[LOGO] Federated Investors
Since 1955
Federated
Bond
Fund
10th Annual Report
October 31, 1996
Established 1987
INCOME
President's Message
Dear Shareholder:
Federated Bond Fund was created in 1987, and I am pleased to present the 10th
Annual Report for the fund. The report, covering the 12-month period from
November 1, 1995, through October 31, 1996, opens with a discussion with Joseph
Balestrino, Vice President, Federated Advisers. Following his discussion,
detailing both the corporate market and recent activity in the fund's
portfolio, are a series of performance charts, a complete listing of the fund's
holdings, and the financial statements.
In a highly volatile interest rate environment, Federated Bond Fund continued
to produce a strong income stream while outperfoming its peer group, the Lipper
Corporate BBB-Rated Bond Funds average. The performance of the fund's share
classes during the period is shown below.*
Income Total Return
Class A Shares $0.71 7.21%
Class B Shares $0.64 6.40%
Class C Shares $0.64 6.40%
Class F Shares $0.71 7.18%
The fund's portfolio of corporate bonds reflects an emphasis on diversification
and quality. Holdings are extremely well diversified. On October 31, 1996, the
portfolio consisted of more than 250 bonds with an average rating of
BBB--approximately 80% of the assets are typically investment-grade bonds, while
the remaining assets are invested in high-yield corporate bonds.**
And, as of October 31, 1996, the fund received a four-star rating from
Morningstar, an independent mutual fund rating service, out of 1,054
fixed-income funds.***
* Performance quoted is based on net asset value and reflects past performance.
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.
Total returns for the period based on offering price or the payment of the
contingent deferred sales charge for Class A, B, C, and F shares were 2.39%,
0.59%, 5.30%, and 5.00%, respectively.
** Lower rated bonds involve a higher degree of risk than investment grade
bonds in return for higher yield potential.
***Morningstar proprietary ratings reflect historical risk-adjusted performance
as of October 31, 1996. They are subject to change every month. Past
performance is no guarantee of future results. Ratings are calculated from the
funds' 3-, 5- and 10-year average annual returns in excess of 90-day Treasury
bill returns with appropriate fee adjustments, and a risk factor that reflects
fund performance below 90-day T-bill returns. The 1-year rating is calculated
using the same methodology, but is not a component of the overall rating. The
fund received 4 stars for the three- and five-year periods and was rated among
1,054 and 572 fixed-income funds, respectively. For the 1-year period, the fund
received 3 stars and was rated among 1,654 fixed-income funds. Ten percent of
funds in a rating universe receive 5 stars, 22.5% receive 4 stars, 35% receive
3 stars. Ratings quoted are for the F Shares. Star ratings for other classes
may vary and are available only for classes with three years of performance
history.
Thank you for participating in the income potential of Federated Bond Fund.
Remember, it's easy to increase your participation in the performance potential
of a diversified bond portfolio by reinvesting your earnings automatically in
additional fund shares.
As always, we welcome your comments, questions and suggestions.
Sincerely,
J. Christopher Donahue
President
December 15, 1996
Investment Review
[PHOTO APPEARS HERE]
Joseph Balestrino
Vice President
Federated Advisers
Q Joe, you have had over 10 years' experience in the high-yield and
high-grade bond markets. The last 12 months were not easy, so would you please
comment on what has been a volatile bond market environment during the 12-month
period.
A For the fiscal year period ending October 31, 1996, the bond market
exhibited tremendous volatility that, in retrospect, displayed three distinct
interest rate environments. The fiscal year both started and ended in a very
positive fashion with interest rates falling under the expectation of a slower
economy. The middle months of the period (February-June 1996) were
characterized by sharply higher interest rates in response to much stronger
than anticipated economic data releases. As the period drew to a close, the
economy was once again sending mixed signals but with a bias toward reduced
economic activity. In particular, both consumer debt creation and incremental
consumer spending, which historically have been closely correlated, declined in
October 1996, and interest rates fell significantly.
In summary, the volatility over the past one year period was the equivalent of
a 10-year cycle that occurred between 1984 and 1995.
Q Federated Bond Fund performed relatively well during this difficult period.
How has the fund been performing compared to all BBB rated bond funds as
tracked by Lipper Analytical Services?
A Consistent with bond market volatility, the fund's A, B, C, and F share
classes produced total returns of 7.21%, 6.40%, 6.40%, and 7.18%, respectively,
based on net asset value for the period ended October 31, 1996.* These returns
compared very favorably to the total return of 5.54% for the Lipper Corporate
BBB Rated Bond Funds category.**
* Performance quoted is based on net asset value and reflects past
performance. 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. Total return for the period based on offering price or the payment of
the contingent deferred sales charge for Class A, B, C, and F shares were
2.39%, 0.59%, 5.30%, and 5.00%, respectively.
** Lipper averages do not include the effect of sales charges.
Q The fund's income distributions remain an important source of cash flow to
many shareholders. What were the fund's yields on October 31, 1996?
