FEDERATED
TOTAL
RETURN
BOND FUND
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
MARCH 31, 1997
[FEDERATED LOGO]
Cusip 31428Q101
Cusip 31428Q507
G01664-01 (5/97)
[RECYCLE LOGO]
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Shareholder:
I am pleased to present the first Semi-Annual Report to Shareholders
for Federated Total Return Bond Fund, a portfolio of Federated Total
Return Series, Inc.
This report covers the six-month reporting period from the fund's
initial public offering on October 1, 1996, through March 31, 1997.
The report begins with a commentary by the fund's portfolio manager,
which is followed by a complete listing of the fund's diversified bond
holdings and the financial statements.
Federated Total Return Bond Fund seeks total return through a
diversified portfolio of high-quality, investment grade bonds.
Over the first six months of operation, the fund's Institutional
Shares produced a total return of 2.78%* through dividends totaling
$0.36 per share. Net asset value decreased by $0.06 per share as a
result of bond market volatility and rising interest rates.
Institutional Service Shares produced a total return of 2.66%* through
dividends totaling $0.35 per share. Net asset value decreased by $0.06
per share as a result of bond market volatility and rising interest
rates. At the end of the reporting period, fund net assets reached
$5.9 million.
Thank you for participating in the total return opportunities of
high-quality bonds through Federated Total Return Bond Fund. We
welcome your comments and suggestions.
Sincerely,
LOGO
Glen R. Johnson
President
May 15, 1997
* Performance quoted reflects past performance and is not indicative
of future performance. Investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
INVESTMENT REVIEW
- --------------------------------------------------------------------------------
Federated Total Return Bond Fund represents a high quality, fixed
income portfolio combining the various fixed income asset classes.
Investments are concentrated in U.S. Treasury, government agency, and
high quality corporate debt securities. The fund may also allocate
some of its assets in the high-yield corporate and international bond
sectors.
The high quality fixed income environment represented two extremes
over the six-month reporting period ended March 31, 1997. During the
initial three months of the reporting period (fourth calendar quarter
of 1996) interest rates fell across the maturity spectrum. The
situation completely reversed during the latter three months of the
reporting period (first calendar quarter of 1997) with surprising
strong economic growth leading to much higher interest rates. For the
entire six-month reporting period, rates increased for all maturity
points.
From the perspective of sector allocation and relative performance,
"spread" product--corporate and mortgage securities--outperformed
comparable maturity U.S. Treasury securities. The only significant
exception was the final month, March 1997, where spreads widened, and
corporate bonds and mortgage-backed securities underperformed the U.S.
Treasury market. For much of the six-month reporting period, the fund
was significantly overweight in the high-quality corporate sector,
neutral in the mortgage sector, and significantly underweight in the
U.S. Treasury sector relative to the benchmark--the Lehman Brothers
Aggregate Bond Index+. The target duration was maintained within a
narrow range, generally just slightly short of the index duration.
Due to both the asset allocation and duration targets, the fund
outperformed the Lehman Brothers Aggregate Bond Index for the
reporting period. During the reporting period, total returns for
Institutional Shares and Institutional Service Shares were 2.78%* and
2.66%*, respectively, versus 2.42% for the Lehman Brothers Aggregate
Bond Index. Given continued economic strength into the second calendar
quarter of 1997, fund management does not anticipate significant
changes in either asset allocation or duration targets.
+ Lehman Brothers Aggregate Bond Index is an unmanaged index composed
of securities from Lehman Brothers Government/ Corporate Bond Index,
Mortgaged-Backed Securities Index, and the Asset-Backed Securities
Index.
Investments cannot be made in an index.
* Performance quoted reflects past performance and is not indicative
of future performance. Investment return and principle value will
fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
FEDERATED TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- --------------------------------------------------------------------- ----------
<C> <C> <S> <C>
ADJUSTABLE RATE MORTGAGES--8.1%
- ------------------------------------------------------------------------------------
$468,741 GNMA ARM 8746, 30 Year, 11/20/2025 (IDENTIFIED COST $477,823) $ 475,214
--------------------------------------------------------------------- ----------
CORPORATE BONDS--45.1%
- ------------------------------------------------------------------------------------
BANKING--4.3%
---------------------------------------------------------------------
260,000 First Bank Puerto Rico, Sub. Note, 7.625%, 12/20/2005 253,565
--------------------------------------------------------------------- ----------
CABLE TELEVISION--4.6%
---------------------------------------------------------------------
250,000 TKR Cable, Inc., 10.50%, 10/30/2007 271,113
--------------------------------------------------------------------- ----------
ECOLOGICAL SERVICES & EQUIPMENT--4.4%
---------------------------------------------------------------------
250,000 WMX Technologies, Inc., 8.75%, 5/1/2018 259,757
--------------------------------------------------------------------- ----------
ELECTRONICS--4.3%
---------------------------------------------------------------------
250,000 Anixter International, Inc., Company Guarantee, 8.00%, 9/15/2003 249,935
--------------------------------------------------------------------- ----------
FINANCIAL INTERMEDIARIES--5.2%
---------------------------------------------------------------------
250,000 Green Tree Financial Corp., Sr. Sub. Note, 10.25%, 6/1/2002 281,575
---------------------------------------------------------------------
25,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 24,938
--------------------------------------------------------------------- ----------
Total 306,513
--------------------------------------------------------------------- ----------
FINANCIAL SERVICES--0.9%
---------------------------------------------------------------------
50,000 Associates Corp. of North America, Sr. Note, 6.25%, 3/15/1999 49,650
--------------------------------------------------------------------- ----------
INDUSTRIAL PRODUCTS & EQUIPMENT--5.3%
---------------------------------------------------------------------
300,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 313,500
--------------------------------------------------------------------- ----------
INSURANCE--4.9%
---------------------------------------------------------------------
250,000 Conseco, Inc., Sr. Note, 10.50%, 12/15/2004 288,470
--------------------------------------------------------------------- ----------
RETAILERS--4.2%
---------------------------------------------------------------------
250,000 Penney (J.C.) Co., Inc., Deb., 7.65%, 8/15/2016 245,487
--------------------------------------------------------------------- ----------
SURFACE TRANSPORTATION--7.0%
---------------------------------------------------------------------
350,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 408,674
--------------------------------------------------------------------- ----------
TOTAL CORPORATE BONDS (IDENTIFIED COST $2,697,518) 2,646,664
--------------------------------------------------------------------- ----------
</TABLE>
FEDERATED TOTAL RETURN BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- --------------------------------------------------------------------- ----------
<C> <C> <S> <C>
MORTGAGE BACKED SECURITIES--17.1%
- ------------------------------------------------------------------------------------
$996,197 Federal Home Loan Mortgage Corp., Pool D73503, 8.00%, 8/1/2026
(IDENTIFIED COST $1,007,715) $1,002,423
--------------------------------------------------------------------- ----------
MUNICIPAL SECURITIES--0.9%
- ------------------------------------------------------------------------------------
50,000 Harvard University, Revenue Bonds, 8.125%, 4/15/2007 (IDENTIFIED COST
$54,340) 53,250
--------------------------------------------------------------------- ----------
U.S. TREASURY--24.6%
- ------------------------------------------------------------------------------------
U.S. TREASURY BOND--5.8%
---------------------------------------------------------------------
400,000 6.00%, 2/15/2026 342,328
--------------------------------------------------------------------- ----------
U.S. TREASURY NOTES--18.8%
---------------------------------------------------------------------
1,120,000 6.50%-6.625%, 3/31/2002-10/15/2026 1,099,814
--------------------------------------------------------------------- ----------
TOTAL U.S. TREASURY (IDENTIFIED COST $1,468,505) 1,442,142
--------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $5,705,901)(A) $5,619,693
--------------------------------------------------------------------- ----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to
$5,705,901. The net unrealized depreciation of investments on a
federal tax basis amounts to $86,208 which is comprised of $1,248
appreciation and $87,456 depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,868,403) at March 31, 1997.
