1933 Act File No. 33-48847
1940 Act File No. 811-07021
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 13 X
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 14 ...................................X
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INVESTMENT SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) on
_________________ pursuant to paragraph (b) 60 days after
filing pursuant to paragraph (a) (i)
X on DECEMBER 31, 1997 pursuant to paragraph (a) (i). 75 days
after filing pursuant to paragraph (a)(ii) on pursuant to
paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of Investment Series
Funds, Inc., which consists of one portfolio, Federated Bond Fund,
consisting of four classes of shares (a) Class A Shares, (b) Class B
Shares, (c) Class C Shares, and (d) Class F Shares, is comprised of
the following:
<TABLE>
<CAPTION>
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
<S> <C> <C>
Item 1. Cover Page............................. Cover Page.
Item 2. Synopsis............................... Summary of Fund Expenses.
Item 3. Condensed Financial
Information............................ Financial Highlights; Performance Information.
Item 4. General Description of
Registrant............................. General Information; Investment Information;
Investment Objective; Investment Policies;
Investment Limitations.
Item 5. Management of the Fund................. Fund Information; Management of the Corporation; Administration
of the Fund; Brokerage Transactions; Distribution of Shares.
Item 6. Capital Stock and Other
Securities............................. Account and Share Information; Dividends and Distributions;
Retirement Plans; Shareholder Information;
Voting Rights; Tax Information; Federal Income Tax; State and
Local Taxes.
Item 7. Purchase of Securities Being
Offered................................ Net Asset Value; Investing in the Fund; Investing in
Class A Shares; Investing in Class B Shares; Investing
in Class C Shares; Investing in Class F Shares; How to
Purchase Shares; Share Purchases; Minimum Investment
Required; What Shares Cost; Eliminating the Sales Charge;
Reducing or Eliminating the Sales Charge; Systematic
Investment Program; Confirmations and Account Statements;
Special Purchase Features; Exchange Privilege; Requirements
for Exchange.
Item 8. Redemption or Repurchase............... How to Redeem Shares; Special Redemption Features; Redeeming
Class F Shares; Through a Financial Institution;
Other Classes of Shares; Exchanges for Shares of Other
Funds; Systematic Withdrawal Program; Accounts with
Low Balances; Contingent Deferred Sales Charge;
Elimination of Contingent Deferred Sales Charge.
Item 9. Pending Legal Proceedings.............. None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page............................. Cover Page.
Item 11. Table of Contents...................... Table of Contents.
Item 12. General Information and
History................................ General Information About the Fund; About Federated Investors.
Item 13. Investment Objectives and
Policies............................... Investment Objective and Policies; Investment Limitations.
Item 14. Management of the Fund................. Investment Series Funds, Inc. Management; Directors' Compensation.
Item 15. Control Persons and Principal
Holders of Securities.................. Fund Ownership.
Item 16. Investment Advisory and Other
Services............................... Investment Advisory Services; Other Services; Administrative Services;
Transfer Agent and Dividend Disbursing Agent.
Item 17. Brokerage Allocation................... Brokerage Transactions.
Item 18. Capital Stock and Other
Securities............................. Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered................................ Purchasing Shares; Determining Net Asset Value;
Redeeming Shares; Exchange Privilege (Class F Shares Only).
Item 20. Tax Status............................. Tax Status.
Item 21. Underwriters........................... Not Applicable.
Item 22. Calculation of Performance
Data................................... Total Return; Yield; Performance Comparisons.
Item 23. Financial Statements...... To be filed by Amendment.
</TABLE>
FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES, CLASS B SHARES, CLASS C SHARES
PROSPECTUS
The shares of Federated Bond Fund (the "Fund") represent interests in
a diversified portfolio of securities which is an investment portfolio
of Investment Series Funds, Inc. (the "Corporation"), an open-end
management investment company (a mutual fund). The investment
objective of the Fund is to provide as high a level of current income
as is consistent with the preservation of capital by investing
primarily in a portfolio of investment grade bonds.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class A Shares, Class B Shares, or Class C Shares
of the Fund. Keep this prospectus for future reference.
The Fund has also filed with the Securities and Exchange Commission
("SEC") a Statement of Additional Information dated December 31, 1997
for Class A Shares, Class B Shares, Class C Shares, and Class F
Shares. The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper
copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain
other information, or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information,
material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1997
<PAGE>
TABLE OF CONTENTS
Summary Of Fund Expenses.......................1
Class A Shares..............................1
Class B Shares..............................2
Class C Shares..............................3
Financial Highlights...........................4
Class A Shares..............................4
Class B Shares..............................5
Class C Shares..............................6
General Information............................7
Investment Information.........................7
Investment Objective........................7
Investment Policies.........................8
Investment Limitations.....................17
Net Asset Value...............................18
Investing In The Fund.........................18
How To Purchase Shares........................19
Investing in Class A Shares................19
Reducing or Eliminating the Sales
Charge...................................20
Investing in Class B Shares................22
Investing in Class C Shares................22
Special Purchase Features..................23
Exchange Privilege............................23
Requirements For Exchange..................24
How To Redeem Shares..........................25
Special Redemption Features................26
Contingent Deferred Sales Charge...........26
Elimination of Contingent Deferred
Sales Charge.............................28
Account And Share Information.................28
Fund Information..............................29
Management of the Corporation..............29
Distribution of Shares.....................30
Administration of the Fund.................31
Shareholder Information.......................32
Voting Rights..............................32
Tax Information...............................32
Federal Income Tax.........................32
State and Local Taxes......................32
Performance Information.......................33
Other Classes Of Shares.......................33
Appendix......................................34
Addresses.....................................36
<PAGE>
SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
CLASS A SHARES
<PAGE>
SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
CLASS B SHARES
<PAGE>
SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
CLASS C SHARES
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS A SHARES
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS B SHARES
<PAGE>
FINANCIAL HIGHLIGHTS--CLASS C SHARES
<PAGE>
GENERAL INFORMATION
The Corporation was organized under the laws of the State of Maryland
on May 20, 1992. Prior to February 5, 1993, the Fund was operated as a
portfolio of Investment Series Trust, a Massachusetts business trust
established pursuant to a Declaration of Trust dated March 17, 1987.
The Articles of Incorporation permit the Fund to offer separate series
of shares of beneficial interest representing interests in separate
portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date
of this prospectus, the Board of Directors (the "Directors") has
established four classes of shares, known as Class A Shares, Class B
Shares, Class C Shares (individually and collectively referred to
herein, as the context requires, as "Shares"), and Class F Shares.
This prospectus relates only to the Class A Shares, Class B Shares,
and Class C Shares of the Fund.
Shares of the Fund are designed primarily for individuals and
institutions seeking as high a level of current income as is
consistent with the preservation of capital by investing in a
portfolio of investment grade bonds.
For information on how to purchase the Shares offered by this
prospectus, please refer to "Investing in the Fund." The minimum
initial investment for Class A Shares is $500. The minimum initial
investment for Class B Shares and Class C Shares is $1,500. However,
the minimum initial investment for a retirement account in any class
is $50. Subsequent investments in any class must be in amounts of at
least $100, except for retirement plans which must be in amounts of at
least $50.
Class A Shares are sold at net asset value plus an applicable sales
charge and are redeemed at net asset value. Class B Shares are sold at
net asset value and are redeemed at net asset value. However, a
contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "Redeeming
Shares." Class C Shares are sold at net asset value. A contingent
deferred sales charge of 1.00% will be charged on assets redeemed
within the first 12 months following purchase. See "Redeeming
Shares."
Additionally, information regarding the exchange privilege offered
with respect to the Fund and certain other funds for which affiliates
of Federated Investors serve as principal underwriter or investment
adviser ("Federated Funds") can be found under "Exchange Privilege."
Federated Advisers is the investment adviser (the "Adviser") to the
Fund and receives compensation for its services.
The Fund's current net asset value and offering price can be found in
the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. The investment objective stated above
cannot be changed without the approval of shareholders. Unless stated
otherwise, the investment policies of the Fund described below may be
changed without shareholder approval.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a
professionally managed, diversified portfolio of bonds. Under normal
circumstances, at least 65% of the Fund's net assets will be invested
in such bonds. Additionally, at least 65% of the Fund's net assets
will be invested in investment grade securities, including repurchase
agreements collateralized by such investment grade securities.
Investment grade securities are generally described as securities that
are rated in one of the top four ratings categories by a nationally
recognized statistical rating organization ("NRSRO"), such as Moody's
Investors Service, Inc. ("Moody's), Standard & Poor's Ratings Group
("S&P"), or Fitch Investors Service, Inc. ("Fitch") or that are
unrated but determined by the Fund's investment adviser to be of
comparable quality. A description of the ratings categories is
contained in the Appendix to this prospectus. Permitted investments
include:
o domestic or foreign corporate debt obligations;
o obligations of the United States;
o notes, bonds, and discount notes of the following U.S.
government agencies or instrumentalities, such as Federal
Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Farm Credit
System (including the National Bank for Cooperatives and
Banks for Cooperatives), Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration;
o taxable municipal debt obligations (as a matter of operating
policy, the lowest rated municipal debt obligations in which
the Fund will invest will be rated BBB or better by an
NRSRO, or which are of comparable quality in the judgment of
the Fund's Adviser);
o asset-backed securities;
o commercial paper that matures in 270 days or less and
is rated A-1 or A-2 by S&P, P-1 or P-2 by Moody's, or
F-1 or F-2 by Fitch;
o time and savings deposits (including certificates of
deposit) in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF"), or in
institutions whose accounts are insured by the Savings
Association Insurance Fund ("SAIF"), including
certificates of deposit issued by, and other time deposits
in, foreign branches of BIF-insured banks which, if
negotiable, mature in six months or less or if not
negotiable, either mature in ninety days or less, or may
be withdrawn upon notice not exceeding ninety days;
o bankers' acceptances issued by a BIF-insured bank, or
issued by the bank's Edge Act subsidiary and guaranteed by
the bank, with remaining maturities of nine months or
less. The total acceptances of any bank held by the Fund
cannot exceed 0.25% of such bank's total deposits
according to the bank's last published statement of
condition preceding the date of acceptance;
o preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon and/or
convertible securities;
o convertible securities, irrespective of their ratings;
o equity securities;
o other securities which are deemed by the Fund's Adviser, to
be consistent with the Fund's investment objective; and repurchase
agreements collateralized by acceptable investments.
Under normal circumstances, the Fund will not invest more than 10% of
its total assets in equity securities.
CORPORATE DEBT OBLIGATIONS
Although the corporate debt obligations in which the Fund will
invest primarily are rated as investment grade by an NRSRO, or of
comparable quality in the judgment of the Adviser, the Fund may invest
not more than 35% of its net assets in corporate debt obligations that
are not investment grade, but are rated in any category below BBB or
Baa or are of comparable quality in the judgment of the Adviser (i.e.,
"junk bonds") and may include bonds in default. Corporate debt
obligations that are below investment grade are high-yield, high-risk
securities, typically subject to greater market fluctuations and
greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade securities, lower
rated securities tend to reflect short-term corporate, economic, and
market developments, as well as investor perceptions of the issuer's
credit quality. In addition, lower rated securities may be more
difficult to dispose of or to value than higher rated, lower-yielding
securities. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and
interest payments with respect to these securities than for higher
rated securities.
The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates.
As a Percentage of Total Market
Value of Bond
Credit Rating Holdings as of October 31, 1997
BB ___%
B ___
CC & CCC ___
___%
<PAGE>
U.S. GOVERNMENT OBLIGATIONS
The U.S. government obligations in which the Fund invests are either issued
or guaranteed by the U.S. government, its agencies, or instrumentalities.
These securities include, but are not limited to:
o direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes, and bonds;
o notes, bonds, and discount notes issued or guaranteed
by U.S. government agencies and instrumentalities
supported by the full faith and credit of the United
States;
o notes, bonds, and discount notes of U.S. government
agencies or instrumentalities which receive or have
access to federal funding; and
o notes, bonds, and discount notes of other U.S.
government instrumentalities supported only by the
credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are backed by the full faith
and credit of the U.S. Treasury. No assurances can be given that the
U.S. government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. These agencies
and instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a
specific line of credit
o from the U.S. Treasury;
o discretionary authority of the U.S. government to
purchase certain obligations of an agency or
instrumentality; or
o the credit of the agency or instrumentality.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such
as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works.
They are also issued to repay outstanding obligations, to raise funds
for general operating expenses, and to make loans to other public
institutions and facilities. Municipal securities include industrial
development bonds issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local
employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain
governmental, government related and private loans, receivables and
other lender assets including vehicle installment purchase obligations
and credit card receivables into pools. Interests in these pools are
sold as individual securities and are not backed or guaranteed by the
U.S. government and may not be secured. Payments from the asset pools
may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular
installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive
payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear
different interest rates, which may be fixed or floating. Because the
loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of
declining mortgage interest rates, because many borrowers refinance
their mortgages to take advantage of the more favorable rates.
Depending upon market conditions, the yield that the Fund receives
from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original mortgage
security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less
potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be
allocated to one branch of securities ahead of other tranches, in
order to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent
that the prepaid mortgage securities were purchased at a market
premium over their stated amount. Conversely, the prepayment of
mortgage securities purchased at a market discount from their stated
principal amount will accelerate the recognition of interest income by
the Fund, which would be taxed as ordinary income when distributed to
the shareholders. The credit characteristics of asset-backed
securities also differ in a number of respects from those of
traditional debt securities. The credit quality of most asset-backed
securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit
enhancement to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such
as credit card and accounts receivable and motor vehicle and other
installment purchase obligations and leases. These securities may be
in the form of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental entities
and carry no direct or indirect government guarantee, are structurally
similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed
securities. These types of investments may include adjustable rate
mortgage securities, collateralized mortgage obligations, real estate
mortgage investment conduits, or other securities collateralized by or
representing an interest in real estate mortgages (collectively,
"mortgage securities"). Many mortgage securities are issued or
guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMs are pass-through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMs in
which the Fund invests are issued by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC") and
are actively traded. The underlying mortgages which collateralize ARMs
issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMs issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction industry.
CMOs purchased by the Fund may be:
o collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S.
government;
o collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer
and such guarantee is collateralized by U.S. government
securities; or
o securities in which the proceeds of the issuance are
invested in mortgage securities and payment of the
principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a
NRSRO.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions
of the Internal Revenue Code (the "Code"). Issuers of REMICs may take
several forms, such as trusts, partnerships, corporations,
associations, or segregated pools of mortgages. Once REMIC status is
elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests,"
some of which may offer adjustable rates of interest, and a single
class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMs, CMOs, and REMICs in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost
of funds index or a moving average of mortgage rates. Commonly
utilized indices include the one-year and five-year constant maturity
Treasury Note rates, the three-month Treasury Bill rate, the 180-day
Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market interest
rate levels. Others tend to lag changes in market rate levels and tend
to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility
than adjustable rate mortgage securities that closely mirror the
market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market
rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event the Fund
purchases such residual interest mortgage securities, it will factor
in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMs, CMOs, and
REMICs in which the Fund invests will frequently have caps and floors
which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or
adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes.
These payment caps may result in negative amortization. The value of
mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an
institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). Due to
the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to
domestic banks, such as the reserve requirements, loan limitations,
examination, accounting, auditing, recordkeeping, and the public
availability of information, these investments may present additional
risks to investors.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be
exchanged for or converted into common stock of the issuer or a
related financial entity (for example, a merged or acquired company or
partner). Convertible securities may include, but are not limited to:
convertible bonds or debentures; convertible preferred stock; units
consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security held, such as
DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable for
Common Stock when issued as a debt security), LYONS--(Liquid Yield
Option Notes, which are corporate bonds that are purchased at prices
below par with no coupons and are convertible into stock),
PERCS--(Preferred Equity Redeemable Stock, an equity issue that pays a
high cash dividend, has a cap price and mandatory conversion to common
stock at maturity), and PRIDES--(Preferred Redeemable Increased
Dividend Securities, which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or
not rated because they fall below debt obligations and just above
common equity in order of preference or priority on the issuer's
balance sheet. Hence, an issuer with investment grade senior debt may
issue convertible securities with ratings less than investment grade
or not rated. The Fund does not limit convertible securities by
rating, and there is no minimal acceptance rating for a convertible
security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This
could result in the Fund purchasing and holding, without limit,
convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating
below investment grade after the Fund has purchased it. Convertible
securities rated below investment grade may be subject to some of the
same risks as those inherent in junk bonds.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are
issued at a discount to their face amount and do not entitle the
holder to any periodic payments of interest prior to maturity. Rather,
interest earned on zero coupon convertible securities accretes at a
stated yield until the security reaches its face amount at maturity.
Zero coupon convertible securities are convertible into a specific
number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide
the holder with the opportunity to put the bonds back to the issuer at
a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Federal income tax law requires the holder of a zero coupon
convertible security to recognize income with respect to the security
prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability of federal
income taxes, the Fund will be required to distribute income accrued
with respect to zero coupon convertible securities which it owns, and
may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities and as a matter of
fundamental investment policy, which may not be changed without
shareholder approval, will limit such investments to no more than 10%
of its net assets. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. However, the Fund will limit investments in illiquid
securities, including repurchase agreements providing for settlement
in more than seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under the federal securities laws, and is generally sold
to institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that
Section 4(2) commercial paper, and possibly certain other restricted
securities which meet the criteria for liquidity established by the
Directors, are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity
established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities within the parameters of its
investment objective, policies, and limitations. Investments in
foreign securities, particularly those of non-governmental issuers,
involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the
possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political,
social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to
enforce contractual obligations abroad than would be the case in the
United States because of differences in the legal systems. Transaction
costs in foreign securities may be higher. The Adviser will consider
these and other factors before investing in foreign securities and
will not make such investments unless, in its opinion, such
investments will meet the Fund's standards and objectives.
With respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income
securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a
spot or forward basis in connection with these investments. The
Adviser will allocate investments among securities of particular
issuers on the basis of its views as to the best values then currently
available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled
with expectations regarding the economy, movements in the general
level and term of interest rates, currency values, political
developments and variations in the supply of funds available for
investment in the world bond market relative to the demands placed
upon it.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment
companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment by
the Fund in shares of other investment companies may be subject to
such duplicate expenses.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during
times of unusual market conditions for defensive purposes and to
maintain liquidity.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and
price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. Repurchase agreements
are included within the definition of investment grade securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The
seller's failure to complete the transaction may cause the Fund to
miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the
market values of the securities purchased may vary from the purchase
prices.
The Fund may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Fund may enter
in transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize
short-term profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities on a short-term or long-term basis up to one-third of the
value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition
of the securities may be delayed pending court action.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and
put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to
protect securities which the Fund holds against decreases in value.
For the immediate future, the Fund will enter into futures contracts
directly only when it desires to exercise a financial futures put
option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only purchase puts on financial
futures contracts which are traded on a nationally recognized
exchange.
The Fund will generally purchase over-the-counter put options on
portfolio securities in negotiated transactions with the writers of
the options since options on the portfolio securities held by the Fund
are typically not traded on an exchange. The Fund purchases options
only from investment dealers and other financial associations (such as
commercial banks or savings associations) deemed creditworthy by the
Adviser.
In general, over-the-counter put options differ from exchange traded
put options in the following respects. Over-the-counter put options
are two party contracts with price and terms negotiated between buyer
and seller, and such options are endorsed and/or guaranteed by third
parties (such as a New York Stock Exchange member). Additionally,
over-the-counter strike prices are adjusted to reflect dividend
payments, initial strike prices are generally set at market, and
option premiums (which are all time premiums) are amortized on a
straight line basis over the life of the option. In contrast, exchange
traded options are third-party contracts with standardized strike
prices and expiration dates and are purchased from the Clearing
Corporation. Strike prices are not adjusted for dividends, and options
are marked to market, thereby obviating the need to amortize the time
premium. Exchange traded options have a continuous liquid market while
over-the-counter options do not.
