Putnam
High Quality
Bond Fund*
SEMIANNUAL REPORT
April 30, 1998
*Formerly Putnam Federal Income Trust
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* The U.S. economy continues to provide an excellent backdrop for
bonds: growth without inflation. On May 1, 1998, The Wall Street Journal
reported that the Commerce Department's best gauge of inflation -- the
price index for gross domestic purchases, which measures what consumers
pay for homemade and imported goods and services -- was flat in the first
quarter, noting, "The index, which rose 1.4% in the fourth quarter, hasn't
been so tame since the fall of 1954."
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
16 Financial statements
28 Results of April 2, 1998 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The rush of funds to the safety of the U.S. bond market during the first
half of Putnam High Quality Bond Fund's fiscal year pulled down yields
on most bonds -- as the brisk demand moved their prices higher. This was
especially the case for the U.S. Treasury issues that make up a large
portion of your fund's portfolio. The Federal Reserve Board kept close
watch but in the end remained on the sidelines, apparently content that
the U.S. economic engine was still sufficiently under control.
During the period, Jennifer Leichter and James Prusko were appointed
managers of your fund, formerly known as Putnam Federal Income Trust.
Jennifer has been with Putnam since 1987 and has 15 years of investment
experience. Before joining Putnam in 1992, Jim was with Salomon
Brothers. He has 7 years of investment experience. In the following
report, Jennifer and Jim discuss the fund's strategy during the six
months ended April 30, 1998, and look at prospects for the fiscal year's
second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 17, 1998
Report from the Fund Managers
Jennifer E. Leichter
James M. Prusko
The U.S. bond market continued to reward fixed-income investors with
positive results through the winter and spring of 1998. However, not all
segments of the market contributed in equal measure to these results.
Putnam High Quality Bond Fund's flexible investment strategy enabled it
to make the most of available opportunities, providing a 2.37% return
for class A shares at net asset value for the six months ended April 30,
1998. At public offering price, class A shares returned -2.51%. For
more performance information, including results for other share classes,
please see page 8.
* U.S. TREASURIES RALLY ON POSITIVE ECONOMIC NEWS
Over the semiannual period, the U.S. Treasury sector was the strongest-
performing sector of the domestic bond market with returns of nearly 5%
for long-term Treasuries. To a large extent, the gains reflect investor
confidence that the U.S. economy could continue its growth without
inflation. After a period of moderating growth in the summer of 1997,
the economy quickened its pace in the fall and winter, accelerating at
an annualized rate of 4.2% in the first quarter of 1998. Consumer
spending soared, and yet inflation recorded its smallest increase since
1964. Investors took the above-trend growth in stride, counting on the
negative trade effects of the Asian slump to offset pricing pressure
here in the United States.
Adding to the Treasury market's performance was a flight to quality from
Asian markets. Beginning last summer, the currencies of several
Southeast Asian countries crumbled under competitive pressures from
China and Japan. Weak current-account balances were revealed, and a
number of fiscal-policy missteps sent investors seeking safer havens.
Local depositors also suffered an erosion of confidence, as years of
government-controlled lending practices and misguided investments
culminated in several high-profile bank closings.
At the start of the period, your fund had 30% of its assets positioned
in the U.S. Treasury market, which contributed substantially to overall
returns. So strong was the demand for dollar-denominated bonds that by
January the yield of the 30-year U.S. Treasury bond had declined to a
three-decade low of 5.69%. (Generally a bond's yield moves lower as its
price rises.) This is especially remarkable given that the federal funds
rate -- the interest rate charged on overnight loans from one member
bank of the Federal Reserve System to another, used as the basis for all
short-term interest rates -- was 5.50% throughout the period. In
January, we took profits on the fund's Treasury position, which had
appreciated, trimming the fund's weighting back to roughly 30%.