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
- --------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $5,705,901) $5,619,693
- --------------------------------------------------------------------------------
Cash 15,148
- --------------------------------------------------------------------------------
Income receivable 101,662
- --------------------------------------------------------------------------------
Receivable for shares sold 135,340
- --------------------------------------------------------------------------------
Deferred expenses 29,787
- -------------------------------------------------------------------------------- ----------
Total assets 5,901,630
- --------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------
Income distribution payable 33,227
- -------------------------------------------------------------------------------- ----------
NET ASSETS for 590,395 shares outstanding $5,868,403
- -------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Paid in capital $6,038,150
- --------------------------------------------------------------------------------
Net unrealized depreciation of investments (86,208)
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (83,539)
- -------------------------------------------------------------------------------- ----------
Total Net Assets $5,868,403
- -------------------------------------------------------------------------------- ----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- --------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- --------------------------------------------------------------------------------
$5,829,108 / 586,442 shares outstanding $9.94
- -------------------------------------------------------------------------------- ----------
INSTITUTIONAL SERVICE SHARES:
- --------------------------------------------------------------------------------
$39,295 / 3,953 shares outstanding $9.94
- -------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
STATEMENT OF OPERATIONS
PERIOD ENDED MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------
Interest $192,227
- ------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------
Investment advisory fee $ 10,072
- -----------------------------------------------------------------------------
Administrative personnel and services fee 77,500
- -----------------------------------------------------------------------------
Custodian fees 2,608
- -----------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 21,363
- -----------------------------------------------------------------------------
Legal fees 2,278
- -----------------------------------------------------------------------------
Portfolio accounting fees 28,934
- -----------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 14
- -----------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 6,281
- -----------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 14
- -----------------------------------------------------------------------------
Share registration costs 10,006
- -----------------------------------------------------------------------------
Printing and postage 9,177
- -----------------------------------------------------------------------------
Insurance premiums 1,124
- -----------------------------------------------------------------------------
Miscellaneous 5,819
- ----------------------------------------------------------------------------- ---------
Total expenses 175,190
- -----------------------------------------------------------------------------
Waivers and reimbursements--
- -----------------------------------------------------------------
Waiver of investment advisory fee $ (10,072)
- -----------------------------------------------------------------
Waiver of distribution services fee--Institutional Service
Shares (11)
- -----------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (6,281)
- -----------------------------------------------------------------
Reimbursement of other operating expenses (157,955)
- ----------------------------------------------------------------- ---------
Total waivers and reimbursements (174,319)
- ----------------------------------------------------------------------------- ---------
Net expenses 871
- ------------------------------------------------------------------------------------------ --------
Net investment income 191,356
- ------------------------------------------------------------------------------------------ --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------
Net realized gain on investments 42,794
- ------------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments (86,208)
- ------------------------------------------------------------------------------------------ --------
Net realized and unrealized loss on investments (43,414)
- ------------------------------------------------------------------------------------------ --------
Change in net assets resulting from operations $147,942
- ------------------------------------------------------------------------------------------ --------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31, 1997*
---------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------
Net investment income $ 191,356
- ------------------------------------------------------------------------
Net realized gain on investments ($42,794 net gain, as computed for
federal tax purposes) 42,794
- ------------------------------------------------------------------------
Net change in unrealized depreciation (86,208)
- ------------------------------------------------------------------------ --------------
Change in net assets resulting from operations 147,942
- ------------------------------------------------------------------------ --------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------------------
Institutional Shares (190,972)
- ------------------------------------------------------------------------
Institutional Service Shares (384)
- ------------------------------------------------------------------------ --------------
Change in net assets resulting from distributions to shareholders (191,356)
- ------------------------------------------------------------------------ --------------
SHARE TRANSACTIONS--
- ------------------------------------------------------------------------
Proceeds from sale of shares 6,964,360
- ------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 272
- ------------------------------------------------------------------------
Cost of shares redeemed (6,153,330)
- ------------------------------------------------------------------------ --------------
Change in net assets resulting from share transactions 811,302
- ------------------------------------------------------------------------ --------------
Change in net assets 767,888
- ------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------
Beginning of period 5,100,515
- ------------------------------------------------------------------------ --------------
End of period $ 5,868,403
- ------------------------------------------------------------------------ --------------
</TABLE>
* For the period from October 1, 1996 (start of performance) to March
31, 1997.
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31, 1997(A)
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.36
- ----------------------------------------------------------------------
Net realized and unrealized loss on investments (0.06)
- ---------------------------------------------------------------------- -----------
Total from investment operations 0.30
- ---------------------------------------------------------------------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Distributions from net investment income (0.36)
- ---------------------------------------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.94
- ---------------------------------------------------------------------- -----------
TOTAL RETURN(B) 2.78%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.03%*
- ----------------------------------------------------------------------
Net investment income 7.60%*
- ----------------------------------------------------------------------
Expense waiver/reimbursement(c) 6.92%*
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 5,829
- ----------------------------------------------------------------------
Portfolio turnover 99%
- ----------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31, 1997(A)
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.35
- ----------------------------------------------------------------------
Net realized and unrealized loss on investments (0.06)
- ---------------------------------------------------------------------- -----------
Total from investment operations 0.29
- ---------------------------------------------------------------------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Distributions from net investment income (0.35)
- ---------------------------------------------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.94
- ---------------------------------------------------------------------- -----------
TOTAL RETURN(B) 2.66%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.30%*
- ----------------------------------------------------------------------
Net investment income 7.02%*
- ----------------------------------------------------------------------
Expense waiver/reimbursement(c) 7.87%*
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $39
- ----------------------------------------------------------------------
Portfolio turnover 99%
- ----------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED TOTAL RETURN BOND FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered
under the Investment Company Act of 1940, as amended (the "Act") as an
open-end, management investment company. The Corporation consists of
four portfolios. The financial statements included herein are only
those of Federated Total Return Bond Fund (the "Fund"), a diversified
portfolio. The financial statements of the other portfolios are
presented separately. The assets of each portfolio are segregated and
a shareholder's interest is limited to the portfolio in which shares
are held. The Fund offers two classes of shares: Institutional Shares
and Institutional Service Shares. The investment objective of the Fund
is to provide total return.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles.
INVESTMENT VALUATIONS--Listed corporate bonds, (other fixed
income and asset-backed securities), and unlisted securities and
private placement securities are generally valued at the mean of
the latest bid and asked price as furnished by an independent
pricing service. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the
time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS--It is the policy of the Fund to require
the custodian bank to take possession, to have legally segregated
in the Federal Reserve Book Entry System, or to have segregated
within the custodian bank's vault, all securities held as
collateral under repurchase agreement transactions. Additionally,
procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's
collateral to ensure that the value of collateral at least equals
the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks
and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be
creditworthy pursuant to the guidelines and/or standards reviewed
or established by the Board of Directors (the "Directors"). Risks
may arise from the potential inability of counterparties to honor
the terms of the repurchase agreement. Accordingly, the Fund
could receive less than the repurchase price on the sale of
collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income
and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal
FEDERATED TOTAL RETURN BOND FUND
- --------------------------------------------------------------------------------
Revenue Code, as amended (the "Code"). Distributions to
shareholders are recorded on the ex-dividend date.
FEDERAL TAXES--It is the Fund's policy to comply with the
provisions of the Code applicable to regulated investment
companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for
federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may
engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains
security positions such that sufficient liquid assets will be
available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding
the initial expense of registering its shares, have been deferred
and are being amortized over a period not to exceed five years
from the Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets, liabilities, expenses and revenues reported in
the financial statements. Actual results could differ from those
estimated.
OTHER--Investment transactions are accounted for on the trade
date.
(3) CAPITAL STOCK
At March 31, 1997, par value shares ($0.001 per share) authorized were
as follows:
<TABLE>
<CAPTION>
# OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
- ----------------------------- -------------------------
<S> <C>
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
</TABLE>
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------ -------- -----------
<S> <C> <C>
Shares sold 678,799 $ 6,919,503
- ------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 26 272
- ------------------------------------------------------------------
Shares redeemed (602,404) (6,148,327)
- ------------------------------------------------------------------ -------- -----------
Net change resulting from Institutional Share transactions 76,421 $ 771,448
- ------------------------------------------------------------------ -------- -----------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
FEDERATED TOTAL RETURN BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------ -------- -----------
<S> <C> <C>
Shares sold 4,424 $ 44,857
- ------------------------------------------------------------------
Shares redeemed (501) (5,003)
- ------------------------------------------------------------------ -------- -----------
Net change resulting from Institutional Service Share
transactions 3,923 $ 39,854
- ------------------------------------------------------------------ -------- -----------
Net change resulting from share transactions 80,344 $ 811,302
- ------------------------------------------------------------------ -------- -----------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment
adviser (the "Adviser"), receives for its services an annual
investment advisory fee equal to 0.40% of the Fund's average daily net
assets. The Adviser may voluntarily choose to wave a portion of its
fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion.
ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with
administrative personnel and services. The fee paid to FServ is based
on the level of average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative
Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan
(the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of
the Plan, the Fund will compensate Federated Securities Corp. ("FSC"),
the principal distributor, from the net assets of the Institutional
Service Shares to finance activities intended to result in the sale of
the Fund's Institutional Service Shares. The Plan provides that the
Fund may incur distribution expenses up to 0.25% of the average daily
net assets of the Institutional Service Shares annually, to compensate
FSC.
The distributor may voluntarily choose to waive any portion of its
fee. The distributor can modify or terminate this voluntary waiver at
any time at its sole discretion.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will
pay FSS up to 0.25% of average daily net assets of the Fund for the
period. The fee paid to FSS is used to finance certain services for
shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ
through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent
FEDERATED TOTAL RETURN BOND FUND
- --------------------------------------------------------------------------------
for the Fund. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level of
the Fund's average daily net assets for the period, plus out-of-pocket
expenses.
GENERAL--Certain of the Officers and Directors of the Fund are
Officers and Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the period ended March 31, 1997, were as follows:
<TABLE>
<S> <C>
PURCHASES $9,699,497
- -------------------------------------------------------------------------------- ----------
SALES $4,490,330
- -------------------------------------------------------------------------------- ----------
</TABLE>
<TABLE>
<S> <C>
DIRECTORS OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Glen R. Johnson
William J. Copeland President
J. Christopher Donahue J. Christopher Donahue
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. Edward C. Gonzales
Edward L. Flaherty, Jr. Executive Vice President
Peter E. Madden John W. McGonigle
Gregor F. Meyer Executive Vice President,
John E. Murray, Jr. Treasurer, and Secretary
Wesley W. Posvar J. Crilley Kelly
Marjorie P. Smuts Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed
by any bank, and are not insured or guaranteed by the U.S. government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves
investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors
only when preceded or accompanied by the fund's prospectus, which
contains facts concerning its objective and policies, management fees,
expenses and other information.
Federated Limited Duration Fund
(Formerly Federated Total Return Limited Duration Fund)
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS
The Institutional Shares of Federated 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
May 30, 1997, 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 NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated May 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights--Institutional Shares.....................................2
General Information............................................................3
Investment Information.........................................................3
Investment Objective........................................................3
Investment Policies.........................................................3
Investment Limitations.....................................................11
Hub and Spoke(R) Option....................................................12
Net Asset Value...............................................................12
Investing in Institutional Shares.............................................12
Share Purchases............................................................12
Minimum Investment Required................................................12
What Shares Cost...........................................................13
Exchanging Securities for Fund Shares......................................13
Certificates and Confirmations.............................................13
Dividends and Distributions................................................13
Redeeming Institutional Shares................................................13
Telephone Redemption.......................................................14
Written Requests...........................................................14
Accounts with Low Balances.................................................14
Fund Information..............................................................15
Management of the Corporation..............................................15
Distribution of Institutional Shares.......................................16
Administration of the Fund.................................................16
Expenses of the Fund and Institutional Shares..............................16
Shareholder Information.......................................................17
Voting Rights..............................................................17
Tax Information...............................................................17
Federal Income Tax.........................................................17
State and Local Taxes......................................................17
Performance Information.......................................................17
Other Classes of Shares.......................................................18
Appendix......................................................................19
Financial Highlights--Institutional Service Shares............................23
Financial Statements..........................................................24
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
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)................................ 0.00%
Shareholder Services Fee(2)............................................. 0.00%
Total Operating Expenses(3)................................................. 0.00%
</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 shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion. The
maximum shareholder services fee is 0.25%.
(3) The total operating expenses are estimated to be 6.33% absent the
anticipated voluntary waiver of the management and the shareholder
services 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. ................. $ 0 $ 0
</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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED LIMITED DURATION FUND--INSTITUTIONAL SHARES
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31,
1997(A)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.33
- ----------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total from investment operations 0.31
- ---------------------------------------------------------------------------------------- --------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Distributions from net investment income (0.33)
- ----------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total distributions (0.35)
- ---------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96
- ---------------------------------------------------------------------------------------- --------
TOTAL RETURN(B) 3.08%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.00%*
- ----------------------------------------------------------------------------------------
Net investment income 6.41%*
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 6.92%*
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $5,117
- ----------------------------------------------------------------------------------------
Portfolio turnover 91%
- ----------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
------------------------------------------------------
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." On May 14, 1997, the Board of
Directors (the "Directors") approved the Fund's name change from
Federated Total Return Limited Duration Fund to Federated Limited
Duration 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 has established two classes of
shares for Federated Limited Duration Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to the
Institutional Shares of Federated 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:
N 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;
N obligations issued or guaranteed as to payment of principal and interest by
the U.S. government, or its agencies or instrumentalities;
N mortgage-backed securities;
N asset-backed securities;
N municipal securities;
N commercial paper which matures in 270 days or less;
N 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
N 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, 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
In pursuing its investment objective, the Fund may from time to time,
invest its assets in securities of other investment companies. Since
investment companies incur certain expenses such as management fees,
any investment by the Fund in shares of other investment companies may
be subject to some duplicate expenses.
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.
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:
N 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
N 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 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 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 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 and must have a readily ascertainable market
value. 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 2266-8600. 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 Limited Duration
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.
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
$110 billion invested across more than 300 funds under management
and/or administration by its subsidiaries, as of December 31, 1996,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,500 financial institutions nationwide.
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.
Robert K. Kinsey has been the Fund's portfolio manager since May, 1997. Mr.
Kinsey joined Federated in 1995 as a Vice President of a Federated advisory
subsidiary. He has been a Vice President of the Fund's adviser since March,
1997. From 1992 to 1995, he served as a Portfolio Manager for Harris Investment
Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance from U.C.L.A.
Mark E. Durbiano is the Fund's 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.
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
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.
------------------------------------------------------
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 of May 7, 1997, Federated
Securities Corp., Federated Investors Tower, Pittsburgh, PA, owned
59.87% of the voting securities of the Fund, and, therefore, may, for
certain purposes, be deemed to control the Fund and be able to affect
the outcome of certain matters presented for a vote of shareholders.
As a Maryland corporation, the 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 retail and private
banking customers of 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 averages.