The Fund may also write call options on all or any portion of its
portfolio in an effort to generate income for the Fund. The Fund will
write call options on securities either held in its portfolio or which
it has the right to obtain without payment of further consideration or
for which it has segregated cash in the amount of any additional
consideration. The call options which the Fund writes and sells must
be listed on a recognized options exchange. Although the Fund reserves
the right to write covered call options on its entire portfolio, it
will not write such options on more than 25% of its total assets
unless a higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.
RISKS. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund purchases puts on financial futures contracts
to protect against declines in prices of portfolio securities, there
is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures
contract and its corresponding put to react differently than the
portfolio securities to market changes. In addition, the Adviser could
be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In such an event, the
Fund may lose the purchase price of the put option. Finally, it is not
certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into
option transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any
particular time. The Fund's ability to establish and close out option
positions depends on this secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain
contracts (including, futures, forward, option and swap contracts)
that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities
that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." The term has also been applied
to securities "derived" from the cash flows from underlying
securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase
the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market
changes may differ from traditional investments, such as stock and
bonds, derivatives do not necessarily present greater market risks
than traditional investments. The Fund will only use derivative
contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that
could be characterized as derivatives, such as asset-backed securities
and mortgage-backed securities, including ARMs, CMOs, and REMICs, it
will only do so in a manner consistent with its investment objectives,
policies and limitations.
INVESTMENT LIMITATIONS
The Fund will not:
o borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a
portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or
pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its
total assets and pledge up to 10% of the value of those
assets to secure such borrowings;
o lend any of its assets except portfolio securities up
to one-third of the value of its total assets;
o sell securities short except, under strict limitations,
it may maintain open short positions so long as not
more than 10% of the value of its net assets is held as
collateral for those positions; nor
o with respect to 75% of the value of its total assets,
invest more than 5% in securities of any one issuer
other than cash, cash items or securities issued or
guaranteed by the government of the United States, its
agencies, or instrumentalities and repurchase
agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder
approval.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value
for Shares is determined by adding the interest of each class of
Shares in the market value of all securities and other assets of the
Fund, subtracting the interest of each class of Shares in the
liabilities of the Fund and those attributable to each class of
Shares, and dividing the remainder by the total number of each class
of Shares outstanding. The net asset value for each class of Shares
may differ due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.
The net asset value is determined as of the close of trading
(normally 4:00 p.m., Eastern time) on the New York Stock Exchange,
Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days
during which no Shares are tendered for redemption and no orders to
purchase Shares are received; or (iii) the following holidays: New
Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
INVESTING IN THE FUND
This prospectus offers investors three classes of Shares that carry
sales charges and contingent deferred sales charges in different forms
and amounts and which bear different levels of expenses:
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales
charge of 4.50% at the time of purchase. As a result, Class A Shares
are not subject to any charges when they are redeemed. Class A Shares
are distributed pursuant to a Rule 12b-1 plan whereby the distributor
is paid a fee of up to .25%. Certain purchases of Class A Shares
qualify for reduced sales charges. See "Reducing or Eliminating the
Sales Charge." Class A Shares have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are
subject to a contingent deferred sales charge of up to 5.50% if
redeemed within six full years following purchase. Class B Shares also
bear a higher 12b-1 fee than Class A Shares. Class B Shares will
automatically convert into Class A Shares, based on relative net asset
value, on or around the fifteenth of the month eight full years after
the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the
investment is made, but (until conversion) will have a higher expense
ratio and pay lower dividends than Class A Shares due to Class B
Shares' higher possible 12b-1 fee of up to .75%.
CLASS C SHARES
Class C Shares are sold without an initial sales charge but are
subject to a 1.00% contingent deferred sales charge on assets redeemed
within the first 12 months following purchase. Class C Shares provide
an investor the benefit of putting all of the investor's dollars to
work from the time the investment is made, but will have a higher
expense ratio and pay lower dividends than Class A Shares due to Class
C Shares' higher possible 12b-1 fee of up to .75%. Class C Shares have
no conversion feature.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on days on which the New York Stock
Exchange is open. Shares of the Fund may be purchased as described
below, either through a financial institution (such as a bank or
broker/dealer which has a sales agreement with the distributor) or by
wire or by check directly to the Fund, with a minimum initial
investment of $500 for Class A Shares and $1,500 for Class B Shares
and Class C Shares. Additional investments can be made for as little
as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different
minimum investment requirements on their customers.)
In connection with any sale, Federated Securities Corp., may from time
to time, offer certain items of nominal value to any shareholder or
investor. The Fund reserves the right to reject any purchase request.
An account must be established at a financial institution or by
completing, signing, and returning the new account form available from
the Fund before Shares can be purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after
an order is received, plus a sales charge as follows:
Sales Sales Dealer
Charge Charge Concession
As A As A As A
Percentage Percentage Percentage
Of Public Of Net Of Public
Offering Amount Offering
Amount Of Transaction Price Invested Price*
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but less than
$1 million 2.00% 2.04% 1.80%
$1,000,000 or greater 0.00% 0.00% 0.25%
*See sub-section entitled Dealer Concession."
No sales charge is imposed for Class A Shares purchased through bank
trust departments, investment advisers registered under the Investment
Advisers Act of 1940, retirement plans where the third party
administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates, to "wrap accounts" or similar
programs for the benefit of clients of financial institutions under
which clients pay fees to such financial institutions, or to
shareholders designated as Liberty Life Members. However, investors
who purchase Shares through a trust department, investment adviser,
wrap account, or retirement plan may be charged an additional service
fee by the institution.
DEALER CONCESSION
For sales of Class A Shares, a dealer will normally receive up to 90%
of the applicable sales charge. Any portion of the sales charge which
is not paid to a dealer will be retained by the distributor. However,
the distributor, may offer to pay dealers up to 100% of the sales
charge retained by it. Such payments may take the form of cash or
promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings
about the Fund or other special events at recreational-type
facilities, or items of material value. In some instances, these
incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1
million or more, the investor pays no sales charge; however, the
distributor will make twelve monthly payments to the dealer totaling
0.25% of the public offering price over the first year following the
purchase. Such payments are based on the original purchase price of
Shares outstanding at each month end.
The sales charge for Shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp.
Federated Securities Corp. may pay fees to banks out of the sales
charge in exchange for sales and/or administrative services performed
on behalf of the bank's customers in connection with the initiation of
customer accounts and purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of
Class A Shares through:
o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent; or
o using the reinvestment privilege.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
As shown in the table above, larger purchases reduce or eliminate the
sales charge paid. The Fund will combine purchases of Class A Shares
made on the same day by the investor, the investor's spouse, and the
investor's children under age 21 when it calculates the sales charge.
In addition, the sales charge, if applicable, is reduced or eliminated
for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will
consider the previous purchases still invested in the Fund. For
example, if a shareholder already owns Class A Shares having a current
value at the public offering price of $90,000 and he purchases $10,000
more at the current public offering price, the sales charge on the
additional purchase according to the schedule now in effect would be
3.75%, not 4.50%.
To receive the sales charge reduction or elimination, Federated
Securities Corp. must be notified by the shareholder in writing or by
his financial institution at the time the purchase is made that Class
A Shares are already owned or that purchases are being combined. The
Fund will reduce the sales charge after it confirms or eliminates the
purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder
has the privilege of combining concurrent purchases of two or more
Class A Shares in the Federated Funds, the purchase price of which
includes a sales charge. For example, if a shareholder concurrently
invested $80,000 in one of the other Class A Shares in the Federated
Funds with a sales charge, and $20,000 in this Fund, the sales charge
would be reduced or eliminated.
To receive this sales charge reduction or elimination, Federated
Securities Corp. must be notified by the shareholder in writing or by
his financial institution at the time the concurrent purchases are
made. The Fund will reduce or eliminate the sales charge after it
confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of shares of
the funds in the Federated Funds (excluding money market funds) over
the next 13 months, the sales charge may be reduced or eliminated by
signing a letter of intent to that effect. This letter of intent
includes a provision for a sales charge adjustment depending on the
amount actually purchased within the 13-month period and a provision
for the custodian to hold up to 4.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is
completed.
The Shares held in escrow in the shareholder's account will be
released upon the fulfillment of the letter of intent or the end of
the 13-month period, whichever comes first. If the amount specified in
the letter of intent is not purchased, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in
the sales charge.
While this letter of intent will not obligate the shareholder to
purchase Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the
time a letter of intent is established, current balances in accounts
in any Class A Shares of any fund in the Federated Funds, excluding
money market accounts, will be aggregated to provide a purchase credit
towards fulfillment of the letter of intent. Prior trade prices will
not be adjusted.
REINVESTMENT PRIVILEGE
If Class A Shares in the Fund have been redeemed, the shareholder
has a one-time right, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales
charge. Federated Securities Corp. must be notified by the shareholder
in writing or by his financial institution of the reinvestment in
order to eliminate a sales charge. If the shareholder redeems his
Class A Shares in the Fund, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after
an order is received. While Class B Shares are sold without an initial
sales charge, under certain circumstances described under "Contingent
Deferred Sales Charge--Class B Shares," a contingent deferred sales
charge may be applied by the distributor at the time Class B Shares
are redeemed.
CONVERSION OF CLASS B SHARES
Class B Shares will automatically convert into Class A Shares on or
around the fifteenth of the month eight full years after the purchase
date, except as noted below, and will no longer be subject to a
distribution services fee (see "Distribution of Shares"). Such
conversion will be on the basis of the relative net asset values per
share, without the imposition of any sales charge, fee or other
charge. Class B Shares acquired by exchange from Class B Shares of
another fund in the Federated Funds will convert into Class A Shares
based on the time of the initial purchase. For purposes of conversion
to Class A Shares, Shares purchased through the reinvestment of
dividends and distributions paid on Class B Shares will be considered
to be held in a separate sub-account. Each time any Class B Shares in
the shareholder's account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The
conversion of Class B Shares to Class A Shares is subject to the
continuing availability of a ruling from the Internal Revenue Service
or an opinion of counsel that such conversions will not constitute
taxable events for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of
Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue
to be subject to higher expenses than Class A Shares for an indefinite
period.
Orders for $250,000 or more of Class B Shares will automatically be
invested in Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an
order is received. A contingent deferred sales charge of 1.00% will be
charged on assets redeemed within the first full 12 months following
purchase. For a complete description of this charge see "Contingent
Deferred Sales Charge--Class C Shares."
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an
investment dealer) to place an order to purchase Shares. Orders placed
through a financial institution are considered received when the Fund
is notified of the purchase order or when payment is converted into
federal funds. Purchase orders through a registered broker/dealer must
be received by the broker before 4:00 p.m. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (Eastern time)
in order for Shares to be purchased at that day's price. Purchase
orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m.
(Eastern time) in order for Shares to be purchased at that day's
price. It is the financial institution's responsibility to transmit
orders promptly. Financial institutions may charge additional fees for
their services.
The financial institution which maintains investor accounts in Class B
Shares or Class C Shares with the Fund must do so on a fully disclosed
basis unless it accounts for share ownership periods used in
calculating the contingent deferred sales charge (see "Contingent
Deferred Sales Charge"). In addition, advance payments made to
financial institutions may be subject to reclaim by the distributor
for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not
account for share ownership periods (see "Other Payments to Financial
Institution").
PURCHASING SHARES BY WIRE
To purchase Shares directly from Federated Securities Corp. by Federal
Reserve wire, call the Fund. Shares cannot be purchased by wire on
holidays when wire transfers are restricted. Questions on wire
purchases should be directed to your shareholder services
representative at the telephone number listed on your account
statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by
sending a check made payable to the name of the Fund (designate class
of Shares and account number) to: Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by
mail are considered received when payment by check is converted into
federal funds (normally the business day after the check is received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking or savings account at an Automated Clearing
House ("ACH") member and invested in the Fund at the net asset value
next determined after an order is received by the Fund, plus the sales
charge, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS
Fund Shares can be purchased as an investment for retirement plans or
IRA accounts. For further details, contact the Fund and consult a tax
adviser.
EXCHANGE PRIVILEGE
CLASS A SHARES
Class A shareholders may exchange all or some of their Shares for
Class A Shares of other funds in the Federated Funds at net asset
value. Neither the Fund nor any of the funds in the Federated Funds
imposes any additional fees on exchanges.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for
Class B Shares of other funds in the Federated Funds. (Not all funds
in the Federated Funds currently offer Class B Shares. Contact your
financial institution regarding the availability of other Class B
Shares in the Federated Funds). Exchanges are made at net asset value
without being assessed a contingent deferred sales charge on the
exchanged Shares. To the extent that a shareholder exchanges Shares
for Class B Shares in other funds in the Federated Funds, the time for
which the exchanged-for Shares are to be held will be added to the
time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.
CLASS C SHARES
Class C shareholders may exchange all or some of their Shares for
Class C Shares in other funds in the Federated Funds at net asset
value without a contingent deferred sales charge. (Not all funds in
the Federated Funds currently offer Class C Shares. Contact your
financial institution regarding the availability of other Class C
Shares in the Federated Funds.) Participants in a retirement plan
under the Program may exchange some or all of their Shares for Class C
Shares of other funds offered under their plan at net asset value
without a contingent deferred sales charge. To the extent that a
shareholder exchanges Shares for Class C Shares in other funds in the
Federated Funds, the time for which the exchanged-for Shares are to be
held will be added to the time for which exchanged-from Shares were
held for purposes of satisfying the applicable holding period. For
more information, see "Contingent Deferred Sales Charge."
Please contact your financial institution directly or Federated
Securities Corp. at 1-800-341-7400 for information on and prospectuses
for the Federated Funds into which your Shares may be exchanged free
of charge.
Shareholders of Class A Shares who have been designated Liberty Life
Members are exempt from sales charges on future purchases in and
exchanges between the Class A Shares of any funds in the Federated
Funds, as long as they maintain a $500 balance in one of the Federated
Funds.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange Shares having a net
asset value equal to the minimum investment requirements of the fund
into which the exchange is being made. Before the exchange, the
shareholder must receive a prospectus of the fund for which the
exchange is being made.
Upon receipt of proper instructions and required supporting documents,
Shares submitted for exchange are redeemed and proceeds invested in
the same class of Shares of the other fund. The exchange privilege may
be modified or terminated at any time. Shareholders will be notified
of the modification or termination of the exchange privilege.
Further information on the exchange privilege and prospectuses for the
Federated Funds are available by contacting the Fund.
TAX CONSEQUENCES
An exercise of the exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a capital gain
or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanges for the Liberty Family of Funds may be
given in writing or by telephone. Written instructions may require a
signature guarantee. Shareholders of the Fund may have difficulty in
making exchanges by telephone through brokers and other financial
institutions during times of drastic economic or market changes. If a
shareholder cannot contact his broker or financial institution by
telephone, it is recommended that an exchange request be made in
writing and sent by overnight mail to Federated Shareholder Services
Company, 1099 Hingham Street, Rockland, Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS
Telephone instructions made by the investor may be carried out only if
a telephone authorization form completed by the investor is on file
with the Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the
Fund. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone
instructions. Shares may be exchanged between two funds by telephone
only if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone
but must be forwarded to Federated Shareholder Services Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600 and deposited to the
shareholder's account before being exchanged. Telephone exchange
instructions are recorded and will be binding upon the shareholder.
Such instructions will be processed as of 4:00 p.m. (Eastern time) and
must be received by the Fund before that time for Shares to be
exchanged the same day. Shareholders exchanging into a Fund will not
receive any dividend that is payable to shareholders of record on that
date. This privilege may be modified or terminated at any time.
HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable
contingent deferred sales charge, next determined after the Fund
receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests must
be received in proper form and can be made as described below.
Redemptions of Shares held through retirement plans will be governed
by the requirements of the respective plans.
REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial
institution to request the redemption. Shares will be redeemed at the
net asset value, less any applicable contingent deferred sales charge
next determined after the Fund receives the redemption request from
the financial institution. Redemption requests through a registered
broker/dealer must be received by the broker before 4:00 p.m. (Eastern
time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be redeemed at that day's
net asset value. Redemption requests through other financial
institutions (such as banks) must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be redeemed at that day's net asset
value. The financial institution is responsible for promptly
submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the
financial institution for this service.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the
Fund has a properly completed authorization form. These forms can be
obtained from Federated Securities Corp. Proceeds will be mailed in
the form of a check, to the shareholder's address of record or by wire
transfer to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. The minimum amount for
a wire transfer is $1,000. Proceeds from redeemed Shares purchased by
check or through ACH will not be wired until that method of payment
has cleared. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following
business day. Questions about telephone redemptions on days when wire
transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
Telephone instructions will be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If this occurs, "Redeeming
Shares By Mail" should be considered. If at any time the Fund shall
determine it necessary to terminate or modify the telephone redemption
privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be
sent unendorsed with the written request by registered or certified
mail to the address noted above.
The written request should state: the Fund name and the Class
designation; the account name as registered with the Fund; the account
number; and the number of shares to be redeemed or the dollar amount
requested. All owners of the account must sign the request exactly as
the shares are registered. Normally, a check for the proceeds is
mailed within one business day, but in no event more than seven days,
after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is
processed.
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund or a redemption
payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary
public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount
not less than $100 may take advantage of the Systematic Withdrawal
Program. Under this program, Shares are redeemed to provide for
periodic withdrawal payments in an amount directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Shares,
and the fluctuation of the net asset value of Shares redeemed under
this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under
this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in
this program, a shareholder must have an account value of at least
$10,000, other than retirement accounts subject to required minimum
distributions. A shareholder may apply for participation in this
program through his financial institution. Due to the fact that Class
A Shares are sold with a sales charge, it is not advisable for
shareholders to continue to purchase Class A Shares while
participating in this program. A contingent deferred sales charge may
be imposed on Class B and C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
CLASS A SHARES
CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within
six full years of the purchase date of those Shares will be charged a
contingent deferred sales charge by the Fund's distributor. Any
applicable contingent deferred sales charge will be imposed on the
lesser of the net asset value of the redeemed Shares at the time of
purchase or the net asset value of the redeemed Shares at the time of
redemption in accordance with the following schedule:
Contingent
Year Of Redemption Deferred
After Purchase Sales Charge
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
CLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within
one full year of the purchase date of those Shares will be charged a
contingent deferred sales charge by the Fund's distributor of 1.00%.
Any applicable contingent deferred sales charge will be imposed on the
lesser of the net asset value of the redeemed Shares at the time of
purchase or the net asset value of the redeemed Shares at the time of
redemption.