* MORTGAGE-BACKED SECURITIES WITHSTAND REFINANCING BLITZ
Usually when Treasuries are strong, mortgage-backed securities suffer
because of prepayment concerns. As interest rates fall, many homeowners
refinance their mortgages, returning principal to mortgage investors. In
addition to disrupting an investor's income stream, this prepayment of
principal forces the investor to reinvest at lower prevailing rates. In
January, mortgage refinancings reached an all-time high, as measured by
the Mortgage Bankers Refinancing Index. Investors did not abandon
mortgage-backed securities as expected, however. Many, seeking the
relatively higher yields offered by these securities, simply reinvested
their prepaid principal, keeping demand for mortgages strong.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF BOND MARKET PERFORMANCE BY SECTOR]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/97-4/30/98
Lehman Brothers
Mortgage-Backed Securities Index 3.48%
Lehman Brothers
Corporate Bond Index 3.83%
Salomon Brothers
World Government Bond Index 0.52%
Lehman Brothers
Long-Term Treasury Bond Index 4.97%
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.
We took several steps to limit the fund's exposure to prepayment risk
during the period. First, we concentrated primarily on commercial
mortgage-backed security (CMBS) issues. CMBS issues represent mortgages
of office buildings, hotels, multifamily housing, and industrial real
estate. Unlike residential mortgages, CMBS issues have the advantage of
prepayment protection. For example, under the terms of some loans,
commercial mortgage owners are not allowed to prepay for the first five
years. In November, with the Asian crisis at its peak, CMBS issues
underperformed in line with corporate bonds because investors feared a
significant slowdown in Asia would heighten credit risk in the United
States. We took the opportunity to increase the fund's position in these
securities at depressed prices, and they helped boost fund performance
as prepayment risk increased in other segments of the mortgage market.
We also sought to avoid prepayments by increasing the fund's weighting
in GNMAs, which carry less prepayment risk than FHLMC and FNMA bonds
because the average GNMA mortgage is smaller. In addition, we
concentrated mortgage holdings in lower-coupon bonds -- those in the 6%
to 7.5% range -- since the owners of these mortgages had relatively
little to gain by refinancing. Finally we focused on seasoned issues,
those for which homeowners have passed over previous opportunities to
refinance and thus are not likely to trade in their mortgages now.
* OPPORTUNITY IN CORPORATE SECTOR
When credit concerns linked to the Asian financial crisis heightened in
November and December, we took the opportunity to add high-quality
corporate bonds at discount prices. The prices of these bonds recovered
in early 1998, when investors realized the Asia effect would be less
than anticipated. For the full six-month period, corporate bonds turned
out to be the second best-performing segment of the U.S. bond market.
Recent purchases include new positions in TCI Communications and Dell
Computer and additions to existing holdings in Time Warner and News
America.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF CHANGES IN PORTFOLIO COMPOSITION]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/97 4/30/98
Mortgage-backed
securities 51.2% 47.4%
U.S. Treasury
securities 29.8% 31.4%
Foreign
bonds and notes 6.4% 4.5%
Corporate bonds 8.6% 8.9%
Collateralized
mortgage obligations 7.6% 10.5%
Asset-backed
securities 0.0% 0.9%
Short-term
investments 1.0% 0.0%
Footnote reads:
* Based on total net assets as of indicated date. Holdings will vary over
time.
* CONSERVATIVE STRATEGY PREPARES FUND FOR FED ACTION
We intend to maintain a slightly conservative interest-rate strategy
until the U.S. Federal Reserve Board gives a clear indication of its
intention to either ease or restrain the flow of capital. This wait-and-
see stance held back overall performance somewhat during the period, but
it has also added a measure of stability in an increasingly volatile
market. We expect to favor mortgages over Treasuries in the coming
months while taking steps to avoid unexpected prepayment of principal.
In addition, we will continue to seek income opportunities outside the
government sector. With a flexible investment strategy and a cautious
eye toward the future direction of interest rates, we believe your fund
is well positioned to make the most of the fixed-income opportunities
that lie ahead.
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 4/30/98, 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
High Quality Bond Fund is designed for investors seeking high current
income consistent with preservation of capital primarily through U.S.
government securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/98
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 2.37% -2.51% 2.10% -2.86% 2.34% -0.97%
- ------------------------------------------------------------------------------
1 year 8.99 3.84 8.24 3.24 8.83 5.31
- ------------------------------------------------------------------------------
5 years 32.01 25.72 27.27 25.38 30.58 26.30
Annual average 5.71 4.68 4.94 4.63 5.48 4.78
- ------------------------------------------------------------------------------
10 years 110.43 100.41 93.90 93.90 104.15 97.58
Annual average 7.72 7.20 6.85 6.85 7.40 7.05
- ------------------------------------------------------------------------------
Life of fund 125.95 115.26 104.27 104.27 117.13 110.03
Annual average 7.08 6.65 6.18 6.18 6.73 6.43
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 4/30/98
Lehman Bros.
