ANNUAL REPORT
[american century logo]
American
Century(sm)
March 31, 1997
BENHAM
GROUP
Premium Government Reserve
Premium Capital Reserve
Premium Bond
[front cover]
TABLE OF CONTENTS
Report Highlights........................................... 1
Our Message to You.......................................... 2
Period Overview............................................. 3
Corporate Credit Review..................................... 4
Premium Government Reserve
Performance & Portfolio Information.................... 5
Management Q & A....................................... 6
Schedule of Investments................................ 8
Financial Highlights...................................26
Premium Capital Reserve
Performance & Portfolio Information.................... 9
Management Q & A.......................................10
Schedule of Investments................................12
Financial Highlights...................................27
Premium Bond
Performance & Portfolio Information....................15
Management Q & A.......................................16
Schedule of Investments................................19
Financial Highlights...................................28
Statements of Assets and Liabilities........................21
Statements of Operations....................................22
Statements of Changes in Net Assets.........................23
Notes to Financial Statements...............................24
Report of Independent Auditors..............................29
IRA/403(b) Information......................................30
Background Information
Investment Philosophy & Policies.......................32
Comparative Indices....................................32
Lipper Rankings........................................32
Portfolio Management Team..............................32
Credit Research Team...................................32
Glossary....................................................33
American Century Investments offers you nearly 70 fund choices covering stocks,
bonds, money markets, specialty investments and blended portfolios. To help you
find the funds that may meet your needs, we have divided American Century funds
into three groups based on investment style and objectives. These groups, which
appear below, are designed to help simplify your fund decisions.
American Century Investments--Family of Funds
BENHAM GROUP AMERICAN CENTURY GROUP TWENTIETH CENTURY GROUP
MONEY MARKET FUNDS ASSET ALLOCATION &
GOVERNMENT BOND FUNDS BALANCED FUNDS U.S. GROWTH FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS INTERNATIONAL FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
Premium Government Reserve
Premium Capital Reserve
Premium Bond
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and the Benham Group are registered marks of American Century
Services Corporation and Benham Management Corporation, respectively. American
Century is a service mark of American Century Services Corporation.
American Century Investments
REPORT HIGHLIGHTS
Period Overview
o The U.S. economy expanded much faster than expected during the twelve
months ended March 31, 1997. Despite strong economic growth, inflation
remained tame.
o The Fed raised short-term interest rates in late March in an effort to
pre-empt inflation going forward.
o Changing expectations of Fed policy caused bond yields to fluctuate
throughout the period.
o Mortgage-backed securities were the best-performing fixed-income sector,
while corporate debt outperformed both Treasury and government agency
securities.
Corporate Credit Review
o A strong U.S. economy led to improved corporate credit during 1996.
According to bond-rater Moody's Investors Service, corporate credit
upgrades outpaced downgrades by 283 to 184 in 1996.
o Despite the generally positive credit outlook, many "sub-prime" auto
lenders--so called because they make loans to borrowers with poor credit
histories--defaulted on debt payments or suffered credit rating downgrades.
Premium Government Reserve
o For the fiscal year ended March 31, 1997, the fund returned 5.07%, compared
with the 5.08% average return of its peers.
o We maintained about 10% to 15% of the portfolio in floating-rate notes to
try to improve the fund's ability to capture rising interest rates.
o Going forward, we expect strong economic growth and low levels of
unemployment may cause interest rates to trend higher.
Premium Capital Reserve
o For the fiscal year ended March 31, 1997, the fund matched the 5.13% return
of its peer group average.
o Some money market funds were hit by defaults and rating downgrades on debt
issued by sub-prime auto lenders, but Premium Capital Reserve was
unaffected because these risky issuers failed to meet our strict credit
criteria.
o Going forward, we expect strong economic growth and low levels of
unemployment may cause interest rates to trend higher.
Premium Bond
o For the fiscal year ended March 31, 1997, the fund returned 4.57%, compared
with the 4.23% average return of its peers.
o With bond prices trading in a range throughout the period, we maintained a
defensive posture, keeping the fund's duration at or below neutral.
o Rather than try to guess the Fed's interest rate intentions, we'll take a
conservative approach to managing the fund's duration and average maturity
going forward.
Premium Government
Total Returns: AS OF 3/31/97
6 Months 2.50%*
1 Year 5.07%
7-Day Current Yield: 5.02%
Net Assets: $38.8 million
(AS OF 3/31/97)
Inception Date: 4/1/93
Ticker Symbol: TWPXX
Premium Capital
Total Returns: AS OF 3/31/97
6 Months 2.52%*
1 Year 5.13%
7-Day Current Yield: 4.95%
Net Assets: $154 million
(AS OF 3/31/97)
Inception Date: 4/1/93
Ticker Symbol: TCRXX
Premium Bond
Total Returns: AS OF 3/31/97
6 Months 2.48%*
1 Year 4.57%
Net Assets: $21.7 million
(AS OF 3/31/97)
Inception Date: 4/1/93
Ticker Symbol: N/A
* Not annualized.
Annual Report Report Highlights 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
March 31, 1997, marked the end of an eventful year for our company and the
Benham Premium Reserve funds. Over the past twelve months, money market rates
fluctuated sharply in response to changing interest rate expectations. In U.S.
bond markets, mortgage-backed and corporate securities produced strong returns,
outperforming Treasury and government agency bonds. In the following pages, our
investment management team provides further details about these markets and how
your fund was managed during the year.
In January, nearly two years of integration between Twentieth Century and The
Benham Group culminated when we began serving you as American Century
Investments. Under this new name, we have combined our offerings of nearly 70
funds.
The new name also introduces three new groupings for the funds--the Benham Group
(money market and bond funds), the American Century Group (asset allocation,
balanced, conservative equity and specialty funds) and the Twentieth Century
Group (growth and international equity funds). The Premium Reserve funds have
moved to the Benham Group because their investment goals match key attributes of
that group.
In reviewing this report, you may notice some changes. Based on investors'
feedback, our shareholder reports have been redesigned with added features,
including a one-page report summary, a glossary, more charts and graphs, and
expanded management Q & A and background information sections. By June, all
American Century shareholder reports will have been converted to this format.
We appreciate your confidence in American Century and look forward to continuing
to serve you.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
President and Chief Executive Officer Vice Chairman
American Century Companies American Century Companies
2 Our Message to You American Century Investments
PERIOD OVERVIEW
U.S. Economy
The U.S. economy expanded by 4.1% during the twelve months ended March 31, 1997.
Strong employment and income growth coupled with the highest levels of consumer
confidence in six years helped the economy grow at a 4.7% annual rate during the
second quarter of 1996. While the pace of growth slowed to 2.1% during the third
quarter, the economy came back in the fourth quarter to expand at a 3.8% annual
rate. According to the government's initial estimate, the economy expanded at a
much-stronger-than-expected 5.6% annual rate during the first quarter of 1997.
Despite strong economic growth, inflation remained tame in 1996 and early 1997.
During the twelve months ended March 1997, consumer prices rose by just 2.8%.
Though wages rose during the period, overall labor costs were kept in check by
lower health care and benefit costs. A stronger dollar also helped keep
inflation at bay by making imported goods less expensive for U.S.
consumers.
Although inflation was modest, the U.S. Federal Reserve (the Fed) raised
short-term interest rates in March 1997 in an effort to pre-empt higher
inflation going forward. While we believe that the Fed may raise rates further,
we don't expect rates to move sharply higher. "Real" short-term interest
rates--stated rates minus the rate of inflation--are already at levels that
would typically inhibit economic growth.
U.S. Bond Market
Changing expectations of Fed interest rate policy caused bond yields to
fluctuate sharply between April 1996 and March 1997. Rates edged decidedly
higher over the last half of the period because of surging economic growth and
critical comments on inflation by ranking Fed officials. As a result, yields
finished the period about 20-70 basis points (a basis point equals 0.01%) higher
across the maturity spectrum.
At the short end of the yield curve, three-month Treasury bill (T-bill) yields,
which tend to reflect market participants' future expectations for short-term
interest rates, traded in a range between 4.92% and 5.40%. Overall, the yield on
the three-month T-bill rose from 5.13% at the beginning of the period to 5.32%
on March 31.
Treasury notes and bonds produced modest returns during the year ended March 31.
Because of rising interest rates, securities with shorter maturities-- which
usually suffer less price depreciation when interest rates rise--performed
better than longer-term securities. For example, the two-year Treasury note
posted a 5.65% return for the year, while the 30-year Treasury bond returned
1.65%. The yield on the 30-year Treasury bond, which fell to a low of 6.35% in
December, closed the period at 7.10%.
Mortgage-backed securities were the best-performing fixed-income sector during
the one-year period. Corporate securities also produced strong returns,
outperforming Treasury and government agency securities. Strong demand for these
securities caused yield spreads (the difference in yield between mortgage-backed
or corporate securities and Treasurys) to tighten to historically low levels.