A At the period end, the fund's daily distribution rate+ based on net asset
value was 7.30%* (Class A shares) compared to the 10-year Treasury rate which
was 6.34% on that same day. The fund's distribution rates for Class B, C, and F
shares were 6.46%, 6.46% and 7.14%, respectively. The fund's 30-day current net
yields for Class A, B, C, and F shares were 6.99%, 6.51%, 6.51%, and 7.22%,
respectively.++
Q What strategies accounted for the fund's outperforming its Lipper peer
group?
A We used two distinct strategies that enabled the fund to outperform its
Lipper peer group--the first related to the overall quality position, and second
related to the interest rate exposure or duration decision. Throughout much of
the fiscal year period, the fund maintained approximately 20% of total assets
in high-yield corporate securities. This minority, but still significant,
position generated not only an above-average income distribution for
shareholders, but just as importantly, served to cushion the falling price
effect of rising rates during the first half of 1996.
Relatively late in the fiscal period, at the end of August 1996, we concluded
that interest rates had increased faster and higher than justified by the
economic fundamentals. With no visible signs of documented inflation hikes, we
increased the portfolio's duration position to 5.8 years, which helped the fund
participate in significant price appreciation as interest rates fell hard and
fast during the months of September and October 1996.
* At the period end, Class A shares distribution rate based on offering price
was 6.97%.
+ The 30-day distribution rate reflects actual distributions made to
shareholders. It is calculated by dividing the monthly annualized dividend plus
short-term capital gains, if any, by the average 30-day offering price.
++The 30-day current net yield is calculated by dividing the investment income
per share for the prior 30 days by the maximum offering price per share on that
date. The figure is compounded and annualized.
Q As we leave 1996, what is your outlook for the year ahead?
A While the economy has continued to display pockets of both strength and
weakness, one must recognize that the current economic expansion has been over
5 years in length, when expansions typically last 3 years. Given that
inflation remains relatively low and corporate earnings are exhibiting a slower
growth pattern, we maintain a positive outlook for the year ahead. As a
result, the fund's shareholders can likely expect to see more of the same from
a portfolio strategy perspective, with a desire to produce above-average income
and capital appreciation potential should interest rates fall.
Two Ways You May Seek to Invest for Success in
Federated Bond Fund
Initial Investment:
If you had made an initial investment of $9,000, in the Class F Shares of
Federated Bond Fund* on 5/20/87, reinvested dividends and capital gains, and
did not redeem any shares, your account would be worth $21,782 on 10/31/96. You
would have earned a 9.80%** average annual total return for the 9-year
investment life span.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 10/31/96, the Class A Shares' total return one year and since inception
(on 6/28/95) was 2.39% and 4.77%, respectively. Class B Shares' total return
one year and since inception (on 6/28/95) was 0.59% and 3.80%, respectively.
Class C Shares' total return one year and since inception (on 6/28/95) was
5.30% and 7.62%. Class F Shares' average annual one-year, five-year and since
inception (on 5/20/87) total returns were 5.00%, 10.38% and 9.81%,
respectively.***
[CHART APPEARS HERE]SEE APPENDIX A
* On June 15, 1992, at a special meeting of shareholders, the shareholders
approved a change to the name of the fund from High Income Securities Fund to
Fortress Bond Fund, and a change to the fund's fundamental investment objective
to pursue as high a level of current income as is consistent with the
preservation of capital. This resulted in shifting the fund's focus from
investing not less than 65% of its assets in high-yield, lower quality
securities to not less than 65% of its assets in investment grade securities.
** Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 1.00%
sales charge and 1.00% contingent deferred sales charge.
***The total returns stated take into account the 4.50% sales charge for Class
A Shares, the 5.50% contingent deferred sales charge for Class B Shares, the
1.00% contingent deferred sales charge for Class C Shares, the 1.00% sales
charge and 1.00% contingent deferred sales charge for Class F Shares.
Data quoted represent past performance and do not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original costs.
Federated Bond Fund
One Step at a Time:
$1,000 invested each year for 9 years (reinvesting all dividends and capital
gains) grew to $16,916.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class F Shares of Federated
Bond Fund on 5/20/87, reinvested your dividends and capital gains, and did not
redeem any shares, you would have invested only $9,000, but your account would
have reached a total value of $16,916 by 10/31/96. You would have earned an
average annual total return of 10.32%*.
A practical investment plan helps you pursue a high level of income through
corporate bonds. Through systematic investing, you buy shares on a regular
basis and reinvest all earnings. An investment plan works for you when you
invest only $1,000 annually. You can take it one step at a time. Put time,
money and compounding to work!
[CHART APPEARS HERE] SEE APPENDIX B
* No method of investing can guarantee a profit or protect against loss in down
markets. However, by investing regularly over time and buying shares at various
prices, investors can purchase more shares at lower prices, and all accumulated
shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue purchases
through periods of low price levels.
Federated Bond Fund
Hypothetical Investor Profile: Investing for High Monthly Income
John and Joan Wicker are a fictional couple who, like many other shareholders,
look for high monthly income opportunities.
John is an attorney in his late forties with an established client base. Joan
is a school teacher. On May 20, 1987, the Wickers invested $20,000 in Class F
Shares of Federated Bond Fund.