Government Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 3.56% 0.56%
- ------------------------------------------------------------------------------
1 year 11.05 1.44
- ------------------------------------------------------------------------------
5 years 37.97 12.85
Annual average 6.65 2.45
- ------------------------------------------------------------------------------
10 years 132.43 38.77
Annual average 8.80 3.33
- ------------------------------------------------------------------------------
Life of fund 163.93 49.22
Annual average 8.49 3.42
- ------------------------------------------------------------------------------
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.318 $0.281 $0.305
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.318 $0.281 $0.305
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
10/31/97 $10.19 $10.70 $10.15 $10.19 $10.53
- ------------------------------------------------------------------------------
4/30/98 10.11 10.61 10.08 10.12 10.46
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.29% 5.99% 5.48% 5.93% 5.74%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.31 5.05 4.57 5.05 4.89
- ------------------------------------------------------------------------------
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 3/31/98
(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 3.28% -1.58% 2.93% -2.07% 3.16% -0.19%
- ------------------------------------------------------------------------------
1 year 10.12 4.87 9.37 4.37 9.86 6.28
- ------------------------------------------------------------------------------
5 years 31.95 25.68 27.06 25.18 30.31 26.05
Annual average 5.70 4.68 4.91 4.59 5.44 4.74
- ------------------------------------------------------------------------------
10 years 108.44 98.61 91.95 91.95 101.93 95.35
Annual average 7.62 7.10 6.74 6.74 7.28 6.93
- ------------------------------------------------------------------------------
Life of fund 125.21 114.56 103.54 103.54 116.28 109.21
Annual average 7.10 6.67 6.19 6.19 6.74 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 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.
Portfolio of investments owned
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (78.8%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (47.4%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 8,810,396 Federal Home Loan Mortgage Corp. 5 1/2s, with
due dates from March 1, 2011 to April 1, 2011 $ 8,510,226
Federal National Mortgage Association
Adjustable Rate Mortgages
334,737 7.835s, May 1, 2025 348,545
613,646 7.143s, July 1, 2027 622,083
Government National Mortgage Association
29,013,896 8s, with due dates from January 15, 2001 to
February 15, 2028 29,633,141
16,061,398 7 1/2s, with due dates from January 15, 2023 to
July 15, 2025 16,577,783
66,548,875 7s, with due dates from July 20, 2024 to
April 15, 2028 66,867,596
8,395,703 6 1/2s, with due dates from March 15, 2028 to
April 15, 2028 8,319,553
16,120,000 6 1/2s, TBA, June 15, 2028 15,973,792
798,030 6s, July 20, 2024 818,231
15,525,550 5 1/2s, April 20, 2028 15,574,067
Government National Mortgage Association
Adjustable Rate Mortgages
1,072,365 7s, July 20, 2024 1,099,844
--------------
164,344,861
U.S. Treasury Obligations (31.4%)
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
15,800,000 11 7/8s, November 15, 2003 (SEG) 20,347,398
11,900,000 11 5/8s, November 15, 2004 15,667,064
4,430,000 8 1/8s, August 15, 2019 5,526,425
14,950,000 7 1/2s, November 15, 2024 17,823,241
7,830,000 6 1/8s, November 15, 2027 8,011,030
U.S. Treasury Notes
1,060,000 6 1/8s, August 15, 2007 1,088,652
2,830,000 5 7/8s, September 30, 2002 2,850,772
2,120,000 5 3/4s, November 30, 2002 2,125,300
20,360,000 5 3/4s, November 15, 2000 20,423,523
3,285,000 5 5/8s, December 31, 1999 3,287,562
4,940,000 5 1/2s, January 31, 2003 4,905,272
5,975,000 5 1/2s, March 31, 2000 5,964,723
875,000 5 1/2s, February 29, 2000 873,635
--------------
108,894,597
--------------
Total U.S. Government and Agency Obligations
(cost $270,684,551) $ 273,239,458
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (10.5%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp.
