FEDERATED TOTAL RETURN BOND FUND
(FORMERLY, FEDERATED GOVERNMENT TOTAL RETURN FUND)
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities, focusing on investment grade debt securities.
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 RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated September
16, 1996, with the Securities and Exchange Commission ("SEC"). 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 the Fund
at the address listed on the back of this prospectus. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 16, 1996
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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GENERAL INFORMATION 2
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INVESTMENT INFORMATION 2
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Investment Objective 2
Investment Policies 2
Investment Limitations 13
Hub and Spoke(R) Option 13
NET ASSET VALUE 14
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INVESTING IN INSTITUTIONAL SHARES 14
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Share Purchases 14
Minimum Investment Required 14
What Shares Cost 15
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 15
Dividends and Distributions 15
REDEEMING INSTITUTIONAL SHARES 16
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Telephone Redemption 16
Written Requests 16
Accounts With Low Balances 17
FUND INFORMATION 17
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Management of the Corporation 17
Distribution of Institutional Shares 18
Administration of the Fund 19
Expenses of the Fund and Institutional
Shares 19
Federated LifeTrack(TM) Program 20
SHAREHOLDER INFORMATION 20
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Voting Rights 20
TAX INFORMATION 21
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Federal Income Tax 21
State and Local Taxes 21
PERFORMANCE INFORMATION 21
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OTHER CLASSES OF SHARES 22
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APPENDIX 23
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ADDRESSES 28
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1)...................................................... 0.00%
12b-1 Fee............................................................................. None
Total Other Expenses (after expense reimbursement)(2)................................. 0.35%
Shareholder Services Fee(3)................................................ 0.00%
Total Operating Expenses(4)........................................................... 0.35%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.40%.
(2) The total other expenses are estimated to be 0.50% absent the anticipated
voluntary reimbursement of certain other operating expenses.
(3) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1997. If
Institutional Shares were paying or accruing the shareholder services fee,
Institutional Shares would be able to pay up to 0.25% of its average daily net
assets for the shareholder services fee. See "Fund Information."
(4) The total operating expenses are estimated to be 0.90% absent the
anticipated voluntary waiver of the management fee and the anticipated voluntary
reimbursement of certain other operating expenses.
* Total Institutional Shares operating expenses are estimated based on average
expenses expected to be incurred during the period ending September 30, 1997.
During the course of this period, expenses may be more or less than the average
amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INSTITUTIONAL SHARES WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND "FUND
INFORMATION." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO
ADDITIONAL FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
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<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period....... $4 $11
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL SHARES' FISCAL YEAR
ENDING SEPTEMBER 30, 1997.
GENERAL INFORMATION
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The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." and the name of the Fund was changed from "Insight U.S. Government Fund"
to "Federated Government Total Return Fund." On May 15, 1996, the name of the
Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to Institutional
Shares of Federated Total Return Bond Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of investment grade debt securities. A minimum initial
investment of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of investment grade debt securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. Unless indicated otherwise, the
investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in a professionally managed,
diversified portfolio consisting primarily of investment grade debt securities,
mortgage-backed securities, asset-backed
securities, and U.S. and foreign government obligations. The Fund may also
invest in derivative instruments of such securities (including instruments with
demand features or credit enhancement and stripped mortgage-backed securities),
as well as money market instruments and cash.
The securities in which the Fund invests principally are:
- asset-backed securities;
- domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, or its agencies or instrumentalities;
- mortgage-backed securities;
- municipal securities;
- commercial paper which matures in 270 days or less;
- time deposits (including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts
are insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or which have at least $100 million in capital; and
- repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS. The Fund invests in
corporate and foreign government/agency debt obligations, including bonds,
notes, medium term notes, and debentures, which may have floating or fixed rates
of interest. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS. The Fund expects to invest in floating
rate debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities
is then reset periodically (commonly every 90 days) to an increment over
some predetermined interest rate index. Commonly utilized indices include
the three-month Treasury bill rate, the six-month Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE DEBT OBLIGATIONS. The Fund will also invest in fixed rate
securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates, the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear
interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published
interest rate or interest rate index. Many variable rate demand notes allow
the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed intervals.
See "Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S. Treasury; the
issuer's right to borrow an amount limited to a specific line of credit from the
U.S. Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal National
Mortgage Association; Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently four basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie
Mac"); (ii) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; (iii) those issued by
private issuers that represent an interest in or are collateralized by whole
loans or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities with adjustable rather than fixed interest rates. The
ARMS in which the Fund invests include, but are not limited to, securities
issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded.
The underlying mortgages which collateralize ARMS issued by Ginnie Mae are
fully guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by Fannie Mae or
Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest.
The Fund may invest in certain CMOs which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) securities
which are 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; (ii) securities which are
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 (iii) other securities in which the
proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as
amended. 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.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that generally
are not mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time the Fund
reinvests the payments and any unscheduled prepayments of principal are
received, the Fund may receive a rate of interest which is actually lower
than the rate of interest paid on these securities ("prepayment risks").
Mortgage-backed and asset-backed securities are subject to higher
prepayment risks than most other types of debt instruments with prepayment
risks because the underlying mortgage loans or the collateral supporting
asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed 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.
Prepayments on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or elect
to make unscheduled payments on their mortgages. Although asset-backed
securities generally are less likely to experience substantial prepayments
than are mortgage-backed securities, certain factors that affect the rate
of prepayments on mortgage-backed securities also affect the rate of
prepayments on many types of asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then re-registered because the owner and obligor moves to another
state, such re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
FOREIGN SECURITIES. The Fund may invest in foreign securities. Foreign
securities do not include American Depository Receipts, but do include foreign
securities not publicly traded in the United States. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities.
RISKS. The risks associated with investments in foreign securities relate
to political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but
are not limited to, expropriation, confiscatory taxation, currency
fluctuations, withholding taxes on interest, limitations on the use or
transfer of assets, political or social instability, ability to obtain or
enforce court judgments abroad and adverse diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably
from the domestic economy in such respects as growth of gross national
product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS. Foreign securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of the Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not
convert its holdings of foreign currencies to U.S. dollars daily. When the
Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between
the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may want to establish the U.S. dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund attempts to protect itself
against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. dollar and such
foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated
to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency or
denominated in a currency or currencies that the adviser believes will
reflect a high degree of correlation with the currency with regard to price
movements. The Fund generally will not enter into forward foreign currency
exchange contracts with a term longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are derivative
multi-class securities which may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, such as savings and loan associations, mortgage banks, commercial banks,
investment banks, and special purpose subsidiaries of the foregoing
organizations. The market volatility of stripped mortgage-backed securities
tends to be greater than the market volatility of the other types of
mortgage-related securities in which the Fund invests. Principal-only stripped
mortgage-backed securities are used primarily to hedge against interest rate
risk to the capital assets of the Fund in a changing interest rate environment.
A principal-only investor is assured of receiving cash flows in the amount of
principal purchased -- the unknown is when the cash flows will be received.
Interest-only investments over the life of the investment horizon may not
receive cash flows in the amount of the original investment.
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.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution that has capital, surplus and undivided profits over $100 million or
is insured by the BIF or the SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"). The banks issuing these instruments are
not necessarily subject to the same regulatory requirements that apply to
domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation
and an institutional lender (such as the Fund) payable upon demand by either
party. The notice period for demand typically ranges from one to seven days, and
the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES. The Fund may
purchase and sell financial and foreign currency futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future, while foreign currency futures contracts call for
the delivery of either U.S. or foreign currency at a certain time in the future.
The seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the instruments subject to the
futures contracts may not correlate perfectly with the prices of the
instruments in the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the portfolio's holdings
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary
market on an exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's ability to establish
and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS. The Fund may invest up to but not including 35% of
its total assets in debt securities that are not investment-grade but are rated
BB or lower by an NRSRO (or, if unrated, determined by the adviser to be of
comparable quality). Some of these securities may involve equity
characteristics. The Fund may invest in equity securities, including unit
offerings which combine fixed rate securities and common stock or common stock
equivalents such as warrants, rights and options. Securities which are rated BB
or lower by a nationally recognized statistical rating organization are
considered speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. These securities are
commonly referred to as "junk bonds." A description of the rating categories for
the permissible investments are contained in the Appendix to this Prospectus.
RISKS. Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, 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 bonds,
lower-rated bonds 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 bonds may be more difficult to dispose of
or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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." Some securities, such as stock rights, warrants and
convertible securities, although not typically referred to as derivatives,
contain options that may affect their value and performance. 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, it will only do so in a manner consistent with its
investment objective, policies and limitations.
TOTAL RETURN. The "total return" sought by the Fund will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling Shares) or realized from the purchase and sale of
securities, and successful use of futures and options, or gains from favorable
changes in foreign currency exchange rates. Generally, over the long term, the
total return obtained by a portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a
portfolio that invests primarily in equity securities. At the same time, the
market risk and price volatility of a fixed income portfolio is expected to be
less than that of an equity portfolio.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. 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. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, interest rate swaps,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 15% of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
The Fund reserves the right to invest up to 100% of its assets in one or more
investment companies, but would do so only after receipt of an exemptive order
from the Securities and Exchange Commission permitting this. If, in the future,
the Fund does receive such an exemptive order, the Fund would notify
shareholders of its intent to increase the level of investment in other
investment companies. However, shareholder approval will not be required to
effect any such change in this investment policy.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, 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 investment 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 at all times.
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.
WHEN-ISSUED AND 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. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.
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 into 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.
INVESTMENT LIMITATIONS
The Fund will not:
- 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
its assets to secure such borrowings; or
- with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash,
cash items, or securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities) or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service 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.
INVESTING IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares by Federal Reserve wire, call the Fund before 4:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Total Return Bond Fund -- Institutional Shares; Fund Number (this
number can be found on the account statement or by contacting the Fund); Group
Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
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.
BY MAIL. To purchase Shares by mail, send a check made payable to Federated
Total Return Bond Fund -- Institutional Shares 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 by State Street
Bank and Trust Company ("State Street Bank") into federal funds. This is
normally the next business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
Shares through a financial intermediary may be charged a service fee by that
financial intermediary.
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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who purchase Shares through a
financial intermediary may be charged a service fee by that financial
intermediary. 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 by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. 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. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
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 such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 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: Federated Total Return Bond
Fund -- Institutional Shares; 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.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, 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.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .40% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the adviser, the adviser may voluntarily waive some or all of
its fee. The adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, 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 Management 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 $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Both the Corporation 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 interests. 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.
PORTFOLIO MANAGER'S BACKGROUND. Joseph M. Balestrino is the Fund's
portfolio manager. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser since 1995. Mr.
Balestrino was an Assistant Vice President of the investment adviser from
1991 until 1995 and served as an Investment Analyst of the investment
adviser from 1989 until 1991. 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 is the Fund's sub-portfolio manager for the high yield
corporate bonds asset category. He has performed these duties since the
Fund's inception. Mr. Durbiano joined Federated Investors in 1982 and has
been a Senior Vice President of the Fund's adviser since January 1996. Mr.
Durbiano was a Vice President of the Fund's adviser from 1988 through 1995.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for Institutional
Shares. 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
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 the Institutional Shares, computed at an annual rate,
to obtain certain personal services for shareholders and to maintain shareholder
accounts. From time to time and for such periods as deemed appropriate, the
amount stated above may be reduced voluntarily. 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. 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 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 Fund' s investment 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 Fund. Federated
Services Company provides these at an annual rate which relates to the average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- ----------------------------------
<S> <C>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
on assets in excess of $750
0.075% million
</TABLE>
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.
EXPENSES OF THE FUND AND INSTITUTIONAL SHARES
Holders of Institutional Shares pay their allocable portion of Corporation and
Fund expenses.
The Corporation expenses for which holders of Institutional Shares pay their
allocable portion include, but are not limited to: the cost of organizing the
Corporation and continuing its existence; registering the Corporation with
federal and state securities authorities; Directors' fees; auditors' fees, the
cost of meetings of Directors; legal fees of the Corporation; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The Fund expenses for which holders of Institutional Shares pay their allocable
portion include, but are not limited to: registering the portfolio and
Institutional Shares of the portfolio; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such non-
recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Institutional
Shares as a class are expenses under the Corporation's Shareholder Services
Agreement. However, the Directors reserve the right to allocate certain other
expenses to holders of Institutional Shares as they deem appropriate ("Class
Expenses"). In any case, Class Expenses would be limited to: distribution fees;
transfer agent fees as identified by the transfer agent as attributable to
holders of Institutional Shares; fees under the Corporation's Shareholder
Services; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange Commission
and to state securities commissions; expenses related to administrative
personnel and services as required to support holders of Institutional Shares;
and Directors' fees incurred as a result of issues relating solely to
Institutional Shares.