[line graph - data below]
TREASURY YIELD CURVES
Years to Maturity 3/31/96 3/31/97
1 5.376 5.997
2 5.752 6.411
3 5.884 6.562
4 6.02 6.650
5 6.078 6.748
6 6.179 6.799
7 6.28 6.850
8 6.29433333 6.868
9 6.30866667 6.887
10 6.323 6.905
11 6.3744 6.935
12 6.4258 6.965
13 6.4772 6.995
14 6.5286 7.025
15 6.58 7.055
16 6.632 7.084
17 6.684 7.113
18 6.736 7.142
19 6.788 7.171
20 6.84 7.200
21 6.823 7.190
22 6.806 7.180
23 6.789 7.170
24 6.772 7.160
25 6.755 7.150
26 6.7378 7.139
27 6.7206 7.128
28 6.7034 7.117
29 6.6862 7.106
30 6.669 7.095
Source: Bloomberg Financial Markets
Annual Report Period Overview 3
CORPORATE CREDIT REVIEW
A strong U.S. economy led to improved corporate credit conditions during the
twelve months ended March 31, 1997. Steady corporate earnings growth contributed
to a record number of corporate credit rating upgrades. According to bond-rating
agency Moody's Investors Service, upgrades outpaced downgrades during 1996 by
283 to 184, a ratio of 3 to 2.
Specific industries benefiting from the upgrade trend included industrial
companies, most recently in the airline sector. In the financial sector, banks
continued a credit upgrade trend that began a few years ago, while a rising
stock market and heavy initial public offering activity translated into upgrades
for brokerage firms.
Nevertheless, we continue to monitor a few negative credit trends evident during
the period. Two problem areas highlight how our proactive and conservative
approach to credit analysis helps limit the funds' credit risk.
So far in 1997, several "sub-prime" auto lenders--so called because they make
loans to borrowers with poor credit histories--have defaulted on debt payments
or experienced credit rating downgrades.
The difficulties experienced by sub-prime lenders (which struck some mutual fund
companies) illustrate the importance of our conservative credit criteria. Take
sub-prime lender Mercury Finance, which defaulted on its debt payments, as an
example. Mercury's direct debt issues were considered "tier 1" according to SEC
standards. The SEC defines a "tier 1" security as an issue that has received the
highest possible short-term rating from two independent rating agencies. Our
standards for considering a security for purchase are much tougher. Mercury's
debt failed to clear even the first hurdle in our internal rating process.
Another development we're watching closely is the ongoing Japanese banking
crisis. Japanese banks have suffered since 1990, when speculative bubbles in
both the Japanese real estate and stock markets burst. Japan's economy is
recovering slowly, while its real estate and stock markets continue to
deteriorate. We expect many Japanese banks to report significant losses from bad
real estate loans, falling equity positions and sluggish loan activity when the
Japanese fiscal year ends March 31.
To prop up the banking system, the Japanese government announced it would back
the 20 largest Japanese banks. We've pared down that list of 20 to only those
banks that can function independently. In practice, that means the list of
Japanese banks with which we'll do business is much shorter than the list of 20
that others find acceptable. Our corporate money market and bond funds currently
have no Japanese bank exposure.
[line graph - data below]
IMPROVING CORPORATE CREDIT QUALITY
Downgrades Upgrades
'87 189 102
'88 237 138
'89 339 138
'90 433 98
'91 350 119
'92 227 136
'93 154 163
'94 160 183
'95 221 205
'96 184 283
Source: Moody's Investors Service
4 Corporate Credit Review American Century Investments
<TABLE>
<CAPTION>
PREMIUM GOVERNMENT RESERVE
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
Premium Government Reserve .............................. 2.50% 5.07% 5.06% 4.48%
90-Day Treasury Bill Index .............................. 2.54% 5.15% 5.18% 4.66%
Average Institutional U.S. Government
Money Market Fund(1) .................................... 2.51% 5.08% 5.06% 4.53%(2)
Fund's Ranking Among Institutional U.S. Government
Money Market Funds(1) ................................... -- 46 out of 79 32 out of 59 35 out of 51
(1) According to Lipper Analytical Services.
(2) Returns since 4/30/93, the date nearest the fund's inception for which
return data are available. Inception date was April 1, 1993.
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
YIELDS AS OF MARCH 31, 1997
7-DAY 7-DAY
CURRENT EFFECTIVE
YIELD YIELD
Premium Government Reserve 5.02% 5.15%
Yields are defined in the Glossary on page 33.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 29 27
Weighted Average Maturity 40 days 55 days
Expense Ratio 0.45% 0.44%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
Many of the investment terms in this report are
defined in the Glossary on page 33.
Annual Report Premium Government Reserve 5
PREMIUM GOVERNMENT RESERVE
Management Q & A
An interview with Bob Gahagan, a vice president and senior portfolio manager on
the Premium Reserve funds management team.
HOW DID THE FUND PERFORM?
The fund performed in line with its peer group average. For the fiscal year
ended March 31, 1997, the fund returned 5.07%, compared with the 5.08% average
return of the 79 "Institutional U.S. Government Money Market Funds" tracked by
Lipper Analytical Services. (See the Total Returns table on the previous page
for other fund performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
Though money market yields, as measured by the three-month Treasury bill
(T-bill), traded in a range between 4.92% and 5.40%, yields actually closed
March 1997 near where they began the period. The fluctuation of money market
rates was a direct result of the market's uncertainty over Fed monetary policy
(see page 3). As a result of this uncertainty, we positioned the fund
defensively, keeping its average maturity slightly shorter than its neutral
range of 40-45 days for the majority of the period. However, we extended the
fund's average maturity slightly in November and December because slower
economic growth and better-than-expected numbers on inflation reduced the chance
of a Fed interest rate increase.
Nevertheless, we again shortened the fund's average maturity because strong
first-quarter economic growth increased the likelihood of a short-term rate
hike. A shorter average maturity allows the fund to better capture the rise in
rates by reinvesting its maturing assets more quickly.
YOU MAINTAINED ABOUT 10% TO 15% OF THE FUND'S ASSETS IN FLOATING-RATE NOTES
(FLOATERS) DURING THE PERIOD. WHY?
We believe holding floaters is a good way to improve the fund's responsiveness
to changing interest rates. Floaters reflect changes in interest rates quickly
because their interest rates reset on a periodic basis. Most of the floaters we
hold reset weekly off of the three- or six-month T-bill rate. T-bill floaters
are especially attractive in a rising interest rate environment because three-
and six-month T-bill rates tend to quickly reflect market participants' future
expectations for the level of interest rates.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
U.S. Government Agency
Discount Notes 75%
U.S. Government Agency
Floating-Rate Notes 11%
U.S. Government
Agency Notes 11%
Repurchase Agreements 3%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
U.S. Government Agency
Discount Notes 67%
U.S. Government
Agency Notes 17%
U.S. Government Agency
Floating-Rate Notes 16%
6 Premium Government Reserve American Century Investments
PREMIUM GOVERNMENT RESERVE
WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES GOING FORWARD?
High levels of consumer confidence, rising employment and wage growth argue for
continued solid economic expansion going forward. Until the economy shows signs
of slowing, there will be upward pressure on interest rates. As a result, we
expect the trend toward higher rates to continue in the months ahead.
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SIX
MONTHS?
We'll likely keep the fund's average maturity relatively short, so that if
interest rates continue to rise, the fund will be positioned to capture rising
yields. We also plan to increase the fund's holdings of floating-rate notes,
which will also help the fund's yield reflect rising interest rates more
quickly.
[pie charts]
PORTFOLIO COMPOSITION BY MATURITY (as of 3/31/97)
1-30 Days 55%
31-60 Days 15%
61-90 Days 21%
91-180 Days 8%
181-397 Days 1%
PORTFOLIO COMPOSITION BY MATURITY (as of 9/30/96)
1-30 Days 61%
31-60 Days 18%
61-90 Days 14%
91-180 Days 7%
Annual Report Premium Government Reserve 7
SCHEDULE OF INVESTMENTS
PREMIUM GOVERNMENT RESERVE
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES(1)
$ 930,000 FFCB, 5.55%, 4/1/97 $ 930,000
3,200,000 FHLB, 5.45%, 4/10/97 3,195,831
1,400,000 FHLB, 5.42%, 4/17/97 1,396,696
500,000 FHLB, 5.58%, 11/21/97 482,775
3,000,000 FHLMC, 5.45%, 4/4/97 through
4/9/97 2,997,249
8,843,000 FHLMC, 5.47%, 4/29/97 through
6/5/97 8,777,711
1,500,000 FHLMC, 5.52%, 6/25/97 1,480,450
9,000,000 FNMA, 5.44%, 4/15/97 through
6/3/97 8,952,925
---------
TOTAL U.S. GOVERNMENT AGENCY
DISCOUNT NOTES--74.7% 28,213,637
----------
OTHER U.S. GOVERNMENT AGENCY SECURITIES(1)
1,000,000 FFCB, 5.34%, 7/1/97 999,310
1,000,000 FFCB, VRN, 5.60%, 4/1/97,
RESETS WEEKLY OFF THE 6-MONTH
T-BILL RATE PLUS 0.05% WITH NO
CAPS, FINAL MATURITY 6/13/97 1,000,000
1,000,000 FHLB, 5.79%, 5/23/97 1,001,663
1,000,000 FHLB, 6.22%, 6/27/97 1,001,844
250,000 FHLB, 7.61%, 7/3/97 251,294
1,000,000 FHLB, VRN, 5.67%, 4/1/97,
resets daily off the Fed Funds
rate plus 0.15% with no caps,
final maturity 8/1/97 1,000,000
2,000,000 FHLMC, 5.375%, 6/30/97 1,999,825
1,500,000 FNMA, VRN, 5.61%, 4/1/97,
resets weekly off the 3-month
T-Bill rate plus 0.20% with no
caps, final maturity 8/22/97 1,499,718
1,000,000 SLMA, VRN, 5.59%, 4/1/97,
resets weekly off the 3-month
T-Bill rate plus 0.18% with no
caps, final maturity 11/10/97 999,708
TOTAL OTHER U.S. GOVERNMENT ---------
AGENCY SECURITIES--22.4% 9,753,362
---------
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--2.9%
Repurchase Agreement, Morgan (J.P.) & Co. Inc.,
(U.S. Treasury obligations), in a joint trading
account at 6.20%, dated 3/31/97,
due 4/1/97 (Delivery value $1,128,194) $ 1,128,000
-----------
TOTAL INVESTMENT SECURITIES--100.0% $39,094,999
===========
Notes To Schedule of Investments
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
resets = The frequency with which a fixed-income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that the
coupon will vary significantly from current market rates.