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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED LIMITED DURATION FUND--INSTITUTIONAL SERVICE SHARES
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31,
1997(A)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.32
- ----------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total from investment operations 0.30
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Distributions from net investment income (0.32)
- ----------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total distributions (0.34)
- ---------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96
- ---------------------------------------------------------------------------------------- --------
TOTAL RETURN(B) 3.07%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.30%*
- ----------------------------------------------------------------------------------------
Net investment income 6.28%*
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 6.87%*
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $40
- ----------------------------------------------------------------------------------------
Portfolio turnover 91%
- ----------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
<C> <S> <C>
ASSET-BACKED SECURITIES--27.8%
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE--9.6%
- ---------------------------------------------------------------------------------------------
$183,473 Daimler-Benz Auto Grantor Trust, (Class A), 5.85%, 5/15/2002 $ 183,218
--------------------------------------------------------------------------------
167,155 Honda Auto Receivables Grantor Trust, (Class A), 6.20%, 12/15/2000 166,692
--------------------------------------------------------------------------------
150,000 Yamaha Motor Master Trust, (Class A), 6.20%, 5/15/2003 146,690
-------------------------------------------------------------------------------- --------
Total 496,600
-------------------------------------------------------------------------------- --------
FINANCIAL SERVICES--14.4%
- ---------------------------------------------------------------------------------------------
150,000 Chemical Master Credit Card Trust I, (Class A), 6.23%, 4/15/2005 145,107
--------------------------------------------------------------------------------
150,000 Credit Card Merchant Voucher Receivables Master Trust, (Series 1996), (Class A),
6.25%, 12/1/2003 144,797
--------------------------------------------------------------------------------
250,000 Dayton Hudson Credit Card Master Trust, (Class A), 6.10%, 2/25/2002 249,405
--------------------------------------------------------------------------------
200,000 Spiegel Master Trust, (Class A), 8.15%, 6/15/2004 206,538
-------------------------------------------------------------------------------- --------
Total 745,847
-------------------------------------------------------------------------------- --------
MANUFACTURED HOUSING--3.8%
- ---------------------------------------------------------------------------------------------
200,000 Associates Manufactured Housing Certificates, (Class A), 6.05%, 6/15/2027 195,154
-------------------------------------------------------------------------------- --------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $1,448,405) 1,437,601
-------------------------------------------------------------------------------- ---------
CORPORATE BONDS--26.0%
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE--4.7%
- ---------------------------------------------------------------------------------------------
225,000 Chrysler Corp., Deb., 10.95%, 8/1/2017 241,200
-------------------------------------------------------------------------------- --------
CABLE TELEVISION--6.3%
- ---------------------------------------------------------------------------------------------
100,000 Continental Cablevision, Sr. Sub. Note, 10.625%, 6/15/2002 106,260
--------------------------------------------------------------------------------
200,000 TKR Cable, Inc., 10.50%, 10/30/2007 216,890
-------------------------------------------------------------------------------- --------
Total 323,150
-------------------------------------------------------------------------------- --------
FINANCIAL SERVICES--5.2%
- ---------------------------------------------------------------------------------------------
250,000 AIM Management Group, 9.00%, 11/15/2003 267,310
-------------------------------------------------------------------------------- --------
HOTELS, MOTELS, INNS & CASINOS--2.0%
- ---------------------------------------------------------------------------------------------
100,000 La Quinta Inns, Inc., Sr. Sub. Note, 9.25%, 5/15/2003 104,500
-------------------------------------------------------------------------------- --------
INDUSTRIAL PRODUCTS & EQUIPMENT--2.0%
- ---------------------------------------------------------------------------------------------
100,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 104,500
-------------------------------------------------------------------------------- --------
INDUSTRIAL SERVICES--3.8%
- ---------------------------------------------------------------------------------------------
200,000 Healthsource, Inc., Conv. Bond, 5.00%, 3/1/2003 196,152
-------------------------------------------------------------------------------- --------
</TABLE>
FEDERATED LIMITED DURATION FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- ----------------------------------------------------------------------------------------------
UTILITIES--2.0%
- ---------------------------------------------------------------------------------------------
$100,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 $ 103,164
-------------------------------------------------------------------------------- ---------
TOTAL CORPORATE BONDS (IDENTIFIED COST $1,349,039) 1,339,976
-------------------------------------------------------------------------------- ---------
COLLATERALIZED MORTGAGE OBLIGATIONS--17.4%
- ---------------------------------------------------------------------------------------------
225,000 (a)C-BASS ABS, LLC, (Series 1997-1), (Class A), 7.05%, 2/1/2017 225,632
--------------------------------------------------------------------------------
100,000 (a)K Mart CMBS Financing, Inc., (Series 1997-1), (Class D), 6.475%, 3/1/2007 100,188
--------------------------------------------------------------------------------
252,471 Residential Accredit Loans, Inc., (Series 1996-QS8), (Class A3), 7.05%,
12/25/2026 249,512
--------------------------------------------------------------------------------
250,000 Residential Accredit Loans, Inc., (Series 1997-QS2), (Class A3), 7.25%,
3/31/2027 248,165
--------------------------------------------------------------------------------
4,625,501 Vendee Mortgage Trust, (Series 1995-1C), (Class 3IO), 0.2925%, 2/15/2025 72,297
-------------------------------------------------------------------------------- --------
TOTAL COLLATERALIZED MORTGAGE-OBLIGATIONS (IDENTIFIED COST $902,637) 895,794
-------------------------------------------------------------------------------- --------
GOVERNMENTS/AGENCIES--20.5%
- ---------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--13.7%
- ---------------------------------------------------------------------------------------------
475,331 Government National Mortgage Association, 8.50%, 8/15/2026 487,214
--------------------------------------------------------------------------------
197,468 Government National Mortgage Association, 11.00%, 9/15/2015 221,286
-------------------------------------------------------------------------------- --------
Total 708,500
-------------------------------------------------------------------------------- --------
SOVEREIGN GOVERNMENT--2.0%
- ---------------------------------------------------------------------------------------------
100,000 (a)United Mexican States, 7.625%, 8/6/2001 101,190
-------------------------------------------------------------------------------- --------
STATE/PROVINCIAL--4.8%
- ---------------------------------------------------------------------------------------------
300,000 Ontario Hydro, 10.00%, 3/19/2001 249,051
-------------------------------------------------------------------------------- --------
TOTAL GOVERNMENTS/AGENCIES (IDENTIFIED COST $1,073,162) 1,058,741
-------------------------------------------------------------------------------- ---------
(B)REPURCHASE AGREEMENT--10.0%
- ---------------------------------------------------------------------------------------------
515,000 BT Securities Corporation, 6.45%, dated 3/31/1997, due 4/1/1997 (AT AMORTIZED
COST) 515,000
-------------------------------------------------------------------------------- --------
TOTAL INVESTMENTS (IDENTIFIED COST $5,288,243)(C) $5,247,112
-------------------------------------------------------------------------------- ----------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on
resale under Federal Securities Laws. At March 31, 1997, these
securities amounted to $427,010 which represents 8.3% of net
assets.
(b) The repurchase agreement is fully collateralized by U.S.
government and/or agency obligations based on market prices at the
date of the portfolio. The investment in the repurchase agreement
is through participation in a joint account with other Federated
funds.