FEDERATED LIFETRACK(TM) PROGRAM
The Fund is a member of the Federated LifeTrack(TM) Program sold through
financial representatives. Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and administrative services. Additional
fees are charged to participating plans for these services. As part of the
Federated LifeTrack(TM) Program, exchanges may readily be made between
investment options selected by the employer or a plan trustee.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote.
As a Maryland corporation, the Fund 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 a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation'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, as amended, 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 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 their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
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.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) 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 number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. 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 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
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 S&P 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 some time 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 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 obligor'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 obligor's 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.
NR -- NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-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.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1 -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1 -- (Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2 -- (Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Total Return Bond Fund Federated Investors Tower
Pittsburgh, PA 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, PA 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, PA 15222-3779
- ------------------------------------------------------------------------------------------------
Custodian
State Street Bank and
Trust Company P.O. Box 8600
Boston, MA 02266-8600
- ------------------------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services P.O. Box 8600
Company Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Public Accountants
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
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- --------------------------------------------------------------------------------
FEDERATED TOTAL RETURN
BOND FUND
(FORMERLY, FEDERATED GOVERNMENT
TOTAL RETURN FUND)
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of
Federated Total Return Series,
Inc.
an Open-end, Management
Investment Company
Prospectus dated September 16,
1996
LOGO
Cusip 31428Q101
G01721-01-IS (9/96)
FEDERATED TOTAL RETURN BOND FUND
(FORMERLY, FEDERATED GOVERNMENT TOTAL RETURN FUND)
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities, focusing on investment grade debt securities.
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 RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated September
16, 1996, with the Securities and Exchange Commission ("SEC"). 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 the Fund
at the address listed on the back of this prospectus. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 16, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Limitations 13
Hub and Spoke(R) Option 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SERVICE SHARES 14
- ------------------------------------------------------
Share Purchases 14
Minimum Investment Required 14
What Shares Cost 15
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 15
Dividends and Distributions 15
REDEEMING INSTITUTIONAL SERVICE SHARES 16
- ------------------------------------------------------
Telephone Redemption 16
Written Requests 16
Accounts With Low Balances 17
FUND INFORMATION 17
- ------------------------------------------------------
Management of the Corporation 17
Distribution of Institutional Service Shares 18
Administration of the Fund 19
Expenses of the Fund and
Institutional Service Shares 20
Federated LifeTrack(TM) Program 20
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
State and Local Taxes 21
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
OTHER CLASSES OF SHARES 22
- ------------------------------------------------------
APPENDIX 23
- ------------------------------------------------------
ADDRESSES 28
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)...................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable).................................... None
Redemption Fee (as a percentage of amount redeemed, if applicable)......................... None
Exchange Fee............................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets) *
Management Fee (after waiver)(1)........................................................... 0.00%
12b-1 Fee(2)............................................................................... 0.05%
Total Other Expenses (after expense reimbursement)(3)...................................... 0.60%
Shareholder Services Fee........................................................ 0.25%
Total Operating Expenses(4)............................................................ 0.65%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.40%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The total other expenses are estimated to be 0.80% absent the anticipated
voluntary reimbursement of certain other operating expenses.
(4) The total operating expenses are estimated to be 1.40% absent the
anticipated voluntary waivers of the management fee and a portion of the 12b-1
fee and the anticipated voluntary reimbursement of certain other operating
expenses.
* Total Institutional Service Shares operating expenses are estimated based on
average expenses expected to be incurred during the period ending September 30,
1997. During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INSTITUTIONAL SERVICE
SHARES WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS
OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SERVICE
SHARES" AND "FUND INFORMATION". WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000
MAY BE SUBJECT TO ADDITIONAL FEES.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- -------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............... $7 $21
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL SERVICE SHARES' FISCAL
YEAR ENDING SEPTEMBER 30, 1997.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." and the name of the Fund was changed from "Insight U.S. Government Fund"
to "Federated Government Total Return Fund." On May 15 1996, the name of the
Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares of Federated Total Return Bond Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in investment grade debt securities. A minimum
initial investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of investment grade debt securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. Unless indicated otherwise, the
investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in a professionally managed,
diversified portfolio consisting primarily of investment grade debt securities,
mortgage-backed securities, asset-backed securities, and U.S. government
obligations. The Fund may also invest in derivative instruments of such
securities (including instruments with demand features or credit enhancement and
stripped mortgage-backed securities), as well as money market instruments and
cash.
The securities in which the Fund invests principally are:
- asset-backed securities;
- domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, or its agencies or instrumentalities;
- mortgage-backed securities;
- municipal securities;
- commercial paper which matures in 270 days or less;
- time deposits (including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts
are insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or which have at least $100 million in capital; and
- repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS. The Fund invests in
corporate and foreign government/agency debt obligations, including bonds,
notes, medium term notes, and debentures, which may have floating or fixed rates
of interest. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS. The Fund expects to invest in floating
rate debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities
is then reset periodically (commonly every 90 days) to an increment over
some predetermined interest rate index. Commonly utilized indices include
the three-month Treasury bill rate, the six-month Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert
the increasing rate of interest to a fixed rate under such terms,
conditions, and limitations as are described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS. The Fund will also invest in fixed rate
securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates, the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear
interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published
interest rate or interest rate index. Many variable rate demand notes allow
the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed intervals.
See "Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S. Treasury; the
issuer's right to borrow an amount limited to a specific line of credit from the
U.S. Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks;
Federal National Mortgage Association; Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently four basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie
Mac"); (ii) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; (iii) those issued by
private issuers that represent an interest in or are collateralized by whole
loans or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities with adjustable rather than fixed interest rates. The
ARMS in which the Fund invests include, but are not limited to, securities
issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded.
The underlying mortgages which collateralize ARMS issued by Ginnie Mae are
fully guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by Fannie Mae or
Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest.
The Fund may invest in certain CMOs which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) securities
which are 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; (ii) securities which are
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 (iii) other securities in which the
proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as
amended. 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.
ASSET-BACKED SECURITIES. Asset-backed securities have structural
characteristics similar to mortgage-backed securities but have underlying assets
that generally are not mortgage loans or interests in mortgage loans. The Fund
may invest in asset-backed securities including, but not limited to, interests
in pools of receivables, such as motor vehicle installment purchase obligations
and credit card receivables, equipment leases, manufactured housing (mobile
home) leases, or home equity loans. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are issued by
non-governmental entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal are received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed 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. Prepayments on mortgage-backed
securities are also affected by other factors, such as the frequency with
which people sell their homes or elect to make unscheduled payments on
their mortgages. Although asset-backed securities generally are less likely
to experience substantial prepayments than are mortgage-backed securities,
certain factors that affect the rate of prepayments on mortgage-backed
securities also affect the rate of prepayments on many types of
asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain possession of
the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities.
Further, if a vehicle is registered in one state and is then re-registered
because the owner and obligor moves to another state, such re-registration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables
may not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
FOREIGN SECURITIES. The Fund may invest in foreign securities. Foreign
securities do not include American Depository Receipts, but do include foreign
securities not publicly traded in the United States. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities.
RISKS. The risks associated with investments in foreign securities relate
to political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but
are not limited to, expropriation, confiscatory taxation, currency
fluctuations, withholding taxes on interest, limitations on the use or
transfer of assets, political or social instability, ability to obtain or
enforce court judgments abroad and adverse diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably
from the domestic economy in such respects as growth of gross national
product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS. Foreign securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of the Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not
convert its holdings of foreign currencies to U.S. dollars daily. When the
Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between
the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward contracts to purchase or sell foreign
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may want to establish the U.S. dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund attempts to protect itself
against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. dollar and such
foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated
to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency or
denominated in a currency or currencies that the adviser believes will
reflect a high degree of correlation with the currency with regard to price
movements. The Fund generally will not enter into forward foreign currency
exchange contracts with a term longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are derivative
multi-class securities which may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, such as savings and loan associations, mortgage banks, commercial banks,
investment banks, and special purpose subsidiaries of the foregoing
organizations. The market volatility of stripped mortgage-backed securities
tends to be greater than the market volatility of the other types of
mortgage-related securities in which the Fund invests. Principal-only stripped
mortgage-backed securities are used primarily to hedge against interest rate
risk to the capital assets of the Fund in a changing interest rate environment.
A principal-only investor is assured of receiving cash flows in the amount of
principal purchased -- the unknown is when the cash flows will be received.
Interest-only investments over the life of the investment horizon may not
receive cash flows in the amount of the original investment.
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.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution that has capital, surplus and undivided profits over $100 million or
is insured by the BIF or the SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"). The banks issuing these instruments are
not necessarily subject to the same regulatory requirements that apply to
domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on
the underlying security or other event that terminates the demand feature before
its exercise, will adversely affect the liquidity of the underlying security.
Demand features that are exercisable even after a payment default on the
underlying security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES. The Fund may
purchase and sell financial and foreign currency futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future, while foreign currency futures contracts call for
the delivery of either U.S. or foreign currency at a certain time in the future.
The seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the instruments subject to the
futures contracts may not correlate perfectly with the prices of the
instruments in the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the portfolio's holdings
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the
futures contract or option. It is not certain that a secondary market for
positions in futures contracts or for options will exist at all times.
Although the investment adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary
market on an exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's ability to establish
and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS. The Fund may invest up to but not including 35% of
its total assets in debt securities that are not investment-grade but are rated
BB or lower by an NRSRO (or, if unrated, determined by the adviser to be of
comparable quality). Some of these securities may involve equity
characteristics. The Fund may invest in equity securities, including unit
offerings which combine fixed rate securities and common stock or common stock
equivalents such as warrants, rights and options. Securities which are rated BB
or lower by a nationally recognized statistical rating organization are
considered speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. These securities are
commonly referred to as "junk bonds." A description of the rating categories for
the permissible investments are contained in the Appendix to this Prospectus.
RISKS. Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, 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 bonds,
lower-rated bonds 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 bonds may be more difficult to dispose of
or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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." Some securities, such as stock rights, warrants and
convertible securities, although not typically referred to as derivatives,
contain options that may affect their value and performance. 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, it will only do so in a manner consistent with its
investment objective, policies and limitations.
TOTAL RETURN. The "total return" sought by the Fund will consist of interest
and dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling Shares) or realized from the purchase and sale
of securities, and successful use of futures and options, or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return obtained by a portfolio investing primarily in fixed
income securities is not expected to be as great as that obtained by a portfolio
that invests primarily in equity securities. At the same time, the market risk
and price volatility of a fixed income portfolio is expected to be less than
that of an equity portfolio.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. 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. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, interest rate swaps,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 15% of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
The Fund reserves the right to invest up to 100% of its assets in one or more
investment companies, but would do so only after receipt of an exemptive order
from the Securities and Exchange Commission permitting this. If, in the future,
the Fund does receive such an exemptive order, the Fund would notify
shareholders of its intent to increase the level of investment in other
investment companies. However, shareholder approval will not be required to
effect any such change in this investment policy.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, 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 investment 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 at all times.
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.
WHEN-ISSUED AND 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. Accordingly, the
Fund may pay more or less than the market value of the securities on the
settlement date.
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 into 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.
INVESTMENT LIMITATIONS
THE FUND WILL NOT:
- 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
its assets to secure such borrowings; or
- with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash,
cash items, or securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities) or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
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The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of 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.
INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the telephone.
The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares by Federal Reserve wire, call the Fund before 4:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal funds must be received before 3:00 p.m. (Eastern
time) on the next business day following the order. Federal funds should be
wired as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For Credit to:
Federated Total Return Bond Fund -- Institutional Service Shares; Fund Number
(this number can be found on the account statement or by contacting the Fund);
Group Number or Order Number; Nominee or Institution Name; ABA Number 011000028.
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.
BY MAIL. To purchase Shares by mail, send a check made payable to Federated
Total Return Bond Fund -- Institutional Service Shares 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 by State Street
Bank and Trust Company ("State Street Bank") into federal funds. This is
normally the next business day after State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
shares through a financial intermediary may be charged a service fee by that
financial intermediary.
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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund Shares on the day the securities are valued. One Share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
Shares, a gain or loss may be realized by the investor.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of the Fund on payment dates at net asset value,
unless cash payments are requested by shareholders on the application or by
writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
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 by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. 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. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
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 such a case should occur, another
method of redemption, such as "Written Requests," should be considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 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: Federated Total Return Bond
Fund -- Institutional Service Shares; 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.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, 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.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory fee
equal to .40% of the Fund's average daily net assets. Under the investment
advisory contract, which provides for voluntary waivers of expenses by the
adviser, the adviser may voluntarily waive some or all of its fee. The adviser
can terminate this voluntary waiver of some or all of its advisory fee at any
time at its sole discretion. The adviser has also undertaken to reimburse the
Fund for operating expenses in excess of limitations established by certain
states.