SLMA = Student Loan Marketing Association
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective March 31, 1997.
(1) The rates for U.S. Government Agency Discount Notes are the yield to
maturity at March 31, 1997. The rates for other U.S. Government Agency
securities are the stated coupon rates.
See Notes to Financial Statements
8 Premium Government Reserve American Century Investments
<TABLE>
<CAPTION>
PREMIUM CAPITAL RESERVE
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
Premium Capital Reserve ................................. 2.52% 5.13% 5.12% 4.54%
90-Day Treasury Bill Index .............................. 2.54% 5.15% 5.18% 4.66%
Average Institutional
Money Market Fund(1) .................................... 2.53% 5.13% 5.12% 4.63%(2)
Fund's Ranking Among Institutional
Money Market Funds(1) ................................... -- 87 out of 163 71 out of 124 62 out of 96
(1) According to Lipper Analytical Services.
(2) Returns since 4/30/93, the date nearest the fund's inception for which
return data are available. Inception date was April 1, 1993.
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
</TABLE>
YIELDS AS OF MARCH 31, 1997
7-DAY 7-DAY
CURRENT EFFECTIVE
YIELD YIELD
Premium Capital Reserve 4.95% 5.07%
Yields are defined in the Glossary on page 33.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 51 34
Weighted Average Maturity 46 days 49 days
Expense Ratio 0.45% 0.45%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
Many of the investment terms in this report are
defined in the Glossary on page 33.
Annual Report Premium Capital Reserve 9
PREMIUM CAPITAL RESERVE
Management Q & A
An interview with Bob Gahagan, a vice president and senior portfolio manager on
the Premium Reserve funds management team.
HOW DID THE FUND PERFORM?
The fund's performance was consistent with that of its peers. For the fiscal
year ended March 31, 1997, the fund returned 5.13%, matching the average return
of the 163 "Institutional Money Market Funds" tracked by Lipper Analytical
Services. (See the Total Returns table on the previous page for other fund
performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
Though money market yields, as measured by the three-month Treasury bill
(T-bill), traded in a range between 4.92% and 5.40%, yields actually closed
March 1997 near where they began the period. The fluctuation of money market
rates was a direct result of the market's uncertainty over Fed monetary policy
(see page 3). Concern that the Fed might raise rates led us to keep the fund's
average maturity near its neutral range of 40-45 days. A shorter, more defensive
average maturity allows the fund to better capture rising rates by reinvesting
its maturing assets more quickly.
SOME MONEY MARKET FUNDS WERE HIT IN EARLY 1997 BY DEFAULTS AND RATING DOWNGRADES
ON DEBT ISSUED BY SOME OF THE MORE AGGRESSIVE AUTO LOAN COMPANIES, CALLED
"SUB-PRIME LENDERS." DID THE FUND HOLD ANY OF THESE SECURITIES?
No. The consistent, disciplined application of our conservative credit criteria
is one reason we weren't affected by the defaults and downgrades that hit some
of our competitors. We simply don't want to increase our credit risk for a
slightly higher yield. We rely on our high credit standards to narrow down the
list of debt issuers to those we feel are the most creditworthy. From that
exclusive list, we do our homework to uncover the best yield and return stories.
WHAT ARE ASSET-BACKED SECURITIES AND WHY HAVE YOU INCLUDED THEM IN THE FUND?
Asset-backed securities are debt securities that represent ownership in a pool
of assets. Auto loans and credit cards are good examples of types of debt that
are commonly packaged as asset-backed securities. Asset-backed securities
generally have very high credit quality because they usually carry credit
enhancements, such as bond insurance. The securities are also often
overcollateralized, which means the security contains more assets than are
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
Commercial Paper 83%
Floating-Rate Notes 7%
Asset-Backed Securities 5%
U.S. Government Agency
Floating-Rate Notes 3%
CDs 2%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Commercial Paper 82%
U.S. Government Agency
Floating-Rate Notes 10%
Floating-Rate Notes 6%
CDs 2%
10 Premium Capital Reserve American Century Investments
PREMIUM CAPITAL RESERVE
required to pay off the debt. Another attraction of asset-backed securities is
that they typically have higher yields than commercial paper and CDs. Consistent
with our conservative approach to managing credit risk, we've added specialists
in asset-backed securities to our corporate credit research staff.
WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES GOING FORWARD?
High levels of consumer confidence, rising employment and wage growth seem to
argue for continued solid economic growth going forward. Until the economy shows
signs of slowing, there will be upward pressure on interest rates. As a result,
we expect the trend toward higher rates to continue in the months ahead.
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SIX
MONTHS?
Going forward, we'll likely shorten the fund's average maturity and maintain or
even increase the fund's holdings of floating-rate notes. If interest rates
continue to rise, the fund will be well positioned to capture rising yields. We
also expect to continue to work closely with our credit research staff to
uncover value in the asset-backed securities market.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 3/31/97)
A1+ 70%
A1 25%
A2 3%
Unrated U.S. Government
Agency Securities 2%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 9/30/96)
A1+ 76%
A1 18%
Unrated U.S. Government
Agency Securities 6%
Annual Report Premium Capital Reserve 11
SCHEDULE OF INVESTMENTS
PREMIUM CAPITAL RESERVE
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
COMMERCIAL PAPER(1)
AUTOMOBILES & AUTO PARTS--0.7%
$ 1,000,000 PACCAR Financial Corp., 5.83%,
4/4/97 $ 999,550
-----------
BANKING--18.1%
6,000,000 Abbey National North, 5.59%,
4/23/97 5,980,677
4,000,000 Bil North America, Inc., 5.52%,
5/21/97 3,970,778
4,000,000 Cosco (Cayman) Company, 5.65%,
4/17/97 3,990,489
5,000,000 Galicia Funding, 5.52%, 6/3/97 4,952,969
4,000,000 Generale Bank, Inc., 5.52%,
6/3/97 3,962,480
4,500,000 Morgan (J.P.) & Co. Inc., 5.53%,
7/9/97 4,433,422
----------
27,290,815
----------
CHEMICALS & RESINS--3.6%
5,400,000 Bayer AG, 5.52%, 5/12/97
(Acquired 2/21/97, Cost
$5,336,880)(2) 5,367,651
---------
COMMUNICATIONS SERVICES--2.0%
3,000,000 Ameritech Corp., 5.54%, 4/28/97 2,988,097
---------
COMPUTER SYSTEMS--2.1%
3,300,000 Hitachi Credit Corp., 5.52%,
5/1/97 through 6/25/97 3,267,719
---------
DIVERSIFIED COMPANIES--2.8%
4,300,000 Mitsubishi International,
5.52%-5.53%,
4/29/97 through 6/13/97 4,268,471
---------
EDUCATION--2.8%
4,300,000 Leland Stanford, 5.52%-5.76%,
4/9/97 through 5/22/97 4,286,778
---------
ELECTRICAL & ELECTRONIC
COMPONENTS--2.1%
3,200,000 Panasonic Finance Inc., 5.52%,
6/9/97 (Acquired 3/10/97,
Cost $3,156,805)(2) 3,167,248
---------
Principal Amount Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--17.3%
$ 5,000,000 BT Securities Corporation, 5.67%,