(c) The cost of investments for federal tax purposes amounts to
$5,288,243. The net unrealized depreciation of investments on a
federal tax basis amounts to $41,131 which is comprised of $2,529
appreciation and $43,660 depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,157,002) at March 31, 1997.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $5,288,243) $5,247,112
- ---------------------------------------------------------------------------------------------
Cash 14,274
- ---------------------------------------------------------------------------------------------
Income receivable 67,286
- ---------------------------------------------------------------------------------------------
Net receivable for foreign currency exchange contracts sold 9,023
- ---------------------------------------------------------------------------------------------
Deferred expenses 52,648
- --------------------------------------------------------------------------------------------- ---------
Total assets 5,390,343
- ---------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------
Payable for investments purchased $208,222
- ----------------------------------------------------------------------------------
Income distribution payable 25,119
- ---------------------------------------------------------------------------------- -------
Total liabilities 233,341
- --------------------------------------------------------------------------------------------- ----------
NET ASSETS for 517,884 shares outstanding $5,157,002
- --------------------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------
Paid in capital $5,179,946
- ---------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and translation of assets and liabilities in
foreign currency (32,112)
- ---------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions 9,168
- --------------------------------------------------------------------------------------------- ---------
Total Net Assets 5,157,002
- --------------------------------------------------------------------------------------------- ---------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- ---------------------------------------------------------------------------------------------
$5,117,224 / 513,889 shares outstanding $9.96
- --------------------------------------------------------------------------------------------- --------
INSTITUTIONAL SERVICE SHARES:
- ---------------------------------------------------------------------------------------------
$39,778 / 3,995 shares outstanding $9.96
- --------------------------------------------------------------------------------------------- --------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest $161,524
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 10,080
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 77,500
- -------------------------------------------------------------------------------------
Custodian fees 2,641
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 21,650
- -------------------------------------------------------------------------------------
Legal fees 4,000
- -------------------------------------------------------------------------------------
Portfolio accounting fees 29,015
- -------------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 14
- -------------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 6,286
- -------------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 14
- -------------------------------------------------------------------------------------
Share registration costs 8,584
- -------------------------------------------------------------------------------------
Printing and postage 7,500
- -------------------------------------------------------------------------------------
Insurance premiums 1,500
- -------------------------------------------------------------------------------------
Taxes 500
- -------------------------------------------------------------------------------------
Miscellaneous 5,000
- ------------------------------------------------------------------------------------- --------
Total expenses 174,284
- -------------------------------------------------------------------------------------
Waivers and reimbursements--
- -------------------------------------------------------------------------
Waiver of investment advisory fee $ (10,080)
- -------------------------------------------------------------------------
Waiver of distribution services fee--Institutional Service Shares (11)
- -------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (6,286)
- -------------------------------------------------------------------------
Reimbursement of other operating expenses (157,889)
- ------------------------------------------------------------------------- --------
Total waivers and reimbursements (174,266)
- ------------------------------------------------------------------------------------- --------
Net expenses 18
- -------------------------------------------------------------------------------------------------- -------
Net investment income 161,506
- -------------------------------------------------------------------------------------------------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
- --------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 19,389
- --------------------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments and translation of assets and liabilities in
foreign currency (32,112)
- -------------------------------------------------------------------------------------------------- -------
Net realized and unrealized loss on investments and foreign currency (12,723)
- -------------------------------------------------------------------------------------------------- -------
Change in net assets resulting from operations $148,783
- -------------------------------------------------------------------------------------------------- --------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31, 1997*
---------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------------
Net investment income $ 161,506
- --------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 19,389
- --------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments and translation of assets and
liabilities in foreign currency (32,112)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations 148,783
- -------------------------------------------------------------------------------------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------------
Distributions from net investment income
- --------------------------------------------------------------------------------------
Institutional Shares (161,160)
- --------------------------------------------------------------------------------------
Institutional Service Shares (345)
- --------------------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign currency transactions
- --------------------------------------------------------------------------------------
Institutional Shares (10,211)
- --------------------------------------------------------------------------------------
Institutional Service Shares (11)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from distributions to shareholders (171,727)
- -------------------------------------------------------------------------------------- -----------
SHARE TRANSACTIONS--
- --------------------------------------------------------------------------------------
Proceeds from sale of shares 6,521,773
- --------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 127
- --------------------------------------------------------------------------------------
Cost of shares redeemed (1,342,454)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from share transactions 5,179,446
- -------------------------------------------------------------------------------------- -----------
Change in net assets 5,156,502
- --------------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------------
Beginning of period 500
- -------------------------------------------------------------------------------------- -----------
End of period $ 5,157,002
- -------------------------------------------------------------------------------------- -----------
</TABLE>
* For the period from October 1, 1996 (start of performance) to March
31, 1997.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered
under the Investment Company Act of 1940, as amended (the "Act") as an
open-end, management investment company. The Corporation consists of
four portfolios. The financial statements included herein are only
those of Federated Total Return Limited Duration Fund (the "Fund"), a
diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in
which shares are held. The Fund offers two classes of shares:
Institutional Shares and Institutional Service Shares. The investment
objective of the Fund is to provide total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, (other fixed
income and asset-backed securities), and unlisted securities and
private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value.
With respect to valuation of foreign securities, trading in foreign
cities may be completed at times which vary from the closing of the
New York Stock Exchange. Therefore, foreign securities are valued at
the latest closing price on the exchange on which they are traded
prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are transmitted into U.S.
Dollars at the foreign exchange rate in effect at noon, eastern time,
on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement
transactions. Additionally, procedures have been established by the
Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which
are deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Directors (the "Directors"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and
discount, if applicable, are amortized as required by the Internal
Revenue Code, as amended (the "Code"). Distributions to shareholders
are recorded on the ex-dividend date.
FEDERATED LIMITED DURATION FUND
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly,
no provisions for federal tax are necessary.
However, federal taxes may be imposed on the Fund upon the disposition
of certain investments in passive foreign investment companies.
Withholding taxes on foreign interest have been provided for in
accordance with the Fund's understanding of the applicable country's
tax rules and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions.
The Fund records when-issued securities on the trade date and
maintains security positions such that sufficient liquid assets will
be available to make payment for the securities purchased. Securities
purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES
The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of
registering its shares, have been deferred and are being amortized
over a period not to exceed five years from the Fund's commencement
date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed
delivery of securities or foreign currency exchange transactions.
Purchased contracts are used to acquire exposure to foreign
currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon
entering these transactions from the potential inability of
counter-parts to meet the terms of their commitments and from
unanticipated movements in security prices or foreign exchange rates.
The foreign currency transactions are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded
for financial statement purpose as unrealized until the settlement
date.
At March 31, 1997, the Fund had outstanding foreign currency
commitments as set forth below:
<TABLE>
<CAPTION>
CONTRACTS TO
DELIVER/ IN EXCHANGE CONTRACTS UNREALIZED
SETTLEMENT DATE RECEIVE FOR AT VALUE APPRECIATION
- ---------------------------------------- ------------------------ -------------- --------- --------------
<S> <C> <C> <C> <C>
Contracts Sold:
May 7, 1997 361,449 Canadian Dollars $ 270,748 $261,725 $ 9,023
</TABLE>
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies ("FC") are
translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases
and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions
are recorded. Differences between income and expense amounts recorded
and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
FEDERATED LIMITED DURATION FUND
Reported net realized foreign exchange gains or losses arise from
sales of portfolio securities, sales and maturities of short-term
securities, sales of FCs, currency gains or losses realized between
the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined
to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's
restricted securities are valued at the price provided by dealers in
the secondary market or, if no market prices are available, at the
fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at March 31,
1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
- -------------------------- ---------------- ----------------
<S> <C> <C>
C-BASS ABS, LLC 02/27/97 $225,914
K Mart CMBS Financing, 03/04/97 100,000
Inc.
United Mexican States 10/09/96 100,000
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual
results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At March 31, 1997 par value shares ($0.001 per share) authorized were
as follows:
<TABLE>
<CAPTION>
# OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
- ------------------------------ -------------------------
<S> <C>
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
</TABLE>
FEDERATED LIMITED DURATION FUND
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 647,823 $ 6,481,926
- -------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 11 110
- -------------------------------------------------------------------------------
Shares redeemed (133,965) (1,342,454)
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from Institutional Share transactions 513,869 $ 5,139,582
- ------------------------------------------------------------------------------- ------- ---------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 3,963 $ 39,847
- -------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2 17
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from Institutional Service Share transactions 3,965 $ 39,864
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from share transactions 517,834 $ 5,179,446
- ------------------------------------------------------------------------------- ------- ---------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can
modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative
Services Agreement, provides the Fund with administrative personnel
and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received
during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of
shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Institutional Service Shares
to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% of the average daily net
assets of the Institutional Service Shares, annually, to compensate
FSC. The distributor may voluntarily choose to waive any portion of
its fee. The distributor can modify or terminate this voluntary waiver
at any time at its sole discretion.
FEDERATED LIMITED DURATION FUND
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of
average daily net assets of the Fund for the period. The fee paid to
FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. For the period ended March 31, 1997,
the Institutional Shares did not incur a shareholder services fee. FSS
may voluntarily choose to waive any portion of its fee. FSS can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary,
Federated Shareholder Services Company ("FSSC") serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FSSC is based
on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a
fee. The fee is based on the level of the Fund's average daily net
assets for the period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers
and Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the period ended March 31, 1997, were as follows:
<TABLE>
<S> <C>
PURCHASES $9,176,069
- ------------------------------------------------------------------------------------------- --------
SALES $4,167,429
- ------------------------------------------------------------------------------------------- --------
</TABLE>
[FEDERATED INVESTORS LOGO]
Federated Limited Duration Fund
(formerly, Federated Total Return
Limited Duration Fund)
Institutional Shares
Federated Limited
Duration 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 Company
P.O. Box 8600
Boston, MA 02266-8600
Independent Auditors
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Prospectus
May 30, 1997
A Diversified Portfolio of
Federated Total Return Series, Inc.