ADVISER'S BACKGROUND. Federated Management, 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 Management 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 $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Both the Corporation 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 interests. 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.
PORTFOLIO MANAGER'S BACKGROUND. Joseph M. Balestrino is the Fund's
portfolio manager. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser since 1995. Mr.
Balestrino was an Assistant Vice President of the investment adviser from
1991 until 1995 and served as an Investment Analyst of the investment
adviser from 1989 until 1991. 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 is the Fund's sub-portfolio manager for the high yield
corporate bonds asset category. He has performed these duties since the
Fund's inception. Mr. Durbiano joined Federated Investors in 1982 and has
been a Senior Vice President of the Fund's adviser since January 1996. Mr.
Durbiano was a Vice President of the Fund's adviser from 1988 through 1995.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in
Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Institutional
Service Shares. 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"), the distributor may be paid a fee by the Fund in an amount computed at
an annual rate of .25% of the average daily net asset value of Institutional
Service Shares of the Fund. 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.
The 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 the Fund
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
Shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. 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. In addition to payments made
pursuant to the Plan and Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of 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 Fund' s investment 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 Fund. Federated
Services Company provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- -----------------------------------
<S> <C>
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
</TABLE>
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.
EXPENSES OF THE FUND AND INSTITUTIONAL SERVICE SHARES
Holders of Institutional Service Shares pay their allocable portion of
Corporation and Fund expenses.
The Corporation expenses for which holders of Institutional Service Shares pay
their allocable portion include, but are not limited to: the cost of organizing
the Corporation and continuing its existence; registering the Corporation with
federal and state securities authorities; Directors' fees; auditors' fees, the
cost of meetings of Directors; legal fees of the Corporation; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The Fund expenses for which holders of Institutional Service Shares pay their
allocable portion include, but are not limited to: registering the portfolio and
Institutional Service Shares of the portfolio; investment advisory services;
taxes and commissions; custodian fees; insurance premiums; auditors' fees; and
such non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Institutional
Service Shares as a class are expenses under the Corporation's Distribution Plan
and Shareholder Services Agreement. However, the Directors reserve the right to
allocate certain other expenses to holders of Institutional Service Shares as
they deem appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: distribution fees; transfer agent fees as identified by the transfer
agent as attributable to holders of Institutional Service Shares; fees under the
Corporation's Shareholder Services; printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders; registration fees paid to the Securities
and Exchange Commission and to state securities commissions; expenses related to
administrative personnel and services as required to support holders of
Institutional Service Shares; and Directors' fees incurred as a result of issues
relating solely to Institutional Service Shares.
FEDERATED LIFETRACK(TM) PROGRAM
The Fund is a member of the Federated LifeTrack(TM)Program sold through
financial representatives. Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and
administrative services. Additional fees are charged to participating plans for
these services. As part of the Federated LifeTrack(TM) Program, exchanges may
readily be made between investment options selected by the employer or a plan
trustee.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote.
As a Maryland corporation, the Fund 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 a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation'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, as amended, 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 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 their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
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.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) 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 number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
APPENDIX
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STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. 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 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
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 S&P 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 some time 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 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 obligor'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 obligor's 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.
NR -- NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-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.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1 -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1 -- (Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2 -- (Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
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<TABLE>
<S> <C> <C>
Federated Total Return Bond Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Custodian
State Street Bank and
Trust Company P.O. Box 8600
Boston, Massachusetts 02266-8600
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Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services
Company P.O. Box 8600
Boston, Massachusetts 02266-8600
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Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
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FEDERATED TOTAL RETURN
BOND FUND
(FORMERLY, FEDERATED GOVERNMENT
TOTAL RETURN FUND)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of
Federated Total Return Series,
Inc.
an Open-End, Management
Investment Company
Prospectus dated September 16,
1996
LOGO
Cusip 31428Q507
G01721-03-SS (9/96)
FEDERATED TOTAL RETURN BOND FUND
(FORMERLY, FEDERATED GOVERNMENT TOTAL RETURN FUND)
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus(es) of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the `Fund''), a portfolio of
Federated Total Return Series, Inc. (the `Corporation'') dated
September 16, 1996. 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, PENNSYLVANIA 15222-3779
Statement dated September 16, 1996
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 31428Q101
31428Q507
G01722-02 (9/96)
GENERAL INFORMATION ABOUT THE FUND 4
INVESTMENT OBJECTIVE AND POLICIES 4
TYPES OF INVESTMENTS 4
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") 5
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") 6
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") 7
INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS 7
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES 8
RESETS OF INTEREST 8
CAPS AND FLOORS 3
FOREIGN BANK INSTRUMENTS 10
FUTURES AND OPTIONS TRANSACTIONS 10
MEDIUM TERM NOTES AND DEPOSIT NOTES 15
WEIGHTED AVERAGE PORTFOLIO MATURITY 5
WEIGHTED AVERAGE PORTFOLIO DURATION 15
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 17
LENDING OF PORTFOLIO SECURITIES 6
RESTRICTED AND ILLIQUID SECURITIES 18
REPURCHASE AGREEMENTS 18
REVERSE REPURCHASE AGREEMENTS 19
PORTFOLIO TURNOVER 19
INVESTMENT LIMITATIONS 7
FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT 9
OFFICERS AND DIRECTORS 9
FUND OWNERSHIP 13
DIRECTORS' COMPENSATION 13
DIRECTOR LIABILITY 14
INVESTMENT ADVISORY SERVICES 14
ADVISER TO THE FUND 14
ADVISORY FEES 37
OTHER SERVICES 15
FUND ADMINISTRATION 15
CUSTODIAN AND PORTFOLIO ACCOUNTING 15
TRANSFER AGENT 15
INDEPENDENT AUDITORS 15
BROKERAGE TRANSACTIONS 15
PURCHASING SHARES 15
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY )
AND SHAREHOLDER SERVICES 15
DETERMINING NET ASSET VALUE 16
DETERMINING MARKET VALUE OF SECURITIES 16
VALUING MUNICIPAL BONDS 16
USE OF AMORTIZED COST 16
REDEEMING SHARES 17
REDEMPTION IN KIND 17
TAX STATUS 17
THE FUND'S TAX STATUS 17
SHAREHOLDERS' TAX STATUS 17
TOTAL RETURN 17
YIELD 17
PERFORMANCE COMPARISONS 18
ECONOMIC AND MARKET INFORMATION 19
ABOUT FEDERATED INVESTORS 19
MUTUAL FUND MARKET 19
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 11, 1993. On March 21, 1995, the name of the
Corporation was changed from "Insight Institutional Series, Inc." to
"Federated Total Return Series, Inc." and the name of the Fund was changed
from "Insight U.S. Government Fund" to "Federated Government Total Return
Fund." ." On May 15, 1996, the name of the Fund was changed from
`Federated Government Total Return Fund'' to ``Federated Total Return Bond
Fund.'' The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares.
Shares of the Fund are offered in two classes, known as Institutional
Shares and Institutional Service Shares (individually and collectively
referred to as `Shares,'' as the context may require). This Statement of
Additional Information relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide total return. The
investment objective cannot be changed without approval of shareholders.
The investment policies stated below may be changed by the Board of
Directors ("Directors") without shareholder approval. Shareholders will be
notified before any material change in the investment policies becomes
effective.
TYPES OF INVESTMENTS
The Fund invests primarily in a diversified portfolio of debt securities.
Under normal circumstances, the Fund will invest at least 65% of the value
of its total assets in domestic investment grade debt securities.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
The ARMS in which the Fund invests include, but are not limited to,
securities issued by Government National Mortgage Association, Federal
National Mortgage Association, and Federal Home Loan Mortgage Corporation.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed income securities. ARMS may also be collateralized by whole loans
or private pass-through securities.
Like other fixed income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs; most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities.
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date, and the final class (Z bond) typically
receives any excess income from the underlying investments after payments
are made to the other classes and receives no principal or interest
payments until the shorter maturity classes have been retired, but then
receives all remaining principal and interest payments;
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bond).
When those securities are completely retired, all principal payments are
then directed to the next shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. The interest
portion of these payments is distributed by the Fund as income, and the
capital portion is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which
qualify and elect treatment as such under provisions of the Internal
Revenue Code, as amended. 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.
INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS
Some of the securities purchased by the Fund may represent an interest
solely in the principal repayments or solely in the interest payments on
mortgage-backed securities (stripped mortgage-backed securities or
"SMBSs"). SMBSs are usually structured with two classes and receive
different proportions of the interest and principal distributions on the
pool of underlying mortgage-backed securities. Due to the possibility of
prepayments on the underlying mortgages, SMBSs may be more interest-rate
sensitive than other securities purchased by the Fund. If prevailing
interest rates fall below the level at which SMBSs were issued, there may
be substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only SMBSs (the principal-only or
"PO" class) and a reduction in the amount of payments made to holders of
interest-only SMBSs (the interest-only or "IO" class). Because the yield to
maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on
the underlying mortgages. The Fund's inability to fully recoup its
investments in these securities as a result of a rapid rate of principal
prepayments may occur even if the securities are rated by an NRSRO.
Therefore, interest-only SMBSs generally increase in value as interest
rates rise and decrease in value as interest rates fall, counter to changes
in value experienced by most fixed income securities.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an
ownership interest in federal agency mortgage pass-through securities such
as those issued by Government National Mortgage Association as well as
those issued by non-government related entities. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities
dealers and other investors makes government-related and non-government
related pools highly liquid.
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.
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, ARMS
which use indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage securities that
closely mirror the market.
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.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign withholdings
or other taxes on interest income, difficulties in obtaining or enforcing a
judgment against the issuing bank, and the possible impact of interruptions
of the flow of international currency transactions. Different risks may
also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping and the public
availability of information. These factors will be carefully considered by
the Fund's adviser in selecting investments for the Fund.
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 moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in
rates 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 agree to purchase
securities in the future at a predetermined price (i.e., "go long") 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) at 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).
MEDIUM TERM NOTES AND DEPOSIT NOTES
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade
like commercial paper, but may have maturities from 9 months to ten years.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a `weight'' to each portfolio security based upon the pro rata
market value of such portfolio security in comparison to the market value
of the entire portfolio. The remaining maturity to each portfolio security
is then multiplied by its weight, and the results are added together to
determine the weighted average maturity of the portfolio. For purposes of
calculating its dollar-weighted average portfolio maturity, the Fund will
treat (a) asset-backed securites as having a maturity equal to their
estimated weighted-average maturity and (b) variable and floating rate
instruments as having a remaining maturity commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest
rate. The average maturity of asset-backed securities will be calculated
based upon assumptions established by the investment adviser as to the
probable amount of the principal prepayments weighted by the period until
such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be
treated as floating or variable rate securities based upon the interest
rate index of the swap or cap; floating and variable rate securities hedged
with interest rate swaps or floors will be treated as having a maturity
equal to the term of the swap or floor. In the event that the Fund holds
an interest rate swap, cap or floor that is not hedging another portfolio
security, the swap, cap or floor will be treated as having a maturity equal
to its term and a weight equal to its notional principal amount of such
term.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the
price of a debt security, or the aggregate market value of a portfolio of
debt securities, prior to maturity. Duration measures the magnitude of the
change in the price of a debt security relative to a given change in the
market rate of interest. The duration of a debt security depends upon three
primary variables: the security's coupon rate, maturity date and the level
of market interest rates for similar debt securities. Generally, debt
securities with lower coupons or longer maturities will have a longer
duration than securities with higher coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of
cash flows of a security or portfolio of securities, including principal
and interest payments, by the sum of the present values of the cash flows.
Certain debt securities, such as asset-backed securities, may be subject to
prepayment at irregular intervals. The duration of these instruments will
be calculated based upon assumptions established by the investment adviser
as the probable amount and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps,
caps and floors, is calculated in the same manner as other securities.
However, certain interest rate agreements have negative durations, which
the Fund may use to reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3)
+ ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt = the present value of the cash flow in period t discounted at
the prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing yield-to-maturity.
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. 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. 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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws.
The Rule provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market for
securities eligible for resale under Rule 144A. The Fund believes that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Directors. The Directors consider the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
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 Fund's adviser to be creditworthy
pursuant to guidelines established by the Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is 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. These securities are marked to
market daily and are 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 objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%.
INVESTMENT LIMITATIONS
The following limitations are fundamental [except that no investment
limitation of the Fund shall prevent the Fund from investing substantially
all of its assets (except for assets which are not considered `investment
securities''under the Investment Company Act of 1940, or assets exempted
by the Securities and Exchange Commission) in an open-end investment
company with substantially the same investment objectives]:
SELLING SHORT OR BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but ra 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 borrowings in excess of 5% of its
total assets are outstanding. ther as a temporary, extraordinary, or
emergency measure to facilitate management of the Fund by enabling the
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets:
margin deposits for the purchase and sale of financial futures
contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.