4/15/97 $ 4,989,500
7,081,000 Bass Finance (C.I.) Ltd.,
5.52%-5.53%,
4/29/97 through 5/6/97 7,048,213
2,400,000 General Electric Capital Corp.,
6.75%, 4/1/97 2,400,000
4,600,000 General Motors Acceptance Corp.,
5.52%-5.55%,
5/15/97 through 8/4/97 4,539,445
3,000,000 Hitachi Credit America Corp.,
5.76%, 4/9/97 2,996,420
4,100,000 Mobil Australia Finance, 5.67%,
4/15/97 (Acquired 3/14/97,
Cost $4,080,612)(2) 4,091,517
----------
26,065,095
FOOD & BEVERAGE--2.6% ----------
4,000,000 Brown-Forman Corp., 5.83%,
4/4/97 3,998,133
INSURANCE--6.7% ---------
2,110,000 Metlife Funding Inc., 5.52%,
5/19/97 2,095,202
5,000,000 SAFECO Credit Co. Inc., 5.73%,
4/11/97 4,992,570
800,000 St. Paul Companies, Inc. (The),
6.75%, 4/1/97 (Acquired
3/27/97, Cost $799,344)(2) 800,000
2,200,000 USAA Capital Corp., 5.60%,
4/22/97 2,193,186
----------
10,080,958
METALS & MINING--5.2% ----------
2,000,000 RTZ America Inc., 5.52%, 6/9/97 1,979,223
6,000,000 U.S. Borax & Chemical Corp.,
5.52%, 5/28/97 5,950,030
---------
7,929,253
PAPER & PUBLISHING--4.3% ---------
6,500,000 Weyerhaeuser Co., 5.52%,
5/14/97 6,458,696
PETROLEUM REFINING--1.5% ---------
2,300,000 Chevron Transport, 5.60%,
4/22/97 2,292,836
See Notes to Financial Statements ---------
12 Premium Capital Reserve American Century Investments
SCHEDULE OF INVESTMENTS
PREMIUM CAPITAL RESERVE
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
SECURITY BROKERS & DEALERS--3.9%
$ 6,000,000 Morgan Stanley Group Inc., 5.52%,
5/16/97 through 5/23/97 $ 5,958,197
SOVEREIGN GOVERNMENTS ----------
& AGENCIES--2.0%
3,000,000 Canadian Wheat Board, 5.52%,
5/14/97 2,981,044
UTILITIES (ELECTRIC)--3.2% ----------
4,800,000 National Rural Utilities Cooperative
Finance Corp., 5.53%-5.77%,
4/8/97 through 4/29/97 4,788,162
MISCELLANEOUS--1.7% ----------
2,500,000 Clorox Co., 5.65%, 4/17/97 2,494,280
----------
TOTAL COMMERCIAL PAPER--82.6% 124,682,983
-----------
ASSET-BACKED SECURITIES(3)
1,331,137 Ford Motor Credit Co. Auto Lease
Trust, Series 1996-1, Cl A1,
5.45%, 11/15/97 1,331,053
1,274,122 Ford Motor Credit Co. Auto Owner
Trust, Series 1996-B, Cl A1,
5.51%, 10/15/97 1,274,275
2,887,674 TMS Auto Grantor Trust, Series
1996-2, Cl A1, 5.51%,
1/15/98 2,887,674
2,000,000 WFS Financial Owner Trust, Series
1997-A, Cl A1, 5.63%, 3/20/98 2,000,000
----------
TOTAL ASSET-BACKED SECURITIES--5.0% 7,493,002
----------
CERTIFICATES OF DEPOSIT--2.0%(1)
3,000,000 ABN Amro Bank Canada, 5.68%,
4/14/97 2,994,164
----------
Principal Amount Value
- --------------------------------------------------------------------------------
OTHER CORPORATE DEBT
$ 2,500,000 American Express Centurion, VRN,
5.50%, 4/23/97, resets
monthly off the 1-month LIBOR
minus 0.03% with no caps, final
maturity 12/23/97 $ 2,500,000
1,800,000 First Bank N.A., Minneapolis, VRN,
5.62%, 4/16/97, resets
monthly off the 1-month LIBOR
minus 0.04% with no caps, final
maturity 11/19/97 1,800,000
4,500,000 General American Life, VRN,
5.58%, 4/1/97, resets
monthly off the 1-month LIBOR
plus 0.20% with no caps, final
maturity 1/6/98 (Acquired
1/3/97, Cost $4,500,000)(4) 4,500,000
2,000,000 PNC Bank Corp., VRN, 5.34%,
4/15/97, resets monthly off the
1-month LIBOR minus 0.10%
with no caps, final maturity
5/15/97 1,999,843
----------
TOTAL OTHER CORPORATE DEBT--7.1% 10,799,843
----------
U.S. GOVERNMENT AGENCY SECURITIES
2,000,000 FHLB, VRN, 5.67%, 4/1/97,
resets daily off the Fed Funds
rate plus 0.15% with no caps,
final maturity 8/1/97 2,000,000
3,000,000 FNMA, VRN, 5.53%, 4/1/97,
resets daily off the Fed Funds
rate plus 0.01% with no caps,
final maturity 5/5/97 2,999,758
TOTAL U.S. GOVERNMENT ----------
AGENCY SECURITIES--3.3% 4,999,758
------------
TOTAL INVESTMENT SECURITIES--100.0% $150,969,750
============
See Notes to Financial Statements
Annual Report Premium Capital Reserve 13
SCHEDULE OF INVESTMENTS
PREMIUM CAPITAL RESERVE
Notes to Schedule of Investments
FHLB = Federal Home Loan Bank
FNMA = Federal National Mortgage Association
LIBOR = London Interbank Offered Rate
resets = The frequency with which a fixed-income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that the
coupon will vary significantly from current market rates.
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective March 31, 1997.
(1) The rates for commercial paper and certificates of deposit are the yield to
maturity at March 31, 1997.
(2) Security was purchased under Rule 144A or Section 4(2) of the Securities
Act of 1933 and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at March 31, 1997, was $13,426,416
which represented 8.7% of net assets.
(3) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(4) Restricted as to resale. Security may require registration under the
Securities Act of 1933 or an exemption therefrom in order to effect sale in
the ordinary course of business. The aggregate value of restricted
securities was $4,500,000, which represented 2.9% of net assets.
See Notes to Financial Statements
14 Premium Capital Reserve American Century Investments
<TABLE>
<CAPTION>
PREMIUM BOND
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
TOTAL RETURNS AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
Premium Bond 2.48% 4.57% 6.81% 5.31%
Lehman Aggregate Bond Index 2.42% 4.91% 6.86% 5.72%
Average A-Rated Corporate Debt Fund(1) 2.21% 4.23% 5.98% 5.14%(2)
Fund's Ranking Among
A-Rated Corporate Debt Funds(1) -- 42 out of 119 15 out of 84 33 out of 65
(1) According to Lipper Analytical Services.
(2) Returns since 4/30/93, the date nearest the fund's inception for which
return data are available. Inception date was April 1, 1993.
</TABLE>
See pages 32-33 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $100,000 OVER THE LIFE OF THE FUND
Value on 3/31/97
$100,000 investment made 4/1/93
Premium Bond Lehman Aggregate Bond Index
4/1/93 $100,000 $100,000
Apr-93 $100,740 $100,700
May-93 $100,300 $100,820
Jun-93 $101,870 $102,650
Jul-93 $102,460 $103,230
Aug-93 $104,460 $105,040
Sep-93 $104,620 $105,330
Oct-93 $104,890 $105,720
Nov-93 $104,020 $104,820
Dec-93 $104,530 $105,390
Jan-94 $105,970 $106,820
Feb-94 $103,370 $104,960
Mar-94 $100,910 $102,370
Apr-94 $99,910 $101,550
May-94 $99,770 $101,540
Jun-94 $99,530 $101,320
Jul-94 $101,650 $103,330
Aug-94 $101,540 $103,460
Sep-94 $100,020 $101,930
Oct-94 $99,810 $101,840
Nov-94 $99,590 $101,620
Dec-94 $100,250 $102,320
Jan-95 $102,120 $104,340
Feb-95 $104,630 $106,820
Mar-95 $105,430 $107,480
Apr-95 $106,990 $108,980
May-95 $111,950 $113,200
Jun-95 $112,630 $114,030
Jul-95 $112,070 $113,770
Aug-95 $113,680 $115,150
Sep-95 $114,820 $116,270
Oct-95 $116,560 $117,780
Nov-95 $118,530 $119,540
Dec-95 $120,400 $121,220
Jan-96 $121,110 $122,030
Feb-96 $118,510 $119,910
Mar-96 $117,580 $119,070
Apr-96 $116,750 $118,400
May-96 $116,420 $118,160
Jun-96 $117,860 $119,750
Jul-96 $118,130 $120,080
Aug-96 $117,910 $119,880
Sep-96 $119,980 $121,960
Oct-96 $122,820 $124,670
Nov-96 $125,150 $126,800
Dec-96 $123,690 $125,620
Jan-97 $123,960 $126,010
Feb-97 $124,310 $126,320
Mar-97 $122,960 $124,920
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The line representing the fund's total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total return line of the index does not.