$ 1,314,708 Ser. 94-G, Class B3, 7s, April 25, 2025 $ 1,287,181
900,864 Interest Strip Ser. 93-3, Class B6, 7.46s,
October 30, 2024 923,782
3,864,973 Interest Strip Ser. 93-3, Class B7, 7.46s,
October 30, 2024 3,963,298
1,045,293 CMC Securities Corp. III Ser. 94-F, Class B2, 6 1/4s,
May 25, 2014 1,011,648
Commercial Mortgage Acceptance Corp.
1,080,000 6.57s, December 15, 2030 1,092,994
75,000 Ser. 97-ML1, Class A2, 6.53s, December 15, 2030 75,938
710,000 Ser. 97-ML1, Class D, 7.11s, December 15, 2030 711,997
First Union-Lehman Brothers Commercial
Mortgage Ser. 97-C2
1,160,000 Class D, 7.12s, November 18, 2012 1,157,644
1,725,000 Class A3, 6.65s, June 18, 2008 1,751,145
GMAC Commercial Mortgage Securities, Inc.
1,278,000 Ser. 98-C1, Class E, 7.153s, March 15, 2011 1,283,791
814,000 Ser. 98-C1, Class A2, 6.7s, March 15, 2008 832,824
1,825,000 6.44s, May 15, 2030 1,842,109
2,580,299 Housing Securities, Inc. Ser. 93-J, Class J2, 6.66s,
January 25, 2009 2,575,461
159,000 Merrill Lynch Mortgage Investors, Inc. Ser. 98-C2,
Class D, 14.045s, February 15, 2030 159,000
610,000 Morgan Stanley Capital I Ser. 96-WF1, Class A2, 7.218s,
January 16, 2006 630,778
2,653,192 Prudential Home Mortgage Securities Co. Ser. 94-28,
Class B2, 6.803s, September 25, 2001 2,614,223
4,433,258 Prudential Home Mortgage Securities Co. 144A
Ser. 94-D, Class 3B, 6.312s, August 28, 2009 4,306,495
3,647,735 Prudential Home Mortgage Securities Co. 144A
Ser. 93-31, Class B1, 6s, August 25, 2000 3,555,402
Residential Funding Mortgage Securities
925,083 Ser. 93-S17, Class M3, 7s, May 25, 2008 924,794
708,130 Ser. 93-S23, Class M3, 6 1/2s, June 25, 2008 694,189
Securitized Asset Sales, Inc.
3,341,639 Ser. 93-J, Class 2B, 6.808s, November 28, 2023 3,296,736
1,814,240 Mortgage. Pass-Through Certificates Ser. 94-3,
Class B1, 6.11s, March 25, 1999 1,801,200
--------------
Total Non-Agency Collateralized Mortgage Obligations
(cost $33,697,593) $ 36,492,629
CORPORATE BONDS AND NOTES (8.9%) (a)
PRINCIPAL AMOUNT VALUE
Computer Services and Software (0.5%)
- -------------------------------------------------------------------------------------------------------------
$ 1,770,000 Dell Computer Corp. deb. 7.1s, 2028 $ 1,765,575
Consumer Services (0.5%)
- -------------------------------------------------------------------------------------------------------------
1,555,000 TCI Communications, Inc. sr. notes 8.65s, 2004 1,710,593
Entertainment (0.8%)
- -------------------------------------------------------------------------------------------------------------
1,685,000 Time Warner Ent. sr. notes 8 3/8s, 2033 1,940,716
840,000 Time Warner, Inc. notes 7 3/4s, 2005 890,719
--------------
2,831,435
Insurance and Finance (3.2%)
- -------------------------------------------------------------------------------------------------------------
1,730,000 Amvescap Corp. PLC 144A sr. notes 6.6s, 2005 1,727,370
3,925,000 Fleet Credit Card LLC sr. bank notes 7.02s, 2001 4,023,125
1,750,000 Paine Webber Group, Inc. sr. notes 6.55s, 2008 1,743,438