As this chart shows, over nine years their original investment in Class F
Shares has grown to $48,405. This represents a 9.80% average annual total
return.* For John and Joan, that means extra money to supplement their
daughter's college tuition.
[CHART APPEARS HERE] SEE APPENDIX C
*This hypothetical scenario is provided for illustrative purposes only and does
not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
Federated Bond Fund--
(Class A Shares)
Growth of $10,000 Invested in Federated Bond Fund (Class A Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Bond Fund (Class A Shares) (the "Fund") from June 28, 1995
(start of performance), to October 31, 1996, compared to the Lehman Brothers
Corporate Bond Index (LBCBI)+ and the Lipper Corporate Debt Funds BBB Rated
Average
(LCDBBB).++
[CHART APPEARS HERE] SEE APPENDIX D
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 4.50% ($10,000 investment minus $450 sales
charge=$9,550). The Fund's performance assumes the reinvestment of all
dividends and distributions. The LBCBI and the LCDBBB have been adjusted to
reflect reinvestment of dividends on securities in the index and average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LBCBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
++ The LCDBBB represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the SEC requires
to be reflected in a fund's performance.
Federated Bond Fund--
(Class B Shares)
Growth of $10,000 Invested in Federated Bond Fund (Class B Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Bond Fund (Class B Shares) (the "Fund") from June 28, 1995 (start of
performance), to October 31, 1996, compared to the Lehman Brothers Corporate
Bond Index (LBCBI)+ and the Lipper Corporate Debt Funds BBB Rated Average
(LCDBBB).++
[CHART APPEARS HERE] SEE APPENDIX E
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund. The ending
value of the Fund reflects a contingent deferred sales charge of 5.50% on any
redemption less than 1 year from the purchase date. The LBCBI and the LCDBBB
have been adjusted to reflect reinvestment of dividends on securities in the
index and average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LBCBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
++ The LCDBBB represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the SEC requires
to be reflected in a fund's performance.
Federated Bond Fund--
(Class C Shares)
Growth of $10,000 Invested in Federated Bond Fund (Class C Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Bond Fund (Class C Shares) (the "Fund") from June 28, 1995 (start of
performance), to October 31, 1996, compared to the Lehman Brothers Corporate
Bond Index (LBCBI)+ and the Lipper Corporate Debt Funds BBB Rated Average
(LCDBBB).++
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they may
be worth more or less than original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.
[CHART APPEARS HERE]SEE APPENDIX F
* Represents a hypothetical investment of $10,000 in the Fund. The ending
value of the Fund reflects a contingent deferred sales charge of 1.00% on any
redemption less that 1 year from the purchase date. The LBCBI and the LCDBBB
have been adjusted to reflect reinvestment of dividends on securities in the
index and average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LBCBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
++ The LCDBBB represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the SEC requires
to be reflected in a fund's performance.
Federated Bond Fund--
(Class F Shares)
Growth of $10,000 Invested in Federated Bond Fund (Class F Shares)
The graph below illustrates the hypothetical investment of $10,000 in the
Federated Bond Fund (Class F Shares) (the "Fund") from May 20, 1987
(start of performance), to October 31, 1996, compared to the Lehman Brothers
Corporate Bond Index (LBCBI)+ and the Lipper Corporate Debt Funds BBB Rated
Average
(LCDBBB).++
CHART APPEARS HERE - SEE APPENDIX G
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate so when shares are redeemed, they
may be worth more or less than original cost. Mutual funds are not
obligations of or guaranteed by any bank and are not federally insured.
* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 1.00% ($10,000 investment minus $100 sales
charge=$9,900). The Fund's performance assumes the reinvestment of all
dividends and distributions. The LBCBI and the LCDBBB have been adjusted to
reflect reinvestment of dividends on securities in the index and average.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.
+ The LBCBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
++ The LCDBBB represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However, these
total returns are reported net of expenses or other fees that the SEC requires
to be reflected in a fund's performance.