PORTFOLIO AT A GLANCE
3/31/97 3/31/96
Number of Securities 47 45
Weighted Average Maturity 8.6 years 9.3 years
Average Duration 4.6 years 5.3 years
Expense Ratio 0.45% 0.43%
YIELD AS OF MARCH 31, 1997
30-DAY
SEC
YIELD
Premium Bond 6.50%
Yield is defined in the Glossary on page 33.
Many of the investment terms in this report are
defined in the Glossary on page 33.
Annual Report Premium Bond 15
PREMIUM BOND
Management Q & A
An interview with Bud Hoops, a senior vice president and portfolio manager on
the Premium Reserve funds management team.
HOW DID THE FUND PERFORM?
The fund performed very well relative to its peers during the twelve months
ended March 31, 1997. For the fiscal year, the fund returned 4.57%, compared
with the 4.23% average return of the 119 "A-Rated Corporate Debt Funds" tracked
by Lipper Analytical Services. (See the Total Returns table on the previous page
for other fund performance comparisons.) The fund's relatively low expenses and
our disciplined, team-oriented management approach are important reasons for the
fund's strong performance.
HOW WAS THE FUND POSITIONED DURING THE PERIOD?
We maintained a defensive posture, keeping the fund's duration at or below
neutral for most of the period. We shortened the fund's duration from 5.3 years
at the beginning of the period to 4.6 years by the end of March. The fund's
short duration was a benefit as bond prices declined overall during the past
year. Rather than try to guess the direction of interest rates, we took a
steady, conservative approach to managing the fund that paid off with
above-average returns.
We also increased the fund's holdings of mortgage-backed securities, which were
the top-performing fixed-income sector for the year. Mortgage-backed securities,
with their relatively high yields, tend to perform best when yield
[bar chart - data below]
PREMIUM BOND FISCAL YEAR RETURNS
(Periods ended March 31)
Premium Bond Lehman Aggregate Bond Index
1994 0.92% 2.37%
1995 4.48% 4.99%
1996 11.53% 10.79%
1997 4.57% 4.91%
This chart illustrates the historical year-by-year volitility of the fund's
returns since its inception and compares them with the index's returns. The
fund's total returns include operating expenses, while the index's do not. See
page 32 for a definition of the index.
16 Premium Bond American Century Investments
PREMIUM BOND
contributes more than price changes to total return. Because mortgage-backed
issues tend not to perform as well when rates are rising, we added them only
selectively over the last few months, instead making the bulk of our purchases
during the first half of the period.
HOW HAS THE STRONG GROWTH OF THE U.S. ECONOMY AFFECTED THE CORPORATE BOND
MARKET?
The big story in the corporate bond market over the last few years has been the
compression of credit spreads. Corporate bonds typically offer higher yields
than Treasury debt as compensation for increased credit risk. The difference in
yields is known as the "spread." Spreads between like-maturity corporates and
Treasurys have fallen to ten-year lows, or about one-third of their historical
averages.
A vibrant U.S. economy is behind this trend: the strong economy helped to
improve corporate balance sheets, which translated into credit upgrades and
higher prices for corporate debt. The rapid pace of stock-financed corporate
mergers and acquisitions also improved corporate credit by encouraging economies
of scale and eliminating inefficiencies. Heavy demand from mutual fund managers
and foreign buyers also helped increase prices and lower yields on corporate
bonds.
BUT YOU ACTUALLY DECREASED THE FUND'S HOLDINGS OF CORPORATE DEBT DURING THE
PERIOD. WHY?
The compression of spreads between corporate and Treasury securities has made
corporate securities less attractive than other fixed-income sectors. As a
result, we've been taking profits by selling some of our corporate securities
and putting that cash to work in Treasurys. But if spreads widen, we would
likely increase our exposure to corporate debt.
YOU MAINTAINED MODEST HOLDINGS OF CORPORATE BONDS RATED BBB DURING THE PERIOD.
WHY?
Selectively adding BBB-rated corporate securities proved to be a good way to
enhance the fund's yield and boost returns. We worked very closely with our
corporate credit research team to identify securities we felt were undervalued
by virtue of their credit rating or market valuation. The trend toward improving
corporate credit resulted in rating upgrades and tighter spreads between
corporate bonds rated AAA and BBB. Rating upgrades benefit the fund because
upgraded securities typically rise in value.
YOU'VE TALKED A LOT ABOUT CORPORATE CREDIT CONSIDERATIONS. CAN YOU EXPLAIN HOW
THE CREDIT RESEARCH TEAM FITS INTO THE OVERALL MANAGEMENT OF THE FUND?
Yes. The credit research team plays an integral part in our security selection
process, reviewing every security considered for purchase by our corporate money
market and bond funds. As a result, we're often able to purchase securities that
we feel are undervalued but are likely to appreciate in value because of credit
rating upgrades.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 3/31/97)
U.S. Treasury Securities 40%
Corporate Bonds 32%
Mortgage-Backed
Securities 17%
Sovereign Governments &
Agencies 10%
Cash 1%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 9/30/96)
Corporate Bonds 43%
U.S. Treasury Securities 31%
Mortgage-Backed
Securities 15%
Sovereign Governments &
Agencies 9%
Cash 2%
Annual Report Premium Bond 17
PREMIUM BOND
MANY ANALYSTS SEEM TO THINK INTEREST RATES ARE HEADED HIGHER. HOW WOULD HIGHER
RATES AFFECT THE LONGER-MATURITY CORPORATE BONDS THE FUND TYPICALLY INVESTS IN?
In general, the longer a fixed-income security's maturity, the more its price
will fluctuate in response to a change in interest rates. That explains why
short- and intermediate-term securities outperformed longer-maturity bonds over
the past twelve months. Dramatically higher rates would pose a greater risk to
corporate bonds, however. If the Fed were to increase interest rates sharply in
an effort to pre-empt inflation, higher rates would likely slow the economy.
Slower economic activity would hurt corporations' balance sheets and reduce the
attractiveness of corporate debt.
WHAT'S YOUR OUTLOOK FOR INTEREST RATES OVER THE NEXT SIX MONTHS?
It's uncertain if the Fed's March 1997 interest rate increase was an isolated
event or the first in a series of moves. Nevertheless, high levels of consumer
confidence, a vibrant housing market and rising employment and wage growth all
seem to argue for continued strong U.S. economic growth. While inflation has so
far remained tame, we're uncertain if prices can remain subdued with the economy
growing at a pace of more than 4% a year.
Though overall labor costs have remained under control, the Fed is concerned
that the emerging trend toward rising wages may lead to inflation. (Wages are an
important consideration for future inflation because they account for about
sixty percent of total business costs and because consumer spending, which
typically rises along with wages, accounts for about two-thirds of all economic
activity.) It's unlikely that labor costs will remain tame going
forward--improvements in worker productivity and savings on health care and
benefits that have so far kept labor costs in check have likely run their
course. As a result, we expect the Fed will continue to hike short-term interest
rates in an attempt to cool the economy. But because the Fed is acting
pre-emptively by hiking interest rates before inflation gets out of hand, we
don't think rates are headed dramatically higher.
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND GOING FORWARD?