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 U.S. government, 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, and will not acquire more than 10% of the
outstanding voting securities of any one issuer.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, 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, commodity contracts,
or commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or
options on financial futures contracts.
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 objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's
investment objective, policies, and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors without
shareholder approval [except that no investment limitation of the Fund
shall prevent the Fund from investing substantially all of its assets
(except for assets which are not considered `investment securities'' under
the Investment Company Act of 1940, or assets exempted by the Securities
and Exchange Commission) in an open-end investment company with
substantially the same investment objectives]. Shareholders will be
notified before any material changes in these limitations become effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Directors.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, interest rate swaps,
non-negotiable fixed time deposits with maturities over seven days,
and certain restricted securities not determined by the Directors to
be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have
been in operation for less than three years. With respect to asset-
backed securities, the Fund will treat the originator of the asset
pool as the company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
The Fund reserves the right to invest up to 100% of its assets in one
or more investment companies, but would do so only after receipt of an
exemptive order from the Securities and Exchange Commission permitting
this. If, in the future, the Fund does receive such an exemptive
order, the Fund would notify shareholders of its intent to increase
the level of investment in other investment companies. However,
shareholder approval will not be required to effect any such change in
this investment policy.
DEALING IN PUTS AND CALLS
The Fund will not purchase puts, calls, straddles, spreads, or any
combination of them, if by reason thereof the value of such securities
would exceed 5% of its total assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any issuer if
the officers and Directors of the Corporation or the Fund's investment
adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the 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.
The Fund does not expect to borrow money, pledge securities or engage in
reverse repurchase agreements during the coming fiscal year.
To comply with registration requirements in certain states, the Fund (1)
will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund
to 5% of its net assets, and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
"cash items."
FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, 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, Executive Vice
President of the Corporation .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director or Trustee of the Funds; formerly, Senior
Partner, Ernst & Young LLP.
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; President, Northgate Village
Development Corporation; Partner or Trustee in private real estate ventures
in Southwest Florida; Director or Trustee of the Funds; formerly,
President, Naples Property Management, Inc.
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.;
Director or Trustee of the Funds; formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice 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 Corporation.
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 and Member, Board of Trustees, 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-at-law; Shareholder, Miller, Ament, Henny & Kochuba; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director or Trustee of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.
Peter E. Madden
Seacliff
562 Bellevue Avenue
New port, RI
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director
or Trustee of the Funds; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Shareholder, Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; 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 and Hogue; 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 and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho
Management Center; Director or Trustee of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management
Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director or Trustee of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.
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.
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 Directors 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 Directorss 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: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Blanchard Group of
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 ARMS Fund; Federated Equity Funds; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust;, Federated U.S. Government Bond
Fund; Federated U. S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 5-10 Years; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities,
Inc,; High Yield Cash Trust; Federated Insurance Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; RIMCO Monument Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Targeted Duration Trust; Tax-Free Instruments Trust; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors as a group own less than 1% of the Fund`s
outstanding shares.
DIRECTORS' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 68 other investment companies in the Fund
Complex
Thomas G. Bigley,++ $750 $20,688 for the Corporation and
Director 49 other investment companies in the Fund
Complex
John T. Conroy, Jr., $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
William J. Copeland, $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Director 68 other investment companies in the Fund
Complex
James E. Dowd, $825 $117,202 for the Corporation and
++
Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was
appointed a Trustee on 15 additional Federated Funds.
Director 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Peter E. Madden, $750 $90,563 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Gregor F. Meyer, $750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
John E. Murray, Jr., $750 $0 for the Corporationand
Director 69 other investment companies in the Fund
Complex
Wesley W. Posvar,$750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Marjorie P. Smuts, $750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended September 30, 1995.
+The information is provided for the last calendar year.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the Directors will
not be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). 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 Fund or any shareholder 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 Fund.
ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2- 1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1- 1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be waived by the Adviser will be
limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Federated Services Company,
Pittsburgh, Pennsylvania, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid
for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
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 upon 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.
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
Directorss.
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 by 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.
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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value 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 (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
As explained in the respective prospectuses, with respect to Shares of the
Fund, the Fund has adopted a Shareholder Services Agreement, and, with
respect to Institutional Service Shares, the Fund has adopted a
Distribution Plan.
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 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 September 30, 1995, the Fund paid no fees under a
Distribution Plan. In addition, for the fiscal year ended September 30,
1995, the Fund paid no shareholder service fees.
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 securities, other than options, are determined
as follows:
o as provided 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 60 days or less at the
time of purchase, at amortized cost unless the Directors determine
this is not fair value; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good
faith that another method of valuing option positions is necessary.
VALUING MUNICIPAL BONDS
The Directors use an independent pricing service to value municipal bonds.
The independent pricing service takes into consideration yield, stability,
risk, quality, coupon rate, maturity, type of issue, trading
characteristics, special circumstances of a security or trading market, and
any other factors or market data it considers relevant in determining
valuations for normal institutional size trading units of debt securities
and does not rely exclusively on quoted prices.
USE OF AMORTIZED COST
The Directors have decided that the fair value of debt securities
authorized to be purchased by the Fund with remaining maturities of 60 days
or less at the time of purchase shall be their amortized cost value, unless
the particular circumstances of the security indicate otherwise. Under this
method, portfolio instruments and assets are valued at the acquisition cost
as adjusted for amortization of premium or accumulation of discount rather
than at current market value. The Executive Committee continually assesses
this method of valuation and recommends changes where necessary to assure
that the Fund's portfolio instruments are valued at their fair value as
determined in good faith by the Directors.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank 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.
REDEMPTION IN KIND
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Fund is obligated to redeem shares for
any one shareholder solely in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
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 Directors 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.
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, as amended,
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 derive less than 30% of its gross income from the sale of securities
held less than three months;
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.
SHAREHOLDERS' 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.
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
The average annual total return for 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 net asset value 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, adjusted over
the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD
The yield of the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the offering price per share of the
Fund on the last day of the period. This value is 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 Securities and Exchange Commission 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.
PERFORMANCE COMPARISONS
The Fund's performance 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 the Fund 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 RUSSELL ACTIVE SECTOR ROTATION ACCOUNTS UNIVERSE includes portfolios
that change interest rate exposure relative to the Lehman Brothers
Aggregate Bond Index or other broad market indexes, with changes in
portfolio interest rate sensitivity limited to approximately plus or
minus 20% index duration. Durations have typically been 3.5 to 6
years. Primary emphasis is on selecting undervalued sectors or
issues. Includes separate accounts, pooled funds, or mutual funds
managed by investment advisors, banks or insurance companies.
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 the "Intermediate Investment
Grade Debt " category in advertising and sales literature.
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 LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an
unmanaged index comprised of all the bonds issued by the Lehman
Brothers Government/Corporate Bond Index with maturities between 1 and
9.99 years. Total return is based on price appreciation/depreciation
and income as a percentage of the original investment. Indices are
rebalanced monthly by market capitalization.
o LEHMAN BROTHERS AGGREGATE BOND INDEX is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage
of the original investment. Indices are rebalanced monthly by market
capitalization.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
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.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-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 trillion to the more than 5,500 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.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 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 Mark R. Gensheimer, Executive Vice President, Bank Marketing
& Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage
firms nationwide--including 200 New York Stock Exchange firms--supported
by more wholesalers than any other mutual fund distributor.
Federated's service to financial professionals and institutions has
earned it high rankings in several DALBAR Surveys. The marketing effort
to these firms is headed by James F. Getz, President, Broker/Dealer
Division.
*source: Investment Company Institute
FEDERATED TOTAL RETURN LIMITED DURATION FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
PROSPECTUS
The Institutional Shares of Federated Total Return Limited Duration Fund (the
"Fund") offered by this prospectus represent interests in a diversified
investment portfolio of Federated Total Return Series, Inc. (the "Corporation"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities.
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 RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.
The Fund has also filed a Statement of Additional Information dated September
16, 1996, with the Securities and Exchange Commission ("SEC"). 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 the Fund
at the address listed on the back of this prospectus. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 16, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Limitations 13
Hub and Spoke (R) Option 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL SHARES 14
- ------------------------------------------------------
Share Purchases 14
Minimum Investment Required 15
What Shares Cost 15
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 16
Dividends and Distributions 16
REDEEMING INSTITUTIONAL SHARES 16
- ------------------------------------------------------
Telephone Redemption 16
Written Requests 17
Accounts With Low Balances 17
FUND INFORMATION 17
- ------------------------------------------------------
Management of the Corporation 17
Distribution of Institutional Shares 19
Administration of the Fund 19
Expenses of the Fund and Institutional
Shares 20
Federated LifeTrack(TM) Program 20
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
State and Local Taxes 21
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
OTHER CLASSES OF SHARES 22
- ------------------------------------------------------
APPENDIX 23
- ------------------------------------------------------
ADDRESSES 28
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)...................... None
Exchange Fee............................................................................ None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1)........................................................ 0.00%
12b-1 Fee............................................................................... None
Total Other Expenses (after expense reimbursement)(2)................................... 0.35%
Shareholder Services Fee(3).................................................. 0.00%
Total Operating Expenses(4)......................................................... 0.35%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.40%.
(2) The total other expenses are estimated to be 0.50% absent the anticipated
voluntary reimbursement of certain other operating expenses.
(3) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1997. If
Institutional Shares were paying or accruing the shareholder services fee,
Institutional Shares would be able to pay up to 0.25% of its average daily net
assets for the shareholder services fee. See "Fund Information."
(4) The total operating expenses are estimated to be 0.90% absent the
anticipated voluntary waiver of the management fee and the anticipated voluntary
reimbursement of certain other operating expenses.
* Total Institutional Shares operating expenses are estimated based on average
expenses expected to be incurred during the period ending September 30, 1997.
During the course of this period, expenses may be more or less than the average
amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INSTITUTIONAL SHARES WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND "FUND
INFORMATION." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO
ADDITIONAL FEES.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ----------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............ $4 $11
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL SHARES' FISCAL YEAR
ENDING SEPTEMBER 30, 1997.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." The Articles of Incorporation permit the Corporation to offer separate
portfolios and classes of shares. As of the date of this prospectus, the Board
of Directors (the "Directors") has established two classes of shares for
Federated Total Return Limited Duration Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to the Institutional
Shares of Federated Total Return Limited Duration Fund.
Institutional Shares ("Shares") of the Fund are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of fixed income securities. A minimum initial investment
of $100,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. Investment grade debt securities are rated in
the four highest rating categories by one or more nationally recognized
statistical rating organizations ("NRSROs") (AAA, AA, A or BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or which are of comparable
quality in the judgment of the adviser. Downgraded securities will be evaluated
on a case-by-case basis by the adviser. The adviser will determine whether or
not the security continues to be an acceptable investment. If not, the security
will be sold. The remainder of the Fund's assets may be invested in any of the
securities discussed below. The Fund's weighted-average portfolio duration will
at all times be limited to three years or less. (See the section entitled
"Average Portfolio Duration" in this Prospectus.) Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in a professionally managed,
diversified portfolio consisting primarily of corporate debt obligations, U.S.
and foreign government obligations, and
mortgage-backed and asset-backed securities. The Fund may also invest in
derivative instruments of such securities (including instruments with demand
features or credit enhancement and stripped mortgage-backed securities), as well
as money market instruments and cash.
The securities in which the Fund invests principally are:
- domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, or its agencies or instrumentalities;
- mortgage-backed securities;
- asset-backed securities;
- municipal securities;
- commercial paper which matures in 270 days or less;
- time deposits (including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts
are insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or who have at least $100 million in capital; and
- repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS. The Fund invests in
corporate and foreign government/agency debt obligations, including bonds,
notes, medium term notes, and debentures, which may have floating or fixed rates
of interest. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS. The Fund expects to invest in floating rate
debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities
is then reset periodically (commonly every 90 days) to an increment over
some predetermined interest rate index. Commonly utilized indices include
the three-month Treasury bill rate, the six-month Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE DEBT OBLIGATIONS. The Fund will also invest in fixed rate
securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates, the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear
interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published
interest rate or interest rate index. Many variable rate demand notes allow
the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed intervals.
See "Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S. Treasury; the
issuer's right to borrow an amount limited to a specific line of credit from the
U.S. Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal National
Mortgage Association; Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently four basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie
Mac"); (ii) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; (iii) those issued by
private issuers that represent an interest in or are collateralized by whole
loans or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities with adjustable rather than fixed interest rates. The
ARMS in which the Fund invests include, but are not limited to, securities
issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded.
The underlying mortgages which collateralize ARMS issued by Ginnie Mae are
fully guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by Fannie Mae or
Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest.
