001
to June 15, 2023 15,194,960
54,149,888 7 1/2s, with due dates from January 15, 2023
to October 15, 2027 55,457,140
17,535,000 7s, TBA, November 15, 2027 17,633,546
3,550,000 6s, TBA, November 16, 2027 3,581,063
18,080,000 5 1/2s, TBA, December 16, 2027 18,043,298
--------------
184,109,838
U.S. Treasury Obligations (29.8%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
13,940,000 11 5/8s, November 15, 2004 18,492,246
11,145,000 8 1/8s, August 15, 2019 13,649,170
20,730,000 7 1/2s, November 15, 2024 24,186,106
1,870,000 6 1/2s, November 15, 2026 1,949,176
2,790,000 6 3/8s, August 15, 2027 2,875,430
U.S. Treasury Notes
21,575,000 11 7/8s, November 15, 2003 # 28,108,126
165,000 6 1/4s, June 30, 2002 168,145
3,139,000 6 1/8s, August 15, 2007 3,207,179
3,490,000 6s, July 31, 2002 3,523,260
2,830,000 5 7/8s, September 30, 2002 2,844,603
8,160,000 5 7/8s, July 31, 1999 8,189,294
--------------
107,192,735
--------------
Total U.S. Government and Agency
Obligations (cost $285,242,479) $ 291,302,573
CORPORATE BONDS AND NOTES (8.6%) *
PRINCIPAL AMOUNT VALUE
Entertainment (0.8%)
- ------------------------------------------------------------------------------------------------------------
$ 1,685,000 Time Warner Entertainment sr. notes 8 3/8s, 2033 $ 1,853,854
870,000 Time Warner Entertainment Inc. deb. 7 1/4s, 2008 894,360
--------------
2,748,214
Insurance and Finance (1.7%)
- ------------------------------------------------------------------------------------------------------------
3,925,000 Advanta National Bank sr. notes 7.02s, 2001 3,945,096
2,010,000 Salton Sea Funding Corp. company
guaranty Ser. E, 8.3s, 2011 2,187,001
--------------
6,132,097
Metals and Mining (0.5%)
- ------------------------------------------------------------------------------------------------------------
1,770,000 PT Alatief Freeport sr. notes 9 3/4s, 2001
(Netherlands) 1,942,487
Publishing (0.8%)
- ------------------------------------------------------------------------------------------------------------
1,705,000 News America Holdings, Inc. deb. 7 3/4s, 2045 1,730,064
1,070,000 News America Holdings, Inc. deb. 7.7s, 2025 1,070,728
--------------
2,800,792
Real Estate (0.9%)
- ------------------------------------------------------------------------------------------------------------
1,270,000 Health Care Property Investors, Inc. sr. notes
6 1/2s, 2006 (R) 1,243,889
2,020,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 2,119,808
--------------
3,363,697
Tobacco (0.7%)
- ------------------------------------------------------------------------------------------------------------
2,910,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 2,667,743
Utilities (3.1%)
- ------------------------------------------------------------------------------------------------------------
9,944,000 Citizens Utilities Co. bonds 7.68s, 2034 11,232,146
--------------
Total Corporate Bonds and Notes
(cost $29,050,495) $ 30,887,176
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (7.6%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp.
$ 1,307,299 Ser. 1994-G, Class B3, 7s, April 25, 2025 $ 1,271,348
924,354 Ser. 1993-3, Class B6, 7.46s, October 29, 2024 946,596
3,965,751 Ser. 1993-3, Class B7, 7.46s, October 29, 2024 4,061,177
1,073,630 CMC Securities Corp. III Ser. 1994-F, Class B2,
6 1/4s, May 25, 2014 1,035,717
2,669,558 Housing Securities Inc. Ser. 1993-J, Class J2, 6.66s,
January 25, 2009 2,656,210
2,673,829 Prudential Home Mortgage Securities Ser. 1994-28,
Class B2, 6.803s, September 25, 2001 2,632,886
4,570,250 Prudential Home Mortgage Securities 144A Ser. 94-D,
Class 3B, 6.312s, August 28, 2009 4,322,457
3,669,424 Prudential Home Mortgage Securities Co. 144A
Ser. 93-31, Class B1, 6s, August 25, 2000 3,562,781
Residential Funding Mortgage Securities
961,997 Ser. 93-S17, Class M3, 7s, May 25, 2008 962,899
733,543 Ser. 93-S23, Class M3, 6 1/2s, June 25, 2008 718,872
Securitized Asset Sales, Inc.