We'll likely maintain the fund's defensive posture in the near term. Rather than
try to guess the Fed's interest rate intentions, we'll take a conservative
approach to managing the fund's duration and average maturity. We'll continue to
use our value-oriented approach to security selection. That means that we're
likely to underweight corporate bonds while adding Treasury securities to the
fund in coming months.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 3/31/97)
AAA 58%
AA 7%
A 22%
BBB 13%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 9/30/96)
AAA 48%
AA 14%
A 20%
BBB 18%
18 Premium Bond American Century Investments
SCHEDULE OF INVESTMENTS
PREMIUM BOND
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
$ 700,000 U.S. Treasury Note, 5.625%,
6/30/97 $ 700,441
1,000,000 U.S. Treasury Note, 5.125%,
2/28/98 991,560
700,000 U.S. Treasury Note, 5.75%,
12/31/98 693,000
1,600,000 U.S. Treasury Note, 5.875%,
1/31/99 1,585,504
300,000 U.S. Treasury Note, 7.125%,
9/30/99 304,032
400,000 U.S. Treasury Note, 7.75%,
1/31/00 411,624
1,100,000 U.S. Treasury Note, 5.75%,
10/31/00 1,068,034
200,000 U.S. Treasury Note, 6.625%,
7/31/01 199,126
250,000 U.S. Treasury Note, 5.875%,
2/15/04 236,485
300,000 U.S. Treasury Note, 7.00%,
7/15/06 300,657
100,000 U.S. Treasury Note, 6.50%,
10/15/06 96,844
400,000 U.S. Treasury Bond, 8.875%,
8/15/17 469,376
400,000 U.S. Treasury Bond, 7.125%,
2/15/23 394,876
300,000 U.S. Treasury Bond, 7.50%,
11/15/24 309,939
475,000 U.S. Treasury Bond, 7.625%,
2/15/25 498,303
300,000 U.S. Treasury Bond, 6.00%,
2/15/26 256,593
----------
TOTAL U.S. TREASURY SECURITIES--39.9% 8,516,394
(Cost $8,632,429) ----------
MORTGAGE-BACKED SECURITIES(1)
1,495,882 FNMA Pool #272894, 6.00%,
2/1/09 1,419,053
1,424,026 GNMA Pool #313107, 7.00%,
11/15/22 1,371,067
115,004 GNMA Pool #407141, 9.25%,
2/15/25 122,010
Principal Amount Value
- --------------------------------------------------------------------------------
$ 500,322 GNMA Pool #408099, 8.75%,
3/15/25 $ 520,395
198,644 GNMA Pool #407254, 9.25%,
3/15/25 210,746
TOTAL MORTGAGE-BACKED ----------
SECURITIES--17.0% 3,643,271
(Cost $3,726,110) ----------
CORPORATE BONDS
AIRLINES--2.2%
479,305 Delta Air Lines, Inc., Equipment
Trust Certificates, 7.541%,
10/11/11 463,129
AUTOMOBILES & AUTO PARTS--1.6% ----------
350,000 General Motors Co., 7.00%,
6/15/03 344,750
BANKING--6.7% ----------
400,000 Chase Manhattan Corp., 8.80%,
2/1/00 400,500
250,000 Corestates Capital Corp., 5.875%,
10/15/03 232,187
200,000 First Union Corp., 8.77%,
11/15/04 208,000
300,000 MBNA Corp., 6.875%, 10/1/99 299,625
300,000 NationsBank Corporation, VRN,
6.112%, 4/15/97, resets
quarterly off the 3-month LIBOR
plus 0.55% with no caps, final
maturity 1/15/27 293,805
----------
1,434,117
CHEMICALS & RESINS--1.7% ----------
300,000 ARCO Chemical Co., 10.25%,
11/1/10 369,000
FINANCIAL SERVICES--7.1% ----------
500,000 Associates Corp., NA, 6.625%,
6/15/05 474,375
200,000 Ford Motor Credit Co., 6.75%,
5/15/05 191,000
550,000 Lehman Brothers Holdings Inc.,
6.625%, 11/15/00 541,063
300,000 Paine Webber Group Inc., 7.875%,
2/15/03 305,625
----------
1,512,063
----------
See Notes to Financial Statements
Annual Report Premium Bond 19
SCHEDULE OF INVESTMENTS
PREMIUM BOND
MARCH 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
INSURANCE--0.8%
$ 175,000 Delphi Financial Group, Inc.,
9.31%, 3/25/27 $ 174,125
MEDIA & BROADCASTING--1.4% ----------
300,000 Time Warner Inc., 6.85%,
1/15/26, Put Date 1/15/03 291,375
REAL ESTATE--3.7% ----------
300,000 Price REIT, Inc. (The), 7.25%,
11/1/00 298,125
500,000 Spieker Properties, Inc., 6.80%,
12/15/01 490,000
----------
788,125
RETAIL (GENERAL MERCHANDISE)--1.6% ----------
300,000 Sears, Roebuck & Co., Inc.,
9.375%, 11/1/11 344,250
TOBACCO--0.9% ----------
200,000 Philip Morris Companies Inc.,
6.80%, 12/1/03 193,000
UTILITIES--3.9% ----------
500,000 Columbia Gas System, Inc. (The),
6.80%, 11/28/05 477,500
400,000 Duke Power Co., 6.875%, 8/1/23 351,000
----------
828,500
----------
TOTAL CORPORATE BONDS--31.6% 6,742,434
(Cost $6,892,161) ----------
SOVEREIGN GOVERNMENTS & AGENCIES
500,000 Hydro-Quebec, 8.05%, 7/7/24,
Put Date 7/7/06 528,750
500,000 Korea Electric Power, 6.375%,
12/1/03 470,000
500,000 National Bank of Canada, 8.125%,
8/15/04 519,375
300,000 Santander Financial Issuances Ltd.,
6.375%, 2/15/11 265,125
400,000 Wharf Resources Ltd., 7.625%,
3/13/07, (Acquired 3/6/97,
Cost $396,836)(2) 389,000
TOTAL SOVEREIGN GOVERNMENTS ----------
& AGENCIES--10.2% 2,172,250
(Cost $2,257,274) ----------
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--1.3%
Repurchase Agreement, Morgan (J.P.) & Co. Inc.,
(U.S. Treasury obligations), in a joint trading
account at 6.20%, dated 3/31/97,
due 4/1/97 (Delivery value $288,050) $ 288,000
(Cost $288,000) ----------
TOTAL INVESTMENT SECURITIES--100.0% $21,362,349
(Cost $21,795,974) ==========
Notes to Schedule of Investments
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
resets = The frequency with which a fixed-income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that the
coupon will vary significantly from current market rates.
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective March 31, 1997.
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be
sold to qualified institutional investors. The aggregate value of
restricted securities at March 31, 1997, was $389,000, which represented
1.79% of the net assets of the Premium Bond Fund.
See Notes to Financial Statements
20 Premium Bond American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1997
PREMIUM PREMIUM PREMIUM
GOVERNMENT RESERVE CAPITAL RESERVE BOND
------------------ --------------- ----
ASSETS
<S> <C> <C> <C>
Investment securities, at value (amortized cost
for Government Reserve and Capital Reserve;
identified cost of $21,795,974 for Bond) (Note 3) .................. $ 39,094,999 $ 150,969,750 $ 21,362,349
Cash ................................................................. -- 1,196,782 484
Receivable for capital shares sold ................................... 317,996 1,970,671 109,128
Interest receivable .................................................. 130,972 178,053 314,446
------- ------- -------
39,543,967 154,315,256 21,786,407
---------- ----------- ----------
LIABILITIES
Disbursements in excess of demand deposit cash ....................... 50,155 150,517 1,169
Payable for capital shares redeemed .................................. 620,172 66,408 12,214
Accrued management fees (Note 2) ..................................... 14,618 58,390 8,301
Dividends payable .................................................... 21,013 81,979 14,720
Accrued expenses and other liabilities ............................... 21 129 12
------- ------- ------
705,979 357,423 36,416
------- ------- ------
Net Assets Applicable to Outstanding Shares .......................... $ 38,837,988 $ 153,957,833 $ 21,749,991
============== =============== =============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ........................................................... 1,000,000,000 1,000,000,000 100,000,000
============= ============= ===========
Outstanding .......................................................... 38,837,988 153,958,859 2,229,409
========== =========== =========
Net Asset Value Per Share ............................................ $ 1.00 $ 1.00 $ 9.76
============== =============== =============
NET ASSETS CONSIST OF:
Capital paid in ...................................................... $ 38,837,988 $ 153,958,878 $ 22,211,652
Accumulated undistributed net realized loss on investments ........... -- (1,045) (28,036)
Net unrealized depreciation on investments (Note 3) .................. -- -- (433,625)
------- ------- ------
$ 38,837,988 $ 153,957,833 $ 21,749,991
============== =============== =============
See Notes to Financial Statements
</TABLE>
Annual Report Statements of Assets and Liabilities 21
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
PREMIUM PREMIUM PREMIUM
GOVERNMENT RESERVE CAPITAL RESERVE BOND
------------------ --------------- ----
INVESTMENT INCOME
Income:
<S> <C> <C> <C>
Interest ...................................................... $1,675,484 $7,781,071 $1,361,449
---------- ---------- ----------
Expenses:
Management fees (Note 2) ...................................... 138,640 640,040 91,566
Directors' fees and expenses .................................. 292 1,343 189
---------- ---------- ----------
138,932 641,383 91,755
---------- ---------- ----------
Net investment income ......................................... 1,536,552 7,139,688 1,269,694
---------- ---------- ----------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS (NOTE 3)
Net realized loss on investments .............................. -- (387) (7,433)
Change in net unrealized depreciation on investments .......... -- -- (393,769)
---------- ---------- ----------
Net realized and unrealized
loss on investments ........................................... -- (387) (401,202)
---------- ---------- ----------
Net Increase in Net Assets
Resulting from Operations ..................................... $1,536,552 $7,139,301 $ 868,492
========== ========== ==========
See Notes to Financial Statements
</TABLE>
22 Statements of Operations American Century Investments
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31, 1997 AND
MARCH 31, 1996
PREMIUM PREMIUM PREMIUM
GOVERNMENT RESERVE CAPITAL RESERVE BOND
------------------ --------------- ----
Increase (Decrease) in Net Assets 1997 1996 1997 1996 1997 1996
--------------------------- ----------------------------- ---------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income .................. $ 1,536,552 $ 1,129,713 $ 7,139,688 $ 7,677,131 $ 1,269,694 $ 968,146
Net realized gain (loss) on investments -- -- (387) 1,221 (7,433) 164,018
Change in net unrealized appreciation
(depreciation) on investments ........ -- -- -- -- (393,769) 261,690
--------- --------- --------- --------- ------- ---------
Net increase in net assets
resulting from operations ............ 1,536,552 1,129,713 7,139,301 7,678,352 868,492 1,393,854
--------- --------- --------- --------- ------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............. (1,536,552) (1,129,713) (7,139,688) (7,677,131) (1,269,694) (968,146)
From net realized gains on
investment transactions .............. -- -- -- -- -- --
--------- --------- --------- --------- ------- ---------
Decrease in net assets
from distributions ................... (1,536,552) (1,129,713) (7,139,688) (7,677,131) (1,269,694) (968,146)
---------- ---------- ---------- ---------- ---------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .............. 57,200,249 39,673,000 244,535,922 299,774,625 7,964,953 14,360,300
Proceeds from reinvestment
of distributions ..................... 1,457,750 1,068,845 6,775,632 7,350,635 1,246,658 949,722
Payments for shares redeemed ........... (46,010,775) (30,931,876) (230,769,999) (312,138,031) (7,339,935) (5,790,446)
----------- ----------- ------------ ------------ ---------- ----------
Net increase (decrease) in net assets
from capital share transactions ...... 12,647,224 9,809,969 20,541,555 (5,012,771) 1,871,676 9,519,576
---------- --------- ---------- ---------- --------- ---------
Net increase (decrease)
in net assets ........................ 12,647,224 9,809,969 20,541,168 (5,011,550) 1,470,474 9,945,284
NET ASSETS