2,010,000 Salton Sea Funding Corp. company guaranty
Ser. E, 8.3s, 2011 2,189,433
1,530,000 Trenwick Group, Inc. 144A sr. notes 6.7s, 2003 1,525,043
--------------
11,208,409
Investment Companies (0.8%)
- -------------------------------------------------------------------------------------------------------------
2,590,000 Wilmington Trust Corp. 6 5/8s, 2008 2,612,740
Metals and Mining (0.5%)
- -------------------------------------------------------------------------------------------------------------
1,770,000 PT Alatief Freeport sr. notes 9 3/4s, 2001
(Netherlands) 1,689,111
Publishing (0.8%)
- -------------------------------------------------------------------------------------------------------------
1,705,000 News America Holdings, Inc. deb. 7 3/4s, 2045 1,781,214
1,070,000 News America Holdings, Inc. deb. 7.7s, 2025 1,119,466
--------------
2,900,680
REITs (Real Estate Investment Trust)(1.0%)
- -------------------------------------------------------------------------------------------------------------
1,270,000 Health Care Property Investors, Inc. sr. notes
6 1/2s, 2006 1,237,285
2,020,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 2,093,306
--------------
3,330,591
Telecommunications (0.5%)
- -------------------------------------------------------------------------------------------------------------
1,750,000 Airtouch Communications, Inc. notes 6.65s, 2008 1,765,313
Tobacco (0.3%)
- -------------------------------------------------------------------------------------------------------------
1,410,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 972,900
--------------
Total Corporate Bonds and Notes (cost $30,656,648) $ 30,787,347
FOREIGN GOVERNMENT BONDS AND NOTES (4.5%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
DEM 6,390,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 $ 3,603,383
DEM 1,950,000 Germany (Federal Republic of) Unity Fund
bonds 8s, 2002 1,212,030
ZAR 7,245,000 South Africa (Republic of) bonds Ser. 153,
13s, 2010 1,431,801
GBP 1,687,500 United Kingdom Treasury bonds 8s, 2021 3,615,752
GBP 3,165,000 United Kingdom Treasury bonds 8s, 2007 5,836,938
--------------
Total Foreign Government Bonds and Notes
(cost $14,875,821) $ 15,699,904
ASSET-BACKED SECURITIES (0.9%) (a)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
$ 1,500,000 Green Tree Financial Corp. Ser. 98-2, Class A5,
6.24s, 2028 $ 1,497,422
1,495,000 Green Tree Recreational, Equipment & Consumer Trust
Ser. 98-A, Class A1C, 6.18s, 2019 1,493,131
--------------
Total Asset-Backed Securities (cost $2,994,766) 2,990,553
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $352,909,379) (b) $ 359,209,891
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $346,793,232.
(b) The aggregate identified cost on a tax basis is $353,378,915, resulting in gross unrealized appreciation
and depreciation of $8,243,215 and $2,412,239, respectively, or net unrealized appreciation of $5,830,976.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements
for futures contracts at April 30, 1998.