3,352,959 Ser. 93-J, Class 2B, 6.808s 3,257,609
1,833,485 Mtge. Pass Thru Certificates Ser. 1994-3, Class B1,
6.11s, February 25, 1999 1,817,156
--------------
Total Non-Agency Collateralized Mortgage
Obligations (cost $24,645,381) $ 27,245,708
FOREIGN GOVERNMENT BONDS AND NOTES (6.4%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
DEM 12,765,000 Germany (Federal Republic of) bonds
Ser. 97, 6 1/2s, 2027 $ 7,703,400
NZD 5,105,000 New Zealand (Government of) bonds
10s, 2002 3,553,931
NZD 10,520,000 New Zealand (Government of) bonds
8s, 2004 6,987,065
ZAR 7,245,000 South Africa (Republic of) bonds
Ser. 153, 13s, 2010 1,367,529
UKS 1,687,500 United Kingdom Treasury bonds 8s, 2021 3,347,524
--------------
Total Foreign Government Bonds
and Notes (cost $22,367,076) $ 22,959,449
SHORT-TERM INVESTMENTS (1.0%) * (cost $3,758,590)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 3,758,000 Interest in $269,350,000 joint repurchase
agreement dated October 31, 1997 with
S.B.C Warburg, Inc, due November 3, 1997
with respect to various U.S. Treasury
obligations -- maturity value of $3,759,769
for an effective yield of 5.65% $ 3,758,590
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $365,064,021) *** $ 376,153,496
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $359,462,734
*** The aggregate identified cost on a tax basis is $365,533,557, resulting in gross unrealized
appreciation and depreciation of $12,904,276 and $2,284,337, respectively, or net unrealized
appreciation of $10,619,939.
# A portion of this security was pledged and segregated with the custodian to cover margin
requirements for futures contracts at October 31, 1997.
(R) Real Estate Investment Trust.
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.
TBA after the name of a security represents to be announced securities (Note 1).
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Buy at October 31, 1997
(aggregate face value $29,338,712)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 383,527 $ 395,225 12/17/97 $ (11,698)
Canadian Dollar 4,409,494 4,538,893 12/17/97 (129,399)
Danish Krone 286,315 279,491 12/17/97 6,824
Deutschemarks 3,649,360 3,652,546 12/17/97 (3,186)
Indonesian Rupiah 1,352,826 1,306,543 6/23/98 46,283
Indonesian Rupiah 2,442,064 2,462,983 2/23/98 (20,919)
Italian Lira 10,138,961 9,760,644 12/17/97 378,317
Japanese Yen 6,987,670 6,942,387 12/17/97 45,283
- ----------------------------------------------------------------------------------------
$ 311,505
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at October 31, 1997
(aggregate face value $34,981,570)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $ 2,693,728 $ 2,550,688 12/17/97 $(143,040)
Deutschemarks 7,719,256 7,486,429 12/17/97 (232,827)
Italian Lira 9,949,910 9,583,443 12/17/97 (366,467)
Japanese Yen 3,325,254 3,313,463 12/17/97 (11,791)
New Zealand Dollar 10,625,921 10,854,170 12/17/97 228,249
South African Rand 1,179,116 1,193,377 12/17/97 14,261
- ----------------------------------------------------------------------------------------
$(511,615)
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts Outstanding at October 31, 1997
Unrealized
Market Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes
10 yr. (Long) $18,550,500 $18,198,316 9-Dec-97 $352,184
U.S. Treasury Bonds
20 yr. (Long) 7,345,063 7,219,907 9-Dec-97 125,156
U.S. Treasury Notes
5 yr. (Short) 35,232,031 34,653,125 9-Dec-97 (578,906)
Japanese Government
Bonds 10 yr. (Long) 10,869,747 10,669,749 9-Dec-97 199,998
- ----------------------------------------------------------------------------------------
$ 98,432
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Commitments Outstanding at October 31, 1997
(proceeds receivable $21,403,531)
Principal Settlement Market
Description Amount Date Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA, 7s,
November 2027 $21,350,000 11/16/97 $21,416,612
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $365,064,021) (Note 1) $376,153,496
- ---------------------------------------------------------------------------------------------------
Cash 17,459,886
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 5,084,907
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 235,165
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 42,513,172
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 361,516
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 752,674
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 544,116
- ---------------------------------------------------------------------------------------------------
Total assets 443,104,932
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 59,842,930
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 264,645
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 574,500
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,564
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 74
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 592
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 83,764
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 952,784
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 388,542
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $21,403,531) 21,416,612
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 98,191
- ---------------------------------------------------------------------------------------------------
Total liabilities 83,642,198
- ---------------------------------------------------------------------------------------------------
Net assets $359,462,734
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $414,299,964
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,549,160
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (Note 1) (69,476,197)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets
and liabilities in foreign currencies 11,089,807
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $359,462,734
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($347,222,913 divided by 34,070,724 shares) $10.19
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $10.19)* $10.70
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($11,311,171 divided by 1,114,256 shares)** $10.15
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($928,650 divided by 91,107 shares) $10.19
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $10.19)* $10.53
- ---------------------------------------------------------------------------------------------------
* 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
Year ended October 31, 1997
<S> <C>
Interest income: $26,721,271
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,331,129
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 778,973
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,814
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,246
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 895,830
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 101,571
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,184
- --------------------------------------------------------------------------------------------------
Reports to shareholders 64,138
- --------------------------------------------------------------------------------------------------
Registration fees 75
- --------------------------------------------------------------------------------------------------
Auditing 50,356
- --------------------------------------------------------------------------------------------------
Legal 8,135
- --------------------------------------------------------------------------------------------------
Postage 34,592
- --------------------------------------------------------------------------------------------------
Other 21,630
- --------------------------------------------------------------------------------------------------
Total expenses 4,310,673
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (220,936)
- --------------------------------------------------------------------------------------------------
Net expenses 4,089,737
- --------------------------------------------------------------------------------------------------
Net investment income 22,631,534
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,842,859
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (784,417)
- --------------------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 1,175,606
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 159,414
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures,
and TBA sale commitments during the year 4,374,045
- --------------------------------------------------------------------------------------------------
Net gain on investments 6,767,507