Beginning of year ...................... 26,190,764 16,380,795 133,416,665 138,428,215 20,279,517 10,334,233
---------- ---------- ----------- ----------- ---------- ----------
End of year ............................ $ 38,837,988 $ 26,190,764 $ 153,957,833 $ 133,416,665 $ 21,749,991 $ 20,279,517
============ ============ ============= ============= ============ ============
TRANSACTIONS IN SHARES OF THE FUNDS
Sold ................................... 57,200,249 39,673,000 244,535,922 299,774,625 805,036 1,428,902
Issued in reinvestment
of distributions ..................... 1,457,750 1,068,845 6,775,632 7,350,635 126,431 94,806
Redeemed ............................... (46,010,775) (30,931,876) (230,769,999) (312,138,050) (743,472) (574,171)
----------- ----------- ------------ ------------ -------- --------
Net increase (decrease) ................ 12,647,224 9,809,969 20,541,555 (5,012,790) 187,995 949,537
========== ========= ========== ========== ======= =======
See Notes to Financial Statements
</TABLE>
Annual Report Statements of Changes in Net Assets 23
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. Organization and Summary of Significant Accounting Policies Organization--
American Century Premium Reserves, Inc. (the Corporation) is registered under
the Investment Company Act of 1940 as an open-end diversified management
investment company. Three series of funds, investing primarily in fixed-income
securities, are currently issued as : American Century - Benham Government
Reserve Fund (Government Reserve), American Century - Benham Premium Capital
Reserve Fund (Capital Reserve) and American Century - Benham Premium Bond Fund
(Bond) (the Funds). The investment objective of Government Reserve and Capital
Reserve is to obtain as high a level of current income as is consistent with
preservation of capital and maintenance of liquidity. The investment objective
of Bond is to obtain a high level of income from investments in a portfolio of
bonds and other debt obligations having a weighted average maturity of three and
one-half years or more. The following significant accounting policies, related
to the Funds, are in accordance with accounting policies generally accepted in
the investment company industry.
Security Valuations-- Securities held by Government Reserve and Capital Reserve
are valued at amortized cost, which approximates current value. Securities held
by Bond are valued through valuations obtained through a commercial pricing
service or at the mean of the most recent bid and asked prices. When valuations
are not readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Directors.
Security Transactions-- Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
Investment Income-- Interest income is recorded on the accrual basis and
includes amortization of premiums and discounts. Premiums and discounts are
amortized daily on a straight-line basis for securities held by Government
Reserve and Capital Reserve. Premiums and discounts are amortized using the
effective interest rate method for Bond.
Repurchase Agreements-- The Funds may enter into repurchase agreements with
institutions that the Funds' investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Funds require that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
funds to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Funds under each repurchase agreement.
Joint Trading Account-- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the Funds, along with other registered investment
companies having management agreements with ACIM and Benham Management
Corporation, may transfer uninvested cash balances into a joint trading account
held at the Funds' custodian. These balances are invested in one or more
repurchase agreements that are collateralized by U.S. Treasury or Agency
obligations.
Income Tax Status-- It is the Funds' policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal or state taxes.
Distributions to Shareholders-- Distributions from net investment income are
declared daily and distributed monthly. Government Reserve and Capital Reserve
do not expect to realize any long-term capital gains and, accordingly do not
expect to pay any capital gains distributions. Distributions from net realized
gains, for Bond, are declared and paid annually.
At March 31, 1997, accumulated net realized short-term capital loss carryovers
for Capital Reserve and Bond of $1,045 and $22,631, respectively, (expiring 2003
through 2005) may be used to offset future taxable gains.
The character of distributions made during the year from net investment income
or net realized capital gains may differ from their ultimate characterization
for federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
Supplementary Information-- Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc. (ACC), the parent of the Corporation's
investment advisor, ACIM, the Corporation's distributor, American Century
Investment Services, Inc. (ACIS), and the Corporation's transfer agent, American
Century Services Corporation (ACSC).
24 Notes to Financial Statements American Century Investments
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
Use of Estimates-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
- --------------------------------------------------------------------------------
2. Transactions with Related Parties
The Corporation has entered into a Management Agreement with ACIM that provides
the Funds with investment advisory and management services in exchange for a
single, unified fee. The Agreement provides that all expenses of the Funds,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on each Fund's average
daily closing net assets during the previous month. The annual management fee
for each Fund is 0.45%.
- --------------------------------------------------------------------------------
3. Investment Transactions
The aggregate cost of investment securities purchased (excluding short-term
investments) for the year ended March 31, 1997, for Bond, totaled $10,830,750
for U.S. Treasury and Agency obligations and $3,332,079 for other debt
obligations. Proceeds from investment securities sold (excluding short-term
investments), for Bond, totaled $6,825,558 for U.S. Treasury and Agency
obligations and $5,568,592 for other debt obligations.
As of March 31, 1997, accumulated net unrealized depreciation, based on the
aggregate cost of investments of $21,801,380 for federal income tax purposes,
was $439,031, for Bond, consisting of unrealized appreciation of $62,975, and
unrealized depreciation of $502,006.
- --------------------------------------------------------------------------------
4. Corporate Events
The following name changes became effective January 1, 1997:
<TABLE>
NEW NAMES FORMER NAMES
<S> <C> <C>
Funds' Issuer: American Century Premium Reserves, Inc. Twentieth Century Premium Reserves, Inc.
Funds: American Century - Benham Premium Government Reserve Fund Twentieth Century Premium Government Reserve
American Century - Benham Premium Capital Reserve Fund Twentieth Century Premium Capital Reserve
American Century - Benham Premium Bond Fund Twentieth Century Premium Managed Bond
Parent Company: American Century Companies, Inc. Twentieth Century Companies, Inc.
Distributor: American Century Investment Services, Inc. Twentieth Century Securities, Inc.
Transfer Agent: American Century Services Corporation Twentieth Century Services, Inc.
</TABLE>
Annual Report Notes to Financial Statements 25
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PREMIUM GOVERNMENT RESERVE
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C>
Beginning of Year .......................................... $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income .................................... 0.05 0.05 0.05 0.03
---- ---- ---- ----
Distributions
From Net Investment Income ............................... (0.05) (0.05) (0.05) (0.03)
----- ----- ----- -----
Net Asset Value, End of Year ............................... $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return(1) .......................................... 5.07% 5.49% 4.62% 2.75%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ...................................... 0.45% 0.44% 0.45% 0.45%
Ratio of Net Investment Income
to Average Net Assets ...................................... 4.96% 5.30% 4.84% 2.72%
Net Assets, End
of Year (in thousands) ..................................... $38,838 $26,191 $16,381 $5,459
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
See Notes to Financial Statements
</TABLE>
26 Financial Highlights American Century Investments
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PREMIUM CAPITAL RESERVE
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C>
Beginning of Year .......................................... $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Income From Investment Operations
Net Investment Income .................................... 0.05 0.05 0.05 0.03
---- ---- ---- ----
Distributions
From Net Investment Income ............................... (0.05) (0.05) (0.05) (0.03)
----- ----- ----- -----
Net Asset Value, End of Year ............................... $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total Return (1) ......................................... 5.13% 5.58% 4.66% 2.81%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ...................................... 0.45% 0.45% 0.45% 0.45%
Ratio of Net Investment Income
to Average Net Assets ...................................... 5.01% 5.50% 4.76% 2.83%
Net Assets, End
of Year (in thousands) ..................................... $153,958 $133,417 $138,428 $38,823
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
See Notes to Financial Statements
</TABLE>
Annual Report Financial Highlights 27
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PREMIUM BOND
For a Share Outstanding Throughout the Years Ended March 31
1997 1996 1995 1994
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C>
Beginning of Year ......................................... $9.93 $9.46 $9.64 $10.00
----- ----- ----- ------
Income From Investment Operations
Net Investment Income ................................... 0.61 0.61 0.59 0.46
Net Realized and Unrealized
Gain (Loss) on Investments .............................. (0.17) 0.47 (0.18) (0.36)
----- ---- ----- -----
Total From
Investment Operations ................................... 0.44 1.08 0.41 0.10
---- ---- ---- ----
Distributions
From Net Investment Income .............................. (0.61) (0.61) (0.59) (0.46)
----- ----- ----- -----
Net Asset Value, End of Year .............................. $9.76 $9.93 $9.46 $9.64
===== ===== ===== =====
Total Return(1) ......................................... 4.57% 11.53% 4.48% 0.92%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................................... 0.45% 0.43% 0.45% 0.45%
Ratio of Net Investment Income
to Average Net Assets ..................................... 6.20% 6.08% 6.30% 4.65%
Portfolio Turnover ........................................ 63% 92% 51% 144%
Net Assets, End
of Year (in thousands) .................................... $21,750 $20,280 $10,334 $8,080
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
See Notes to Financial Statements
</TABLE>
28 Financial Highlights American Century Investments
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
American Century Premium Reserves, Inc.