The Fund may invest in certain CMOs which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) securities
which are 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; (ii) securities which are
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 (iii) other securities in which the
proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as
amended. 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.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that generally
are not mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time the Fund
reinvests the payments and any unscheduled prepayments of principal are
received, the Fund may receive a rate of interest which is actually lower
than the rate of interest paid on these securities ("prepayment risks").
Mortgage-backed and asset-backed securities are subject to higher
prepayment risks than most other types of debt instruments with prepayment
risks because the underlying mortgage loans or the collateral supporting
asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed 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.
Prepayments on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or elect
to make unscheduled payments on their mortgages. Although asset-backed
securities generally are less likely to experience substantial prepayments
than are mortgage-backed securities, certain factors that affect the rate
of prepayments on mortgage-backed securities also affect the rate of
prepayments on many types of asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then re-registered because the owner and obligor moves to another
state, such re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
FOREIGN SECURITIES. The Fund may invest in foreign securities. Foreign
securities do not include American Depository Receipts, but do include foreign
securities not publicly traded in the United States. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities.
RISKS. The risks associated with investments in foreign securities relate
to political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but
are not limited to, expropriation, confiscatory taxation, currency
fluctuations, withholding taxes on interest, limitations on the use or
transfer of assets, political or social instability, ability to obtain or
enforce court judgments abroad and adverse diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably
from the domestic economy in such respects as growth of gross national
product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS. Foreign securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of the Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not
convert its holdings of foreign currencies to U.S. dollars daily. When the
Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between
the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may want to establish the U.S. dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund attempts to protect itself
against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. dollar and such
foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated
to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency or
denominated in a currency or currencies that the adviser believes will
reflect a high degree of correlation with the currency with regard to price
movements. The Fund generally will not enter into forward foreign currency
exchange contracts with a term longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are derivative
multi-class securities which may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, such as savings and loan associations, mortgage banks, commercial banks,
investment banks, and special purpose subsidiaries of the foregoing
organizations. The market volatility of stripped mortgage-backed securities
tends to be greater than the market volatility of the other types of
mortgage-related securities in which the Fund invests. Principal-only stripped
mortgage-backed securities are used primarily to hedge against interest rate
risk to the capital assets of the Fund in a changing interest rate environment.
A principal-only investor is assured of receiving cash flows in the amount of
principal purchased -- the unknown is when the cash flows will be received.
Interest-only investments over the life of the investment horizon may not
receive cash flows in the amount of the original investment.
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.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution that has capital, surplus and undivided profits over $100 million or
is insured by the BIF or the SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"). The banks issuing these instruments are
not necessarily subject to the same regulatory requirements that apply to
domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a corporation
and an institutional lender (such as the Fund) payable upon demand by either
party. The notice period for demand typically ranges from one to seven days, and
the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES. The Fund may
purchase and sell financial and foreign currency futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future, while foreign currency futures contracts call for
the delivery of either U.S. or foreign currency at a certain time in the future.
The seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the instruments subject to the
futures contracts may not correlate perfectly with the prices of the
instruments in the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the portfolio's holdings
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary market on an
exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to establish and close
out futures and options positions depends on this secondary market.
HIGH-YIELD DEBT OBLIGATIONS. The Fund may invest up to but not including 35% of
its total assets in debt securities that are not investment-grade but are rated
BB or lower by an NRSRO (or, if unrated, determined by the adviser to be of
comparable quality). Some of these securities may involve equity
characteristics. The Fund may invest in equity securities, including unit
offerings which combine fixed rate securities and common stock or common stock
equivalents such as warrants, rights and options. Securities which are rated BB
or lower by a nationally recognized statistical rating organization are
considered speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. These securities are
commonly referred to as "junk bonds." A description of the rating categories for
the permissible investments are contained in the Appendix to this Prospectus.
RISKS. Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, 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 bonds,
lower-rated bonds 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 bonds may be more difficult to dispose of
or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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." Some securities, such as stock rights, warrants and
convertible securities, although not typically referred to as derivatives,
contain options that may affect their value and performance. 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, it will only do so in a manner consistent with its
investment objective, policies and limitations.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of total return, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. Duration is a commonly used measure of the potential
volatility of the price of a debt security, or the aggregate market value of a
portfolio of debt securities, prior to maturity. Securities with shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed three years.
TOTAL RETURN. The "total return" sought by the Fund will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and successful use of futures and options, or gains from favorable
changes in foreign currency exchange rates. Generally, over the long term, the
total return obtained by a portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a portfolio that
invests primarily in equity securities. At the same time, the market risk and
price volatility of a fixed income portfolio is expected to be less than that of
an equity portfolio.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. 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. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, interest rate swaps,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 15% of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing short-term
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
The Fund reserves the right to invest up to 100% of its assets in one or more
investment companies, but would do so only after receipt of an exemptive order
from the Securities and Exchange Commission permitting this. If, in the future,
the Fund does receive such an exemptive order, the Fund would notify
shareholders of its intent to increase the level of investment in other
investment companies. However, shareholder approval will not be required to
effect any such change in this investment policy.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, 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 investment 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 at all times.
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.
WHEN-ISSUED AND 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. Accordingly, the
Fund may pay more or less than the market value of the securities on the
settlement date.
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 into 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.
INVESTMENT LIMITATIONS
The Fund will not:
- 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
its assets to secure such borrowings; or
- with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash,
cash items, or securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities) or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
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The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service 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.
INVESTING IN INSTITUTIONAL SHARES
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SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Shareholder Services Company, c/o State
Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For
Credit to: Federated Total Return Limited Duration Fund -- Institutional Shares;
Fund Number (this number can be found on the account statement or by contacting
the Fund); Group Number or Order Number; Nominee or Institution Name; ABA Number
011000028. 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.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable to
Federated Total Return Limited Duration Fund -- Institutional Shares 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 by State Street Bank and Trust Company ("State
Street Bank") into federal funds. This is normally the next business day after
State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
shares through a financial intermediary may be charged a service fee by that
financial intermediary.
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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
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 by telephone
request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. 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. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
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 such a case should
occur, another method of redemption, such as "Written Requests," should be
considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 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: Federated Total Return Bond
Fund -- Institutional Shares; 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.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, 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.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .40% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the adviser, the adviser may voluntarily waive some or all of
its fee. The Adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, 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 Management 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 $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Both the Corporation 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 interests. 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.
PORTFOLIO MANAGER'S BACKGROUND. Randall S. Bauer is the Fund's portfolio
manager. Mr. Bauer joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since 1994. Mr. Bauer was an
Assistant Vice President of the Fund's investment adviser from 1989 to
1993. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University.
Deborah A. Cunningham is the co-portfolio manager of the Fund. Ms.
Cunningham joined Federated Investors in 1981 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Cunningham served as an
Assistant Vice President of the investment adviser from 1989 until 1992.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Mark E. Durbiano is the Fund's sub-portfolio manager for the high yield
corporate bonds asset category. Mr. Durbiano joined Federated Investors in
1982 and has been a Senior Vice President of the Fund's adviser since
January 1996. Mr. Durbiano was a Vice President of the Fund's adviser from
1988 through 1995. Mr. Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for shares of the Fund.
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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
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 the Institutional Shares, computed at an annual rate,
to obtain certain personal services for shareholders and to maintain shareholder
accounts. From time to time and for such periods as deemed appropriate, the
amount stated above may be reduced voluntarily. 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. 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 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 Fund's investment 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 Fund. Federated
Services Company provides these at an annual rate which
relates to the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
- --------------------- -----------------------------------
<S> <C>
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
</TABLE>
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 to voluntarily waive a portion of its fee.
EXPENSES OF THE FUND AND INSTITUTIONAL SHARES
Holders of Institutional Shares pay their allocable portion of Corporation and
Fund expenses.
The Corporation expenses for which holders of Institutional Shares pay their
allocable portion include, but are not limited to: the cost of organizing the
Corporation and continuing its existence; registering the Corporation with
federal and state securities authorities; Directors' fees; auditors' fees, the
cost of meetings of Directors; legal fees of the Corporation; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The Fund expenses for which holders of Institutional Shares pay their allocable
portion include, but are not limited to: registering the portfolio and
Institutional Shares of the portfolio; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such non-
recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Institutional
Shares as a class are expenses under the Corporation's Shareholder Services
Agreement. However, the Directors reserve the right to allocate certain other
expenses to holders of Institutional Shares as they deem appropriate ("Class
Expenses"). In any case, Class Expenses would be limited to: distribution fees;
transfer agent fees as identified by the transfer agent as attributable to
holders of Institutional Shares; fees under the Corporation's Shareholder
Services; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange Commission
and to state securities commissions; expenses related to administrative
personnel and services as required to support holders of Institutional Shares;
and Directors' fees incurred as a result of issues relating solely to
Institutional Shares.
FEDERATED LIFETRACK(TM) PROGRAM
The Fund is a member of the Federated LifeTrack(TM) Program sold through
financial representatives. Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and
administrative services. Additional fees are charged to participating plans for
these services. As part of the Federated LifeTrack(TM) Program, exchanges may
readily be made between investment options selected by the employer or a plan
trustee.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote.
As a Maryland corporation, the Fund 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 a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation'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, as amended, 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 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 their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
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.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) 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 number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.
From time to time, advertisements for the Fund's Institutional Shares may refer
to ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund.
Institutional Service Shares and Institutional Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Service
Shares and Institutional Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-341-7400.
APPENDIX
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STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. 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 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
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 S&P 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 some time 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 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 obligor'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 obligor's 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.
NR -- NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligation will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-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.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1 -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1 -- (Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2 -- (Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Total Return Federated Investors Tower
Limited Duration Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Federated Management 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 P.O. Box 8600
Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ------------------------------------------------------------------------------------------------
</TABLE>
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FEDERATED TOTAL RETURN
LIMITED DURATION FUND
INSTITUTIONAL SHARES
PROSPECTUS
A Diversified Portfolio of
Federated Total Return Series, Inc.
an Open-End, Management
Investment Company
Prospectus dated September 16, 1996
LOGO
Cusip 31428Q408
G01744-01-IS (9/96)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERATED TOTAL RETURN LIMITED DURATION FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
The Institutional Service Shares of Federated Total Return Limited Duration Fund
(the "Fund") offered by this prospectus represent interests in a diversified
investment portfolio of Federated Total Return Series, Inc. (the "Corporation"),
an open-end, management investment company (a mutual fund).
The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities.
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 RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information dated September
16, 1996, with the Securities and Exchange Commission ("SEC"). 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 the Fund
at the address listed on the back of this prospectus. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated September 16, 1996
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Limitations 13
Hub and Spoke(R) Option 13
NET ASSET VALUE 14
- ------------------------------------------------------
INVESTING IN INSTITUTIONAL
SERVICE SHARES 14
- ------------------------------------------------------
Share Purchases 14
Minimum Investment Required 15
What Shares Cost 15
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 16
Dividends and Distributions 16
REDEEMING INSTITUTIONAL SERVICE SHARES 16
- ------------------------------------------------------
Telephone Redemption 16
Written Requests 17
Accounts With Low Balances 17
FUND INFORMATION 17
- ------------------------------------------------------
Management of the Corporation 17
Distribution of Institutional Service Shares 19
Administration of the Fund 20
Expenses of the Fund and Institutional
Service Shares 20
Federated LifeTrack(TM) Program 21
SHAREHOLDER INFORMATION 21
- ------------------------------------------------------
Voting Rights 21
TAX INFORMATION 21
- ------------------------------------------------------
Federal Income Tax 21
State and Local Taxes 22
PERFORMANCE INFORMATION 22
- ------------------------------------------------------
OTHER CLASSES OF SHARES 22
- ------------------------------------------------------
APPENDIX 23
- ------------------------------------------------------
ADDRESSES 28
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INSTITUTIONAL SERVICES SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............................... None
Redemption Fee (as a percentage of amount redeemed, if applicable).................... None
Exchange Fee.......................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1)...................................................... 0.00%
12b-1 Fee(2).......................................................................... 0.05%
Total Other Expenses (after expense reimbursement)(3)................................. 0.60%
Shareholder Services Fee................................................... 0.25%
Total Operating Expenses(4)...................................................... 0.65%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.40%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The total other expenses are estimated to be 0.80% absent the anticipated
voluntary reimbursement of certain other operating expenses.
(4) The total operating expenses are estimated to be 1.40% absent the
anticipated voluntary waivers of the management fee, a portion of the 12b-1 fee,
and the anticipated voluntary reimbursement of certain other operating expenses.
*Total Institutional Service Shares operating expenses are estimated based on
average expenses expected to be incurred during the period ending September 30,
1997. During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE INSTITUTIONAL SERVICE
SHARES WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS
OF THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SERVICE
SHARES" AND "FUND INFORMATION." WIRE-TRANSFERRED REDEMPTIONS OF LESS THAN $5,000
MAY BE SUBJECT TO ADDITIONAL FEES.