Federated Bond Fund
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
October 31, 1996
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified cost $443,965,411, and tax cost $444,044,776) $448,652,871
- ---------------------------------------------------------------------------------------------------
Cash 10,457
- ---------------------------------------------------------------------------------------------------
Income receivable 9,046,178
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 5,681,056
- ---------------------------------------------------------------------------------------------------
Receivable for shares sold 2,791,567
- --------------------------------------------------------------------------------------------------- -----------
Total assets 466,182,129
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------
Payable for investments purchased $10,649,264
- ---------------------------------------------------------------------------------------
Income distribution payable 1,239,654
- ---------------------------------------------------------------------------------------
Payable for shares redeemed 693,347
- ---------------------------------------------------------------------------------------
Accrued expenses 318,384
- --------------------------------------------------------------------------------------- ----------
Total liabilities 12,900,649
- --------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 46,642,989 shares outstanding $453,281,480
- --------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid in capital $452,459,667
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,687,140
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (3,586,203)
- ---------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (279,124)
- --------------------------------------------------------------------------------------------------- -----------
Total Net Assets $453,281,480
- --------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
CLASS A SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($37,044,798 / 3,811,668 shares outstanding) $9.72
- --------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share (100/95.50 of $9.72)* $10.18
- --------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (99.50/100 of $9.72)** $9.67
- --------------------------------------------------------------------------------------------------- -----------
CLASS B SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($125,620,241 / 12,926,180 shares outstanding) $9.72
- --------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $9.72
- --------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (94.50/100 of $9.72)** $9.19
- --------------------------------------------------------------------------------------------------- -----------
CLASS C SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($22,896,604 / 2,356,018 shares outstanding) $9.72
- --------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share $9.72
- --------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (99.00/100 of $9.72)** $9.62
- --------------------------------------------------------------------------------------------------- -----------
CLASS F SHARES:
- ---------------------------------------------------------------------------------------------------
Net Asset Value Per Share ($267,719,837 / 27,549,123 shares outstanding) $9.72
- --------------------------------------------------------------------------------------------------- -----------
Offering Price Per Share (100/99.00 of $9.72)* $9.82
- --------------------------------------------------------------------------------------------------- -----------
Redemption Proceeds Per Share (99.00/100 of $9.72)** $9.62
- --------------------------------------------------------------------------------------------------- -----------
</TABLE>
* See "Investing in Class A Shares" and "Investing in F Shares" in the
Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended October 31, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest $29,935,824
- ----------------------------------------------------------------------------------------------------
Dividends 46,012
- ---------------------------------------------------------------------------------------------------- -----------
Total income 29,981,836
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee $2,650,984
- ----------------------------------------------------------------------------------------
Administrative personnel and services fee 267,242
- ----------------------------------------------------------------------------------------
Custodian fees 63,712
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 305,537
- ----------------------------------------------------------------------------------------
Directors'/Trustees' fees 10,113
- ----------------------------------------------------------------------------------------
Auditing fees 13,000
- ----------------------------------------------------------------------------------------
Legal fees 4,082
- ----------------------------------------------------------------------------------------
Portfolio accounting fees 150,863
- ----------------------------------------------------------------------------------------
Distribution services fee--Class B Shares 615,497
- ----------------------------------------------------------------------------------------
Distribution services fee--Class C Shares 100,671
- ----------------------------------------------------------------------------------------
Shareholder services fee--Class A Shares 57,618
- ----------------------------------------------------------------------------------------
Shareholder services fee--Class B Shares 205,166
- ----------------------------------------------------------------------------------------
Shareholder services fee--Class C Shares 33,557
- ----------------------------------------------------------------------------------------
Shareholder services fee--Class F Shares 587,321
- ----------------------------------------------------------------------------------------
Share registration costs 141,608
- ----------------------------------------------------------------------------------------
Printing and postage 73,225
- ----------------------------------------------------------------------------------------
Insurance premiums 6,993
- ----------------------------------------------------------------------------------------
Taxes 29,714
- ----------------------------------------------------------------------------------------
Miscellaneous 8,532
- ---------------------------------------------------------------------------------------- ----------
Total expenses 5,325,435
- ----------------------------------------------------------------------------------------
Waivers--
- -----------------------------------------------------------------------------
Waiver of investment advisory fee $(705,603)
- -----------------------------------------------------------------------------
Waiver of shareholder services fee--Class A Shares (11,524)
- -----------------------------------------------------------------------------
Waiver of shareholder services fee--Class F Shares (46,986)
- ----------------------------------------------------------------------------- ---------
Total waivers (764,113)
- ---------------------------------------------------------------------------------------- ----------
Net expenses 4,561,322
- ---------------------------------------------------------------------------------------------------- -----------
Net investment income 25,420,514
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized loss on investments (149,872)
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 317,325
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 167,453
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $25,587,967
- ---------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------------
Net investment income $ 25,420,514 $ 13,868,500
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($129,446 net loss and $101,014 net loss,
respectively, as computed for federal tax purposes) (149,872) (109,537)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 317,325 12,228,666
- ------------------------------------------------------------------------------------ ------------- -------------
Change in net assets resulting from operations 25,587,967 25,987,629
- ------------------------------------------------------------------------------------ ------------- -------------