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 April 30, 1998 (Unaudited)
(aggregate face value $7,096,307)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 67,961 $ 68,662 6/17/98 $ (701)
Deutschemarks 3,506,097 3,485,731 6/17/98 20,366
New Zealand Dollar 2,097,919 2,127,386 6/17/98 (29,467)
South Korean Won 1,556,820 1,414,528 3/11/99 142,292
- --------------------------------------------------------------------------------------------
$132,490
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Forward Currency Contracts to Sell at April 30, 1998 (Unaudited)
(aggregate face value $19,772,265)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $9,338,149 $9,162,220 6/17/98 (175,929)
Deutschemarks 8,413,225 8,336,517 6/17/98 (76,708)
New Zealand Dollar 2,191,081 2,273,528 6/17/98 82,447
- --------------------------------------------------------------------------------------------
$(170,190)
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Futures Contracts Outstanding at April 30, 1998 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury 10 Year Note
(long) $12,242,063 $12,192,697 June-98 $49,366
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TBA Sales Commitments at April 30, 1998 (Unaudited)
(proceeds receivable $15,964,424)
Settlement Market
Principal Amount Date Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GNMA, 7.5s, June 2028 $16,120,000 06/18/98 $15,984,975
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $352,909,379) (Note 1) $359,209,891
- ---------------------------------------------------------------------------------------------------
Cash 369,075
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 4,665,120
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 276,579
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 25,996,499
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 88,562
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 245,105
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 81,446
- ---------------------------------------------------------------------------------------------------
Total assets 390,932,277
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 26,025,364
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 214,891
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 555,795
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 50,160
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,819
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 560
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 80,994
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 282,805
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 27,321
- ---------------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $15,964,424) 15,984,975
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 906,361
- ---------------------------------------------------------------------------------------------------
Total liabilities 44,139,045
- ---------------------------------------------------------------------------------------------------
Net assets $346,793,232
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $404,296,806
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,673,279
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (66,468,480)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 6,291,627
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $346,793,232
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($330,342,857 divided by 32,661,356 shares) $10.11
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $10.11)* $10.61
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($15,306,820 divided by 1,519,008 shares)** $10.08
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,143,555 divided by 112,990 shares) $10.12
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $10.12)* $10.46
- ---------------------------------------------------------------------------------------------------
* 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, 1998 (Unaudited)
<S> <C>
Interest income: $12,295,309
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,126,857
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 387,088
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 17,594
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,357
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 421,024
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 65,352
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,681
- --------------------------------------------------------------------------------------------------
Reports to shareholders 50,995
- --------------------------------------------------------------------------------------------------
Auditing 28,827
- --------------------------------------------------------------------------------------------------
Legal 3,034
- --------------------------------------------------------------------------------------------------
Postage 45,242
- --------------------------------------------------------------------------------------------------
Other 153,216
- --------------------------------------------------------------------------------------------------
Total expenses 2,305,267
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (150,487)
- --------------------------------------------------------------------------------------------------
Net expenses 2,154,780
- --------------------------------------------------------------------------------------------------
Net investment income 10,140,529
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,060,804
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (150,052)
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,903,035)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the period 47,319
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures and
TBA sale commitments during the period (4,845,499)
- --------------------------------------------------------------------------------------------------
Net loss on investments (1,790,463)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 8,350,066
- --------------------------------------------------------------------------------------------------
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
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 10,140,529 $ 22,631,534
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 3,007,717 2,234,048
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (4,798,180) 4,533,459
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,350,066 29,399,041
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (10,623,425) (22,525,251)
- ----------------------------------------------------------------------------------------------------------------------
Class B (360,608) (563,757)
- ----------------------------------------------------------------------------------------------------------------------
Class M (32,377) (51,138)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (10,003,158) (34,799,540)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (12,669,502) (28,540,645)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 359,462,734 388,003,379
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $2,673,279 and $3,549,160, respectively) $346,793,232 $359,462,734
- ----------------------------------------------------------------------------------------------------------------------
* 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.19 $10.01 $10.17 $9.32 $10.47 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .29(b) .61(b) .61(b) .60 .61 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.05) .20 (.18) .84 (1.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 .81 .43 1.44 (.46) .83
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.63) (.59) (.59) (.66) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.32) (.63) (.59) (.59) (.69) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.11 $10.19 $10.01 $10.17 $9.32 $10.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.37* 8.41 4.45 15.97 (4.54) 8.17
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $330,343 $347,223 $379,929 $426,252 $449,480 $600,181
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .64* 1.15 1.16 1.12 1.06 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.88* 6.15 6.12 6.22 6.91 7.81
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.89* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 June 6, 1994+
operating performance (Unaudited) Year ended October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $10.15 $9.98 $10.14 $9.30 $9.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .25(b) .52 .54(b) .52 .18
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) .21 (.18) .84 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .21 .73 .36 1.36 (.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.56) (.52) (.52) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.56) (.52) (.52) (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.08 $10.15 $9.98 $10.14 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.10* 7.55 3.74 15.09 (1.42)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $15,307 $11,311 $7,535 $1,835 $498
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.01* 1.90 1.93 1.85 .72*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.53* 5.30 5.44 5.42 2.34*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.89* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share April 30 Year ended April 12, 1995+
operating performance (Unaudited) October 31 to October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $10.19 $10.01 $10.17 $9.57
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .28(b) .57 .59(b) .29(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) .22 (.18) .60
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 .79 .41 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.61) (.57) (.29)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $10.12 $10.19 $10.01 $10.17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.34* 8.16 4.20 9.35*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,144 $929 $539 $186
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .76* 1.40 1.43 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.73* 5.81 5.90 3.15*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 170.89* 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
April 30, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam High Quality Bond Fund (formerly known as 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. Discounts on
original issue discount 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 taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, 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. 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.