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- --------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period....... $7 $21
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE INSTITUTIONAL SERVICE SHARES' FISCAL
YEAR ENDING SEPTEMBER 30, 1997.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." The Articles of Incorporation permit the Corporation to offer separate
portfolios and classes of shares. As of the date of this prospectus, the Board
of Directors (the "Directors") has established two classes of shares for
Federated Total Return Limited Duration Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to the Institutional Service
Shares of Federated Total Return Limited Duration Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in fixed income securities. A minimum initial
investment of $25,000 over a 90-day period is required.
Shares are sold and redeemed at net asset value without a sales charge imposed
by the Fund.
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. 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.
INVESTMENT POLICIES
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. Investment grade debt securities are rated in
the four highest rating categories by one or more nationally recognized
statistical rating organizations ("NRSROs") (AAA, AA, A or BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or which are of comparable
quality in the judgment of the adviser. Downgraded securities will be evaluated
on a case-by-case basis by the adviser. The adviser will determine whether or
not the security continues to be an acceptable investment. If not, the security
will be sold. The remainder of the Fund's assets may be invested in any of the
securities discussed below. The Fund's weighted-average portfolio duration will
at all times be limited to three years or less. (See the section entitled
"Average Portfolio Duration" in this Prospectus.) Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests in a professionally managed,
diversified portfolio consisting primarily of corporate debt obligations, U.S.
and foreign government obligations, and
mortgage-backed and asset-backed securities. The Fund may also invest in
derivative instruments of such securities (including instruments with demand
features or credit enhancement and stripped mortgage-backed securities), as well
as money market instruments and cash.
The securities in which the Fund invests principally are:
- domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, or its agencies or instrumentalities;
- mortgage-backed securities;
- asset-backed securities;
- municipal securities;
- commercial paper which matures in 270 days or less;
- time deposits (including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts
are insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured
banks or who have at least $100 million in capital; and
- repurchase agreements collateralized by eligible investments.
CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS. The Fund invests in
corporate and foreign government/agency debt obligations, including bonds,
notes, medium term notes, and debentures, which may have floating or fixed rates
of interest. The prices of fixed income securities fluctuate inversely to the
direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS. The Fund expects to invest in floating rate
debt obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is at or
above prevailing market rates. The interest rate paid on these securities
is then reset periodically (commonly every 90 days) to an increment over
some predetermined interest rate index. Commonly utilized indices include
the three-month Treasury bill rate, the six-month Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities.
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at
an initial interest rate which is at or above prevailing market rates.
Interest rates are reset periodically (most commonly every 90 days) at
different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some
increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer
the option to convert the increasing rate of interest to a fixed rate under
such terms, conditions, and limitations as are described in each issue's
prospectus.
FIXED RATE DEBT OBLIGATIONS. The Fund will also invest in fixed rate
securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive
to fluctuating interest rates. In periods of rising interest rates, the
value of a fixed rate security is likely to fall. Fixed rate securities
with short-term characteristics are not subject to the same price
volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear
interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on a published
interest rate or interest rate index. Many variable rate demand notes allow
the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security
at the time of each interest rate adjustment or at other fixed intervals.
See "Demand Features."
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
which generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations (including mortgage-backed
securities, bonds, notes and discount notes) issued or guaranteed by the
following U.S. government agencies or instrumentalities: Farm Credit System,
including the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; and Student Loan Marketing Association. These
securities are backed by: the full faith and credit of the U.S. Treasury; the
issuer's right to borrow an amount limited to a specific line of credit from the
U.S. Treasury; the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or the credit of the
agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Federal Home Loan Banks; Federal National
Mortgage Association; Student Loan Marketing Association; and Federal Home Loan
Mortgage Corporation.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. There are currently four basic
types of mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie
Mac"); (ii) those issued by private issuers that represent an interest in or are
collateralized by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; (iii) those issued by
private issuers that represent an interest in or are collateralized by whole
loans or mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately issued
securities which are 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.
The privately issued mortgage-related securities provide for a periodic payment
consisting of both interest and/or principal. The interest portion of these
payments will be distributed by the Fund as income, and the capital portion will
be reinvested.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities with adjustable rather than fixed interest rates. The
ARMS in which the Fund invests include, but are not limited to, securities
issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded.
The underlying mortgages which collateralize ARMS issued by Ginnie Mae are
fully guaranteed by the Federal Housing Administration or Veterans
Administration, while those collateralizing ARMS issued by Fannie Mae or
Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest.
The Fund may invest in certain CMOs which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) securities
which are 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; (ii) securities which are
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 (iii) other securities in which the
proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as
amended. 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.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities but have underlying assets that generally
are not mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time the Fund reinvests
the payments and any unscheduled prepayments of principal are received, the
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed 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. Prepayments on mortgage-backed
securities are also affected by other factors, such as the frequency with
which people sell their homes or elect to make unscheduled payments on
their mortgages. Although asset-backed securities generally are less likely
to experience substantial prepayments than are mortgage-backed securities,
certain factors that affect the rate of prepayments on mortgage-backed
securities also affect the rate of prepayments on many types of
asset-backed securities.
While mortgage-backed securities generally entail less risk of a decline
during periods of rapidly rising interest rates, mortgage-backed securities
may also have less potential for capital appreciation than other similar
investments (e.g., investments with comparable maturities) because as
interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may
result in some loss of a holder's principal investment to the extent of the
premium paid. Conversely, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due.
Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state
and is then re-registered because the owner and obligor moves to another
state, such re-registration could defeat the original security interest in
the vehicle in certain cases. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of asset-backed securities backed
by automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
FOREIGN SECURITIES. The Fund may invest in foreign securities. Foreign
securities do not include American Depository Receipts, but do include foreign
securities not publicly traded in the United States. Investments in foreign
securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities.
RISKS. The risks associated with investments in foreign securities relate
to political and economic developments abroad, as well as those that result
from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but
are not limited to, expropriation, confiscatory taxation, currency
fluctuations, withholding taxes on interest, limitations on the use or
transfer of assets, political or social instability, ability to obtain or
enforce court judgments abroad and adverse diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably
from the domestic economy in such respects as growth of gross national
product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries.
CURRENCY RISKS. Foreign securities may be denominated in foreign
currencies. Therefore, the value in U.S. dollars of the Fund's assets and
income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not
convert its holdings of foreign currencies to U.S. dollars daily. When the
Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between
the prices at which they buy and sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in foreign securities. The Fund will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. When the Fund
enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may want to establish the U.S. dollar cost or
proceeds, as the case may be. By entering into a forward contract in U.S.
dollars for the purchase or sale of the amount of foreign currency involved
in an underlying security transaction, the Fund attempts to protect itself
against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. dollar and such
foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships.
The Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts where the Fund would be obligated
to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency or
denominated in a currency or currencies that the adviser believes will
reflect a high degree of correlation with the currency with regard to price
movements. The Fund generally will not enter into forward foreign currency
exchange contracts with a term longer than one year.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities. Stripped mortgage-backed securities are derivative
multi-class securities which may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, such as savings and loan associations, mortgage banks, commercial banks,
investment banks, and special purpose subsidiaries of the foregoing
organizations. The market volatility of stripped mortgage-backed securities
tends to be greater than the market volatility of the other types of
mortgage-related securities in which the Fund invests. Principal-only stripped
mortgage-backed securities are used primarily to hedge against interest rate
risk to the capital assets of the Fund in a changing interest rate environment.
A principal-only investor is assured of receiving cash flows in the amount of
principal purchased -- the unknown is when the cash flows will be received.
Interest-only investments over the life of the investment horizon may not
receive cash flows in the amount of the original investment.
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.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
BANK INSTRUMENTS. The Fund only invests in bank instruments either issued by an
institution that has capital, surplus and undivided profits over $100 million or
is insured by the BIF or the SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"). The banks issuing these instruments are
not necessarily subject to the same regulatory requirements that apply to
domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to seven
days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. As the borrower repays the loan, an amount equal to the
repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility from
a bank or other financial institution. The terms of the participation require
the Fund to make a pro rata share of all loans extended to the borrower and
entitles the Fund to a pro rata share of all payments made by the borrower.
Demand notes and revolving facilities usually provide for floating or variable
rates of interest.
CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will treat credit enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.
DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period following
a demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement.
INTEREST RATE SWAPS. As one way of managing its exposure to different types of
investments, the Fund may enter into interest rate swaps, currency swaps, and
other types of swap agreements such as caps, collars, and floors. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund.
FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES. The Fund may
purchase and sell financial and foreign currency futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future, while foreign currency futures contracts call for
the delivery of either U.S. or foreign currency at a certain time in the future.
The seller of the contract agrees to make delivery of the type of instrument
called for in the contract and the buyer agrees to take delivery of the
instrument at the specified future time.
The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to but or sell, respectively, a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.
RISKS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the instruments subject to the
futures contracts may not correlate perfectly with the prices of the
instruments in the Fund's portfolio. This may cause the futures contract
and any related options to react differently than the portfolio's holdings
to market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In these events, the Fund may lose
money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before
entering into options transactions, there is no assurance that a liquid
secondary
market on an exchange or otherwise will exist for any particular futures
contract or option at any particular time. The Fund's ability to establish
and close out futures and options positions depends on this secondary
market.
HIGH-YIELD DEBT OBLIGATIONS. The Fund may invest up to but not including 35% of
its total assets in debt securities that are not investment-grade but are rated
BB or lower by an NRSRO (or, if unrated, determined by the adviser to be of
comparable quality). Some of these securities may involve equity
characteristics. The Fund may invest in equity securities, including unit
offerings which combine fixed rate securities and common stock or common stock
equivalents such as warrants, rights and options. Securities which are rated BB
or lower by a nationally recognized statistical rating organization are
considered speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. These securities are
commonly referred to as "junk bonds." A description of the rating categories for
the permissable investments are contained in the Appendix to this Prospectus.
RISKS. Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, 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 bonds,
lower-rated bonds 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 bonds may be more difficult to dispose of
or to value than higher-rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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." Some securities, such as stock rights, warrants and
convertible securities, although not typically referred to as derivatives,
contain options that may affect their value and performance. 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, it will only do so in a manner consistent with its
investment objective, policies and limitations.
AVERAGE PORTFOLIO DURATION. Although the Fund will not maintain a stable net
asset value, the adviser will seek to limit, to the extent consistent with the
Fund's investment objective of total return, the magnitude of fluctuations in
the Fund's net asset value by limiting the dollar-weighted average duration of
the Fund's portfolio. Duration is a commonly used measure of the potential
volatility of the price of a debt security, or the aggregate market value of a
portfolio of debt securities, prior to maturity. Securities with shorter
durations generally have less volatile prices than securities of comparable
quality with longer durations. The Fund should be expected to maintain a higher
average duration during periods of lower expected market volatility, and a lower
average duration during periods of higher expected market volatility. In any
event, the Fund's dollar-weighted average duration will not exceed three years.
TOTAL RETURN. The "total return" sought by the Fund will consist of interest
and dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and successful use of futures and options, or gains from favorable
changes in foreign currency exchange rates. Generally, over the long term, the
total return obtained by a portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a portfolio that
invests primarily in equity securities. At the same time, the market risk and
price volatility of a fixed income portfolio is expected to be less than that of
an equity portfolio.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
securities. 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. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Directors to be liquid, interest rate swaps,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 15% of the value of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other investment companies, but it will not own more than 3%
of the total outstanding voting stock of any investment company, invest more
than 5% of its total assets in any one investment company, or invest more than
10% of its total assets in investment companies in general. The Fund will invest
in other investment companies primarily for the purpose of investing shortterm
cash which has not yet been invested in other portfolio instruments. It should
be noted that investment companies incur certain expenses such as management
fees and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser will
waive its investment advisory fee on assets invested in securities of open-end
investment companies.
The Fund reserves the right to invest up to 100% of its assets in one or more
investment companies, but would do so only after receipt of an exemptive order
from the Securities and Exchange Commission permitting this. If, in the future,
the Fund does receive such an exemptive order, the Fund would notify
shareholders of its intent to increase the level of investment in other
investment companies. However, shareholder approval will not be required to
effect any such change in this investment policy.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, 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 investment 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 at all times.
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.
WHEN-ISSUED AND 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. Accordingly, the
Fund may pay more or less than the market value of the securities on the
settlement date.
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 into 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.
INVESTMENT LIMITATIONS
The Fund will not:
- 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
its assets to secure such borrowings; or
- with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash,
cash items, or securities issued or guaranteed by the U.S. government and
its agencies or instrumentalities, and repurchase agreements
collateralized by such securities) or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.
The initial shareholder of the Fund (who is an affiliate of Federated Securities
Corp.) voted to vest authority to use this investment structure in the sole
discretion of the Directors. No further approval of shareholders is required.
Shareholders will receive at least 30 days prior notice of any such investment.