NET EQUALIZATION CREDITS (DEBITS)-- 620,232 226,707
- ------------------------------------------------------------------------------------ ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------------------------------
Class A Shares (1,762,704) (53,960)
- ------------------------------------------------------------------------------------
Class B Shares (5,584,736) (282,414)
- ------------------------------------------------------------------------------------
Class C Shares (916,585) (60,261)
- ------------------------------------------------------------------------------------
Class F Shares (17,390,922) (13,317,767)
- ------------------------------------------------------------------------------------ ------------- -------------
Change in net assets resulting from distributions to shareholders (25,654,947) (13,714,402)
- ------------------------------------------------------------------------------------ ------------- -------------
SHARE TRANSACTIONS (EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)--
- ------------------------------------------------------------------------------------
Proceeds from sale of shares 287,180,090 105,072,745
- ------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions
declared 12,940,331 5,532,356
- ------------------------------------------------------------------------------------
Cost of shares redeemed (81,239,742) (35,527,541)
- ------------------------------------------------------------------------------------ ------------- -------------
Change in net assets resulting from share transactions 218,880,679 75,077,560
- ------------------------------------------------------------------------------------ ------------- -------------
Change in net assets 219,433,931 87,577,494
- ------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------
Beginning of period 233,847,549 146,270,055
- ------------------------------------------------------------------------------------ ------------- -------------
End of period (including undistributed net investment income
of $0 and $585,193, respectively) $ 453,281,480 $ 233,847,549
- ------------------------------------------------------------------------------------ ------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Financial Highlights--Class A Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1996 1995(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.71 0.26
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.67 0.37
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------
Distributions from net investment income (0.71) (0.25)
- ---------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 7.21% 3.92%
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 1.05% 1.02%*
- ----------------------------------------------------------------------------------------------
Net investment income 7.46% 8.22%*
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.25% 0.35%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $37,045 $5,070
- ----------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Financial Highlights--Class B Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1996 1995(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.64 0.24
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.60 0.35
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------
Distributions from net investment income (0.64) (0.23)
- ---------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 6.40% 3.72%
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 1.85% 1.81%*
- ----------------------------------------------------------------------------------------------
Net investment income 6.66% 7.36%*
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.20% 0.30%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $125,620 $27,768
- ----------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Financial Highlights--Class C Shares
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1996 1995(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.64 0.24
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.60 0.35
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------
Distributions from net investment income (0.64) (0.23)
- ---------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 6.40% 3.72%
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 1.85% 1.81%*
- ----------------------------------------------------------------------------------------------
Net investment income 6.70% 7.31%*
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.20% 0.30%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $22,897 $5,508
- ----------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Financial Highlights--Class F Shares
(formerly, Fortress Shares)
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992(A) 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.76 $ 9.08 $ 10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79 $ 9.86
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.71 0.79 0.76 0.77 0.59 1.01 1.08 1.23
- -------------------------------
Net realized and unrealized
gain (loss) on investments (0.04) 0.65 (1.09) 1.07 0.43 1.92 (1.84) (1.07)
- ------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total from investment
operations 0.67 1.44 (0.33) 1.84 1.02 2.93 (0.76) 0.16
- ------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.71) (0.76) (0.75) (0.77) (0.60) (1.01) (1.14) (1.23)
- -------------------------------
Distributions from net
realized gain on investment
transactions -- -- (0.14) -- -- -- -- --
- ------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total distributions (0.71) (0.76) (0.89) (0.77) (0.60) (1.01) (1.14) (1.23)
- ------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76 $ 9.08 $ 10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79
- ------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
TOTAL RETURN (C) 7.18% 16.51% (3.41%) 20.61% 11.79% 44.62% (9.59%) 1.32%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.08% 1.03% 1.05% 1.04% 0.49%* 1.00% 1.01% 1.14%
- -------------------------------
Net investment income 7.38% 8.20% 7.92% 7.69% 8.05%* 12.17% 13.43% 12.81%
- -------------------------------
Expense waiver/ reimbursement
(d) 0.22% 0.31% 0.33% 0.61% 2.01%* 1.50% 1.49% 1.36%
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $267,720 $195,502 $146,270 $125,762 $54,886 $6,068 $7,484 $4,734
- -------------------------------
Portfolio turnover 49% 77% 74% 51% 49% 33% 28% 38%
- -------------------------------
<CAPTION>
<S> <C>
1988(B)
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.06
- -------------------------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------------
Net investment income 0.61
- -------------------------------
Net realized and unrealized
gain (loss) on investments (0.16)
- ------------------------------- -----------
Total from investment
operations 0.45
- ------------------------------- -----------
LESS DISTRIBUTIONS
- -------------------------------
Distributions from net
investment income (0.65)
- -------------------------------
Distributions from net
realized gain on investment
transactions --
- ------------------------------- -----------
Total distributions (0.65)
- ------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.86
- ------------------------------- -----------
TOTAL RETURN (C) 4.62%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.00%*
- -------------------------------
Net investment income 12.58%*
- -------------------------------
Expense waiver/ reimbursement
(d) 1.00%*
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period
(000 omitted) $4,968
- -------------------------------
Portfolio turnover 31%
- -------------------------------
</TABLE>
* Computed on an annualized basis.
(a) During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.
(b) Reflects operations for the period from July 8, 1988 (date of initial
public investment) to December 31, 1988.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
Federated Bond Fund
Notes to Financial Statements
- --------------------------------------------------------------------------------
October 31, 1996
1. ORGANIZATION
Investment Series Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of one portfolio. The
financial statements included herein are those of Federated Bond Fund (the
"Fund"), a diversified portfolio. The investment objective of the Fund is to
provide as high a level of current income as is consistent with the preservation
of capital.