CLASS B SHARES AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will be
retained by the distributor. The contingent deferred sales charge will
not be imposed with respect to: (1) Shares acquired through the
reinvestment of dividends or distributions of long-term capital gains;
and (2) Shares held for more than six full years from the date of
purchase with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares. Redemptions will be
processed in a manner intended to maximize the amount of redemption
which will not be subject to a contingent deferred sales charge. In
computing the amount of the applicable contingent deferred sales
charge, redemptions are deemed to have occurred in the following
order: (1) Shares acquired through the reinvestment of dividends and
long-term capital gains; (2) Shares held for more than six full years
from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares; (3)
Shares held for fewer than six years with respect to Class B Shares
and one full year from the date of purchase with respect to Class C
Shares on a first-in, first-out basis. A contingent deferred sales
charge is not assessed in connection with an exchange of Fund Shares
for Shares of other funds in the Federated Funds in the same class
(see "Exchange Privilege"). In determining the applicability of the
contingent deferred sales charge, the required holding period for your
new Shares received through an exchange will include the period for
which your original Shares were held. Moreover, the contingent
deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales
Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect
to the following redemptions: (1) redemptions following the death or
disability, as defined in Section 72(m)(7) of the Internal Revenue
Code of 1986, of the last surviving shareholder; (2) redemptions
representing minimum required distributions from an Individual
Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum
balance requirements; and (4) qualifying redemptions of Class B Shares
under a Systematic Withdrawal Program. To qualify for elimination of
the contingent deferred sales charge through a Systematic Withdrawal
Program, the redemptions of Class B Shares must be from an account:
that is at least 12 months old, has all Fund distributions reinvested
in Fund Shares, and has a value of at least $10,000 when the
Systematic Withdrawal Program is established. Qualifying redemptions
may not exceed 1.00% monthly of the account value as periodically
determined by the Fund. For more information regarding the elimination
of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary or the Fund. No
contingent deferred sales charge will be imposed on redemptions of
Shares held by Directors, employees and sales representatives of the
Fund, the distributor, or affiliates of the Fund or distributor, and
their immediate family members; employees of any financial institution
that sells Shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the
aforementioned persons. Finally, no contingent deferred sales charge
will be imposed on the redemption of Shares originally purchased
through a bank trust department, an investment adviser registered
under the Investment Advisers Act of 1940 or retirement plans where
the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other
financial institution, to the extent that no payments were advanced
for purchases made through such entities. The Fund reserves the right
to discontinue or modify the elimination of the contingent deferred
sales charge. Shareholders will be notified of a discontinuation. Any
shares purchased prior to the termination of such waiver would have
the contingent deferred sales charge eliminated as provided in the
Fund's prospectus at the time of the purchase of the Shares. If a
shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or the transfer agent in writing that the
shareholder is entitled to such elimination.
ACCOUNT AND SHARE INFORMATION
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions
(except for systematic program transactions). In addition,
shareholders will receive periodic statements reporting all account
activity, including dividends paid. The Fund will not issue share
certificates.
DIVIDENDS
Dividends are declared and paid monthly to all shareholders invested
in the Fund on the record date. Dividends and distributions are
automatically reinvested in additional Shares of the Fund on payment
dates at the ex-dividend date net asset value without a sales charge,
unless shareholders request cash payments on the new account form or
by contacting the transfer agent. All shareholders on the record date
are entitled to the dividend. If Shares are redeemed or exchanged
prior to the record date or purchased after the record date, those
Shares are not entitled to that month's dividend.
CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the
Fund may redeem Shares in any account, except retirement plans, and
pay the proceeds to the shareholder if the account balance falls below
the Class A Share required minimum value of $500 or the required
minimum value of $1,500 for Class B Shares and Class C Shares. This
requirement does not apply, however, if the balance falls below the
required minimum value because of changes in the net asset value of
the respective Share Class. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to
purchase additional Shares to meet the minimum requirement.
FUND INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation is managed by a Board of Directors. The Directors are
responsible for managing the Corporation's business affairs and for
exercising all the Fund's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles
the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Advisers, the
Fund's investment adviser, subject to direction by the Directors. The
Adviser continually conducts investment research and supervision for
the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.
Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Directors, and could result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .75%
of the Fund's average daily net assets. The fee paid by the Fund,
while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by other mutual funds with similar
objectives and policies. The Adviser may voluntarily waive a portion
of its fee or reimburse the Fund for certain operating expenses. The
Adviser can terminate this voluntary waiver at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Advisers, a Delaware business trust organized on April 11,
1989, is a registered investment adviser under the Investment Advisers
Act of 1940. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust,
the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated
Investors.
Federated Advisers and other subsidiaries of Federated Investors serve
as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative
services to a number of investment companies. With over $110 billion
invested across over 300 funds under management and/or administration
by its subsidiaries, as of December 31, 1996, Federated Investors is
one of the largest mutual fund investment managers in the United
States. With more than 2,000 employees, Federated continues to be led
by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions
nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since
June, 1992 and is responsible for managing the allocation of fixed
income assets (between investment grade and high yield). Mr.
Balestrino also manages the investment grade portion of the Fund. Mr.
Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Fund's investment adviser since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser from
1991 until 1995. Mr. Balestrino is a Chartered Financial Analyst and
received his Master's Degree in Urban and Regional Planning from the
University of Pittsburgh.
Mark E. Durbiano has been the Fund's portfolio manager since
June, 1992 and is responsible for managing the high yield portion of
the Fund. Mr. Durbiano joined Federated Investors in 1982 and has been
a Senior Vice President of the Fund's investment adviser since January
1996. From 1988 through 1995, Mr. Durbiano was a Vice President of the
Fund's investment adviser. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. Federated Securities Corp. is located at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
The distributor will pay dealers an amount equal to 5.5% of the net
asset value of Class B Shares purchased by their clients or customers.
These payments will be made directly by the distributor from its
assets, and will not be made from the assets of the Fund. Dealers may
voluntarily waive receipt of all or any portion of these payments. The
distributor may pay a portion of the distribution fee discussed below
to financial institutions that waive all or any portion of the advance
payments.
The distributor may offer to pay financial institutions an amount
equal to 1% of the net asset value of Class C Shares purchased by
their clients or customers at the time of purchase. These payments
will be made directly by the distributor from its assets, and will not
be made from assets of the Fund. Financial institutions may elect to
waive the initial payment described above; such waiver will result in
the waiver by the Fund of the otherwise applicable contingent deferred
sales charge.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Investment
Company Act Rule 12b-1 (the "Distribution Plan"), the distributor may
be paid a fee in an amount computed at an annual rate of up to .25%
for Class A Shares and up to .75% for Class B Shares and Class C
Shares of the average daily net assets of each class of Shares to
finance any activity which is principally intended to result in the
sale of Shares subject to the Distribution Plan. The Fund does not
currently make payments to the distributor or charge a fee under the
Distribution Plan for Class A Shares, and shareholders of Class A
Shares will be notified if the Fund intends to charge a fee under the
Distribution Plan. For Class A Shares and Class C Shares, the
distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related
support services as agents for their clients or customers. With
respect to Class B Shares, because distribution fees to be paid by the
Fund to the distributor may not exceed an annual rate of .75% of each
class of Shares' average daily net assets, it will take the
distributor a number of years to recoup the expenses it has incurred
for its sales services and distribution-related support services
pursuant to the Plan. The Distribution Plan is a compensation type
plan. As such, the Fund makes no payments to the distributor except as
described above. Therefore, the Fund does not pay for unreimbursed
expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund,
interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses.
However, the distributor may be able to recover such amounts or may
earn a profit from future payments made by Shares under the Plan.
In addition, the Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of
Federated Investors, under which the Fund may make payments up to .25%
of the average daily net asset value of Class A Shares, Class B
Shares, and Class C Shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts
("shareholder services"). Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder
services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
With respect to Class A Shares, Class B Shares, and Class C Shares, in
addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services may pay supplemental fees from their
own assets to financial institutions as financial assistance for
providing substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring
sales, educational and training seminars for their employees,
providing sales literature, and engineering computer software programs
that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells
or may sell, and/or upon the type and nature of sales or marketing
support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the
Corporation. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:
Maximum
Administrative Average Aggregate
Fee Daily Net Assets
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be at
least $125,000 per portfolio and $30,000 per each additional class of
Shares. Federated Services Company may choose voluntarily to waive a
portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director
elections and other matters submitted to shareholders for vote. All
Shares of each portfolio or class in the Fund have equal voting
rights, except that in matters affecting only a particular portfolio
or class, only Shares of that portfolio or class are entitled to vote.
As of October 14, 1997, Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, acting in various capacities for numerous
accounts, was the owner of record of approximately 1,359,134 (36.22%)
of the Class C Shares of the Fund, and therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As a Maryland corporation, the Corporation is not required to hold
annual shareholder meetings. Shareholder approval will be sought only
for certain changes in the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a
special meeting. A special meeting of shareholders shall be called by
the Directors upon the written request of shareholders owning at least
10% of the Fund's outstanding Shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded
to such companies.
The Fund will be treated as a single separate entity for federal
income tax purposes so that income (including capital gains) and
losses realized by the Corporation's other portfolios, if any, will
not be combined for tax purposes with those realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal
income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and
distributions are received in cash or as additional Shares.
Distributions representing long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains no matter how long
the shareholders have held the Shares. No federal income tax is due on
any dividends earned in an IRA or qualified retirement plan until
distributed.
STATE AND LOCAL TAXES
Fund Shares are exempt from personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for
each class of Shares including Class F Shares (described under "Other
Classes of Shares").
Total return represents the change, over a specific period of time, in
the value of an investment in each class of Shares after reinvesting
all income and capital gains distributions. It is calculated by
dividing that change by the initial investment and is expressed as a
percentage.
The yield of each class of Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of Shares over a thirty-day period by
the maximum offering price per share of each class on the last day of
the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually
earned by each class of Shares and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
The performance information reflects the effect of non-recurring
charges, such as the maximum sales charge or contingent deferred sales
charges, which, if excluded, would increase the total return and
yield.
Total return and yield will be calculated separately for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares.
From time to time, advertisements for the Class A Shares, Class B
Shares, Class C Shares, and Class F Shares of the Fund may refer to
ratings, rankings, and other information in certain financial
publications and/or compare the performance of Class A Shares, Class B
Shares, Class C Shares, and Class F Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Class F Shares.
Class F Shares are sold primarily to customers of financial
institutions subject to a front-end sales charge, a contingent
deferred sales charge and a minimum initial investment of $1,500,
unless the investment is in a retirement account in which the minimum
investment is $50.
Shares and Class F Shares are subject to certain of the same expenses;
however, the front-end sales charge for Class F Shares is lower than
that for
Class A Shares. Expense differences, however, between Shares and
Class F Shares may affect the performance of each class.
To obtain more information and a prospectus for Class F Shares,
investors may call 1-800-341-7400 or contact their financial
institution.
<PAGE>
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard &
Poor's Ratings Group. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A--Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB--Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal payments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal.
CC--The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is
being paid.
D--Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
BA--Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
CA--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB--Bonds considered to be investment grade and of satisfactory
credit quality. The obligator's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B--Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential
for recovery on these bonds, and D represents the lowest potential for
recovery.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate
liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment. F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.
<PAGE>
ADDRESSES
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Series Funds, Inc.
Federated Bond Fund
Class A Shares
Class B Shares
Class C Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian
State Street Bank and
Trust Company P.O. Box 8600
Boston, Massachusetts 02266-8600
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder
Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Independent Auditors
Ernst & Young LLP One Oxford Center
Pittsburgh, Pennsylvania 15219
</TABLE>
FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.
CLASS A SHARES, CLASS B SHARES
CLASS C SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
December 31, 1997
[GRAPHIC OMITTED]
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 461444507
Cusip 461444606
Cusip 461444705
G01271-01 (12/97)
[GRAPHIC OMITTED]
FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS F SHARES
PROSPECTUS
The shares of Federated Bond Fund (the "Fund") represent interests in
a diversified portfolio of securities which is an investment portfolio
of Investment Series Funds, Inc. (the "Corporation"), an open-end
management investment company (a mutual fund).
The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital by
investing primarily in a portfolio of investment grade bonds.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This prospectus contains the information you should read and know
before you invest in Class F Shares of the Fund. Keep this prospectus
for future reference.
The Fund has also filed with the Securities and Exchange Commission
("SEC") a Statement of Additional Information dated December 31, 1997
for Class A Shares, Class B Shares, Class C Shares, and Class F
Shares. The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may
request a copy of the Statement of Additional Information or a paper
copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain
other information, or make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information,
material incorporated by reference into this document and other
information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated December 31, 1997
<PAGE>
TABLE OF CONTENTS
Summary Of Fund Expenses.......................1
Financial Highlights...........................2
General Information............................3
Investment Information.........................3
Investment Objective........................3
Investment Policies.........................3
Investment Limitations........................13
Net Asset Value...............................13
Investing In Class F Shares...................14
Share Purchases............................14
Minimum Investment Required................15
What Shares Cost...........................15
Eliminating The Sales Charge...............15
Systematic Investment Program..............17
Exchange Privileges........................17
Certificates And Confirmations.............17
Dividends And Distributions................17
Retirement Plans...........................17
Redeeming Class F Shares......................17
Through A Financial Institution............18
Contingent Deferred Sales Charge...........19
Systematic Withdrawal Program..............20
Accounts With Low Balances.................20
Exchanges For Shares Of Other Funds........20
Fund Information..............................20
Management Of The Corporation..............20
Distribution Of Class F Shares.............22
Administration Of The Fund.................22
Shareholder Information.......................23
Voting Rights..............................23
Tax Information...............................23
Federal Income Tax.........................23
State And Local Taxes......................23
Performance Information.......................24
Other Classes Of Shares.......................24
Appendix......................................25
Addresses.....................................27
<PAGE>
28
SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
<PAGE>
FEDERATED BOND FUND
FINANCIAL HIGHLIGHTS--CLASS F SHARES
<PAGE>
GENERAL INFORMATION
The Corporation was organized under the laws of the State of Maryland
on May 20, 1992. Prior to February 5, 1993, the Fund was operated as a
portfolio of Investment Series Trust, a Massachusetts business trust
established pursuant to a Declaration of Trust dated March 17, 1987.
The Articles of Incorporation permit the Fund to offer separate series
of shares of beneficial interest representing interests in separate
portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date
of this prospectus, the Board of Directors (the "Directors") has
established four classes of shares, known as Class A Shares, Class B
Shares, Class C Shares, and Class F Shares. This prospectus relates
only to Class F Shares ("Shares," or "Class F Shares," as the context
requires) of the Fund.
Shares of the Fund are designed primarily for individuals and
institutions seeking as high a level of current income as is
consistent with the preservation of capital by investing in a
portfolio of investment grade bonds. A minimum initial investment of
$1,500 is required, unless the investment is in a retirement account,
in which case the minimum initial investment is $50.
Shares are sold at net asset value plus an applicable sales charge and
are redeemed at net asset value. However, a contingent deferred sales
charge is imposed on Shares, other than shares purchased through
reinvestment of dividends, which are redeemed within one to four years
of their purchase date.
The Fund's current net asset value and offering price can be found in
the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus. The investment objective stated above
cannot be changed without the approval of shareholders. Unless stated
otherwise, the investment policies of the Fund described below may be
changed without shareholder approval.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a professionally managed, diversified
portfolio of bonds. Under normal circumstances, at least 65% of the
Fund's net assets will be invested in such bonds. Additionally, at
least 65% of the Fund's net assets will be invested in investment
grade securities, including repurchase agreements collateralized by
such investment grade securities. Investment grade securities are
generally described as securities that are rated in one of the top
four rating categories by a nationally recognized statistical rating
organization ("NRSRO"), such as Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P"), or Fitch
Investors Service, Inc. ("Fitch") or that are unrated but determined
by the Fund's investment adviser to be of comparable quality. A
description of the ratings categories is contained in the Appendix to
this prospectus. Permitted investments include:
o domestic or foreign corporate debt obligations;
o obligations of the United States;
o notes, bonds, and discount notes of the following U.S.
government agencies or instrumentalities, such as Federal
Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Farm Credit
System (including the National Bank for Cooperatives and
Banks for Cooperatives), Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration;
o taxable municipal debt obligations (as a matter of
operating policy, the lowest rated municipal debt
obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable
quality in the judgment of the Fund's investment
adviser);
o asset-backed securities;
o commercial paper that matures in 270 days or less and
is rated A-1 or A-2 by S&P, P-1 or P-2 by Moody's, or
F-1 or F-2 by Fitch;
o time and savings deposits (including certificates of
deposit) in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF"), or in
institutions whose accounts are insured by the Savings
Association Insurance Fund ("SAIF"), including
certificates of deposit issued by, and other time deposits
in, foreign branches of BIF-insured banks which, if
negotiable, mature in six months or less or if not
negotiable, either mature in ninety days or less, or may
be withdrawn upon notice not exceeding ninety days;
o bankers' acceptances issued by a BIF-insured bank, or
issued by the bank's Edge Act subsidiary and guaranteed by
the bank, with remaining maturities of nine months or
less. The total acceptances of any bank held by the Fund
cannot exceed 0.25% of such bank's total deposits
according to the bank's last published statement of
condition preceding the date of acceptance;
o convertible securities, irrespective of their ratings;
o preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon and/or
convertible securities;
o convertible securities, irrespective of their ratings;
o equity securities;
o other securities which are deemed by the Fund's investment
adviser, Federated Advisers (the "Adviser"), to be consistent with the
Fund's investment objective; and
o repurchase agreements collateralized by acceptable investments.
Under normal circumstances, the Fund will not invest more than 10% of
its total assets in equity securities.
CORPORATE DEBT OBLIGATIONS
Although the corporate debt obligations in which the Fund will
invest primarily are rated as investment grade by an NRSRO, or of
comparable quality in the judgment of the Adviser, the Fund may invest
not more than 35% of its net assets in corporate debt obligations that
are not investment grade, but are rated in any category below BBB or
Baa or are of comparable quality in the judgment of the Adviser (i.e.
"junk bonds") and may include bonds in default. Corporate debt
obligations that are below investment grade are high-yield, high-risk
securities, typically subject to greater market fluctuations and
greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment grade securities, lower
rated securities tend to reflect short-term corporate, economic, and
market developments, as well as investor perceptions of the issuer's
credit quality. In addition, lower rated securities may be more
difficult to dispose of or to value than higher rated, lower-yielding
securities. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and
interest payments with respect to these securities than for higher
rated securities.
The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates.
As a Percentage of Total
Market Value of Bond
Credit Rating Holdings as of October 31, 1997
BB ___%
B ___%
CC & CCC ___%
___%
U.S. GOVERNMENT OBLIGATIONS
The U.S. government obligations in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities. These
securities include, but are not limited to:
o direct obligations of the U.S. Treasury, such as U.S.
Treasury bills, notes, and bonds;
o notes, bonds, and discount notes issued or guaranteed
by U.S. government agencies and instrumentalities
supported by the full faith and credit of the United
States;
o notes, bonds, and discount notes of U.S. government
agencies or instrumentalities which receive or have
access to federal funding; and
o notes, bonds and discount notes of other U.S.
government instrumentalities supported only by the
credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government are backed by the full faith
and credit of the U.S. Treasury. No assurances can be given that the
U.S. government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. These agencies
and instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a
specific line of credit from the U.S. Treasury;
o discretionary authority of the U.S. government to
purchase certain obligations of an agency or
instrumentality; or
o the credit of the agency or instrumentality.
MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works such
as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works.
They are also issued to repay outstanding obligations, to raise funds
for general operating expenses, and to make loans to other public
institutions and facilities. Municipal securities include industrial
development bonds issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local
employment.
ASSET-BACKED SECURITIES
Asset-backed securities are created by the grouping of certain
governmental, government related and private loans, receivables and
other lender assets including vehicle installment purchase obligations
and credit card receivables into pools. Interests in these pools are
sold as individual securities and are not backed or guaranteed by the
U.S. government and may not be secured. Payments from the asset pools
may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular
installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive
payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear
different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during
periods of declining mortgage interest rates, because many borrowers
refinance their mortgages to take advantage of the more favorable
rates. Depending upon market conditions, the yield that the Fund
receives from the reinvestment of such prepayments, or any scheduled
principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less
potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be
allocated to one tranch of securities ahead of other tranches, in
order to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent
that the prepaid mortgage securities were purchased at a market
premium over their stated amount. Conversely, the prepayment of
mortgage securities purchased at a market discount from their stated
principal amount will accelerate the recognition of interest income by
the Fund, which would be taxed as ordinary income when distributed to
the shareholders.