In making its determination, the Directors will consider, among other things,
the benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Directors will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of 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.
INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request.
BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the Fund
before 4:00 p.m. (Eastern time) to place an order. The order is considered
received immediately. Payment by federal funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Shareholder Services Company, c/o State
Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For
Credit to: Federated Total Return Limited Duration Fund -- Institutional Service
Shares; Fund Number (this number can be found on the account statement or by
contacting the Fund); Group Number or Order Number; Nominee or Institution Name;
ABA Number 011000028. 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.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable to
Federated Total Return Limited Duration Fund -- Institutional Service Shares 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 by State Street Bank & Trust Company ("State
Street Bank") into federal funds. This is normally the next business day after
State Street Bank receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment.
WHAT SHARES COST
Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who purchase
shares through a financial intermediary may be charged a service fee by that
financial intermediary.
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, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least equal to the minimum investment in the Fund. The Fund
acquires the exchanged securities for investment and not for resale.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Share certificates are not issued unless
requested on the application or by contacting the Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly statements are sent to report dividends paid during the
month.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. 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 of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds.
Shares earn dividends through the business day that proper redemption
instructions are received by State Street Bank.
REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who purchase Shares through a
financial intermediary may be charged a service fee by that financial
intermediary. 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 by telephone request or by written request.
TELEPHONE REDEMPTION
Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business day,
but in no event more than seven days, to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. 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. If at any time the Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders will be promptly notified.
An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions may
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 such a case should
occur, another method of redemption, such as "Written Requests," should be
considered.
WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 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: Federated Total Return Limited Duration
Fund -- Institutional Service Shares; 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.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 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.
FUND INFORMATION
- --------------------------------------------------------------------------------
MANAGEMENT OF THE CORPORATION
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The Directors
are responsible for managing the Corporation's business affairs and for
exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, 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.
ADVISORY FEES. The Fund's adviser receives an annual investment advisory
fee equal to .40% of the Fund's average daily net assets. Under the
investment advisory contract, which provides for voluntary waivers of
expenses by the adviser, the adviser may voluntarily waive some or all of
its fee. The adviser can terminate this voluntary waiver of some or all of
its advisory fee at any time at its sole discretion. The adviser has also
undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.
ADVISER'S BACKGROUND. Federated Management, 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 Management 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 $80 billion invested across
more than 250 funds under management and/or administration by its
subsidiaries, as of December 31, 1995, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more
than 1,800 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide. More than 100,000
investment professionals have selected Federated funds for their clients.
Both the Corporation 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 interests. 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.
PORTFOLIO MANAGER'S BACKGROUND. Randall S. Bauer is the Fund's portfolio
manager. Mr. Bauer joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since 1994. Mr. Bauer was an
Assistant Vice President of the Fund's investment adviser from 1989 to
1993. Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University.
Deborah A. Cunningham is the co-portfolio manager of the Fund. Ms.
Cunningham joined Federated Investors in 1981 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Cunningham served as an
Assistant Vice President of the investment adviser from 1989 until 1992.
Ms. Cunningham is a Chartered Financial Analyst and received her M.S.B.A.
in Finance from Robert Morris College.
Mark E. Durbiano is the Fund's sub-portfolio manager for the high yield
corporate bonds asset category. Mr. Durbiano joined Federated Investors in
1982 and has been a Senior Vice President of the Fund's adviser since
January 1996. Mr. Durbiano was a Vice President of the Fund's adviser from
1988 through 1995. Mr. Durbiano is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Pittsburgh.
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Institutional
Service Shares. 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"), the distributor may be paid a fee by the Fund in an amount computed at
an annual rate of .25% of the average daily net asset value of Institutional
Service Shares of the Fund. 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.
The 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 the Fund
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
Shares to obtain certain personal services for shareholders and to maintain
shareholder accounts. From time to time and for such periods as deemed
appropriate, the amount stated above may be reduced voluntarily. 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. In addition to payments made
pursuant to the Plan and Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of 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 Fund' s investment
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 Fund. Federated
Services Company provides these at an annual rate which relates to the average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
- --------------------- ----------------------------------
<S> <C>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
on assets in excess of $750
0.075% million
</TABLE>
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 to voluntarily waive a portion of its fee.
EXPENSES OF THE FUND AND INSTITUTIONAL SERVICE SHARES
Holders of Institutional Service Shares pay their allocable portion of
Corporation and Fund expenses.
The Corporation expenses for which holders of Institutional Service Shares pay
their allocable portion include, but are not limited to: the cost of organizing
the Corporation and continuing its existence; registering the Corporation with
federal and state securities authorities; Directors' fees; auditors' fees, the
cost of meetings of Directors; legal fees of the Corporation; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.
The Fund expenses for which holders of Institutional Service Shares pay their
allocable portion include, but are not limited to: registering the portfolio and
Institutional Service Shares of the portfolio; investment advisory services;
taxes and commissions; custodian fees; insurance premiums; auditors' fees; and
such non-recurring and extraordinary items as may arise from time to time.
At present, the only expenses which are allocated specifically to Institutional
Service Shares as a class are expenses under the Corporation's Distribution Plan
and Shareholder Services Agreement. However, the Directors reserve the right to
allocate certain other expenses to holders of Institutional Service Shares as
they deem appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: distribution fees; transfer agent fees as identified by the transfer
agent as attributable to holders of Institutional Service Shares; fees under the
Corporation's Shareholder Services; printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders; registration fees paid to the Securities
and Exchange Commission and to state securities commissions; expenses related to
administrative personnel and services as required to support holders of
Institutional Service Shares; and Directors' fees incurred as a result of issues
relating solely to Institutional Service Shares.
FEDERATED LIFETRACK(TM) PROGRAM
The Fund is a member of the Federated LifeTrack(TM) Program sold through
financial representatives. Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and administrative services. Additional
fees are charged to participating plans for these services. As part of the
Federated LifeTrack(TM) Program, exchanges may readily be made between
investment options selected by the employer or a plan trustee.
SHAREHOLDER INFORMATION
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VOTING RIGHTS
Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote.
As a Maryland corporation, the Fund 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 a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote.
TAX INFORMATION
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FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, 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 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 their shares. Information on the tax status of
dividends and distributions is provided annually.
STATE AND LOCAL TAXES
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
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From time to time, the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the Fund 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 the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) 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 number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Service
Shares and Institutional Shares.
From time to time, advertisements for the Fund's Institutional Service Shares
may refer to ratings, rankings, and other information in certain financial
publications and/or compare the Fund's Institutional Service Shares performance
to certain indices.
OTHER CLASSES OF SHARES
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The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan.
Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses. Expense differences, however, between Institutional Shares
and Institutional Service Shares may affect the performance of each class.
To obtain more information and a prospectus for Institutional Shares, investors
may call 1-800-341-7400.
APPENDIX
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STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. 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 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. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
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 S&P 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 some time 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 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 obligor'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 obligor's 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.
NR -- NR indicates that Fitch does not rate the specific issue.
PLUS (+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
DUFF & PHELPS CREDIT RATING CO.
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-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.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1 -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1 -- (Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2 -- (Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
ADDRESSES
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<TABLE>
<S> <C> <C>
Federated Total Return Federated Investors Tower
Limited Duration Fund Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Investment Adviser
Federated Management 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 P.O. Box 8600
Boston, Massachusetts 02266-8600
- ------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
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</TABLE>
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FEDERATED TOTAL RETURN
LIMITED DURATION FUND
INSTITUTIONAL SERVICE SHARES
PROSPECTUS
A Diversified Portfolio of
Federated Total Return Series,
Inc.
an Open-End, Management
Investment Company
Prospectus dated September 16,
1996
LOGO
Cusip 31428Q309
G01744-02-SS (9/96)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FEDERATED TOTAL RETURN LIMITED DURATION FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus(es) of Federated Total Return Limited Duration Fund (the
`Fund''), a portfolio of Federated Total Return Series, Inc. (the
`Corporation'') dated September 16, 1996. 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, PENNSYLVANIA 15222-3779
Statement dated September 16, 1996
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 31428Q408
31428Q309
G01744-03 (9/96)
GENERAL INFORMATION ABOUT THE FUND 4
INVESTMENT OBJECTIVE AND POLICIES 4
TYPES OF INVESTMENTS 4
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") 5
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") 6
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") 7
INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS 7
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES 8
RESETS OF INTEREST 8
CAPS AND FLOORS 3
FOREIGN BANK INSTRUMENTS 10
FUTURES AND OPTIONS TRANSACTIONS 10
MEDIUM TERM NOTES AND DEPOSIT NOTES 5
WEIGHTED AVERAGE PORTFOLIO MATURITY 5
WEIGHTED AVERAGE PORTFOLIO DURATION 15
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 17
LENDING OF PORTFOLIO SECURITIES 6
RESTRICTED AND ILLIQUID SECURITIES 6
REPURCHASE AGREEMENTS 18
REVERSE REPURCHASE AGREEMENTS 19
PORTFOLIO TURNOVER 19
INVESTMENT LIMITATIONS 7
FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT 9
OFFICERS AND DIRECTORS 9
FUND OWNERSHIP 13
DIRECTORS' COMPENSATION 14
DIRECTOR LIABILITY 15
INVESTMENT ADVISORY SERVICES 15
ADVISER TO THE FUND 15
ADVISORY FEES 37
OTHER SERVICES 15
FUND ADMINISTRATION 15
CUSTODIAN AND PORTFOLIO ACCOUNTING 15
TRANSFER AGENT 15
INDEPENDENT AUDITORS 15
BROKERAGE TRANSACTIONS 16
PURCHASING SHARES 16
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY )
AND SHAREHOLDER SERVICES 16
DETERMINING NET ASSET VALUE 17
DETERMINING MARKET VALUE OF SECURITIES 17
VALUING MUNICIPAL BONDS 17
USE OF AMORTIZED COST 17
REDEEMING SHARES 17
REDEMPTION IN KIND 17
TAX STATUS 18
THE FUND'S TAX STATUS 18
SHAREHOLDERS' TAX STATUS 18
TOTAL RETURN 18
YIELD 18
PERFORMANCE COMPARISONS 18
ECONOMIC AND MARKET INFORMATION 19
ABOUT FEDERATED INVESTORS 19
MUTUAL FUND MARKET 19
GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 11, 1993. On March 21, 1995, the name of the
Corporation was changed from "Insight Institutional Series, Inc." to
"Federated Total Return Series, Inc." The Articles of Incorporation permit
the Corporation to offer separate portfolios and classes of shares.
Shares of the Fund are offered in two classes, known as Institutional
Shares and Institutional Service Shares (individually and collectively
referred to as `Shares,'' as the context may require). This Statement of
Additional Information relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide total return. The
investment objective cannot be changed without approval of shareholders.
The investment policies stated below may be changed by the Board of
Directors ("Directors") without shareholder approval. Shareholders will be
notified before any material change in the investment policies becomes
effective.
TYPES OF INVESTMENTS
The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. The Fund's weighted-
average portfolio duration will at all times be limited to three years or
less.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
The ARMS in which the Fund invests include, but are not limited to,
securities issued by Government National Mortgage Association, Federal
National Mortgage Association, and Federal Home Loan Mortgage Corporation.
Unlike conventional bonds, ARMS pay back principal over the life of the
ARMS rather than at maturity. Thus, a holder of the ARMS, such as the Fund,
would receive monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing payments on the
underlying mortgages. At the time that a holder of the ARMS reinvests the
payments and any unscheduled prepayments of principal that it receives, the
holder may receive a rate of interest which is actually lower than the rate
of interest paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other types
of fixed income securities. ARMS may also be collateralized by whole loans
or private pass-through securities.
Like other fixed income securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates rise and generally
rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the likelihood
increases that mortgages will be prepaid. Furthermore, if ARMS are
purchased at a premium, mortgage foreclosures and unscheduled principal
payments may result in some loss of a holder's principal investment to the
extent of the premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled
prepayment of principal would increase current and total returns and would
accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The following example illustrates how mortgage cash flows are prioritized
in the case of CMOs; most of the CMOs in which the Fund invests use the
same basic structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities.
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date, and the final class (Z bond) typically
receives any excess income from the underlying investments after payments
are made to the other classes and receives no principal or interest
payments until the shorter maturity classes have been retired, but then
receives all remaining principal and interest payments;
(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities; and
(3) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bond).
When those securities are completely retired, all principal payments are
then directed to the next shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.
Because the cash flow is distributed sequentially instead of pro rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. The interest
portion of these payments is distributed by the Fund as income, and the
capital portion is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class mortgage-backed securities which
qualify and elect treatment as such under provisions of the Internal
Revenue Code, as amended. 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.
INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS
Some of the securities purchased by the Fund may represent an interest
solely in the principal repayments or solely in the interest payments on
mortgage-backed securities (stripped mortgage-backed securities or
"SMBSs"). SMBSs are usually structured with two classes and receive
different proportions of the interest and principal distributions on the
pool of underlying mortgage-backed securities. Due to the possibility of
prepayments on the underlying mortgages, SMBSs may be more interest-rate
sensitive than other securities purchased by the Fund. If prevailing
interest rates fall below the level at which SMBSs were issued, there may
be substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only SMBSs (the principal-only or
"PO" class) and a reduction in the amount of payments made to holders of
interest-only SMBSs (the interest-only or "IO" class). Because the yield to
maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on
the underlying mortgages. The Fund's inability to fully recoup its
investments in these securities as a result of a rapid rate of principal
prepayments may occur even if the securities are rated by an NRSRO.
Therefore, interest-only SMBSs generally increase in value as interest
rates rise and decrease in value as interest rates fall, counter to changes
in value experienced by most fixed income securities.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an
ownership interest in federal agency mortgage pass-through securities such
as those issued by Government National Mortgage Association as well as
those issued by non-government related entities. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities
dealers and other investors makes government-related and non-government
related pools highly liquid.
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.
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, ARMS,
which use indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage securities that
closely mirror the market.
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.
FOREIGN BANK INSTRUMENTS
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are
subject to somewhat different risks than domestic obligations of domestic
issuers. Examples of these risks include international, economic and
political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign withholdings
or other taxes on interest income, difficulties in obtaining or enforcing a
judgment against the issuing bank, and the possible impact of interruptions
of the flow of international currency transactions. Different risks may
also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping and the public
availability of information. These factors will be carefully considered by
the Fund's adviser in selecting investments for the Fund.
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 moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in
rates 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 agree to purchase
securities in the future at a predetermined price (i.e., "go long") 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) at 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).
MEDIUM TERM NOTES AND DEPOSIT NOTES
Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade
like commercial paper, but may have maturities from 9 months to ten years.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a `weight'' to each portfolio security based upon the pro rata
market value of such portfolio security in comparison to the market value
of the entire portfolio. The remaining maturity to each portfolio security
is then multiplied by its weight, and the results are added together to
determine the weighted average maturity of the portfolio. For purposes of
calculating its dollar-weighted average portfolio maturity, the Fund will
treat (a) asset-backed securites as having a maturity equal to their
estimated weighted-average maturity and (b) variable and floating rate
instruments as having a remaining maturity commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest
rate. The average maturity of asset-backed securities will be calculated
based upon assumptions established by the investment adviser as to the
probable amount of the principal prepayments weighted by the period until
such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be
treated as floating or variable rate securities based upon the interest
rate index of the swap or cap; floating and variable rate securities hedged
with interest rate swaps or floors will be treated as having a maturity
equal to the term of the swap or floor. In the event that the Fund holds
an interest rate swap, cap or floor that is not hedging another portfolio
security, the swap, cap or floor will be treated as having a maturity equal
to its term and a weight equal to its notional principal amount of such
term.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the
price of a debt security, or the aggregate market value of a portfolio of
debt securities, prior to maturity. Duration measures the magnitude of the
change in the price of a debt security relative to a given change in the
market rate of interest. The duration of a debt security depends upon three
primary variables: the security's coupon rate, maturity date and the level
of market interest rates for similar debt securities. Generally, debt
securities with lower coupons or longer maturities will have a longer
duration than securities with higher coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of
cash flows of a security or portfolio of securities, including principal
and interest payments, by the sum of the present values of the cash flows.
Certain debt securities, such as asset-backed securities, may be subject to
prepayment at irregular intervals. The duration of these instruments will
be calculated based upon assumptions established by the investment adviser
as the probable amount and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps,
caps and floors, is calculated in the same manner as other securities.
However, certain interest rate agreements have negative durations, which
the Fund may use to reduce its weighted average portfolio duration.
Duration = PVCF1(1) + PVCF2(2) + PVCF3(3)
+ ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt = the present value of the cash flow in period t discounted at
the prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing yield-to-maturity.
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. 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. 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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-
exclusive safe harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws.
The Rule provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market for
securities eligible for resale under Rule 144A. The Fund believes that the
Staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Directors. The Directors consider the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
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 Fund's adviser to be creditworthy
pursuant to guidelines established by the Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is 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. These securities are marked to
market daily and are 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 objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%.
INVESTMENT LIMITATIONS
The following limitations are fundamental [except that no investment
limitation of the Fund shall prevent the Fund from investing substantially
all of its assets (except for assets which are not considered `investment
securities''under the Investment Company Act of 1940, or assets exempted
by the Securities and Exchange Commission) in an open-end investment
company with substantially the same investment objectives]:
SELLING SHORT OR BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with futures contracts or related options transactions is
not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount 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 to facilitate
management of the Fund 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 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. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets:
margin deposits for the purchase and sale of financial futures
contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.
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 U.S. government, 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, and will not acquire more than 10% of the
outstanding voting securities of any one issuer.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, 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, commodity contracts,
or commodity futures contracts except to the extent that the Fund may
engage in transactions involving financial futures contracts or
options on financial futures contracts.
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 objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's
investment objective, policies, and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry (other than securities issued by the U.S.
government, its agencies or instrumentalities).
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors without
shareholder approval [except that no investment limitation of the Fund
shall prevent the Fund from investing substantially all of its assets
(except for assets which are not considered `investment securities'' under
the Investment Company Act of 1940, or assets exempted by the Securities
and Exchange Commission) in an open-end investment company with
substantially the same investment objectives]. Shareholders will be
notified before any material changes in these limitations become effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, interest rate swaps,
non-negotiable fixed time deposits with maturities over seven days,
and certain restricted securities not determined by the Directors to
be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have
been in operation for less than three years. With respect to asset-
backed securities, the Fund will treat the originator of the asset
pool as the company issuing the security for purposes of determining
compliance with this limitation.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest
in the securities of issuers which invest in or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
The Fund reserves the right to invest up to 100% of its assets in one
or more investment companies, but would do so only after receipt of an
exemptive order from the Securities and Exchange Commission permitting
this. If, in the future, the Fund does receive such an exemptive
order, the Fund would notify shareholders of its intent to increase
the level of investment in other investment companies. However,
shareholder approval will not be required to effect any such change in
this investment policy.
DEALING IN PUTS AND CALLS
The Fund will not purchase puts, calls, straddles, spreads, or any
combination of them, if by reason thereof the value of such securities
would exceed 5% of its total assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE CORPORATION
The Fund will not purchase or retain the securities of any issuer if
the officers and Directors of the Corporation or the Fund's investment
adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the 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.
The Fund does not expect to borrow money, pledge securities or engage in
reverse repurchase agreements during the coming fiscal year.
To comply with registration requirements in certain states, the Fund (1)
will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund
to 5% of its net assets, and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
"cash items."
FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, 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, Executive Vice
President of the Corporation .
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director or Trustee of the Funds; formerly, Senior
Partner, Ernst & Young LLP.
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; President, Northgate Village
Development Corporation; Partner or Trustee in private real estate ventures
in Southwest Florida; Director or Trustee of the Funds; formerly,
President, Naples Property Management, Inc.
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.;
Director or Trustee of the Funds; formerly, Vice Chairman and Director, PNC
Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.
J. Christopher Donahue*
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice 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 Corporation.
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 and Member, Board of Trustees, 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-at-law; Shareholder, Miller, Ament, Henny & Kochuba; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director or Trustee of the Funds; formerly, Counsel, Horizon Financial,
F.A., Western Region.
Peter E. Madden
Seacliff
562 Bellevue Avenue
New port, RI
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts; Director
or Trustee of the Funds; formerly, President, State Street Bank and Trust
Company and State Street Boston Corporation.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Shareholder, Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; 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 and Hogue; 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 and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho
Management Center; Director or Trustee of the Funds; President Emeritus,
University of Pittsburgh; founding Chairman, National Advisory Council for
Environmental Policy and Technology and Federal Emergency Management
Advisory Board.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director or Trustee of the Funds.
Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.
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.
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 Directors 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 Directorss 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: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Blanchard Group of
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 ARMS Fund; Federated Equity Funds; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust;, Federated U.S. Government Bond
Fund; Federated U. S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 5-10 Years; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund,
Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities,
Inc,; High Yield Cash Trust; Federated Insurance Series; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc.-1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; RIMCO Monument Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Targeted Duration Trust; Tax-Free Instruments Trust; Trust for Financial
Institutions; Trust For Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors as a group own less than 1% of the Fund`s
outstanding shares.
DIRECTORS' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +
John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 68 other investment companies in the Fund
Complex
Thomas G. Bigley,++ $750 $20,688 for the Corporation and
Director 49 other investment companies in the Fund
Complex
John T. Conroy, Jr., $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
William J. Copeland, $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 68 other investment companies in the Fund
Complex
andDirector
James E. Dowd, $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D., $750 $106,460 for the Corporation and
++
Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was
appointed a Trustee on 15 additional Federated Funds.
Director 64 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr., $825 $117,202 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Peter E. Madden, $750 $90,563 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Gregor F. Meyer, $750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
John E. Murray, Jr., $750 $0 for the Corporationand
Director 69 other investment companies in the Fund
Complex
Wesley W. Posvar,$750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
Marjorie P. Smuts, $750 $106,460 for the Corporation and
Director 64 other investment companies in the Fund
Complex
*Information is furnished for the fiscal year ended September 30, 1995 and
the Corporation was comprised of 2 portfolios.
+The information is provided for the last calendar year.
DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the Directors will
not be liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). 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 Fund or any shareholder 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 Fund.
ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus.
STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2 1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1 1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be waived by the Adviser will be
limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Federated Services Company,
Pittsburgh, Pennsylvania, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid
for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
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 upon 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.
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
Directorss.
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 by 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.
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.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, shares are
sold at their net asset value 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 (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
As explained in the respective prospectuses, with respect to Shares of the
Fund, the Fund has adopted a Shareholder Services Agreement, and, with
respect to Institutional Service Shares, has adopted a Distribution Plan.
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 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.
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 securities, other than options, are determined
as follows:
o as provided 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 60 days or less at the
time of purchase, at amortized cost unless the Directors determine
this is not fair value; or
o at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good
faith that another method of valuing option positions is necessary.
VALUING MUNICIPAL BONDS
The Directors use an independent pricing service to value municipal bonds.
The independent pricing service takes into consideration yield, stability,
risk, quality, coupon rate, maturity, type of issue, trading
characteristics, special circumstances of a security or trading market, and
any other factors or market data it considers relevant in determining
valuations for normal institutional size trading units of debt securities
and does not rely exclusively on quoted prices.
USE OF AMORTIZED COST
The Directors have decided that the fair value of debt securities
authorized to be purchased by the Fund with remaining maturities of 60 days
or less at the time of purchase shall be their amortized cost value, unless
the particular circumstances of the security indicate otherwise. Under this
method, portfolio instruments and assets are valued at the acquisition cost
as adjusted for amortization of premium or accumulation of discount rather
than at current market value. The Executive Committee continually assesses
this method of valuation and recommends changes where necessary to assure
that the Fund's portfolio instruments are valued at their fair value as
determined in good faith by the Directors.
REDEEMING SHARES
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank 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.
REDEMPTION IN KIND
The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Fund is obligated to redeem shares for
any one shareholder solely in cash only up to the lesser of $250,000 or 1%
of the Fund's net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Directors
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 Directors 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.
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, as amended,
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 derive less than 30% of its gross income from the sale of securities
held less than three months;
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.
SHAREHOLDERS' 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.
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
The average annual total return for 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 net asset value 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, adjusted over
the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD
The yield of the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the offering price per share of the
Fund on the last day of the period. This value is 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 Securities and Exchange Commission 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.
PERFORMANCE COMPARISONS
The Fund's performance 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 the Fund 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 MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities between 1 and 2.99 years. The
index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o MERRILL LYNCH 1-3 YEAR CORPORATE INDEX is a market capitalization
weighted index including fixed-coupon domestic investment grade
corporate bonds with at least $100 million par amount outstanding.
Both interest and price return are calculated daily based on an
accrued schedule and trader pricing. Quality range is BBB3-AAA.
Maturities for all bonds are more than one year and less than three
years. Yankees, Canadians, and all Structured Notes are excluded.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in the
Fund based on monthly reinvestment of dividends over a specified period of
time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
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.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-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 trillion to the more than 5,500 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.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 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 Mark R. Gensheimer, Executive Vice President, Bank Marketing
& Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage
firms nationwide--including 200 New York Stock Exchange firms--supported
by more wholesalers than any other mutual fund distributor.
Federated's service to financial professionals and institutions has
earned it high rankings in several DALBAR Surveys. The marketing effort
to these firms is headed by James F. Getz, President, Broker/Dealer
Division.
*source: Investment Company Institute