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $29,399,041
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 22,631,534 $ 24,690,591
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign
currency transactions 2,234,048 3,459,579
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and assets and liabilities
in foreign currencies 4,533,459 (10,987,465)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 29,399,041 17,162,705
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (22,525,251) (23,678,859)
- ----------------------------------------------------------------------------------------------------------------------
Class B (563,757) (243,839)
- ----------------------------------------------------------------------------------------------------------------------
Class M (51,138) (19,056)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (34,799,540) (33,489,985)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (28,540,645) (40,269,034)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 388,003,379 428,272,413
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $3,549,160 and $3,815,033, respectively) $359,462,734 $388,003,379
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.01 $10.17 $9.32 $10.47 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .61 (b) .61 (b) .60 .61 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 (.18) .84 (1.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .81 .43 1.44 (.46) .83
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.63) (.59) (.59) (.66) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.63) (.59) (.59) (.69) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.19 $10.01 $10.17 $9.32 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.41 4.45 15.97 (4.54) 8.17
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $347,223 $379,929 $426,252 $449,480 $600,181
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.15 1.16 1.12 1.06 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.15 6.12 6.22 6.91 7.81
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 218.97 297.30 234.95 317.91 150.05
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share June 6, 1994+
operating performance Year ended October 31 to October 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 .52 .54 (b) .52 .18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 (.18) .84 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .73 .36 1.36 (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.56) (.52) (.52) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) (.52) (.52) (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.15 $9.98 $10.14 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.55 3.74 15.09 (1.42)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,311 $7,535 $1,835 $498
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.90 1.93 1.85 .72*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.30 5.44 5.42 2.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 218.97 297.30 234.95 317.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 12, 1995+
operating performance Year ended October 31 to October 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 .57 .59 (b) .29(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .22 (.18) .60
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .79 .41 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.19 $10.01 $10.17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.16 4.20 9.35*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $929 $539 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.40 1.43 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.81 5.90 3.15*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 218.97 297.30 234.95
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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
October 31, 1997
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. Discount on
original issue bonds are accreted according to the yield-to-maturity 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 gains and losses 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 appreciation and
depreciation of assets and liabilities in foreign currencies 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 current 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. 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. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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 the 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. 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, 1997, the fund had a capital loss carryover of approximately
$69,108,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- ---------------- ----------------
$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. These differences
include treatment of realized and unrealized gains and losses on forward
foreign currency contracts, currency gains and losses on foreign bonds, losses
on wash sale transactions, expiration of a capital loss carryover, market
discount and paydown gains and losses on mortgage-backed securities.
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, 1997, the fund
reclassified $242,739 to increase undistributed net investment income and
$117,126,116 to decrease paid-in-capital, with a decrease in accumulated net
realized loss on investments of $116,883,377. The calculation of net
investment income per share in the financial highlights table excludes these
adjustments.
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.
The fund reimburses Putnam Management an allocated amount 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 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, 1997, fund expenses were reduced by $220,936
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested a portion of
the 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 funds receive an annual Trustees fee of which $704 has been
allocated to the fund 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 "Deferral 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 certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension 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
Compensation of trustees 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 currently limit payment by the fund to 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $47,015 and $367 from the sale of
class A and class M shares, respectively and $22,542 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 year
ended October 31, 1997, 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, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $197,006,617 and $218,561,696, respectively. Purchases and sales of
U.S. government obligations aggregated $598,736,801 and $593,427,707,
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 October 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
October 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 2,019,842 $20,161,173
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,231,792 12,262,877
- ------------------------------------------------------------
3,251,634 32,424,050
Shares
repurchased (7,118,836) (71,151,211)
- ------------------------------------------------------------
Net decrease (3,867,202) $(38,727,161)
- ------------------------------------------------------------
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 31,952,664
Shares
repurchased (7,170,397) (71,497,032)
- ------------------------------------------------------------
Net decrease (3,965,350) $(39,544,388)
- ------------------------------------------------------------
Year ended
October 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,308,316 13,014,460
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 50,048 496,673
- ------------------------------------------------------------
1,358,364 13,511,133
Shares
repurchased (998,805) (9,956,230)
- ------------------------------------------------------------
Net increase 359,559 $ 3,554,903
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
October 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 112,345 $1,116,519
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,484 34,651
- ------------------------------------------------------------
115,829 1,151,170
Shares
repurchased (78,575) (778,452)
- ------------------------------------------------------------
Net increase 37,254 $372,718
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1998 will show the tax
status of all distributions paid to your account in
calendar 1997.
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
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
38089-039/334/878 12/97