The Fund offers four classes of shares: Class A Shares, Class B Shares, Class C
Shares and Class F Shares.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Listed corporate bonds, U.S. government securities,
other fixed income and asset-backed securities, unlisted securities, and
private placement securities are generally valued at the mean of the latest
bid and asked price as furnished by an independent pricing service. Listed
equity securities are valued at the last sale price reported on a national
securities exchange. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities
with remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized
as required by the
Federated Bond Fund
- --------------------------------------------------------------------------------
Internal Revenue Code, as amended (the "Code"). Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
section 988 transactions and accumulated equalization. The following
reclassifications have been made to the financial statements.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
ACCUMULATED NET INCOME/ACCUMULATED DISTRIBUTIONS
PAID-IN CAPITAL REALIZED GAIN/LOSS IN EXCESS OF NET INVESTMENT INCOME
<S> <C> <C>
$ 1,241,041 $ 9,075 ($ 1,250,116)
</TABLE>
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
At last fiscal year-end date, the Fund, for federal tax purposes, had a
capital loss carryforward of $3,590,286, which will reduce the Fund's
taxable income arising from future net realized gain on investments, if
any, to the extent permitted by the Code, and thus will reduce the amount
of the distributions to shareholders which would otherwise be necessary to
relieve the Fund of any liability for federal tax. Pursuant to the Code,
such capital loss carryforward will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<S> <C>
2002 $ 3,359,826
- ------------------------------------------------------------------------------------
2003 $ 101,014
- ------------------------------------------------------------------------------------
2004 $ 129,446
- ------------------------------------------------------------------------------------
</TABLE>
Federated Bond Fund
- --------------------------------------------------------------------------------
EQUALIZATION--The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from sales and
costs of redemptions of fund shares (equivalent, on a per share basis, to
the amount of undistributed net investment income on the date of the
transaction) is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
RESTRICTED SECURITIES--Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Board of Directors. The Fund will not
incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary
market or, if no market prices are available, at the fair value as
determined by the Fund's pricing committee.
Additional information on each restricted security held at October 31, 1996
is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Astor Corporation, Sr. Sub. Note 10/2/1996 $ 402,875
- ------------------------------------------------------------------
Australis Holdings Pty Limited, Unit 10/29/1996 224,833
- ------------------------------------------------------------------
Bar Technologies, Inc., Warrants 8/27/1996 0
- ------------------------------------------------------------------
Bayer Corp, Deb. 9/26/1995-11/9/1995 1,992,050
- ------------------------------------------------------------------
Bayer Corp, Deb. 3/21/1996-4/17/1996 1,687,443
- ------------------------------------------------------------------
CalEnergy Co., Inc., Sr. Note 9/18/1996 99,616
- ------------------------------------------------------------------
Dade International, Inc., Sr. Sub. Note 4/30/1996-7/15/1996 718,250
- ------------------------------------------------------------------
Equitable Life, Note 10/17/1996 2,980,650
- ------------------------------------------------------------------
Euramax International Plc, Sr. Sub. Note 9/18/1996 504,000
- ------------------------------------------------------------------
First Nationwide Escrow Corp., Sr. Sub. Note 9/13/1996 686,875
- ------------------------------------------------------------------
Four M Corp., Sr. Secd. Note 5/23/1996 150,000
- ------------------------------------------------------------------
Freeport Terminal (Malta) Ltd, Gtd. Global Note 3/17/1994-12/7/1995 4,551,806
</TABLE>
Federated Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
- ------------------------------------------------------------------
<S> <C> <C>
Genesis Health Ventures, Inc., Sr. Sub. Note 10/1/1996 450,000
- ------------------------------------------------------------------
IHF Capital, Inc., Warrants 11/4/1994 3,952
- ------------------------------------------------------------------
ISP Holding, Inc., Sr. Note 5/24/1994-2/14/1996 762,733
- ------------------------------------------------------------------
International Home Foods, Inc., Sr. Sub. Note 10/29/1996 550,000
- ------------------------------------------------------------------
International Knife & Saw, Inc., Sr. Sub. Note 10/31/1996 250,000
- ------------------------------------------------------------------
Millicom International Cellular S. A., Sr. Sub. Disc. Note 5/24/1996 558,085
- ------------------------------------------------------------------
Outsourcing Solutions, Inc., Sr. Sub. Note 10/31/1996 251,563
- ------------------------------------------------------------------
Pacific Mutual Life Insurance Company, Note 6/26/1996 4,366,260
- ------------------------------------------------------------------
Paging Network, Inc., Sr. Sub. Note 10/10/1996 300,000
- ------------------------------------------------------------------
Pegasus Media, Class B 10/31/1995 0
- ------------------------------------------------------------------
Prime Succession Acquisition Corp., Sr. Sub. Note 8/13/1996 125,000
- ------------------------------------------------------------------
Principal Mutual Life Insurance Co., Note 8/28/1995 2,847,450
- ------------------------------------------------------------------
Reinsurance Group of America, Sr. Note 3/19/1996 5,483,170
- ------------------------------------------------------------------
Royal Oak Mines, Sr. Sub. Note 8/5/1996-8/28/1996 599,750
- ------------------------------------------------------------------
Stone Container Corp., Rating Adjustable Sr. Notes 9/29/1994 496,410
- ------------------------------------------------------------------
Tenaga Nasional Berhad, Deb. 2/16/1996-10/3/1996 6,219,973
- ------------------------------------------------------------------
Tokheim Corp., Sr. Sub. Note 8/16/1996-9/4/1996 382,938
- ------------------------------------------------------------------
U.S. Can Corp., Sr. Sub. Note 10/10/1996 125,000
- ------------------------------------------------------------------
Union Central Life Insurance Co. 10/31/1996 3,979,120
- ------------------------------------------------------------------
Uniforet Inc., Sr. Note 10/7/1996 250,000
- ------------------------------------------------------------------
</TABLE>