We have audited the accompanying statements of assets and liabilities of
American Century Premium Reserves, Inc. (formerly Twentieth Century Premium
Reserves, Inc.) (comprised of the American Century - Benham Premium Government
Reserve [formerly Premium Government Reserve], American Century - Benham Premium
Capital Reserve [formerly Premium Capital Reserve] and American Century - Benham
Premium Bond [formerly Premium Managed Bond] portfolios) (the Funds), including
the schedules of investments, as of March 31, 1997, and the related statements
of operations for the year then ended and statements of changes in net assets
for each of the two years then ended and the financial highlights for each of
the four years then ended. These financial statements and financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodian. As to securities relating to
uncompleted transactions, we performed other audit procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds comprising American Century Premium Reserves, Inc. at
March 31, 1997, and the results of their operations, changes in their net
assets, and the financial highlights for the periods indicated above, in
conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
April 25, 1997
Annual Report Report of Independent Auditors 29
IMPORTANT NOTICE FOR
ALL IRA AND 403(b) SHAREHOLDERS
As required by law, any distributions you receive from an IRA and certain 403(b)
distributions [not eligible for rollover to an IRA or to another 403(b)] are
subject to federal income tax withholding at the rate of 10% of the total amount
withdrawn, unless you elect not to have withholding apply. If you don't want us
to withhold on this amount, you may send us a written notice not to have the
federal income tax withheld. Your written notice is valid for six months from
the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable for
paying income tax on the taxable portion of your withdrawal. If you elect not to
have income tax withheld or you don't have enough income tax withheld, you may
be responsible for payment of estimated tax. You may incur penalties under the
estimated tax rules if your withholding and estimated tax payments are not
sufficient.
30 Important Notice American Century Investments
NOTES
Annual Report Notes 31
BACKGROUND INFORMATION
Investment Philosophy & Policies
American Century Investments offers 42 fixed-income funds, ranging from money
market funds to long-term bond funds and including both taxable and tax-exempt
funds.
Premium Government Reserve and Premium Capital Reserve are money market funds
that seek to obtain as high a level of current income as is consistent with the
preservation of capital and maintenance of liquidity. The funds will purchase
only securities having remaining maturities of 13 months or less and maintain a
weighted average portfolio maturity of not more than 90 days.
An investment in the funds is neither insured nor guaranteed by the U.S.
government. Yields will fluctuate, and there can be no assurance that the funds
will be able to maintain a stable net asset value of $1 per share. Past
performance is no guarantee of future results.
Premium Bond seeks a high level of income from investment in longer-term bonds
and other debt instruments. It is designed for investors whose primary goal is a
level of income higher than is generally provided by money market or short-and
intermediate-term securities and who can accept the generally greater price
volatility associated with longer-term bonds.
Comparative Indices
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The 90-Day Treasury Bill Index is derived from secondary market interest rates
as published by the Federal Reserve Bank.
The Lehman Aggregate Bond Index is composed of the Lehman Government/Corporate
Index and the Lehman Mortgage-Backed Securities Index. It reflects the price
fluctuations of Treasury securities, U.S. government agency securities,
corporate bond issues and mortgage-backed securities.
Lipper Rankings
Lipper Analytical Services, Inc. is an independent mutual fund ranking service
that groups funds according to their investment objectives. Rankings are based
on average annual returns for each fund in a given category for the periods
indicated. Rankings are not included for periods less than one year.
The Lipper category for the Premium Reserve funds are:
Institutional U.S. Government Money Market Funds (Premium Government
Reserve)--funds with dollar-weighted average maturities of less than 90 days
that intend to maintain a stable net asset value and that invest principally in
financial instruments issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
Institutional Money Market Funds (Premium Capital Reserve)--funds with
dollar-weighted average maturities of less than 90 days that intend to maintain
a stable net asset value and that invest in high-quality financial instruments
rated in the top two grades.
Corporate Debt Funds Rated A (Premium Bond)--funds that invest at least 65% of
their assets in government issues or corporate debt issues rated A or better.
PORTFOLIO MANAGEMENT TEAM
Senior Vice President and
Portfolio Manager Bud Hoops
Vice President and
Senior Portfolio Manager Bob Gahagan
Portfolio Manager Jeff Houston
CREDIT RESEARCH TEAM
Taxable Fixed-Income
Research Director Vicki Zesses
Senior Credit Research Analysts Edward Grant, Tanya Fleischer
Credit Research Analysts Michael Difley, Tom Vaiana,
John Walsh
Associate Credit Research Analyst Sudha Mani
32 Background Information American Century Investments
GLOSSARY
Returns
o Total Return figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o Average Annual Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if the fund's
performance had been constant over the entire period. Average annual
returns smooth out variations in a fund's return; they are not the same as
fiscal year-by-year results. For fiscal year-by-year returns, please refer
to the "Financial Highlights" on pages 26-28.
Yields
o 7-day Current Yield is calculated based on the income generated by an
investment in the fund over a seven-day period and is expressed as an
annual percentage rate.
o 7-day Effective Yield is calculated similarly, although this figure is
slightly higher than the fund's 7-Day Current Yield because of the effects
of compounding. The 7-Day Effective Yield assumes that income earned from
the fund's investments is reinvested and generating additional income.
o 30-day SEC Yield represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's
share price at the end of the 30-day period. The SEC yield should be
regarded as an estimate of the fund's rate of investment income, and it may
not equal the fund's actual income distribution rate, the income paid to a
shareholder's account, or the income reported in the fund's financial
statements.
Portfolio Statistics
o Number of Securities--the number of different securities held by a fund on
a given date.
o Weighted Average Maturity (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average
time until the securities in the portfolio mature, weighted by dollar
amount. The longer the WAM, the more interest rate exposure and sensitivity
the portfolio has.
o Average Duration--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of
the interest and principal payments of the securities in a portfolio. As
the duration of a portfolio increases, so does the impact of a change in
interest rates on the value of the portfolio.
o Expense Ratio--the operating expenses of the fund, expressed as a
percentage of average net assets.
Types of Fixed-Income Securities
o Certificates of Deposit (CDs)--CDs represent a bank's obligation to repay
money deposited with it for a specified period of time.
o Commercial Paper (CP)--short-term debt issued by large corporations to
raise cash and to cover current expenses in anticipation of future
revenues.
o Corporate Bonds--debt securities or instruments issued by companies and
corporations.
o Floating-Rate Notes (Floaters)--debt securities whose interest rates change
when a designated base rate changes. The base rate is often the federal
funds rate, the 90-day Treasury bill rate or the London Interbank Offered
Rate (LIBOR).
o Foreign Government Securities--debt securities issued or guaranteed by
foreign governments or their political subdivisions. Some of these
securities are direct obligations of the issuing government; others are
backed by some form of government sponsorship.
o Mortgage-Backed Securities--debt securities that represent ownership in
pools of mortgage loans.
o Repurchase Agreements (Repos)--short-term debt agreements in which a fund
buys a security at one price and simultaneously agrees to sell it back to
the seller at a slightly higher price on a specified date (usually within
seven days).
o U.S. Government Agency Securities--debt securities issued by U.S.
government agencies (such as the Federal Home Loan Bank and the Federal
Farm Credit Bank). Government agency securities include discount notes
(maturing in one year or less) and medium-term notes, debentures and bonds
(maturing in three months to 50 years).
o U.S. Treasury Securities--debt securities issued by the U.S. Treasury and
backed by the direct "full faith and credit" pledge of the U.S. government.
Treasury securities include bills (maturing in one year or less), notes
(maturing in two to 10 years) and bonds (maturing in more than 10 years).
Annual Report Glossary 33
[american century logo]
American
Century(sm)
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-Person Assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-444-3485
Fax: 816-340-7962
Internet: www.americancentury.com
AMERICAN CENTURY PREMIUM RESERVES, INC.
Investment Manager
AMERICAN CENTURY INVESTMENT MANAGEMENT
This report and the statements it
contains are submitted for the general
information of our shareholders. The
report is not authorized for
distribution to prospective investors
unless preceded or accompanied by an
effective prospectus.
American Century Investment Services, Inc.
9705 [recycled logo]
SH-BKT-8525 Recycled