An Open-End, Management
Investment Company
Federated Securities Corp., Distributor
Cusip 31428Q408
G01744-01-IS (5/97)
[RECYCLED PAPER LOGO]
Federated Limited Duration Fund
(Formerly Federated Total Return Limited Duration Fund)
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated 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
May 30, 1997, 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 NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated May 30, 1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary of Fund Expenses.......................................................1
Financial Highlights--Institutional Service Shares.............................2
General Information............................................................3
Investment Information.........................................................3
Investment Objective........................................................3
Investment Policies.........................................................3
Investment Limitations.....................................................11
Hub and Spoke(R) Option....................................................11
Net Asset Value...............................................................12
Investing in Institutional Service Shares.....................................12
Share Purchases............................................................12
Minimum Investment Required................................................12
What Shares Cost...........................................................12
Exchanging Securities for Fund Shares......................................13
Certificates and Confirmations.............................................13
Dividends and Distributions................................................13
Redeeming Institutional Service Shares........................................13
Telephone Redemption.......................................................13
Written Requests...........................................................14
Accounts with Low Balances.................................................14
Fund Information..............................................................14
Management of the Corporation..............................................14
Distribution of Institutional Service Shares...............................15
Administration of the Fund.................................................16
Expenses of the Fund and Institutional Service Shares................16
Shareholder Information.......................................................17
Voting Rights..............................................................17
Tax Information...............................................................17
Federal Income Tax.........................................................17
State and Local Taxes......................................................17
Performance Information.......................................................17
Other Classes of Shares.......................................................18
Appendix......................................................................19
Financial Highlights--Institutional Shares....................................23
Financial Statements..........................................................24
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICES SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
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)............................................. 0.25%
Shareholder Services Fee............................................................. 0.25%
Total Operating Expenses(3).............................................................. 0.30%
</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 12b-1 fee has been reduced to reflect the voluntary waiver of
a portion of the 12b-1 fee. The distributor can terminate this
voluntary waiver at any time at its sole discretion. The maximum
12b-1 fee is 0.25%.
(3) The total operating expenses are estimated to be 6.58% 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. .......................... $ 3 $ 10
</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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED LIMITED DURATION FUND--INSTITUTIONAL SERVICE SHARES
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31,
1997(A)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.32
- ----------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total from investment operations 0.30
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Distributions from net investment income (0.32)
- ----------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total distributions (0.34)
- ---------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96
- ---------------------------------------------------------------------------------------- --------
TOTAL RETURN(B) 3.07%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.30%*
- ----------------------------------------------------------------------------------------
Net investment income 6.28%*
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 6.87%*
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $40
- ----------------------------------------------------------------------------------------
Portfolio turnover 91%
- ----------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
------------------------------------------------------
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." On May 14, 1997, the Board of
Directors (the "Directors") approved the Fund's name change from
Federated Total Return Limited Duration Fund to Federated Limited
Duration 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 has established two classes of
shares for Federated Limited Duration Fund: Institutional Service
Shares and Institutional Shares. This prospectus relates only to the
Institutional Service Shares of Federated 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 of 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:
N 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;
N obligations issued or guaranteed as to payment of principal and interest by
the U.S. government, or its agencies or instrumentalities;
N mortgage-backed securities;
N asset-backed securities;
N municipal securities;
N commercial paper which matures in 270 days or less;
N 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
N 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 forego-
ing 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, 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
In pursuing its investment objective, the Fund may from time to time,
invest its assets in securities of other investment companies. Since
investment companies incur certain expenses such as management fees,
any investment by the Fund in shares of other investment companies may
be subject to some duplicate expenses.
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.
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:
N 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
N 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 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 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 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 and must have a readily ascertainable market
value. 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 2266-8600. 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 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.
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
$110 billion invested across more than 300 funds under management
and/or administration by its subsidiaries, as of December 31, 1996,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,500 financial institutions nationwide.
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.
Robert K. Kinsey has been the Fund's portfolio manager since May, 1997. Mr.
Kinsey joined Federated in 1995 as a Vice President of a Federated advisory
subsidiary. He has been a Vice President of the Fund's adviser since March,
1997. From 1992 to 1995, he served as a Portfolio Manager for Harris Investment
Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance from U.C.L.A.
Mark E. Durbiano is the Fund's 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.
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 up
to .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, 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 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 NET ASSETS OF THE FEDERATED
FEE 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.
------------------------------------------------------
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 of May 7, 1997, Trustcorp, P.O. Box
2309, Great Falls, MT, and Anbee & Company, c/o Greatbanc Trust
Company, 105 East Galena Blvd.-Suite 500, Aurora, IL owned 31.61% and
59.42%, respectively, of the voting securities of the Fund, and,
therefore, may, for certain purposes, be deemed to control the Fund
and be able to affect the outcome of certain matters presented for a
vote of shareholders.
As a Maryland corporation, the 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
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 averages.
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:
M Leading market positions in well established industries.
N High rates of return on funds employed.
N Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
N Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
N 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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FEDERATED LIMITED DURATION FUND--INSTITUTIONAL SHARES
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31,
1997(A)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------
Net investment income 0.33
- ----------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total from investment operations 0.31
- ---------------------------------------------------------------------------------------- --------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------
Distributions from net investment income (0.33)
- ----------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- ---------------------------------------------------------------------------------------- --------
Total distributions (0.35)
- ---------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.96
- ---------------------------------------------------------------------------------------- --------
TOTAL RETURN(B) 3.08%
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 0.00%*
- ----------------------------------------------------------------------------------------
Net investment income 6.41%*
- ----------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 6.92%*
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $5,117
- ----------------------------------------------------------------------------------------
Portfolio turnover 91%
- ----------------------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to March 31, 1997.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
<C> <S> <C>
ASSET-BACKED SECURITIES--27.8%
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE--9.6%
- ---------------------------------------------------------------------------------------------
$183,473 Daimler-Benz Auto Grantor Trust, (Class A), 5.85%, 5/15/2002 $ 183,218
--------------------------------------------------------------------------------
167,155 Honda Auto Receivables Grantor Trust, (Class A), 6.20%, 12/15/2000 166,692
--------------------------------------------------------------------------------
150,000 Yamaha Motor Master Trust, (Class A), 6.20%, 5/15/2003 146,690
-------------------------------------------------------------------------------- --------
Total 496,600
-------------------------------------------------------------------------------- --------
FINANCIAL SERVICES--14.4%
- ---------------------------------------------------------------------------------------------
150,000 Chemical Master Credit Card Trust I, (Class A), 6.23%, 4/15/2005 145,107
--------------------------------------------------------------------------------
150,000 Credit Card Merchant Voucher Receivables Master Trust, (Series 1996), (Class A),
6.25%, 12/1/2003 144,797
--------------------------------------------------------------------------------
250,000 Dayton Hudson Credit Card Master Trust, (Class A), 6.10%, 2/25/2002 249,405
--------------------------------------------------------------------------------
200,000 Spiegel Master Trust, (Class A), 8.15%, 6/15/2004 206,538
-------------------------------------------------------------------------------- --------
Total 745,847
-------------------------------------------------------------------------------- --------
MANUFACTURED HOUSING--3.8%
- ---------------------------------------------------------------------------------------------
200,000 Associates Manufactured Housing Certificates, (Class A), 6.05%, 6/15/2027 195,154
-------------------------------------------------------------------------------- --------
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $1,448,405) 1,437,601
-------------------------------------------------------------------------------- ---------
CORPORATE BONDS--26.0%
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE--4.7%
- ---------------------------------------------------------------------------------------------
225,000 Chrysler Corp., Deb., 10.95%, 8/1/2017 241,200
-------------------------------------------------------------------------------- --------
CABLE TELEVISION--6.3%
- ---------------------------------------------------------------------------------------------
100,000 Continental Cablevision, Sr. Sub. Note, 10.625%, 6/15/2002 106,260
--------------------------------------------------------------------------------
200,000 TKR Cable, Inc., 10.50%, 10/30/2007 216,890
-------------------------------------------------------------------------------- --------
Total 323,150
-------------------------------------------------------------------------------- --------
FINANCIAL SERVICES--5.2%
- ---------------------------------------------------------------------------------------------
250,000 AIM Management Group, 9.00%, 11/15/2003 267,310
-------------------------------------------------------------------------------- --------
HOTELS, MOTELS, INNS & CASINOS--2.0%
- ---------------------------------------------------------------------------------------------
100,000 La Quinta Inns, Inc., Sr. Sub. Note, 9.25%, 5/15/2003 104,500
-------------------------------------------------------------------------------- --------
INDUSTRIAL PRODUCTS & EQUIPMENT--2.0%
- ---------------------------------------------------------------------------------------------