Federated Bond Fund
- --------------------------------------------------------------------------------
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At October 31, 1996, par value shares ($0.0001 per share) authorized were as
follows:
<TABLE>
<CAPTION>
POUND OF PAR
VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
<S> <C>
Class A 25,000,000
- -----------------------------------------------------------------------------------------------
Class B 25,000,000
- -----------------------------------------------------------------------------------------------
Class C 25,000,000
- -----------------------------------------------------------------------------------------------
Class F 525,000,000
- -----------------------------------------------------------------------------------------------
Unclassified 400,000,000
- ----------------------------------------------------------------------------------------------- -----------------
Total 1,000,000,000
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995(A)
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,691,576 $ 35,793,135 525,834 $ 5,078,460
- -------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 150,861 1,442,578 4,406 42,695
- -------------------------------------------------------------
Shares redeemed (550,070) (5,293,729) (10,939) (105,289)
- ------------------------------------------------------------- ---------- ------------- --------- ------------
Net change resulting from Class A Shares transactions 3,292,367 $ 31,941,984 519,301 $ 5,015,866
- ------------------------------------------------------------- ---------- ------------- --------- ------------
</TABLE>
Federated Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995(A)
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 12,011,129 $ 116,306,127 2,842,775 $ 27,454,188
- -------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 336,941 3,224,612 17,428 168,835
- -------------------------------------------------------
Shares redeemed (2,267,434) (22,140,487) (14,659) (141,896)
- ------------------------------------------------------- ------------ -------------- ---------- -------------
Net change resulting from Class B Shares
transactions 10,080,636 $ 97,390,252 2,845,544 $ 27,481,127
- ------------------------------------------------------- ------------ -------------- ---------- -------------
<CAPTION>
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995(A)
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 2,109,387 $ 20,275,115 559,632 $ 5,403,663
- -------------------------------------------------------------
Shares issued to shareholders in payment of distributions
declared 68,973 660,034 5,231 50,591
- -------------------------------------------------------------
Shares redeemed (386,472) (3,688,591) (733) (7,139)
- ------------------------------------------------------------- ---------- ------------- --------- ------------
Net change resulting from Class C Shares transactions 1,791,888 $ 17,246,558 564,130 $ 5,447,115
- ------------------------------------------------------------- ---------- ------------- --------- ------------
<CAPTION>
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995(A)
CLASS F SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 11,961,299 $ 114,805,713 7,165,637 $ 67,136,434
- -----------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 793,767 7,613,107 562,573 5,270,235
- -----------------------------------------------------
Shares redeemed (5,233,916) (50,116,935) (3,810,614) (35,273,217)
- ----------------------------------------------------- ------------ -------------- ----------- --------------
Net change resulting from Class F Shares
transactions 7,521,150 72,301,885 3,917,596 37,133,452
- ----------------------------------------------------- ------------ -------------- ----------- --------------
Net change resulting from Fund share
transactions 22,686,041 $ 218,880,679 7,846,571 $ 75,077,560
- ----------------------------------------------------- ------------ -------------- ----------- --------------
</TABLE>
(a) For the period from June 28, 1995 (date of initial public investment) to
October 31, 1995.
Federated Bond Fund
- --------------------------------------------------------------------------------
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.75% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any portion of its fee. The Adviser can modify or terminate this
voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class A, Class B, and Class C shares. The Plan provides that the
Fund may incur distribution expenses according to the following schedule
annually, to compensate FSC.
<TABLE>
<CAPTION>
% OF AVG. DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
<S> <C>
Class A Shares 0.25%
- -----------------------------------------------------------------------------------------
Class B Shares 0.75%
- -----------------------------------------------------------------------------------------
Class C Shares 0.75%
- -----------------------------------------------------------------------------------------
</TABLE>
For the year ended October 31, 1996 Class A Shares did not incur a distribution
services fee.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund shares for the period. The fee paid to
FSS is used to finance certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
Federated Bond Fund
- --------------------------------------------------------------------------------
GENERAL--Certain of the Officers and Directors of the Corporation are Officers
and Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended October 31, 1996, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 166,351,567
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 387,167,809
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
Report of Ernst & Young LLP,
Independent Auditors
- --------------------------------------------------------------------------------
To the Directors and Shareholders of
INVESTMENT SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Bond Fund, (one of the portfolios
comprising Investment Series Funds, Inc.) as of October 31, 1996, and the
related statement of operations for the year then ended, the statement 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 presented 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. These 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, 1996, 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
Federated Bond Fund at October 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods presented
therein, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
December 16, 1996
Directors Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President
J. Christopher Donahue Edward C. Gonzales
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward L. Flaherty, Jr. Executive Vice President, Treasurer and Secretary
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus, which contains facts
concerning its objective and policies, management fees, expenses and other
information.