The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The
credit quality of most asset-backed securities depends primarily upon
the credit quality of the assets underlying such securities, how well
the entity issuing the securities is insulated from the credit risk of
the originator or any other affiliated entities, and the amount and
quality of any credit enhancement to such securities.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may invest in non-mortgage related asset-backed securities
including, but not limited to, interests in pools of receivables, such
as credit card and accounts receivable and motor vehicle and other
installment purchase obligations and leases. These securities may be
in the form of pass-through instruments or asset-backed obligations.
The securities, all of which are issued by non-governmental entities
and carry no direct or indirect government guarantee, are structurally
similar to collateralized mortgage obligations and mortgage
pass-through securities, which are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed
securities. These types of investments may include adjustable rate
mortgage securities, collateralized mortgage obligations, real estate
mortgage investment conduits, or other securities collateralized by or
representing an interest in real estate mortgages (collectively,
"mortgage securities"). Many mortgage securities are issued or
guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMs are pass-through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMs in
which the Fund invests are issued by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC") and
are actively traded. The underlying mortgages which collateralize ARMs
issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMs issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
CMOs are bonds issued by single-purpose, stand-alone finance
subsidiaries or trusts of financial institutions, government agencies,
investment bankers, or companies related to the construction industry.
CMOs purchased by the Fund may be:
o collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S.
government;
o collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer
and such guarantee is collateralized by U.S. government
securities; or
o securities in which the proceeds of the issuance are
invested in mortgage securities and payment of the
principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a
NRSRO.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions
of the Internal Revenue Code (the "Code"). Issuers of REMICs may take
several forms, such as trusts, partnerships, corporations,
associations, or segregated pools of mortgages. Once REMIC status is
elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and taxed to
the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests,"
some of which may offer adjustable rates of interest, and a single
class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
RESETS OF INTEREST
The interest rates paid on the ARMs, CMOs, and REMICs in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost
of funds index or a moving average of mortgage rates. Commonly
utilized indices include the one-year and five-year constant maturity
Treasury Note rates, the three-month Treasury Bill rate, the 180-day
Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant
maturity Treasury Note rate, closely mirror changes in market interest
rate levels. Others tend to lag changes in market rate levels and tend
to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility
than adjustable rate mortgage securities that closely mirror the
market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market
rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event the Fund
purchases such residual interest mortgage securities, it will factor
in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMs, CMOs, and
REMICs in which the Fund invests will frequently have caps and floors
which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or
adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes.
These payment caps may result in negative amortization. The value of
mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the
allowable caps or floors on the underlying residential mortgage loans.
Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an
institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of
Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). Due to
the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to
domestic banks, such as the reserve requirements, loan limitations,
examination, accounting, auditing, recordkeeping, and the public
availability of information, these investments may present additional
risks to investors.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be
exchanged for or converted into common stock of the issuer or a
related financial entity (for example, a merged or acquired company or
partner). Convertible securities may include, but are not limited to:
convertible bonds or debentures; convertible preferred stock; units
consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security held, such as
DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable for
Common Stock when issued as a debt security), LYONS--(Liquid Yield
Option Notes, which are corporate bonds that are purchased at prices
below par with no coupons and are convertible into stock),
PERCS--(Preferred Equity Redeemable Stock, an equity issue that pays a
high cash dividend, has a cap price and mandatory conversion to common
stock at maturity), and PRIDES--(Preferred Redeemable Increased
Dividend Securities, which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).
Convertible securities are often rated below investment grade or
not rated because they fall below debt obligations and just above
common equity in order of preference or priority on the issuer's
balance sheet. Hence, an issuer with investment grade senior debt may
issue convertible securities with ratings less than investment grade
or not rated. The Fund does not limit convertible securities by
rating, and there is no minimal acceptance rating for a convertible
security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This
could result in the Fund purchasing and holding, without limit,
convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating
below investment grade after the Fund has purchased it. Convertible
securities rated below investment grade may be subject to some of the
same risks as those inherent in junk bonds.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are
issued at a discount to their face amount and do not entitle the
holder to any periodic payments of interest prior to maturity. Rather,
interest earned on zero coupon convertible securities accretes at a
stated yield until the security reaches its face amount at maturity.
Zero coupon convertible securities are convertible into a specific
number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide
the holder with the opportunity to put the bonds back to the issuer at
a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Federal income tax law requires the holder of a zero coupon
convertible security to recognize income with respect to the security
prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability of federal
income taxes, the Fund will be required to distribute income accrued
with respect to zero coupon convertible securities which it owns, and
may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest in restricted securities and as a matter of
fundamental investment policy, which may not be changed without
shareholder approval, will limit such investments to no more than 10%
of its net assets. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. However, the Fund will limit investments in illiquid
securities, including repurchase agreements providing for settlement
in more than seven days after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under the federal securities laws, and is generally sold
to institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that
Section 4(2) commercial paper, and possibly certain other restricted
securities which meet the criteria for liquidity established by the
Directors, are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity
established by the Directors, including Section 4(2) commercial paper,
as determined by the Adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities.
FOREIGN SECURITIES
The Fund may invest in foreign securities within the parameters of its
investment objective, policies, and limitations. Investments in
foreign securities, particularly those of non-governmental issuers,
involve considerations which are not ordinarily associated with
investments in domestic issuers. These considerations include the
possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political,
social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to
enforce contractual obligations abroad than would be the case in the
United States because of differences in the legal systems. Transaction
costs in foreign securities may be higher. The Adviser will consider
these and other factors before investing in foreign securities and
will not make such investments unless, in its opinion, such
investments will meet the Fund's standards and objectives.
With respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income
securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a
spot or forward basis in connection with these investments. The
Adviser will allocate investments among securities of particular
issuers on the basis of its views as to the best values then currently
available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled
with expectations regarding the economy, movements in the general
level and term of interest rates, currency values, political
developments and variations in the supply of funds available for
investment in the world bond market relative to the demands placed
upon it.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment
companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain
expenses, such as management fees, and, therefore, any investment by
the Fund in shares of other investment companies may be subject to
such duplicate expenses.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during
times of unusual market conditions for defensive purposes and to
maintain liquidity.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and
price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. Repurchase agreements
are included within the definition of investment grade securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The
seller's failure to complete the transaction may cause the Fund to
miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the
market values of the securities purchased may vary from the purchase
prices.
The Fund may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Fund may enter
in transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. The Fund may realize
short-term profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities on a short-term or long-term basis up to one-third of the
value of its total assets to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form
of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, disposition
of the securities may be delayed pending court action.
PUT AND CALL OPTIONS
The Fund may purchase put options on financial futures contracts and
put options on portfolio securities. Financial futures may include
index futures. These options will be used as a hedge to attempt to
protect securities which the Fund holds against decreases in value.
For the immediate future, the Fund will enter into futures contracts
directly only when it desires to exercise a financial futures put
option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only purchase puts on financial
futures contracts which are traded on a nationally recognized
exchange.
The Fund will generally purchase over-the-counter put options on
portfolio securities in negotiated transactions with the writers of
the options since options on the portfolio securities held by the Fund
are typically not traded on an exchange. The Fund purchases options
only from investment dealers and other financial associations (such as
commercial banks or savings associations) deemed creditworthy by the
Adviser.
In general, over-the-counter put options differ from exchange traded
put options in the following respects. Over-the-counter put options
are two party contracts with price and terms negotiated between buyer
and seller, and such options are endorsed and/or guaranteed by third
parties (such as a New York Stock Exchange member). Additionally,
over-the-counter strike prices are adjusted to reflect dividend
payments, initial strike prices are generally set at market, and
option premiums (which are all time premiums) are amortized on a
straight line basis over the life of the option. In contrast, exchange
traded options are third-party contracts with standardized strike
prices and expiration dates and are purchased from the Clearing
Corporation. Strike prices are not adjusted for dividends, and options
are marked to market, thereby obviating the need to amortize the time
premium. Exchange traded options have a continuous liquid market while
over-the-counter options do not.
The Fund may also write call options on all or any portion of its
portfolio in an effort to generate income for the Fund. The Fund will
write call options on securities either held in its portfolio or which
it has the right to obtain without payment of further consideration or
for which it has segregated cash in the amount of any additional
consideration. The call options which the Fund writes and sells must
be listed on a recognized options exchange. Although the Fund reserves
the right to write covered call options on its entire portfolio, it
will not write such options on more than 25% of its total assets
unless a higher limit is authorized by its Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.
Risks. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund purchases puts on financial futures contracts
to protect against declines in prices of portfolio securities, there
is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures
contract and its corresponding put to react differently than the
portfolio securities to market changes. In addition, the Adviser could
be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In such an event, the
Fund may lose the purchase price of the put option. Finally, it is not
certain that a secondary market for options will exist at all times.
Although the Adviser will consider liquidity before entering into
option transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any
particular time. The Fund's ability to establish and close out option
positions depends on this secondary market.
DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain
contracts (including, futures, forward, option and swap contracts)
that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities
that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." The term has also been applied
to securities "derived" from the cash flows from underlying
securities, mortgages or other obligations.
Derivative contracts and securities can be used to reduce or increase
the volatility of an investment portfolio's total performance. While
the response of certain derivative contracts and securities to market
changes may differ from traditional investments, such as stock and
bonds, derivatives do not necessarily present greater market risks
than traditional investments. The Fund will only use derivative
contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that
could be characterized as derivatives, such as asset-backed securities
and mortgage-backed securities, including ARMs, CMOs, and REMICs, it
will only do so in a manner consistent with its investment objectives,
policies and limitations.
INVESTMENT LIMITATIONS
The Fund will not:
o borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a
portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of those assets
to secure such borrowings;
o lend any of its assets except portfolio securities up to one-third
of the value of its total assets;
o sell securities short except, under strict limitations, it
may maintain open short positions so long as not more than
10% of the value of its net assets is held as collateral
for those positions; nor with respect to 75% of the value
of its total assets, invest more than 5% in securities of
any one issuer other than cash, cash items or securities
issued or guaranteed by the government of the United
States, its agencies, or instrumentalities and repurchase
agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder
approval.
NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value
for Shares is determined by adding the interest of the Class F Shares
in the market value of all securities and other assets of the Fund,
subtracting the interest of the Class F Shares in the liabilities of
the Fund and those attributable to Class F Shares, and dividing the
remainder by the total number of Class F Shares outstanding. The net
asset value for Class F Shares may differ from that of Class A Shares,
Class B Shares, and Class C Shares due to the variance in daily net
income realized by each class. Such variance will reflect only accrued
net income to which the shareholders of a particular class are
entitled.
The net asset value is determined as of the close of trading
(normally 4:00 p.m., Eastern time) on the New York Stock Exchange,
Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days
during which no shares are tendered for redemption and no orders to
purchase shares are received; or (iii) the following holidays: New
Year's Day, Martin Luther King Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
INVESTING IN CLASS F SHARES
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange is open.
Shares may be purchased through a financial institution that has a
sales agreement with the distributor, or directly from the
distributor, Federated Securities Corp., either by mail or by wire. In
connection with the sale of Shares, Federated Securities Corp. may
from time to time offer certain items of nominal value to any
shareholder or investors. The Fund reserves the right to reject any
purchase request.
THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or
an investment dealer) to place an order to purchase Shares. Orders
through a financial institution are considered received when the Fund
is notified of the purchase order. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00
p.m. (Eastern time) and must be transmitted by the broker to the Fund
before 5:00 p.m. (Eastern time) in order for Shares to be purchased at
that day's price. Purchase orders through other financial institutions
must be received by the financial institution and transmitted to the
Fund before 4:00 p.m. (Eastern time) in order for Shares to be
purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly.
The financial institution which maintains investor accounts with the
Fund must do so on a fully disclosed basis unless it accounts for
share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition,
advance payments made to financial institutions may be subject to
reclaim by the distributor for accounts transferred to financial
institutions which do not maintain investor accounts on a fully
disclosed basis and do not account for share ownership periods (see
"Other Payments to Financial Institutions").
DIRECTLY BY MAIL
To purchase Shares by mail directly from Federated Securities Corp.:
o complete and sign the new account form available from the Fund;
o enclose a check made payable to Federated Bond Fund--Class F
Shares; and
o mail both to the Fund's transfer agent, Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600.
Orders by mail are considered received after payment by check is
converted by the transfer agent's bank into federal funds. This is
generally the next business day after the transfer agent's bank
receives the check.
DIRECTLY BY WIRE
To purchase Shares directly from Federated Securities Corp. by Federal
Reserve wire, call the Fund. All information needed will be taken over
the telephone, and the order is considered received when the transfer
agent's bank receives payment by wire.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,500, except for an IRA
account, which requires a minimum initial investment of $50.
Subsequent investments must be in amounts of at least $100, except for
an IRA account, which must be in amounts of at least $50.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an
order is received, plus a sales charge of 1.00% of the offering price
(which is 1.01% of the net amount invested). There is no sales charge
for purchases of $1 million or more.
In addition, no sales charge is imposed for Shares purchased through
bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients,
or by sales representatives, Directors, and employees of the Fund, the
Adviser, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., their spouses and children under age 21, or any trusts or
pension or profit-sharing plans for these persons or retirement plans
where the third party administrator has entered into certain
arrangements with Federated Securities Corp., or its affiliates, to
the extent that no payment was advanced for purchases made by such
entities. Unaffiliated institutions through whom Shares are purchased
may charge fees for services provided which may be related to the
ownership of Fund Shares. This prospectus should, therefore, be read
together with any agreement between the customer and the institution
with regard to services provided, the fees charged for these services,
and any restrictions and limitations imposed. Under certain
circumstances, described under "Redeeming Class F Shares,"
shareholders may be charged a contingent deferred sales charge by the
distributor at the time Shares are redeemed.
DEALER CONCESSION
For sales of Shares, broker/dealers will normally receive 100% of the
applicable sales charge. Any portion of the sales charge which is not
paid to a broker/dealer will be retained by the distributor. However,
from time to time, and at the sole discretion of the distributor, all
or a part of that portion may be paid to a dealer. The sales charge
for Shares sold other than through registered broker/dealers will be
retained by Federated Securities Corp. Federated Securities Corp. may
pay fees to banks out of the sales charge in exchange for sales and/or
administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of
Shares.
ELIMINATING THE SALES CHARGE
The sales charge can be eliminated on the purchase of Shares through:
o quantity discounts and accumulated purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
There is no sales charge for purchases of $1 million or more. The Fund
will combine purchases made on the same day by the investor, his
spouse, and his children under age 21 when it calculates the sales
charge.
If an additional purchase of Shares is made, the Fund will consider
the previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public
offering price of $900,000 and he purchases $100,000 more at the
current public offering price, there will be no sales charge on the
additional purchase. The Fund will also combine purchases for the
purpose of reducing the contingent deferred sales charge imposed on
some Share redemptions. For example, if a shareholder already owns
Shares having current value at a public offering price of $1 million
and purchases an additional $1 million at the current public offering
price, the applicable contingent deferred sales charge would be
reduced to .50% of those additional Shares. For more information on
the levels of contingent deferred sales charges and holding periods,
see the section entitled "Contingent Deferred Sales Charge."
To receive the sales charge elimination and/or the contingent deferred
sales charge reduction, Federated Securities Corp. must be notified by
the shareholder in writing or by the shareholder's financial
institution at the time the purchase is made that Shares are already
owned or that purchases are being combined. The Fund will eliminate
the sales charge and/or reduce the contingent deferred sales charge
after it confirms the purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $1 million of Shares
over the next 13 months, the sales charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a
provision for a sales charge elimination depending on the amount
actually purchased within the 13-month period and a provision for the
Fund's custodian to hold 1.00% of the total amount intended to be
purchased in escrow (in Shares) until such purchase is completed.
The 1.00% held in escrow will be applied to the shareholder's
account at the end of the 13-month period unless the amount specified
in the letter of intent, which must be $1 million or more of Shares,
is not purchased. In this event, an appropriate number of escrowed
Shares may be redeemed in order to realize the 1.00% sales charge.
This letter of intent also includes a provision for reductions in the
contingent deferred sales charge and holding period depending on the
amount actually purchased within the 13-month period. For more
information on the various levels of contingent deferred sales charges
and holding periods, see the section entitled "Contingent Deferred
Sales Charge."
This letter of intent will not obligate the shareholder to
purchase Shares. The letter may be dated as of a prior date to include
any purchases made within the past 90 days (purchases within the prior
90 days may be used to fulfill the requirements of the letter of
intent; however, the sales charge on such purchases will not be
adjusted to reflect a lower sales charge).
REINVESTMENT PRIVILEGE
If Shares have been redeemed, the shareholder has a one-time right,
within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated
Securities Corp. must be notified by the shareholder in writing or by
his financial institution of the reinvestment in order to receive this
elimination of the sales charge. If the shareholder redeems his
Shares, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge elimination, a
shareholder has the privilege of combining concurrent purchases of two
or more Class F Shares in certain other funds for which affiliates of
Federated Investors serve as principal underwriter or investment
adviser ("Federated Funds"), the purchase price of which includes a
sales charge. For example, if a shareholder concurrently invested
$400,000 in Class F Shares of one of the other Federated Funds, and
$600,000 in Shares, the sales charge would be eliminated.
To receive this sales charge elimination, Federated Securities
Corp. must be notified by the shareholder in writing or by his
financial institution at the time the concurrent purchases are made.
The Fund will eliminate the sales charge after it confirms the
purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in amounts of not less than $100 per
transaction. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in
Shares at the net asset value next determined after an order is
received by the Fund, plus the 1.00% sales charge for purchases under
$1 million. A shareholder may apply for participation in this program
through Federated Securities Corp. or his financial institution.
EXCHANGE PRIVILEGES
Class F Shares in the Federated Funds may be exchanged for Shares at
net asset value without a sales charge (if previously paid) or a
contingent deferred sales charge.
Shareholders using this privilege must exchange Shares having a net
asset value equal to the minimum investment requirements of the fund
into which the exchange is being made. Shareholders who desire to
automatically exchange Shares of a predetermined amount on a monthly,
quarterly, or annual basis may take advantage of a systematic exchange
privilege. Further information on these exchange privileges is
available by calling Federated Securities Corp. or the shareholder's
financial institution.
Please contact your financial institution directly or Federated
Securities Corp. at 1-800-341-7400 for information on and prospectuses
for the Federated Funds into which your Shares may be exchanged free
of charge.
CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions
(except for systematic program transactions). In addition,
shareholders will receive periodic statements reporting all account
activity, including dividends paid. The Fund will not issue share
certificates.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid monthly to all shareholders invested
in the Fund on the record date. Distributions of any net realized
long-term capital gains will be made at least once every twelve
months. Dividends and distributions are automatically reinvested in
additional Shares on payment dates at the ex-dividend date net asset
value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the transfer agent.
RETIREMENT PLANS
Shares of the Fund can be purchased as an investment for
retirement plans (including 401(k) and 403(b) plans) or for individual
retirement accounts (IRAs). For further details, contact Federated
Securities Corp. and consult with a tax adviser.
REDEEMING CLASS F SHARES
The Fund redeems Shares at their net asset value, less any applicable
contingent deferred sales charge, next determined after the Fund
receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests must
be received in proper form and can be made through a financial
institution or directly from the Fund by written request.
THROUGH A FINANCIAL INSTITUTION
A shareholder may redeem Shares by calling his financial institution
(such as a bank or an investment dealer) to request the redemption.
Shares will be redeemed at the net asset value, less any applicable
contingent deferred sales charge, next determined after the Fund
receives the redemption request from the financial institution.