On April 2, 1998 the shareholders approved a proposal to increase fees payable
to Putnam Management under the fund's management contract. Management fees
will be paid thereafter at an annual rate of: 0.65% of the first $500 million
of average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter.
Prior to April 2, 1998, the fee was 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% thereafter.
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 six months ended April 30, 1998, fund expenses were reduced by
$150,487 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 the assets utilized in connection
with the expense offset arrangements in an income producing asset if it had
not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $600 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 six months ended April 30, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $27,132 and $172 from the sale of
class A and class M shares, respectively and $11,583 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, 1998, Putnam Mutual Funds Corp., acting as underwriter
received $172 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended April 30, 1998, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $340,574,275 and $359,063,042, respectively. Purchases and sales of
U.S. government obligations aggregated $233,902,086 and $264,663,645,
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, 1998 there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
April 30, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,298,232 $ 13,193,678
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 585,372 5,934,525
- ------------------------------------------------------------
1,883,604 19,128,203
Shares
repurchased (3,292,972) (33,448,570)
- ------------------------------------------------------------
Net decrease (1,409,368) $(14,320,367)
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Six months ended
April 30, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 882,669 $8,934,252
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 31,153 314,559
- ------------------------------------------------------------
913,822 9,248,811
Shares
repurchased (509,070) (5,155,670)
- ------------------------------------------------------------
Net increase 404,752 $4,093,141
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Six months ended
April 30, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 34,194 $349,224
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,476 25,104
- ------------------------------------------------------------
36,670 374,328
Shares
repurchased (14,787) (150,260)
- ------------------------------------------------------------
Net increase 21,883 $224,068
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Results of April 2, 1998 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on
April 2, 1998. At the meeting, each of the nominees for
Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 23,181,272 663,273
Hans H. Estin 23,184,430 660,115
John A. Hill 23,186,166 658,379
Ronald J. Jackson 23,188,027 656,518
Paul L. Joskow 23,192,351 652,194
Elizabeth T. Kennan 23,198,101 646,444
Lawrence J. Lasser 23,196,101 648,444
John H. Mullin III 23,194,409 650,136
Robert E. Patterson 23,196,101 648,444
Donald S. Perkins 23,193,514 651,031
William F. Pounds 23,194,415 650,130
George Putnam 23,194,833 649,712
George Putnam, III 23,196,101 648,444
A.J.C. Smith 23,195,887 648,658
W. Thomas Stephens 23,193,991 650,554
W. Nicholas Thorndike 23,195,887 648,658
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as the
independent auditors of your fund was approved as follows: 22,371,848
votes for, and 323,383 votes against, with 1,149,314 abstentions and
broker non-votes.
A proposal to approve a new management contract increasing the fees
payable to Putnam Investment Management, Inc. was approved as follows:
16,126,542 votes for, and 5,668,032 votes against, with 2,049,971
abstentions and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to borrowing was approved as follows: 18,799,471
votes for, and 2,560,087 votes against, with 2,484,987 abstentions and broker
non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to making loans was approved as follows: 18,755,569
votes for, and 2,495,563 votes against, with 2,593,413 abstentions and broker
non-votes.
All tabulations are rounded to nearest whole number.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
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
Global Growth and Income Fund
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
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market 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 Exempt Money Market 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
State tax-free money market funds [SECTION MARK]
California, New York
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
* Formerly Putnam Diversified Income Trust II
+ Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** 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.
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
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
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
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
James M. Prusko
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam High Quality
Bond Fund. 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
- --------------------
SA030-42849 -- 039/334/878 6/98