[LOGO] Federated Investors
Since 1955
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 461444507
Cusip 461444606
Cusip 461444705
Cusip 461444309
G01452-02 (12/96)
APPENDIX
A. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an initial investment of
$9,000 in Federated Bond Fund in 1987 would have grown to $21,782. The
`x'' axis reflects the cost of investment, the ``y'' axis reflects
computation periods from 1987 to 1996, and the right margin reflects a
total investment range from $0 to $22,000. The chart further indicates the
ending market value attributable to principal, as well as the ending market
value attributable to capital gains and reinvested dividends.
B. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an yearly investment of
$1,000 in Federated Bond Fund in 1987 would have grown to $16,916. The
`x'' axis reflects the cost of investment, the ``y'' axis reflects
computation periods from 1987 to 1996, and the right margin reflects a
total investment range from $0 to $18,000. The chart further indicates the
ending market value attributable to principal, as well as the ending market
value attributable to capital gains and reinvested dividends.
C. The graphic presentation here displayed consists of a boxed legend in
the upper left quadrant indicating the components of the corresponding
mountain chart. The color-coded mountain chart is a visual representation
of the narrative text above it, which shows that an investment of $20,000
in Federated Bond Fund in 1987 would have grown to $48,405. The `x'' axis
reflects the cost of investment, the `y'' axis reflects computation
periods from 1987 to 1996, and the right margin reflects a total investment
range from $0 to $50,000. The chart further indicates the ending market
value attributable to principal, as well as the ending market value
attributable to capital gains and reinvested dividends
D. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
A Shares of the fund are represented by a solid line, whereas the Lehman
Brothers Corpoated Bond Index (LBCBI) is represented by a broken dotted
line, and the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB) is
represented by a broken dashed line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Class A Shares of the fund, the LBCBI, and the LCDBBB for
the period from June 28, 1995 to October 31, 1996. The `y'' axis reflects
the cost of the investment. The `x'' axis reflects computation periods
from the ending value of the hypothetical investment in the Class A Shares
of the fund as compared to LBCBI and LCDBBB; the ending values are $10,640,
$11,014 and $10,919,respectively. Beneath the list of the components that
correspond to the line graph are the following total return data for the
Class A Shares of the fund: total return figures for the 1 year period,
and start of performance. The corresponding total figures are as follows:
2.39% and 4.77% respectively. The performance disclaimer and footnotes are
listed directly under the graphic presentation.
E. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
B Shares of the fund are represented by a solid line, whereas the Lehman
Brothers Corpoated Bond Index (LBCBI) is represented by a broken dotted
line, and the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB) is
represented by a broken dashed line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Class B Shares of the fund, the LBCBI, and the LCDBBB for
the period from June 28, 1995 to October 31, 1996. The `y'' axis reflects
the cost of the investment. The `x'' axis reflects computation periods
from the ending value of the hypothetical investment in the Class B Shares
of the fund as compared to LBCBI and LCDBBB; the ending values are $10,513,
$11,014 and $10,919,respectively. Beneath the list of the components that
correspond to the line graph are the following total return data for the
Class B Shares of the fund: total return figures for the 1 year period,
and start of performance. The corresponding total figures are as follows:
0.59% and 3.80% respectively. The performance disclaimer and footnotes are
listed directly under the graphic presentation.
F. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
C Shares of the fund are represented by a solid line, whereas the Lehman
Brothers Corpoated Bond Index (LBCBI) is represented by a broken dotted
line, and the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB) is
represented by a broken dashed line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Class C Shares of the fund, the LBCBI, and the LCDBBB for
the period from June 28, 1995 to October 31, 1996. The `y'' axis reflects
the cost of the investment. The `x'' axis reflects computation periods
from the ending value of the hypothetical investment in the Class C Shares
of the fund as compared to LBCBI and LCDBBB; the ending values are $11,036,
$10,919 and $11,014,respectively. Beneath the list of the components that
correspond to the line graph are the following total return data for the
Class C Shares of the fund: total return figures for the 1 year period,
and start of performance. The corresponding total figures are as follows:
5.30% and 7.62% respectively. The performance disclaimer and footnotes are
listed directly under the graphic presentation.
G. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class
F Shares of the fund are represented by a solid line, whereas the Lehman
Brothers Corpoated Bond Index (LBCBI) is represented by a broken dotted
line, and the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB) is
represented by a broken dashed line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment in the Class F Shares of the fund, the LBCBI, and the LCDBBB for
the period from June 28, 1995 to October 31, 1996. The `y'' axis reflects
the cost of the investment. The `x'' axis reflects computation periods
from the ending value of the hypothetical investment in the Class F Shares
of the fund as compared to LBCBI and LCDBBB; the ending values are $24,146,
$24,197 and $21,921,respectively. Beneath the list of the components that
correspond to the line graph are the following total return data for the
Class F Shares of the fund: total return figures for the 1 year period, 5
year period and start of performance. The corresponding total figures are
as follows: 5.00% 10.38% and 9.81%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic presentation.