Redemption requests through a registered broker/dealer must be
received by the broker before 4:00 p.m. (Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (Eastern time)
in order for Shares to be redeemed at that day's net asset value.
Redemption requests through other financial institutions must be
received by the financial institution and transmitted to the Fund
before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible
for promptly submitting redemption requests and providing proper
written redemption instructions to the Fund. The financial institution
may charge customary fees and commissions for this service. If, at any
time, the Fund shall determine it necessary to terminate or modify
this method of redemption, shareholders will be promptly notified.
REDEEMING SHARES BY TELEPHONE
Shares may be redeemed in any amount by calling the Fund provided the
Fund has a properly completed authorization form. These forms can be
obtained from Federated Securities Corp. Proceeds will be mailed in
the form of a check, to the shareholder's address of record or by wire
transfer to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. The minimum amount for
a wire transfer is $1,000. Proceeds from redeemed Shares purchased by
check or through ACH will not be wired until that method of payment
has cleared. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following
business day. Questions about the telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder
services representative at the telephone number listed on your account
statement.
Telephone instructions will be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If this occurs, "Redeeming
Shares By Mail" should be considered. If at any time the Fund shall
determine it necessary to terminate or modify the telephone redemption
privilege, shareholders would be promptly notified.
REDEEMING SHARES BY MAIL
Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be
sent unendorsed with the written request by registered or certified
mail to the address noted above.
The written request should state: the Fund name and the Class
designation; the account name as registered with the Fund; the account
number; and the number of shares to be redeemed or the dollar amount
requested. All owners of the account must sign the request exactly as
the shares are registered. Normally, a check for the proceeds is
mailed within one business day, but in no event more than seven days,
after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is
processed.
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund or a redemption
payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary
public.
CONTINGENT DEFERRED SALES CHARGE
Shareholders redeeming Shares from their Fund accounts within
certain time periods of the purchase date of those Shares will be
charged a contingent deferred sales charge by the Fund's distributor
of the lesser of the original price or the net asset value of the
Shares redeemed as follows:
Contingent
Deferred
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
Up to $1,999,999 4 full years or less 1.00%
$2,000,000 to $4,999,999 2 full years or less .50%
$5,000,000 or more 1 full year or less .25%
In determining the applicability of the contingent deferred sales
charge, the required holding period for your new Class F Shares
received through an exchange will include the period for which your
original Class F Shares were held.
In instances in which Shares have been acquired in exchange for Class
F Shares in the Federated Funds, (i) the purchase price is the price
of the shares when originally purchased and (ii) the time period
during which the shares are held will run from the date of the
original purchase. The contingent deferred sales charge will not be
imposed on shares acquired through the reinvestment of dividends or
distributions of long-term capital gains. In computing the amount of
contingent deferred sales charge for accounts with shares subject to a
single holding period, if any, redemptions are deemed to have occurred
in the following order: 1) first of shares acquired through the
reinvestment of dividends and long-term capital gains, 2) second of
purchases of shares occurring prior to the number of years necessary
to satisfy the applicable holding period, and 3) finally of purchases
of shares occurring within the current holding period. For accounts
with shares subject to multiple share holding periods, the redemption
sequence will be determined first, with reinvested dividends and
long-term capital gains, and second, on a first-in, first-out basis.
The contingent deferred sales charge will not be imposed when a
redemption results from a tax-free return under the following
circumstances: (i) a total or partial distribution from a qualified
plan, other than an IRA, Keogh Plan, or a custodial account, following
retirement; (ii) a total or partial distribution from an IRA, Keogh
Plan, or a custodial account after the beneficial owner attains age
59-1/2; or (iii) from the death or disability of the beneficial owner.
The exemption from the contingent deferred sales charge for qualified
plans, an IRA, Keogh Plan, or a custodial account does not extend to
account transfers, rollovers, and other redemptions made for purposes
of reinvestment. Contingent deferred sales charges are not charged in
connection with exchanges of Shares for Class F Shares in the
Federated Funds, or in connection with redemptions by the Fund of
accounts with low balances. Shares of the Fund originally purchased
through a bank trust department or investment adviser registered under
the Investment Advisers Act of 1940, and third-party administrators
acting on behalf of deferred contribution plans, are not subject to
the contingent deferred sales charge, to the extent that no payment
was advanced for purchases made by such entities.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount may take advantage of the Systematic Withdrawal
Program. Under this program, Shares are redeemed to provide for
periodic withdrawal payments in an amount directed by the shareholder;
the minimum withdrawal amount is $100. Depending upon the amount of
the withdrawal payments, the amount of dividends paid and capital
gains distributions with respect to Shares, and the fluctuation of the
net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the
Fund. For this reason, payments under this program should not be
considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder
must have an account value of at least $10,000, other than retirement
accounts subject to required minimum distributions. A shareholder may
apply for participation in this program through Federated Securities
Corp. Due to the fact that Shares are sold with a sales charge and
contingent deferred sales charge, it is not advisable for shareholders
to be purchasing Shares while participating in this program.
A contingent deferred sales charge is charged for Shares redeemed
through this program within four years of their purchase dates.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the
Fund may redeem Shares in any account, except retirement plans, and
pay the proceeds to the shareholder if the account balance falls below
the minimum required value of $1,000. This requirement does not apply,
however, if the balance falls below $1,000 because of changes in the
Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is
notified in writing and allowed 30 days to purchase additional Shares
to meet the minimum requirement.
EXCHANGES FOR SHARES OF OTHER FUNDS
Shares may be exchanged for Class F Shares in the Federated Funds at
net asset value without a contingent deferred sales charge or a sales
charge.
Shareholders using this privilege must exchange shares having a net
asset value equal to the minimum investment required for the fund into
which the exchange is being made. A shareholder may obtain information
on the exchange privilege, and may obtain prospectuses for other
Fortress Funds and Federated Funds by calling Federated Securities
Corp. or his financial institution.
Please contact your financial institution directly or Federated
Securities Corp. at 1-800-341-7400 for information on and prospectuses
for the Federated Funds into which your Shares may be exchanged free
of charge.
FUND INFORMATION
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS
The Corporation is managed by a Board of Directors. The Directors are
responsible for managing the Corporation's business affairs and for
exercising all the Fund's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles
the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Advisers, the
Fund's investment adviser, subject to direction by the Directors. The
Adviser continually conducts investment research and supervision for
the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.
Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Directors, and could result in severe penalties.
ADVISORY FEES
The Adviser receives an annual investment advisory fee equal to .75%
of the Fund's average daily net assets. The fee paid by the Fund,
while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by other mutual funds with similar
objectives and policies. The Adviser may voluntarily waive a portion
of its fee or reimburse the Fund for certain operating expenses. The
Adviser can terminate this voluntary waiver at any time at its sole
discretion.
ADVISER'S BACKGROUND
Federated Advisers, a Delaware business trust organized on April 11,
1989, is a registered investment adviser under the Investment Advisers
Act of 1940. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust,
the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated
Investors.
Federated Advisers and other subsidiaries of Federated Investors serve
as investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative
services to a number of investment companies. With over $110 billion
invested across over 300 funds under management and/or administration
by its subsidiaries, as of December 31, 1996, Federated Investors is
one of the largest mutual fund investment managers in the United
States. With more than 2,000 employees, Federated continues to be led
by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions
nationwide.
Joseph M. Balestrino has been the Fund's portfolio manager since
June, 1992 and is responsible for managing the allocation of fixed
income assets (between investment grade and high yield). Mr.
Balestrino also manages the investment grade portion of the Fund. Mr.
Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Fund's investment adviser since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment adviser from
1991 until 1995. Mr. Balestrino is a Chartered Financial Analyst and
received his Master's Degree in Urban and Regional Planning from the
University of Pittsburgh.
Mark E. Durbiano has been the Fund's portfolio manager since
June, 1992 and is responsible for managing the high yield portion of
the Fund. Mr. Durbiano joined Federated Investors in 1982 and has been
a Senior Vice President of the Fund's investment adviser since January
1996. From 1988 through 1995, Mr. Durbiano was a Vice President of the
Fund's investment adviser. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
DISTRIBUTION OF CLASS F SHARES
Federated Securities Corp. is the principal distributor for
Shares of the Fund. Federated Securities Corp. is located at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779. It is a
Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
SHAREHOLDER SERVICES
The Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors,
under which the Fund may make payments up to .25% of the average daily
net asset value of Class F Shares, computed at an annual rate, to
obtain certain personal services for shareholders and to maintain
shareholder accounts. Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder
services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based
upon shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENT TO FINANCIAL INSTITUTIONS
The distributor will pay financial institutions, for distribution
and/or administrative services, an amount equal to 1.00% of the
offering price of the Shares acquired by their clients or customers on
purchases up to $1,999,999, .50% of the offering price on purchases of
$2,000,000 to $4,999,999, and .25% of the offering price on purchases
of $5,000,000 or more. (This fee is in addition to the 1.00% sales
charge on purchases of less that $1 million.) The financial
institutions may elect to waive the initial payment described above;
such waiver will result in the waiver by the Fund of the otherwise
applicable contingent deferred sales charge.
Furthermore, in addition to payments made pursuant to the Shareholder
Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of sales services,
distribution-related support services, or shareholder services. The
support may include participating in sales, educational and training
seminars at recreational-type facilities, providing sales literature,
and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the
amount of Shares the financial institution sells or may sell, and/or
upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services (including certain
legal and financial reporting services) necessary to operate the
Corporation and the Fund. Federated Services Company provides these at
an annual rate which relates to the average aggregate daily net assets
of all Federated Funds as specified below:
Maximum Average Aggregate
ADMINISTRATIVE FEE DAILY NET ASSETS
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of
$750 million
The administrative fee received during any fiscal year shall be
at least $125,000 per portfolio and $30,000 per each additional class
of shares. Federated Services Company may choose voluntarily to waive
a portion of its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All shares of each
portfolio or class in the Fund have equal voting rights, except that
in matters affecting only a particular portfolio or class, only shares
of that portfolio or class are entitled to vote.
As a Maryland corporation, the Corporation is not required to hold
annual shareholder meetings. Shareholder approval will be sought only
for certain changes in the Fund's operation and for the election of
Directors under certain circumstances.
Directors may be removed by the Directors or by shareholders at a
special meeting. A special meeting of shareholders shall be called by
the Directors upon the written request of shareholders owning at least
10% of the Fund's outstanding shares of all series entitled to vote.
TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded
to such companies. The Fund will be treated as a single separate
entity for federal income tax purposes so that income (including
capital gains) and losses realized by the Corporation's other
portfolios, if any, will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders are required to pay federal
income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and
distributions are received in cash or as additional Shares.
Distributions representing long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains no matter how long
the shareholders have held the Shares. No federal income tax is due on
any dividends earned in an IRA or qualified retirement plan until
distributed.
STATE AND LOCAL TAXES
Fund Shares are exempt from personal property taxes imposed by
counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield for
Class F Shares and the Fund's other classes of shares (described below
under "Other Classes of Shares").
Total return represents the change, over a specific period of time, in
the value of an investment in Class F Shares after reinvesting all
income and capital gains distributions. It is calculated by dividing
that change by the initial investment and is expressed as a
percentage.
The yield of Class F Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Class F Shares over a thirty-day period by the
maximum offering price per share of Class F Shares on the last day of
the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually
earned by Class F Shares, and therefore, may not correlate to the
dividends or other distributions paid to shareholders.
The performance information reflects the effect of the maximum sales
charge and other similar non-recurring charges, such as the contingent
deferred sales charge, which, if excluded, would increase the total
return. Total return and yield will be calculated separately for Class
A Shares, Class C Shares, and Class F Shares.
From time to time, advertisements for the Class A Shares, Class B
Shares, Class C Shares, and Class F Shares of the Fund may refer to
ratings, rankings, and other information in certain financial
publications and/or compare the performance of Class A Shares, Class B
Shares, Class C Shares and Class F Shares to certain indices.
OTHER CLASSES OF SHARES
The Fund also offers other classes of shares called Class A Shares,
Class B Shares, and Class C Shares which are all sold primarily to
customers of financial institutions.
Class A Shares are sold subject to a front-end sales charge, a
Rule 12b-1 Plan and a Shareholder Services Agreement. Investments in
Class A Shares are subject to a minimum initial investment of $500,
unless the investment is in a retirement account, in which the minimum
investment is $50.
Class B Shares are sold at net asset value subject to a contingent
deferred sales charge, a Rule 12b-1 Plan and a Shareholder Services
Agreement. Investments in Class B Shares are subject to a minimum
initial investment of $1,500, unless the investment is in a retirement
account, in which the minimum investment is $50.
Class C Shares are sold at net asset value subject to a contingent
deferred sales charge, a Rule 12b-1 Plan and a Shareholder Services
Agreement. Investments in Class C Shares are subject to a minimum
investment of $1,500, unless the investment is in a retirement
account, in which the minimum investment is $50.
Class A Shares, Class B Shares, Class C Shares and Class F Shares
are subject to certain of the same expenses. Expense differences,
however, between Class A Shares, Class B Shares, Class C Shares and
Class F Shares may affect the performance of each class.
To obtain more information and a combined prospectus for Class A
Shares, Class B Shares and Class C Shares, investors may call
1-800-341-7400.
<PAGE>
APPENDIX
STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard &
Poor's Ratings Group. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A--Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB--Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal payments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal.
CC--The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used
to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is
being paid.
D--Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
BA--Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
CA--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB--Bonds considered to be investment grade and of satisfactory
credit quality. The obligator's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
impact on these bonds, and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B--Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential
for recovery on these bonds, and D represents the lowest potential for
recovery.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial
charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate
liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment. F-1--Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.
<TABLE>
<CAPTION>
ADDRESSES
<S> <C> <C>
Investment Series Funds, Inc.
Federated Bond Fund
Class F Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser
Federated Advisers Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Custodian
State Street Bank and
Trust Company P.O. Box 8600
Boston, Massachusetts 02266-8600
Transfer Agent and
Dividend Disbursing Agent
Federated Shareholder Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Independent Auditors
Ernst & Young LLP One Oxford Center
Pittsburgh, Pennsylvania 15219
</TABLE>
<PAGE>
FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.
CLASS F SHARES
(FORMERLY, FORTRESS SHARES
PROSPECTUS
An Open-End, Diversified
Management Investment Company
Prospectus dated December 31, 1997
[GRAPHIC OMITTED]
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 461444309
G01271-02-F (12/97)
[GRAPHIC OMITTED]
FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with
the prospectus for Class A Shares, Class B Shares, and Class C
Shares and the prospectus of Class F Shares of Federated Bond
Fund (the "Fund") dated December 31, 1997. This Statement is not
a prospectus. You may request a copy of a prospectus or a paper
copy of this Statement, if you have received it electronically,
free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated December 31, 1997
[GRAPHIC OMITTED]
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
CUSIP 461444507
CUSIP 461444606
CUSIP 461444705
CUSIP 461444309
2041304B (12/97)
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
TYPES OF INVESTMENTS 1
EQUITY SECURITIES 1
CONVERTIBLE SECURITIES 1
FUTURES AND OPTIONS TRANSACTIONS 1
INVESTING IN FOREIGN CURRENCIES 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 4
LENDING OF PORTFOLIO SECURITIES 4
REPURCHASE AGREEMENTS 4
REVERSE REPURCHASE AGREEMENTS 4
PORTFOLIO TURNOVER 5
INVESTMENT LIMITATIONS 5
INVESTMENT SERIES FUNDS, INC. MANAGEMENT 7
FUND OWNERSHIP 11
DIRECTORS' COMPENSATION 11
INVESTMENT ADVISORY SERVICES 12
ADVISER TO THE FUND 12
ADVISORY FEES 12
BROKERAGE TRANSACTIONS 12
OTHER SERVICES 13
CUSTODIAN AND PORTFOLIO ACCOUNTANT 13
TRANSFER AGENT 13
INDEPENDENT AUDITORS 13
PURCHASING SHARES 13
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES 13
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS (CLASS F SHARES ONLY) 14
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS AND EMPLOYEES 14
CONVERSION TO FEDERAL FUNDS 14
DETERMINING NET ASSET VALUE 14
DETERMINING MARKET VALUE OF SECURITIES 14
REDEEMING SHARES 15
ELIMINATION OF THE CONTINGENT
DEFERRED SALES CHARGE 15
REDEMPTION IN KIND 15
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY) 15
REDUCED SALES CHARGE 16
REQUIREMENTS FOR EXCHANGE 16
TAX CONSEQUENCES 16
MAKING AN EXCHANGE 16
REDEEMING SHARES 16
TAX STATUS 16
THE FUND'S TAX STATUS 16
SHAREHOLDER'S TAX STATUS 17
TOTAL RETURN 17
YIELD 17
PERFORMANCE COMPARISONS 17
DURATION 19
ABOUT FEDERATED INVESTORS 19
FINANCIAL STATEMENTS 20
<PAGE>
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Investment Series Funds, Inc. (the
"Corporation"). The Fund was established as a portfolio of Investment
Series Trust, a Massachusetts business trust, on March 17, 1987. On
June 15, 1992, the shareholders of "High Income Securities Fund"," the
Fund's original name, approved a change to the investment objective of
the Fund as well as the name change of the Fund to "Fortress Bond
Fund." On February 3, 1993, the shareholders of the Fund voted to
reorganize the Fund as a portfolio of the Corporation, effective
February 5, 1993, which is organized under the laws of the State of
Maryland. On June 27, 1995, shareholders approved the name of the Fund
to be changed to "Federated Bond Fund." On June 2, 1996, the name of
the "Fortress Shares" class of the Fund was changed to "Class F
Shares." The Corporation is qualified to do business as a foreign
corporation in Pennsylvania. Shares of the Fund are offered in four
classes known as Class A Shares, Class B Shares, Class C Shares, and
Class F Shares (individually and collectively referred to as "Shares,"
as the context may require). This Statement relates to all classes of
Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
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
investment objective cannot be changed without approval of
shareholders.
TYPES OF INVESTMENTS
As a matter of investment policy, which may be changed without shareholder
approval, the Fund will, under normal circumstances, invest at least 65%
of the value of its net assets in investment grade bonds. Permitted
investments include:
o domestically-issued and foreign-issued corporate debt
obligations;
o asset-backed securities;
o obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
o taxable municipal debt obligations; and
o repurchase agreements.
EQUITY SECURITIES
Generally, less than 10% of the value of the Fund's total assets will
be invested in equity securities, including common stocks, warrants,
or rights. The Fund's investment adviser, Federated Advisers (the
"Adviser"), may choose to exceed this 10% limitation if unusual market
conditions suggest such investments represent a better opportunity to
reach the Fund's investment objective.
CONVERTIBLE SECURITIES
DECS offer a substantial dividend advantage with the possibility of
unlimited upside potential if the price of the underlying common stock
exceeds a certain level. DECS convert to common stock at maturity. The
amount received is dependent on the price of the common at the time of
maturity. DECS contain two call options at different strike prices.
The DECS participate with the common up to the first call price. They
are effectively capped at that point unless the common rises above a
second price point, at which time they participate with unlimited
upside potential.
PERCS offer a substantial dividend advantage, but capital appreciation
potential is limited to a predetermined level. PERCS are less risky
and less volatile than the underlying common stock because their
superior income mitigates declines when the common falls, while the
cap price limits gains when the common rises.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase
its current income. The Fund currently does not intend to invest more
than 5% of its total assets in options transactions. FINANCIAL FUTURES
CONTRACTS
A futures contract is a firm commitment by two parties:
the seller who agrees to make delivery of the specific
type of security called for in the contract ("going
short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed income securities market, price generally
moves inversely to interest rates. Thus, a rise in rates
generally means a drop in price. Conversely, a drop in
rates generally means a rise in price. In order to hedge
its holdings of fixed income securities against a rise in
market interest rates, the Fund could enter into contracts
to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the
prices of its fixed income securities may decline during
the Fund's anticipated holding period. The Fund would "go
long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market
interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial
futures contracts. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial
instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles
(but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at
the specified price. The Fund would purchase put options
on futures contracts to protect portfolio securities
against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the
hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also
decrease in value and the option will increase in value.