100,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 104,500
-------------------------------------------------------------------------------- --------
INDUSTRIAL SERVICES--3.8%
- ---------------------------------------------------------------------------------------------
200,000 Healthsource, Inc., Conv. Bond, 5.00%, 3/1/2003 196,152
-------------------------------------------------------------------------------- --------
</TABLE>
FEDERATED LIMITED DURATION FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- ---------------------------------------------------------------------------------------------
UTILITIES--2.0%
- ---------------------------------------------------------------------------------------------
$100,000 Pennsylvania Power & Light Company, 9.25%, 10/1/2019 $ 103,164
-------------------------------------------------------------------------------- ---------
TOTAL CORPORATE BONDS (IDENTIFIED COST $1,349,039) 1,339,976
-------------------------------------------------------------------------------- ---------
COLLATERALIZED MORTGAGE OBLIGATIONS--17.4%
- ---------------------------------------------------------------------------------------------
225,000 (a)C-BASS ABS, LLC, (Series 1997-1), (Class A), 7.05%, 2/1/2017 225,632
--------------------------------------------------------------------------------
100,000 (a)K Mart CMBS Financing, Inc., (Series 1997-1), (Class D), 6.475%, 3/1/2007 100,188
--------------------------------------------------------------------------------
252,471 Residential Accredit Loans, Inc., (Series 1996-QS8), (Class A3), 7.05%,
12/25/2026 249,512
--------------------------------------------------------------------------------
250,000 Residential Accredit Loans, Inc., (Series 1997-QS2), (Class A3), 7.25%,
3/31/2027 248,165
--------------------------------------------------------------------------------
4,625,501 Vendee Mortgage Trust, (Series 1995-1C), (Class 3IO), 0.2925%, 2/15/2025 72,297
-------------------------------------------------------------------------------- --------
TOTAL COLLATERALIZED MORTGAGE-OBLIGATIONS (IDENTIFIED COST $902,637) 895,794
-------------------------------------------------------------------------------- --------
GOVERNMENTS/AGENCIES--20.5%
- ---------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--13.7%
- ---------------------------------------------------------------------------------------------
475,331 Government National Mortgage Association, 8.50%, 8/15/2026 487,214
--------------------------------------------------------------------------------
197,468 Government National Mortgage Association, 11.00%, 9/15/2015 221,286
-------------------------------------------------------------------------------- --------
Total 708,500
-------------------------------------------------------------------------------- --------
SOVEREIGN GOVERNMENT--2.0%
- ---------------------------------------------------------------------------------------------
100,000 (a)United Mexican States, 7.625%, 8/6/2001 101,190
-------------------------------------------------------------------------------- --------
STATE/PROVINCIAL--4.8%
- ---------------------------------------------------------------------------------------------
300,000 Ontario Hydro, 10.00%, 3/19/2001 249,051
-------------------------------------------------------------------------------- --------
TOTAL GOVERNMENTS/AGENCIES (IDENTIFIED COST $1,073,162) 1,058,741
-------------------------------------------------------------------------------- ---------
(B)REPURCHASE AGREEMENT--10.0%
- ---------------------------------------------------------------------------------------------
515,000 BT Securities Corporation, 6.45%, dated 3/31/1997, due 4/1/1997 (AT AMORTIZED
COST) 515,000
-------------------------------------------------------------------------------- --------
TOTAL INVESTMENTS (IDENTIFIED COST $5,288,243)(C) $5,247,112
-------------------------------------------------------------------------------- ----------
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on
resale under Federal Securities Laws. At March 31, 1997, these
securities amounted to $427,010 which represents 8.3% of net
assets.
(b) The repurchase agreement is fully collateralized by U.S.
government and/or agency obligations based on market prices at the
date of the portfolio. The investment in the repurchase agreement
is through participation in a joint account with other Federated
funds.
(c) The cost of investments for federal tax purposes amounts to
$5,288,243. The net unrealized depreciation of investments on a
federal tax basis amounts to $41,131 which is comprised of $2,529
appreciation and $43,660 depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,157,002) at March 31, 1997.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $5,288,243) $5,247,112
- ---------------------------------------------------------------------------------------------
Cash 14,274
- ---------------------------------------------------------------------------------------------
Income receivable 67,286
- ---------------------------------------------------------------------------------------------
Net receivable for foreign currency exchange contracts sold 9,023
- ---------------------------------------------------------------------------------------------
Deferred expenses 52,648
- --------------------------------------------------------------------------------------------- ----------
Total assets 5,390,343
- ---------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------
Payable for investments purchased $208,222
- ----------------------------------------------------------------------------------
Income distribution payable 25,119
- ---------------------------------------------------------------------------------- -------
Total liabilities 233,341
- --------------------------------------------------------------------------------------------- ----------
NET ASSETS for 517,884 shares outstanding $5,157,002
- --------------------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------
Paid in capital $5,179,946
- ---------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and translation of assets and liabilities in
foreign currency (32,112)
- ---------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions 9,168
- --------------------------------------------------------------------------------------------- ----------
Total Net Assets 5,157,002
- --------------------------------------------------------------------------------------------- ----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- ---------------------------------------------------------------------------------------------
$5,117,224 / 513,889 shares outstanding $9.96
- --------------------------------------------------------------------------------------------- --------
INSTITUTIONAL SERVICE SHARES:
- ---------------------------------------------------------------------------------------------
$39,778 / 3,995 shares outstanding $9.96
- --------------------------------------------------------------------------------------------- --------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest $161,524
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee $ 10,080
- -------------------------------------------------------------------------------------
Administrative personnel and services fee 77,500
- -------------------------------------------------------------------------------------
Custodian fees 2,641
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 21,650
- -------------------------------------------------------------------------------------
Legal fees 4,000
- -------------------------------------------------------------------------------------
Portfolio accounting fees 29,015
- -------------------------------------------------------------------------------------
Distribution services fee--Institutional Service Shares 14
- -------------------------------------------------------------------------------------
Shareholder services fee--Institutional Shares 6,286
- -------------------------------------------------------------------------------------
Shareholder services fee--Institutional Service Shares 14
- -------------------------------------------------------------------------------------
Share registration costs 8,584
- -------------------------------------------------------------------------------------
Printing and postage 7,500
- -------------------------------------------------------------------------------------
Insurance premiums 1,500
- -------------------------------------------------------------------------------------
Taxes 500
- -------------------------------------------------------------------------------------
Miscellaneous 5,000
- ------------------------------------------------------------------------------------- --------
Total expenses 174,284
- -------------------------------------------------------------------------------------
Waivers and reimbursments--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee $ (10,080)
- -------------------------------------------------------------------------
Waiver of distribution services fee--Institutional Service Shares (11)
- -------------------------------------------------------------------------
Waiver of shareholder services fee--Institutional Shares (6,286)
- -------------------------------------------------------------------------
Reimbursement of other operating expenses (157,889)
- ------------------------------------------------------------------------- --------
Total waivers and reimbursements (174,266)
- ------------------------------------------------------------------------------------- --------
Net expenses 18
- -------------------------------------------------------------------------------------------------- -------
Net investment income 161,506
- -------------------------------------------------------------------------------------------------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
- --------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 19,389
- --------------------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments and translation of assets and liabilities in
foreign currency (32,112)
- -------------------------------------------------------------------------------------------------- -------
Net realized and unrealized loss on investments and foreign currency (12,723)
- -------------------------------------------------------------------------------------------------- -------
Change in net assets resulting from operations $148,783
- -------------------------------------------------------------------------------------------------- -------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
<TABLE>
<CAPTION>
PERIOD ENDED
(UNAUDITED)
MARCH 31, 1997*
---------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------------------
OPERATIONS--
- --------------------------------------------------------------------------------------
Net investment income $ 161,506
- --------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 19,389
- --------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments and translation of assets and
liabilities in foreign currency (32,112)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations 148,783
- -------------------------------------------------------------------------------------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- --------------------------------------------------------------------------------------
Distributions from net investment income
- --------------------------------------------------------------------------------------
Institutional Shares (161,160)
- --------------------------------------------------------------------------------------
Institutional Service Shares (345)
- --------------------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign currency transactions
- --------------------------------------------------------------------------------------
Institutional Shares (10,211)
- --------------------------------------------------------------------------------------
Institutional Service Shares (11)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from distributions to shareholders (171,727)
- -------------------------------------------------------------------------------------- -----------
SHARE TRANSACTIONS--
- --------------------------------------------------------------------------------------
Proceeds from sale of shares 6,521,773
- --------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 127
- --------------------------------------------------------------------------------------
Cost of shares redeemed (1,342,454)
- -------------------------------------------------------------------------------------- -----------
Change in net assets resulting from share transactions 5,179,446
- -------------------------------------------------------------------------------------- -----------
Change in net assets 5,156,502
- --------------------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------------------
Beginning of period 500
- -------------------------------------------------------------------------------------- -----------
End of period $ 5,157,002
- -------------------------------------------------------------------------------------- -----------
</TABLE>
* For the period from October 1, 1996 (start of performance) to March
31, 1997.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
FEDERATED LIMITED DURATION FUND
(FORMERLY, FEDERATED TOTAL RETURN LIMITED DURATION FUND)
MARCH 31, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered
under the Investment Company Act of 1940, as amended (the "Act") as an
open-end, management investment company. The Corporation consists of
four portfolios. The financial statements included herein are only
those of Federated Limited Duration Fund (the "Fund"), a diversified
portfolio. The financial statements of the other portfolios are
presented separately. The assets of each portfolio are segregated and
a shareholder's interest is limited to the portfolio in which shares
are held. The Fund offers two classes of shares: Institutional Shares
and Institutional Service Shares. The investment objective of the Fund
is to provide total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, listed corporate bonds, (other fixed
income and asset-backed securities), and unlisted securities and
private placement securities are generally valued at the mean of the
latest bid and asked price as furnished by an independent pricing
service. Short-term securities are valued at the prices provided by an
independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may
be valued at amortized cost, which approximates fair market value.