In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset
both the premium paid by the Fund for the original option
plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do
so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than
the strike price of the option) and exercise the option.
The Fund would then deliver the futures contract in return
for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire
on the date provided in the option contract, and the
premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund
may write listed call options on futures contracts to
hedge its portfolio against an increase in market interest
rates. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of assuming a
short futures position (selling a futures contract) at the
fixed strike price at any time during the life of the
option if the option is exercised. As market interest
rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell
a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase. In
other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the
premium received for the option. This premium can offset
the drop in value of the Fund's fixed income portfolio
which is occurring as interest rates rise. Prior to the
expiration of a call written by the Fund, or exercise of
it by the buyer, the Fund may close out the option by
buying an identical option. If the hedge is successful,
the cost of the second option will be less than the
premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the
decrease in value of the hedged securities. The Fund will
not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts
if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or
loss on those open positions, adjusted for the correlation
of volatility between the hedged securities and the
futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does
not pay or receive money upon the purchase or sale of a
futures contract. Rather, the Fund is required to deposit
an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures
transactions is different from that of margin in
securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund
to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations
have been satisfied. A futures contract held by the Fund
is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or
receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This
process is known as "marking to market." Variation margin
does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund
will mark-to-market its open futures positions. The Fund
is also required to deposit and maintain margin when it
writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities
to protect against price movements in particular
securities in its portfolio. A put option gives the Fund,
in return for a premium, the right to sell the underlying
security to the writer (seller) as a specified price
during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES The Fund may
also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon
exercise of the option during the option period to deliver
the underlying security upon payment of the exercise
price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it
has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
additional consideration).
INVESTING IN FOREIGN CURRENCIES
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter
into forward foreign currency
exchange contracts in order to protect itself against a
possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign
currency involved in an underlying transaction. However,
forward foreign currency exchange contracts may limit
potential gains which could result from a positive change
in such currency relationships. The Fund's investment
adviser, Federated Advisers (the "Adviser"), believes that
it is important to have the flexibility to enter into
forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do
so. The Fund will not speculate in foreign currency
exchange. There is no limitation as to the percentage of
the Fund's assets that may be committed to such contracts.
The Fund does not enter into forward foreign currency
exchange contracts or maintain a net exposure in such
contracts when the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in
that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Adviser
believes will tend to be closely correlated with the
currency with regard to price movements. Generally, the
Fund does not enter into a forward foreign currency
exchange contract with a term longer than one year.
FOREIGN CURRENCY EXCHANGE OPTIONS
A foreign currency option provides the option buyer with
the right to buy or sell a stated amount of foreign
currency at the exercise price on a specified date or
during the option period. The owner of a call option has
the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but
not the obligation to sell the currency. When the option
is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the
secondary market, close its position during the option
period at any time prior to expiration. A call option on
foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option
on foreign currency generally falls in value if the
underlying currency depreciates in value. Although
purchasing a foreign currency option can protect the Fund
against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the
value of such currency. For example, if the Fund were
holding securities denominated in a foreign currency that
was appreciating and had purchased a foreign currency put
to hedge against a decline in the value of the currency,
the Fund would not have to exercise its put option.
Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and,
in conjunction with that purchase, were to purchase a
foreign currency call option to hedge against a rise in
value of the currency, and if the value of the currency
instead depreciated between the date of purchase and the
settlement date, the Fund would not have to exercise its
call. Instead, the Fund could acquire in the spot market
the amount of foreign currency needed for settlement.
<PAGE>
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS Buyers
and sellers of foreign currency options are
subject to the same risks that apply to options generally.
In addition, there are certain additional risks associated
with foreign currency options. The markets in foreign
currency options are relatively new, and the Fund's
ability to establish and close out positions on such
options is subject to the maintenance of a liquid
secondary market. Although the Fund will not purchase or
write such options unless and until, in the opinion of the
Adviser, the market for them has developed sufficiently to
ensure that the risks in connection with such options are
not greater than the risks in connection with the
underlying currency, there can be no assurance that a
liquid secondary market will exist for a particular option
at any specific time. In addition, options on foreign
currencies are affected by all of those factors that
influence foreign exchange rates and investments
generally. The value of a foreign currency option depends
upon the value of the underlying currency relative to the
U.S. dollar. As a result, the price of the option position
may vary with changes in the value of either or both
currencies and may have no relationship to the investment
merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve
substantially larger amounts than those that may be
involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot
market (generally consisting of transactions of less than
$1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots. There
is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that
quotations available through dealers or other market
sources be firm or revised on a timely basis. Available
quotation information is generally representative of very
large transactions in the interbank market and thus may
not reflect relatively smaller transactions (i.e. less
than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S.
option markets are closed while the markets for the
underlying currencies remain open, significant price and
rate movements may take place in the underlying markets
that cannot be reflected in the options markets until they
reopen.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date.
These assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its
assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must
be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower
or placing broker. The Fund does not have the right to vote securities
on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not
repurchase the securities from the Fund, the Fund could receive less
than the repurchase price on any sale of such securities. In the event
that a defaulting seller files for bankruptcy or becomes insolvent,
disposition of securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally
in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy
pursuant to guidelines established by the Fund's Board of Directors
(the "Directors").
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time. When effecting reverse
repurchase agreements, liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. The securities are marked-to-market
daily and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate
since any turnover would be incidental to transactions undertaken in
an attempt to achieve the Fund's investment objectives. Securities in
the Fund's portfolio will be sold whenever the Adviser believes it is
appropriate to do so in light of the Fund's investment objective,
without regard to the length of time a particular security may have
been held. The Adviser does not anticipate that portfolio turnover
will result in adverse tax consequences. Any such trading will
increase the Fund's portfolio turnover rate and transaction costs. For
the fiscal years ended October 31, 1996, and 1995, the portfolio
turnover rates were 49% and 77%, respectively.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of
transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its net assets, including the amounts
borrowed. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any such borrowings in excess of 5% of its total
assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one
issuer(other than cash, cash items or securities issued or guaranteed
by the government of the United States or its agencies or
instrumentalities and repurchase agreements collateralized by such
securities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
the securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell
calls on financial futures contracts. The Fund will notify
shareholders before such a change in its operating policies is
implemented.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the federal securities laws
(except for commercial paper issued under Section 4(2) of the
Securities Act of 1933).
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities,
on a short-term or long-term basis, up to one-third of the value of
its total assets, to broker/dealers, banks, or other institutional
borrowers of securities.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry. However, investing in U.S. government obligations
shall not be considered investments in any one industry.
SELLING SHORT
The Fund will not sell securities short unless:
oduring the time the short position is open, it owns an
equal amount of the securities sold or securities readily
and freely convertible into or exchangeable, without
payment of additional consideration, for securities of the
same issuer as, and equal in amount to, the securities
sold short; and
onot more than 10% of the Fund's net assets (taken at
current value) is held as collateral for such sales at any one time.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
The above investment limitations cannot be changed without
shareholder approval. The following limitation, however, may be
changed by the Directors without shareholder approval. Shareholders
will be notified before any material change in this limitation becomes
effective.
WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The Fund will
not purchase put options on securities unless the securities are held
in the Fund's portfolio. Except with respect to borrowing
money, if a percentage limitation is adhered to at the time of
investment, a later increase or decrease in percentage resulting from
any change in value or net assets will not result in a violation of
such restriction.
For purposes of its limitations, the Fund considers instruments issued
by a U.S. branch of a domestic bank having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."
The use of short sales will allow the Fund to retain certain
bonds in its portfolio longer than it would without such sales. To the
extent the Fund receives the current income produced by such bonds for
a longer period than it might otherwise, the Fund's investment
objective of current income is furthered.
The Fund did not borrow money, sell securities short, engage in
foreign currency options, or purchase financial futures contracts in
excess of 5% of the value of its net assets during the last fiscal
year and has no present intent to do so in the coming fiscal year.
<PAGE>
INVESTMENT SERIES FUNDS, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates,
present positions with Investment Series Funds, Inc., and principal
occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; Chairman and Director,
Federated Research Corp. and Federated Global Research Corp.;
Chairman, Passport Research, Ltd.; Chief Executive Officer and
Director or Trustee of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Director of the Company.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh;
formerly, Senior Partner, Ernst & Young LLP; Director, MED 3000 Group,
Inc.; Director, Member of Executive Committee, University of
Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior
Vice-President, John R. Wood and Associates, Inc., Realtors; Partner
or Trustee in private real estate ventures in Southwest Florida;
formerly, President, Naples Property Management, Inc. and Northgate
Village Development Corporation; Director or Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank
Corp.; Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Director
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp. and Federated Global Research Corp.;
President, Passport Research, Ltd.; Trustee, Federated Shareholder
Services Company, and Federated Shareholder Services; Director,
Federated Services Company; President or Executive Vice President of
the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Director of the Company.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.;
Director or Trustee of the Funds.
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A.,
Western Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of
Massachusetts; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation; Director or Trustee of
the Funds.
Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.;
Retired from the law firm of Miller, Ament, Henny & Kochuba; Director
or Trustee of the Funds.
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica & Murray; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., National Defense University and U.S.
Space Foundation; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy
and Technology, Federal Emergency Management Advisory Board and Czech
Management Center, Prague; Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice
President, Federated Advisers, Federated Management, Federated
Research, Federated Research Corp., Federated Global Research Corp.
and Passport Research, Ltd.; Executive Vice President and Director,
Federated Securities Corp.; Trustee, Federated Shareholder Services
Company; Trustee or Director of some of the Funds; President,
Executive Vice President and Treasurer of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global
Research Corp.; Trustee, Federated Shareholder Services Company;
Director, Federated Services Company; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive
Vice President and Secretary of the Funds; Treasurer of some of the
Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman
and Director, Federated Securities Corp.; President or Vice President
of some of the Funds; Director or Trustee of some of the Funds.
* This Director is deemed to be an "interested person" as
defined in the Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee
of the Board of Directors handles the responsibilities of the Board
between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies:
111 Corcoran Funds; Arrow Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Investment Portfolios;
Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities
Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and
Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond
Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc.
- - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
The Planters Funds; The Virtus Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations;
Wesmark Funds; and World Investment Series, Inc. FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding
shares.
As of October 14, 1997, the following shareholders of record owned 5%
or more of the outstanding Class A Shares of the Fund: FNB Nominee
Co., Indiana, Pennsylvania, owned approximately 724,946 shares
(6.67%); Strafe & Co., for the account of ASR Stauton Employee
Retirement Plan, Columbus, Ohio, owned approximately 1,051,532 shares
(9.67%); and BHC Securities, Inc., Philadelphia, Pennsylvania, owned
approximately 619,481 shares (5.70%).
As of October 14, 1997, the following shareholder of record owned
5% or more of the outstanding Class B Shares of the Fund: Merrill
Lynch Pierce Fenner & Smith, Jacksonville, Florida, owned
approximately 1,506,119 shares (8.08%).
As of October 14, 1997, the following shareholder of record owned
5% or more of the outstanding Class C Shares of the Fund: Merrill
Lynch Pierce Fenner & Smith, Jacksonville, Florida, owned
approximately 1,359,134 shares (36.22%).
As of October 14, 1997, the following shareholders of record
owned 5% or more of the outstanding Class F Shares of the Fund:
Merrill Lynch Pierce Fenner & Smith, Jacksonville, Florida, owned
approximately 5,566,980 shares (17.11%); and Hawaiian Trust Company
Ltd., Honolulu, Hawaii, owned approximately 2,248,505 shares (6.91%).
<PAGE>
DIRECTORS' COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND* FROM FUND COMPLEX +
<S> <C> <C>
John F. Donahue $ -0- $-0- for the Fund and
Chairman and Director 56 other investment companies in the Fund Complex
J. Christopher Donahue $ -0- $-0- for the Fund and
President and Director 18 other investment companies in the Fund Complex
Thomas G. Bigley $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $____ $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
William J. Copeland $____ $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
James E. Dowd $____ $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $____ $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Peter E. Madden $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Gregor F. Meyer $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John E. Murray, Jr. $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Wesley W. Posvar $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Marjorie P. Smuts $____ $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year ended October 31, 1997.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a
subsidiary of Federated Investors. All of the voting securities of
Federated Investors are owned by a trust, the trustees of which are
John F. Donahue, his wife, and his son, J. Christopher Donahue. The
Adviser shall not be liable to the Corporation, the Fund, or any
shareholder of the Fund for any losses that may be sustained in the
purchase, holding, or sale of any security, or for anything done or
omitted by it, except acts or omissions involving willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Corporation.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual
investment advisory fee for the Fund as described in the prospectus.
For the fiscal years ended October 31, 1997, 1996, and 1995, the
Adviser earned $_______, $2,650,984, and $1,271,771, respectively, of
which $_______, $705,603, and $505,263, were voluntarily waived
because of undertakings to limit the Fund's expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale
of portfolio instruments, the adviser looks for prompt execution of
the order at a favorable price. In working with dealers, the adviser
will generally use those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directors. The adviser may select
brokers and dealers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the adviser and
may include: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services.
Research services provided by brokers and dealers may be used by the
adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for
which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions.
They determine in good faith that commissions charged by such persons
are reasonable in relationship to the value of the brokerage and
research services provided. During the fiscal years ended October 31,
1997, 1996, and 1995, the Fund paid total brokerage commissions of
$_____, $0, and $5,595, respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the
type the Fund may make may also be made by those other accounts. When
the Fund and one or more other accounts managed by the adviser are
prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in
a manner believed by the adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received
by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and
the ability to participate in volume transactions will be to the
benefit of the Fund.
OTHER SERVICES
FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee
as described in the prospectus. From March 1, 1994, to March 1, 1996,
Federated Administrative Services, a subsidiary of Federated
Investors, served as the Fund's Administrator. For purposes of this
Statement of Additional Information, Federated Services Company and
Federated Administrative Services may hereinafter collectively be
referred to as the "Administrators." For the fiscal years ended
October 31, 1997 1996, and 1995, the Administrators collectively
earned $_______, $267,242, and $156,316, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for
the securities and cash of the Fund. Federated Services Company,
Pittsburgh, PA provides certain accounting and recordkeeping services
with respect to the Fund's portfolio investments.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent
Federated Shareholder Services Company, maintains all necessary
shareholder records. For its services, the transfer agent receives a
fee based on the size, type and number of accounts and transactions
made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP,
Pittsburgh, Pennsylvania.
PURCHASING SHARES
Except under certain circumstances described in the prospectus,
shares are sold at their net asset value plus a sales charge on days
the New York Stock Exchange is open for business. The procedure for
purchasing shares of the Fund is explained in the prospectus under
"Investing in the Fund."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder Services, to
stimulate distribution activities and to cause services to be provided
to shareholders by a representative who has knowledge of the
shareholder's particular circumstances and goals. These activities and
services may include, but are not limited to, marketing efforts;
providing office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses. By adopting the Distribution Plan, the
Directors expect that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management
and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible
to curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2)
investing shareholder assets with a minimum of delay and
administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended October 31, 1997, payments in the amounts
of $_______ and $_______ were made pursuant to the Distribution Plan
for Class B Shares and Class C Shares, respectively. For the fiscal
year ended October 31, 1997, payments in the amounts of $_______,
$_______, $_______, and $_______ (of which $_______, $_______,
$_______, and $_______ were waived) were made pursuant to the
Shareholder Services Agreement for Class A Shares, Class B Shares,
Class C Shares, and Class F Shares, respectively.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS (CLASS F SHARES ONLY)
The administrative services for which the Distributor will pay
financial institutions include, but are not limited to, providing
office space, equipment, telephone facilities, and various clerical,
supervisory and computer personnel, as is necessary or beneficial to
establish and maintain shareholders' accounts and records, process
purchase and redemption transactions, process automatic investments of
client account cash balances, answer routine client inquiries
regarding the Fund, assist clients in changing dividend options,
account designations, addresses, and providing such other services as
the Fund may reasonably request.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates and
their immediate family members, or any investment dealer who has a
sales agreement with Federated Securities Corp., their spouses, and
their children under 21, may buy Class A Shares at net asset value
without a sales charge. Shares may also be sold without a sales charge
to trusts or pension or profit-sharing plans for these persons. These
sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not
be resold except through redemption by the Fund.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds before shareholders begin to earn dividends. State Street Bank
and Trust Company acts as the shareholder's agent in depositing checks
and converting them to federal funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net
asset value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as
follows:
o according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for equity securities,
according to the mean between the last closing bid and
asked prices, and for bonds and other fixed income
securities as determined by an independent pricing
service;
o for short-term obligations, according to the mean bid
and asked prices, as furnished by an independent
pricing service, or for short-term obligations with
remaining maturities of less than 60 days at the time
of purchase, at amortized cost unless the Board
determines this is not fair value; or
o at fair value as determined in good faith by the Fund's
Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
o yield;
o quality;
o coupon rate;
o maturity;
o type of issue;
o trading characteristics; and
o other market data.
Over-the-counter put options will be valued at the mean between the
bid and the asked prices.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions of Class
B Shares, Class C Shares, and Class F Shares may be subject to a
contingent deferred sales charge. Redemption procedures are explained
in the respective prospectuses under "Redeeming Class A Shares,"
"Redeeming Class B Shares," "Redeeming Class C Shares" or "Redeeming
Class F Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000. Class F
Shares redeemed within one to four years of purchase may be subject to
a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the advance payment
paid at the time of purchase by the distributor to the financial
institutions for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial
institutions elect to receive an amount less than the advance payment
that is stated in the prospectus for servicing a particular
shareholder, the contingent deferred sales charge and/or holding
period for that particular shareholder will be reduced accordingly.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amounts that a shareholder may withdraw under a Systematic
Withdrawal Program that qualify for the elimination of the Contingent
Deferred Sales Charge may not exceed 12% annually with reference
initially to the value of the Class B Shares upon establishment of the
Systematic Withdrawal Program and then as calculated at the fiscal
year end. Redemptions on a qualifying Systematic Withdrawal Program
can be made at a rate of 1.00% monthly, 3.00% quarterly, or 6.00%
semi-annually with reference to the applicable account valuation
amount. Amounts that exceed the 12.00% annual limit for redemption, as
described, may be subject to the Contingent Deferred Sales Charge. To
the extent that a shareholder exchanges Shares for Class B Shares of
other Federated Funds, the time for which the exchanged-for Shares are
to be held will be added to the time for which exchanged-from Shares
were held for purposes of satisfying the 12 month holding requirement.
However, for purposes of meeting the $10,000 minimum account value
requirement, Class B Share account values will not be aggregated.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000
or 1% of the respective Fund's net asset value, whichever is less, for
any one shareholder within a 90-day period. Any redemption beyond this
amount will also be in cash unless the Trustees determine that
payments should be in kind. In such a case, the Fund will pay all or a
portion of the remainder of the redemption in portfolio instruments,
valued in the same way that net asset value is determined. The
portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable. Redemption in kind is not as liquid as a cash
redemption. If redemption is made in kind, shareholders receiving
their securities and selling them before their maturity could receive
less than the redemption value of their securities and could incur
certain transaction costs.
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY)
This section relates only to Class F Shares of the Fund. For
information regarding the Exchange Privilege for Class A Shares, Class
B Shares, and Class C Shares of the Fund, please see the respective
prospectuses for these classes of Shares. The Securities and Exchange
Commission (the "SEC") has issued an order exempting the Corporation
from certain provisions of the Investment Company Act of 1940. As a
result, Fund shareholders are allowed to exchange all or some of their
shares for shares in certain Federated Funds which are sold with a
sales charge that differs from that of the Fund's or which impose no
sales charge so long as the Federated Funds are advised by
subsidiaries or affiliates of Federated Investors. These exchanges are
made at net asset value plus the difference between the Fund's sales
charge already paid and any sales charge of the fund into which the
shares are to be exchanged, if higher. The order also allows certain
other funds, including funds that are not advised by subsidiaries or
affiliates of Federated Investors, which do not have a sales charge,
to exchange their shares for Fund shares on a basis other than their
current offering price. These exchanges may be made to the extent that
such shares were acquired in a prior exchange, at net asset value, for
shares of a Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or Federated Shareholder Services Company in writing.
REQUIREMENTS FOR EXCHANGE
Shareholders using this privilege must exchange shares having a net
asset value equal to the minimum investment requirements of the fund
into which the exchange is being made. Before the exchange, the
shareholder must receive a prospectus of the fund for which the
exchange is being made. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may be
sold. Upon receipt of proper instructions and required supporting
documents, Class F Shares submitted for exchange are redeemed and the
proceeds invested in shares of the other fund. Further information on
the exchange privilege and prospectuses for the Federated Funds are
available by calling the Fund.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a short or long-term capital
gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanging Shares must be given in writing by the
shareholder. Written instructions may require a signature guarantee.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions of Class
B Shares, Class C Shares, and Class F Shares may be subject to a
contingent deferred sales charge. Redemption procedures are explained
in the respective prospectuses under "Redeeming Class A Shares,"
"Redeeming Class B Shares," "Redeeming Class C Shares" or "Redeeming
Class F Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000. Class F
Shares redeemed within one to four years of purchase may be subject to
a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the advance payment
paid at the time of purchase by the distributor to the financial
institutions for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial
institutions elect to receive an amount less than the advance payment
that is stated in the prospectus for servicing a particular
shareholder, the contingent deferred sales charge and/or holding
period for that particular shareholder will be reduced accordingly.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment,
the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends,
interest, and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net
income earned during the year.
SHAREHOLDER'S TAX STATUS
Shareholders are subject to federal income tax on dividends and
capital gains received as cash or additional shares. No portion of any
income dividend paid by the Fund is eligible for the dividends
received deduction available to corporations. These dividends, and any
short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates
on long-term capital gains distributed to them regardless of how long
they have held the Fund shares.
TOTAL RETURN
Class F Shares' average annual total returns for the one-year
and five-year periods ended October 31, 1997, and for the period from
July 8, 1988 (effective date of the Fund's registration statement) to
October 31, 1997, were ____%, ____%, and ____%, respectively.
For the one-year period ended October 31, 1997, Class A Shares,
Class B Shares, and Class C total returns were ____%, ____%, and
____%, respectively. For the period from June 28, 1995 to October 31,
1997, Class A Shares, Class B Shares and Class C Shares total returns
were ____%, ____%, and ____%, respectively.
The average annual total return for all classes of Shares of the Fund
is the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by
multiplying the number of Shares owned at the end of the period by the
offering price per Share at the end of the period. The number of
Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any
applicable sales charge, adjusted over the period by any additional
Shares, assuming a quarterly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge is
deducted from the ending value of the investments based on the lesser
of the original purchase price or the offering price of Shares
redeemed. Total return assumes and is reduced by the payment of the
maximum sales charge and contingent deferred sales charge, if
applicable.
YIELD
The yields for Class A Shares, Class B Shares, Class C Shares, and
Class F Shares for the thirty-day period ended October 31, 1997, were
____%, ____%, ____%, and ____%, respectively.
The yield for all classes of Shares of the Fund is determined each day
by dividing the net investment income per share (as defined by the
SEC) earned by the Fund over a thirty-day period by the maximum
offering price per share of the Fund on the last day of the period.
This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period
is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends
or other distributions paid to shareholders. To the extent that
financial institutions and broker/dealers charge fees in connection
with services provided in conjunction with an investment in the Fund,
performance will be reduced for those shareholders paying those fees.
To the extent that financial institutions and broker/dealers charge
fees in connection with services provided in conjunction with an
investment in any class of Shares, the performance will be reduced for
those shareholders paying those fees.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net
earnings and offering price per share are factors in the computation
of yield and total return. Investors may use financial publications
and/or indices to obtain a more complete view of the Fund's
performance. When comparing performance, investors should consider all
relevant factors such as the composition of any index used, prevailing
market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in
advertising may include:
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is
comprised of approximately 5,000 issues which include:
non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and
publicly issued, fixed rate, non-convertible domestic
bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates
nine years. Tracked by Lehman Brothers, Inc., the index
calculates total returns for one-month, three-month,
twelve-month, and ten-year periods and year-to-date.
o SALOMON BROTHERS AAA-AA CORPORATES INDEX calculates
total returns of approximately 775 issues which include
long-term, high grade domestic corporate taxable bonds,
rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance.
o MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an
unmanaged index comprised of approximately 4,821 issues
which include corporate debt obligations rated BBB or
better and publicly issued, non-convertible domestic debt
of the U.S. government or any agency thereof. These
quality parameters are based on composites of ratings
assigned by Standard and Poor's Ratings Group and Moody's
Investors Service, Inc. Only notes and bonds with a
minimum maturity of one year are included.
o MERRILL LYNCH CORPORATE MASTER is an unmanaged index
comprised of approximately 4,356 corporate debt
obligations rated BBB or better. These quality parameters
are based on composites of ratings assigned by Standard
and Poor's Corporation and Moody's Investors Service, Inc.
Only bonds with a minimum maturity of one year are
included.
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various
fund categories by making comparative calculations using
total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes
into account any change in offering price over a specific
period of time. From time to time, the Fund will quote its
Lipper ranking in advertising and sales literature.
o THE LEHMAN BROTHERS CORPORATE BOND INDEX is comprised of
a large universe of bonds issued by industrial, utility
and financial companies which have a minimum rating of Baa
by Moody's Investors Service, Inc., BBB by Standard and
Poor's Ratings Group or, in the case of bank bonds not
rated by either of the previously mentioned services, BBB
by Fitch Investors Service, Inc.
o LEHMAN BROTHERS HIGH YIELD INDEX covers the universe of
fixed rate, publicly issued, noninvestment grade debt
registered with the SEC. All bonds included in the High
Yield Index must be dollar-denominated and nonconvertible
and have at least one year remaining to maturity and an
outstanding par value of at least $100 million. Generally
securities must be rated Ba1 or lower by Moody's Investors
Service, including defaulted issues. If no Moody's rating
is available, bonds must be rated BB+ or lower by S&P; and
if no S&P rating is available, bonds must be rated below
investment grade by Fitch Investor's Service. A small
number of unrated bonds is included in the index; to be
eligible they must have previously held a high yield
rating or have been associated with a high yield issuer,
and must trade accordingly.
o MORNINGSTAR, INC., an independent rating service, is the
publisher of the bi-weekly Mutual Fund Values. Mutual
Fund Values rates more than 1,000 NASDAQ-listed Mutual
Funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings
are effective for two weeks.
Advertisements and other sales literature for any class of Shares may
quote total returns which are calculated on nonstandardized base
periods. These total returns also represent the historic change in the
value of an investment in any class of Shares based on quarterly
reinvestment of dividends over a specified period of time.
From time to time, the Fund may advertise the performance of any class
of Shares using charts, graphs, and descriptions, compared to
federally insured bank products, including certificates of deposit and
time deposits, and to money market funds using the Lipper Analytical
Services money market instruments average. In addition, advertising
and sales literature for the Fund may use charts and graphs to
illustrate the principals of dollar-cost averaging and may disclose
the amount of dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not
reflect the effect of a sales charge or contingent deferred sales
charge, as applicable.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the
magnitude of the change in the price of a bond relative to a given
change in the market rate of interest. A bond's price volatility
depends on three primary variables: the bond's coupon rate; maturity
date; and the level of market yields of similar fixed income
securities. Generally, bonds with lower coupons or longer maturities
will be more volatile than bonds with higher coupons or shorter
maturities. Duration combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values
of the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When the
Fund invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Fund.
ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured,
straightforward, and consistent. This has resulted in a history of
competitive performance with a range of competitive investment
products that have gained the confidence of thousands of clients and
their customers. The company's disciplined security selection process
is firmly rooted in sound methodologies backed by fundamental and
technical research. Investment decisions are made and executed by
teams of portfolio managers, analysts, and traders dedicated to
specific market sectors. These traders handle trillions of dollars in
annual trading volume.
In the equity sector, Federated Investors has more than 26 years'
experience. As of December 31, 1996, Federated managed 31 equity funds
totaling approximately $7.6 billion in assets across growth, value,
equity income, international, index and sector (i.e. utility) styles.
Federated's value-oriented management style combines quantitative and
qualitative analysis and features a structured, computer-assisted
composite modeling system that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1996, Federated
Investors managed 12 money market funds and 17 bond funds with assets
approximating $17.2 billion and $4.0 billion, respectively.
Federated's corporate bond decision making--based on intensive,
diligent credit analysis--is backed by over 21 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the
first high-yield bond funds in the industry. In 1983, Federated was
one of the first fund managers to participate in the asset-backed
securities market, a market totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated
Investors' equity and high yield corporate bond management while
William D. Dawson, Executive Vice President, oversees Federated
Investors' domestic fixed income management. Henry A. Frantzen,
Executive Vice President, oversees the management of Federated
Investors' international and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their
financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the
more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual
funds for a variety of investment applications. Specific markets
include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and
mutual funds for a variety of applications, including defined benefit
and defined contribution programs, cash management, and
asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional
clients is headed by John B. Fisher, President, Institutional Sales
Division.
BANK MARKETING
Other institutional clients include close relationships with
more than 1,600 banks and trust organizations. Virtually all of the
trust divisions of the top 100 bank holding companies use Federated
funds in their clients' portfolios. The marketing effort to trust
clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage
firms nationwide--we have over 2,200 broker/dealer and bank
broker/dealer relationships across the country--supported by more
wholesalers than any other mutual fund distributor. Federated's
service to financial professionals and institutions has earned it high
ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement.
The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.
*Source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended October 31, 1997,
are incorporated herein by reference to the Annual Report of the Fund dated
October 31, 1997. (File Nos. 33-48847 and 811-07021). A copy of this
report may be obtained without charge by contacting the Fund.
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements (To be filed by Amendment) (b) Exhibits:
(1) Copy of Articles of Incorporation of the Registrant; (1)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) (i) Copies of Specimen Certificates for Shares of Capital
Stock of Federated Bond Fund; (5)
(ii) Copy of Specimen Certificate for Shares of Common Stock
of Class F Shares of Federated Bond Fund; (7)
(5) Conformed copy of Investment Advisory Contract of the
Registrant; (3)
(6) (i) Copy of Distributor's Contract of Registrant;(2)
(a) Conformed copy of Exhibits
C and D to Distributor's
Contract; (4) (b) Conformed
copy of Exhibits E, F, and G
to Distributor's Contract; (5)
(ii) The Registrant hereby
incorporates the conformed
copy of the specimen Mutual
Funds Sales and Service
Agreement; Mutual Funds
Service Agreement; and Plan
Trustee/Mutual Funds Service
Agreement from Item 24(b)(6)
of the Cash Trust Series II
Registration Statement on Form
N-1A, filed with the
Commission on July 24, 1995.
(File Nos. 33-38550 and
811-6269);
(7) Not applicable;
(8) (i) Conformed copy of Custodian Agreement of the
Registrant;(3)
(ii) Conformed copy of State Street Domestic Custody
Fee Schedule; +
+ All exhibits have been filed electronically via EDGAR.
(1) Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 21, 1992. (File
No. 33-48847)
(2) Response is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 on Form N-1A filed September 8,
1992. (File No. 33-48847)
(3) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 4 on Form N-1A filed December 29,
1993 (File No. 33-48847)
(4) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 5 on Form N-1A filed December 23,
1994 (File No. 33-48847)
(5) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 7 on Form N-1A filed July 27, 1995
(File No. 33-48847)
(7) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 11 on Form N-1A filed February
18,1997 (File No. 33-48847)
<PAGE>
(9) (i) Conformed copy of Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services, and
Custody Services Procurement; (7)
(ii) The Registrant hereby incorporates
by reference the conformed copy of the
Shareholder Services Sub-Contract between
Fidelity and Federated Shareholder Services from
Item 24(b)(9)(iii) of the Federated GNMA Trust
Registration Statement on Form N-1A, filed with
the Commission on March 25, 1996 (File Nos.
2-75670 and 811-3375);
(iii) Conformed copy of Amended and Restated Shareholder
Services Agreement; + (iv) The responses described in Item
24(b)(6)(ii) are hereby incorporated by reference;
(10) Copy of Opinion and Consent of Counsel as to legality of
shares being registered; (2)
(11) Copy of Consent of Independent Auditors; (8)
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Copy of Distribution Plan; (2)
(ii) Conformed Copy of Exhibits B and C to Distribution
Plan; (4) (iii) Conformed Copy of Exhibits D, E, and F to
Distribution Plan; (5) (iv) The responses described in
Item 24(b)(6)(ii) are hereby incorporated by reference;
(16) Not applicable;
(17) Copies of Financial Data Schedules; +
(18) The Registrant hereby incorporates the conformed copy of
the specimen Multiple Class Plan from Item 24(b)(18) of
the World Investment Series, Inc. Registration Statement
on Form N-1A, filed with the Commission on January 26,
1996. (File Nos. 33-52149 and 811-07141);
(19) Power of Attorney. (7)
+ All exhibits have been filed electronically via EDGAR.
(2) Response is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 on Form N-1A filed September 8,
1992. (File No. 33-48847)
(4) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 5 on Form N-1A filed December 23,
1994 (File No. 33-48847)
(5) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 7 on Form N-1A filed July 27, 1995
(File No. 33-48847)
(7) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 11 on Form N-1A filed February 18,
1997 (File No. 33-48847)
(8) Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 12 on Form N-1A filed February 28,
1997 (File No. 33-48847)
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
None
Item 26. NUMBER OF HOLDERS OF SECURITIES:
Number of Record Holders
TITLE OF CLASS AS OF OCTOBER 14, 1997
-------------- -----------------------
Federated Bond Fund
Shares of Capital Stock
(.0001 par value)
Class A Shares 2,827
Class B Shares 9,092
Class C Shares 1,025
Class F Shares 7,580
Item 27. INDEMNIFICATION: (1)
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the
investment adviser, see the section entitled "Fund
Information - Management of the Corporation" in Part A.
The affiliations with the Registrant of three of the
Trustees and two of the Officers of the investment
adviser are included in Part B of this Registration
Statement under "Investment Series Funds, Inc.
Management." The remaining Trustee of the investment
adviser and, in parentheses, his principal occupation
is: Mark D. Olson (Partner, Wilson, Halbrook & Bayard),
107 W. Market Street, Georgetown, Delaware 19947.
The remaining Officers of the investment adviser are:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
(1) Response is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 on Form N-1A filed September 8,
1992. (File No. 33-48847)
<PAGE>
Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Steven Lehman
Marian R. Marinack
Sandra L. McInerney
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
Christopher Smith
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka
Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser
Secretary: Stephen A. Keen
Treasurer: Thomas R. Donahue
Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle
Assistant Treasurer: Richard B. Fisher
The business address of each of the Officers of the
investment adviser is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. These individuals
are also officers of a majority of the investment
advisers to the Funds listed in Part B of this
Registration Statement.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS:
(a) Federated Securities Corp. the Distributor for shares of the
Registrant, acts as principal underwriter for the following
open-end investment companies, including the Registrant:
111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward
D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated
ARMs Fund; Federated Equity Funds; Federated Equity
Income Fund, Inc.; Federated Fund for U.S.
Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income
Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series;
Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust;
Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond
Fund; Federated U.S. Government Securities Fund: 1-3
Years; Federated U.S. Government Securities Fund:
2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.;
First Priority Funds; Fixed Income Securities, Inc.;
High Yield Cash Trust; Independence One Mutual
Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market
Management, Inc.; Money Market Obligations Trust;
Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds;
SouthTrust Vulcan Funds; Star Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Virtus Funds; The Wachovia
Funds; The Wachovia Municipal Funds; Tower Mutual
Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury
Obligations; Vision Group of Funds, Inc.; and World
Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for
the following closed-end investment company: Liberty Term Trust, Inc.-
1999.
<TABLE>
<CAPTION>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT
<S> <C> <C>
Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary and Asst.
Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.
Thomas R. Donahue Director, Assistant Secretary --
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
George D. Riedel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
<PAGE>
John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
</TABLE>
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS:
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and Rules 31a-1 through 31a-3
promulgated thereunder are maintained at one of the following
locations:
Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Shareholder Services Company P.O. Box 8600
("Transfer Agent and Dividend Boston, MA 02266-8600
Disbursing Agent")
Federated Services Company Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779
Federated Advisers Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600
Item 31. MANAGEMENT SERVICES: Not applicable.
<PAGE>
Item 32. UNDERTAKINGS:
Registrant hereby undertakes, if requested to do so by
the holders of at least 10% of the registrant's
outstanding shares, to call a meeting of shareholders
for the purpose of voting upon the question of removal
of a Director or Directors and to assist in
communications with other shareholders as required by
Section 16(c).
Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant, INVESTMENT
SERIES FUNDS, INC., has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 24th day of October, 1997.
INVESTMENT SERIES FUNDS, INC.
BY: /s/ Matthew S. Hardin
Matthew S. Hardin, Assistant Secretary
Attorney in Fact for John F. Donahue
October 24, 1997
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to its Registration Statement has been signed below by
the following person in the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Matthew S. Hardin
Matthew S. Hardin Attorney In Fact October 24, 1997
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
J. Christopher Donahue* President and Director
John W. McGonigle* Executive Vice President, Secretary
and Treasurer
(Principal Financial and
Accounting Officer)
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
William J. Copeland* Director
James E. Dowd* Director
Lawrence D. Ellis, M.D.* Director
Edward L. Flaherty, Jr.* Director
Peter E. Madden* Director
Gregor F. Meyer* Director
John E. Murray, Jr.* Director
Wesley W. Posvar* Director
Marjorie P. Smuts* Director
*By Power of Attorney
Exhibit 8(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
STATE STREET
DOMESTIC CUSTODY
FEE SCHEDULE
FEDERATED FUNDS
I. Custody Services
Maintain custody of fund assets. Settle portfolio purchases
and sales. Report buy and sell fails. Determine and collect
portfolio income. Make cash disbursements and report cash
transactions.
Monitor corporate actions.
ANNUAL FEES
ASSET
Per Fund .25 Basis Points
Wire Fees $3.00 per wire
Settlements:
oEach DTC Transaction $5.00
oEach Federal Reserve Book Entry Transaction $3.75
oEach Repo Transaction (All Repo) $3.75
oEach Physical Transaction (NY/Boston, Private Placement) $15.00
oEach Option Written/Exercised/Expired $18.75
Each Book Entry Muni (Sub-custody) Transaction $15.00
oGovernment Paydowns $5.00
oMaturity Collections $8.00
oPTC Transactions $6.00
II. Special Services
Fees for activities of a non-recurring nature such as fund
consolidation or reorganization, extraordinary security shipments and
the preparation of special reports will be subject to negotiation.
III. Balance Credit
MUNICIPAL FUNDS
A balance credit equal to 75% of the average demand deposit
account balance in the custodian account for the month billed
times the 30 day T-Bill Rate on the last Monday of the month
billed, will be applied against the month's custodian bill.
TRANSFER AGENT
A balance credit equal to 100% of the average balance in the
transfer agent demand deposit accounts, less the reserve requirement
and applicable related expenses, times 75% of the 30 average Fed Funds
Rate.
IV. Payment
The above fees will be charged against the funds' custodian
checking account thirty (30) days after the invoice is mailed
to the funds' offices.
V. Term of Contract
The parties agree that this fee schedule shall become
effective January 1, 1997.
FEDERATED SERVICES COMPANY STATE STREET
BY: /S/ DOUGLAS L. HEIN BY: /S/ MICHAEL E. HAGERTY
TITLE: SENIOR VICE PRESIDENT TITLE: VICE PRESIDENT
DATE: APRIL 15, 1997 DATE: APRIL 8, 1997
---------------------------------- -------------
Exhibit 9(iii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AMENDED AND RESTATED
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT, amended and restated as of the first day of
September, 1995, (originally made and enterered into as of the first
day of March, 1994), by and between those investment companies listed
on Exhibit 1, as may be amended from time to time, having their
principal office and place of business at Federated Investors Tower,
Pittsburgh, PA 15222-3779 and who have approved this form of Agreement
(individually referred to herein as a "Fund" and collectively as
"Funds") and Federated Shareholder Services, a Delaware business
trust, having its principal office and place of business at Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS").
1. The Funds hereby appoint FSS to render or cause to be
rendered personal services to shareholders of the Funds
and/or the maintenance of accounts of shareholders of the
Funds ("Services"). In addition to providing Services
directly to shareholders of the Funds, FSS is hereby
appointed the Funds' agent to select, negotiate and
subcontract for the performance of Services. FSS hereby
accepts such appointments. FSS agrees to provide or cause to
be provided Services which, in its best judgment (subject to
supervision and control of the Funds' Boards of Trustees or
Directors, as applicable), are necessary or desirable for
shareholders of the Funds. FSS further agrees to provide the
Funds, upon request, a written description of the Services
which FSS is providing hereunder.
2. During the term of this Agreement, each Fund will pay FSS and
FSS agrees to accept as full compensation for its services
rendered hereunder a fee at an annual rate, calculated daily
and payable monthly, up to 0.25% of 1% of average net assets
of each Fund.
For the payment period in which this Agreement becomes
effective or terminates with respect to any Fund, there shall
be an appropriate proration of the monthly fee on the basis
of the number of days that this Agreement is in effect with
respect to such Fund during the month.
3. This Agreement shall continue in effect for one year from the
date of its execution, and thereafter for successive periods
of one year only if the form of this Agreement is approved at
least annually by the Board of each Fund, including a
majority of the members of the Board of the Fund who are not
interested persons of the Fund ("Independent Board Members")
cast in person at a meeting called for that purpose.
4. Notwithstanding paragraph 3, this Agreement may be terminated as
follows:
(a) at any time, without the payment of any penalty, by the
vote of a majority of the Independent Board Members of
any Fund or by a vote of a majority of the outstanding
voting securities of any Fund as defined in the
Investment Company Act of 1940 on sixty (60) days'
written notice to the parties to this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of
1940; and
(c) by any party to the Agreement without cause by giving
the other party at least sixty (60) days' written
notice of its intention to terminate.
5. FSS agrees to obtain any taxpayer identification number
certification from each shareholder of the Funds to which it
provides Services that is required under Section 3406 of the
Internal Revenue Code, and any applicable Treasury
regulations, and to provide each Fund or its designee with
timely written notice of any failure to obtain such taxpayer
identification number certification in order to enable the
implementation of any required backup withholding.
6. FSS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by any Fund in connection
with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties
under this Agreement. FSS shall be entitled to rely on and
may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
Any person, even though also an officer, trustee, partner,
employee or agent of FSS, who may be or become a member of
such Fund's Board, officer, employee or agent of any Fund,
shall be deemed, when rendering services to such Fund or
acting on any business of such Fund (other than services or
business in connection with the duties of FSS hereunder) to
be rendering such services to or acting solely for such Fund
and not as an officer, trustee, partner, employee or agent or
one under the control or direction of FSS even though paid by
FSS.
This Section 6 shall survive termination of this Agreement.
7. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in
writing signed by the party against which an enforcement of
the change, waiver, discharge or termination is sought.
8. FSS is expressly put on notice of the limitation of liability
as set forth in the Declaration of Trust of each Fund that is
a Massachusetts business trust and agrees that the
obligations assumed by each such Fund pursuant to this
Agreement shall be limited in any case to such Fund and its
assets and that FSS shall not seek satisfaction of any such
obligations from the shareholders of such Fund, the Trustees,
Officers, Employees or Agents of such Fund, or any of them.
9. The execution and delivery of this Agreement have been
authorized by the Trustees of FSS and signed by an authorized
officer of FSS, acting as such, and neither such
authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are
not binding upon any of the Trustees or shareholders of FSS,
but bind only the trust property of FSS as provided in the
Declaration of Trust of FSS.
10. Notices of any kind to be given hereunder shall be in writing
(including facsimile communication) and shall be duly given
if delivered to any Fund and to such Fund at the following
address: Federated Investors Tower, Pittsburgh, PA
15222-3779, Attention: President and if delivered to FSS at
Federated Investors Tower, Pittsburgh, PA 15222-3779,
Attention: President.
11. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with
respect to the subject hereof whether oral or written. If any
provision of this Agreement shall be held or made invalid by
a court or regulatory agency decision, statute, rule or
otherwise, the remainder of this Agreement shall not be
affected thereby. Subject to the provisions of Sections 3 and
4, hereof, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their
respective successors and shall be governed by Pennsylvania
law; provided, however, that nothing herein shall be
construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by
the Securities and Exchange Commission thereunder.
12. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and
delivered, shall be an original, and all such counterparts
shall together constitute one and the same instrument.
13. This Agreement shall not be assigned by any party without the
prior written consent of FSS in the case of assignment by any
Fund, or of the Funds in the case of assignment by FSS,
except that any party may assign to a successor all of or a
substantial portion of its business to a party controlling,
controlled by, or under common control with such party.
Nothing in this Section 14 shall prevent FSS from delegating
its responsibilities to another entity to the extent provided
herein.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the
day and year first above written.
Investment
Companies (listed on Exhibit 1)
Attest: /S/JOHN W. MCGONIGLE By: /S/ JOHN F. DONAHUE
John W. McGonigle John F. Donahue
Secretary Chairman
Federated Shareholder Services
Attest: /S/ JOSEPH M HUBER By: /S/ JOHN W. MCGONIGLE
Secretary President
<PAGE>
Exhibit 1
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
AUTOMATED GOVERNMENT MONEY TRUST
CASH TRUST SERIES, INC.:
Government Cash Series
Municipal Cash Series
Prime Cash Series
Treasury Cash Series
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
FEDERATED AMERICAN LEADERS FUND, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
FEDERATED ARMS FUND
Institutional Service Shares
Institutional Shares
FEDERATED EQUITY FUNDS:
Federated Aggressive Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated Capital Appreciation Fund
Class A Shares
Class B Shares
Class C Shares
Federated Growth Strategies Fund
Class A Shares
Class B Shares
Class C Shares
Federated Small Cap Strategies Fund
Class A Shares
Class B Shares
Class C Shares
FEDERATED EQUITY INCOME FUND, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES, INC.
Class A Shares
Class B Shares
Class C Shares
FEDERATED GNMA TRUST
Institutional Service Shares
Institutional Shares
FEDERATED GOVERNMENT INCOME SECURITIES, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
<PAGE>
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
FEDERATED GOVERNMENT TRUST"
Automated Government Cash Reserves
Automated Treasury Cash Reserves
U.S. Treasury Cash Reserves
Institutional Service Shares
Institutional Shares
FEDERATED HIGH INCOME BOND FUND, INC.
Class A Shares
Class B Shares
Class C Shares
FEDERATED HIGH YIELD TRUST
FEDERATED INCOME SECURITIES TRUST:
Federated Short-Term Income Fund
Institutional Service Shares
Institutional Shares
Federated Intermediate Income Fund
Institutional Service Shares
Institutional Shares
Federated Income Trust
Institutional Service Shares
Institutional Shares
FEDERATED INDEX TRUST:
Federated Max-Cap Fund
Class C Shares
Institutional Service Shares
Institutional Shares
Federated Mid-Cap Fund
Federated Mini-Cap Fund
Class C shares
Institutional Shares
FEDERATED INSTITUTIONAL TRUST:
Federated Institutional Short-Term Government Fund
FEDERATED INVESTMENT TRUST:
Federated Bond Index Fund
Institutional Shares
Institutional Service Shares
Federated Master Trust
FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
FEDERATED MUNICIPAL SECURITIES FUND, INC.
Class A Shares
Class B Shares
Class C Shares
<PAGE>
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
FEDERATED MUNICIPAL TRUST:
Alabama Municipal Cash Trust
California Municipal Cash Trust
Institutional Service Shares
Institutional Shares
Connecticut Municipal Cash Trust
Institutional Service Shares
Florida Municipal Cash Trust
Cash II Shares
Institutional Shares
Georgia Municipal Cash Trust
Maryland Municipal Cash Trust
Massachusetts Municipal Cash Trust
Institutional Service Shares
Boston 1784 Funds Shares
Michigan Municipal Cash Trust
Institutional Service Shares
Institutional Shares
Minnesota Municipal Cash Trust
Cash Series Shares
Institutional Shares
New Jersey Municipal Cash Trust
Institutional Service Shares
Institutional Shares
New York Municipal Cash Trust
Cash II Shares
Institutional Service Shares
North Carolina Municipal Cash Trust
Ohio Municipal Cash Trust
Cash II Shares
Institutional Shares
Institutional Service Shares
Pennsylvania Municipal Cash Trust
Cash Series Shares
Institutional Service Shares
Institutional Shares
Tennessee Municipal Cash Trust
Institutional Shares
Institutional Service Shares
Virginia Municipal Cash Trust
Institutional Service Shares
Institutional Shares
FEDERATED SHORT-TERM MUNICIPAL TRUST
Institutional Service Shares
Institutional Shares
FEDERATED SHORT-TERM U.S. GOVERNMENT TRUST
FEDERATED STOCK AND BOND FUND, INC.
Class A Shares
Class B Shares
Class C Shares
FEDERATED STOCK TRUST
FEDERATED TAX-FREE TRUST
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
FEDERATED U.S. GOVERNMENT BOND FUND
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 1-3 YEARS
Institutional Service Shares
Institutional Shares
FEDERATED U.S. GOVERNMENT SECURITIES FUND: 2-5 YEARS
Institutional Service Shares
Institutional Shares
FEDERATED U. S. GOVERNMENT SECURITIES FUND: 5-10 YEARS
Institutional Service Shares
Institutional Shares
FIXED INCOME SECURITIES, INC.:
Federated Limited Term Fund
Class A Shares
Class F Shares
Federated Limited Term Municipal Fund
Class A Shares
Class F Shares
Federated Strategic Income Fund
Class A Shares
Class B Shares
Class C Shares
Class F Shares
FEDERATED TOTAL RETURN SERIES, INC.:
Federated Limited Duration Government Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Bond Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Government Fund
Institutional Shares
Institutional Service Shares
Federated Total Return Limited Duration Fund
Institutional Shares
Institutional Service Shares
FEDERATED UTILITY FUND, INC.
Class A Shares
Class B Shares
Class C Shares
Class F Shares
INTERMEDIATE MUNICIPAL TRUST:
Federated Intermediate Municipal Trust
Federated Ohio Intermediate Municipal Trust
Federated Pennsylvania Intermediate Municipal Trust
<PAGE>
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
INTERNATIONAL SERIES, INC.:
Federated International Equity Fund
Class A Shares
Class B Shares
Class C Shares
Federated International Income Fund
Class A Shares
Class B Shares
Class C Shares
INVESTMENT SERIES FUNDS, INC.:
Federated Bond Fund
Class A Shares
Class B Shares
Class C Shares
Class F Shares
EDWARD D. JONES & CO. DAILY PASSPORT CASH TRUST
LIBERTY TERM TRUST, INC. -- 1999
LIBERTY U.S. GOVERNMENT MONEY MARKET TRUST
Class A Shares
Class B Shares
LIQUID CASH TRUST
MANAGED SERIES TRUST:
Federated Aggressive Growth Fund
Institutional Shares
Select Shares
Federated Managed Growth and Income Fund
Institutional Shares
Select Shares
Federated Managed Growth Fund
Institutional Shares
Select Shares
Federated Managed Income Fund
Institutional Shares
Select Shares
MONEY MARKET MANAGEMENT, INC.
<PAGE>
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
MONEY MARKET OBLIGATIONS TRUST:
Automated Cash Management Trust
Cash II Shares
Institutional Shares
Government Obligations Fund
Institutional Shares
Institutional Service Shares
Government Obligations Tax-Managed Fund
Institutional Shares
Institutional Service Shares
Prime Obligations Fund
Institutional Shares
Institutional Service Shares
Tax-Free Obligations Fund
Institutional Shares
Institutional Service Shares
Treasury Obligations Fund
Institutional Capital Shares
Institutional Shares
Institutional Service Shares
MONEY MARKET OBLIGATIONS TRUST II:
Municipal Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
Prime Cash Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
Prime Value Obligations Fund
Institutional Capital Shares
Institutional Service Shares
Institutional Shares
MONEY MARKET TRUST
MUNICIPAL SECURITIES INCOME TRUST:
Federated California Municipal Income Fund
Class F Shares
Federated Michigan IntermediateMunicipal Trust
Federated New York Municipal Income Fund
Class F Shares
Federated Ohio Municipal Income Fund
Class F Shares
Federated Pennsylvania Municipal Income Fund
Class A Shares
Class B Shares
TAX-FREE INSTRUMENTS TRUST
Institutional Service Shares
Investment Shares
TRUST FOR GOVERNMENT CASH RESERVES
TRUST FOR SHORT-TERM U.S. GOVERNMENT SECURITIES
TRUST FOR U.S. TREASURY OBLIGATIONS
<PAGE>
AMENDED AND RESTATED SHAREHOLDER SERVICES AGREEMENT
WORLD INVESTMENT SERIES, INC.:
Federated Asia Pacific Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated Emerging Markets Fund
Class A Shares
Class B Shares
Class C Shares
Federated European Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated International Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated International High Income Fund
Class A Shares
Class B Shares
Class C Shares
Federated International Small Company Fund
Class A Shares
Class B Shares
Class C Shares
Federated Latin American Growth Fund
Class A Shares
Class B Shares
Class C Shares
Federated World Utility Fund
Class A Shares
Class B Shares
Class C Shares
Class F Shares
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Federated Bond Fund
Class A Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 443,965,411
<INVESTMENTS-AT-VALUE> 448,652,871
<RECEIVABLES> 17,518,801
<ASSETS-OTHER> 10,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 466,182,129
<PAYABLE-FOR-SECURITIES> 10,649,264
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,251,385
<TOTAL-LIABILITIES> 12,900,649
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452,459,667
<SHARES-COMMON-STOCK> 3,811,668
<SHARES-COMMON-PRIOR> 519,301
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (279,124)
<ACCUMULATED-NET-GAINS> (3,586,203)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,687,140
<NET-ASSETS> 37,044,798
<DIVIDEND-INCOME> 46,012
<INTEREST-INCOME> 29,935,824
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,322
<NET-INVESTMENT-INCOME> 25,420,514
<REALIZED-GAINS-CURRENT> (149,872)
<APPREC-INCREASE-CURRENT> 317,325
<NET-CHANGE-FROM-OPS> 25,587,967
<EQUALIZATION> 620,232
<DISTRIBUTIONS-OF-INCOME> 1,762,704
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,691,576
<NUMBER-OF-SHARES-REDEEMED> 550,070
<SHARES-REINVESTED> 150,861
<NET-CHANGE-IN-ASSETS> 219,433,931
<ACCUMULATED-NII-PRIOR> 585,193
<ACCUMULATED-GAINS-PRIOR> (3,445,406)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,650,984
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,325,435
<AVERAGE-NET-ASSETS> 353,613,547
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.710
<PER-SHARE-GAIN-APPREC> (0.040)
<PER-SHARE-DIVIDEND> 0.710
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.720
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Federated Bond Fund
Class B Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 443,965,411
<INVESTMENTS-AT-VALUE> 448,652,871
<RECEIVABLES> 17,518,801
<ASSETS-OTHER> 10,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 466,182,129
<PAYABLE-FOR-SECURITIES> 10,649,264
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,251,385
<TOTAL-LIABILITIES> 12,900,649
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452,459,667
<SHARES-COMMON-STOCK> 12,926,180
<SHARES-COMMON-PRIOR> 2,845,544
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (279,124)
<ACCUMULATED-NET-GAINS> (3,586,203)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,687,140
<NET-ASSETS> 125,620,241
<DIVIDEND-INCOME> 46,012
<INTEREST-INCOME> 29,935,824
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,322
<NET-INVESTMENT-INCOME> 25,420,514
<REALIZED-GAINS-CURRENT> (149,872)
<APPREC-INCREASE-CURRENT> 317,325
<NET-CHANGE-FROM-OPS> 25,587,967
<EQUALIZATION> 620,232
<DISTRIBUTIONS-OF-INCOME> 5,584,736
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,011,129
<NUMBER-OF-SHARES-REDEEMED> 2,267,434
<SHARES-REINVESTED> 336,941
<NET-CHANGE-IN-ASSETS> 219,433,931
<ACCUMULATED-NII-PRIOR> 585,193
<ACCUMULATED-GAINS-PRIOR> (3,445,406)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,650,984
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,325,435
<AVERAGE-NET-ASSETS> 353,613,547
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> (0.040)
<PER-SHARE-DIVIDEND> 0.640
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.720
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Federated Bond Fund
Class C Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 443,965,411
<INVESTMENTS-AT-VALUE> 448,652,871
<RECEIVABLES> 17,518,801
<ASSETS-OTHER> 10,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 466,182,129
<PAYABLE-FOR-SECURITIES> 10,649,264
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,251,385
<TOTAL-LIABILITIES> 12,900,649
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452,459,667
<SHARES-COMMON-STOCK> 2,356,018
<SHARES-COMMON-PRIOR> 564,130
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (279,124)
<ACCUMULATED-NET-GAINS> (3,586,203)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,687,140
<NET-ASSETS> 22,896,604
<DIVIDEND-INCOME> 46,012
<INTEREST-INCOME> 29,935,824
<OTHER-INCOME> 0
<EXPENSES-NET> 4,561,322
<NET-INVESTMENT-INCOME> 25,420,514
<REALIZED-GAINS-CURRENT> (149,872)
<APPREC-INCREASE-CURRENT> 317,325
<NET-CHANGE-FROM-OPS> 25,587,967
<EQUALIZATION> 620,232
<DISTRIBUTIONS-OF-INCOME> 916,585
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,109,387
<NUMBER-OF-SHARES-REDEEMED> 386,472
<SHARES-REINVESTED> 68,973
<NET-CHANGE-IN-ASSETS> 219,433,931
<ACCUMULATED-NII-PRIOR> 585,193
<ACCUMULATED-GAINS-PRIOR> (3,445,406)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,650,984
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,325,435
<AVERAGE-NET-ASSETS> 353,613,547
<PER-SHARE-NAV-BEGIN> 9.760
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> (0.040)
<PER-SHARE-DIVIDEND> 0.640
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.720
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> Federated Bond Fund
Class F Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 443,965,411
<INVESTMENTS-AT-VALUE> 448,652,871
<RECEIVABLES> 17,518,801
<ASSETS-OTHER> 10,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 466,182,129
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</TABLE>