With respect to valuation of foreign securities, trading in foreign
cities may be completed at times which vary from the closing of the
New York Stock Exchange. Therefore, foreign securities are valued at
the latest closing price on the exchange on which they are traded
prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are transmitted into U.S.
Dollars at the foreign exchange rate in effect at noon, eastern time,
on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement
transactions. Additionally, procedures have been established by the
Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which
are deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Directors (the "Directors"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and
discount, if applicable, are amortized as required by the Internal
Revenue Code, as amended (the "Code"). Distributions to shareholders
are recorded on the ex-dividend date.
FEDERATED LIMITED DURATION FUND
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code
applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly,
no provisions for federal tax are necessary.
However, federal taxes may be imposed on the Fund upon the disposition
of certain investments in passive foreign investment companies.
Withholding taxes on foreign interest have been provided for in
accordance with the Fund's understanding of the applicable country's
tax rules and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions.
The Fund records when-issued securities on the trade date and
maintains security positions such that sufficient liquid assets will
be available to make payment for the securities purchased. Securities
purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES
The costs incurred by the Fund with respect to registration of its
shares in its first fiscal year, excluding the initial expense of
registering its shares, have been deferred and are being amortized
over a period not to exceed five years from the Fund's commencement
date.
FOREIGN EXCHANGE CONTRACTS
The Fund may enter into foreign currency commitments for the delayed
delivery of securities or foreign currency exchange transactions.
Purchased contracts are used to acquire exposure to foreign
currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon
entering these transactions from the potential inability of
counter-parts to meet the terms of their commitments and from
unanticipated movements in security prices or foreign exchange rates.
The foreign currency transactions are adjusted by the daily exchange
rate of the underlying currency and any gains or losses are recorded
for financial statement purpose as unrealized until the settlement
date.
At March 31, 1997, the Fund had outstanding foreign currency
commitments as set forth below:
<TABLE>
<CAPTION>
CONTRACTS TO
DELIVER/ IN EXCHANGE CONTRACTS UNREALIZED
SETTLEMENT DATE RECEIVE FOR AT VALUE APPRECIATION
- ---------------------------------------- ------------------------ -------------- --------- --------------
<S> <C> <C> <C> <C>
Contracts Sold:
May 7, 1997 361,449 Canadian Dollars $270,748 $261,725 $9,023
</TABLE>
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies ("FC") are
translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases
and sales of securities, income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions
are recorded. Differences between income and expense amounts recorded
and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
FEDERATED LIMITED DURATION FUND
Reported net realized foreign exchange gains or losses arise from
sales of portfolio securities, sales and maturities of short-term
securities, sales of FCs, currency gains or losses realized between
the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined
to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's
restricted securities are valued at the price provided by dealers in
the secondary market or, if no market prices are available, at the
fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at March 31,
1997 is as follows:
<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
- -------------------------- ---------------- ----------------
<S> <C> <C>
C-BASS ABS, LLC 02/27/97 $225,914
K Mart CMBS Financing, 03/04/97 100,000
Inc.
United Mexican States 10/09/96 100,000
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual
results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
At March 31, 1997 par value shares ($0.001 per share) authorized were
as follows:
<TABLE>
<CAPTION>
# OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
- ------------------------------ -------------------------
<S> <C>
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
</TABLE>
FEDERATED LIMITED DURATION FUND
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 647,823 $ 6,481,926
- -------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 11 110
- -------------------------------------------------------------------------------
Shares redeemed (133,965) (1,342,454)
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from Institutional Share transactions 513,869 $ 5,139,582
- ------------------------------------------------------------------------------- ------- ---------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31, 1997(A)
------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------- -------- -----------
<S> <C> <C>
Shares sold 3,963 $ 39,847
- -------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 2 17
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from Institutional Service Share transactions 3,965 $ 39,864
- ------------------------------------------------------------------------------- ------- ---------
Net change resulting from share transactions 517,834 $ 5,179,446
- ------------------------------------------------------------------------------- ------- ---------
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to
March 31, 1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can
modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative
Services Agreement, provides the Fund with administrative personnel
and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received
during the period of the Administrative Services Agreement shall be at
least $125,000 per portfolio and $30,000 per each additional class of
shares.
DISTRIBUTION SERVICES FEE
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Institutional Service Shares
to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may
incur distribution expenses up to 0.25% of the average daily net
assets of the Institutional Service Shares, annually, to compensate
FSC. The distributor may voluntarily choose to waive any portion of
its fee. The distributor can modify or terminate this voluntary waiver
at any time at its sole discretion.
FEDERATED LIMITED DURATION FUND
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of
average daily net assets of the Fund for the period. The fee paid to
FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. For the period ended March 31, 1997,
the Institutional Shares did not incur a shareholder services fee. FSS
may voluntarily choose to waive any portion of its fee. FSS can modify
or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
Federated Services Company ("FServ"), through its subsidiary,
Federated Shareholder Services Company ("FSSC") serves as transfer and
dividend disbursing agent for the Fund. The fee paid to FSSC is based
on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a
fee. The fee is based on the level of the Fund's average daily net
assets for the period, plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Directors of the Corporation are Officers
and Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the period ended March 31, 1997, were as follows:
<TABLE>
<S> <C>
PURCHASES $9,176,069
- ------------------------------------------------------------------------------------------- --------
SALES $4,167,429
- ------------------------------------------------------------------------------------------- --------
</TABLE>
[FEDERATED INVESTORS LOGO]
Federated Limited Duration Fund
(formerly, Federated Total Return
Limited Duration Fund)
Institutional Service Shares
Federated Limited
Duration 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 Company
P.O. Box 8600
Boston, MA 02266-8600
Independent Auditors
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Prospectus
May 30, 1997
A Diversified Portfolio of
Federated Total Return Series, Inc.
An Open-End, Management
Investment Company
Federated Securities Corp., Distributor
Cusip 31428Q309
G01744-02-SS (5/97)
[RECYCLED PAPER LOGO]
<PAGE>
Federated Limited Duration Fund
(Formerly, 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 Limited Duration Fund (the "Fund"),
a portfolio of Federated Total Return Series, Inc. (the
"Corporation") dated May 30, 1997. This Statement is not a
prospectus. You may request a copy of a prospectus or a paper
copy of this Statement, if you have received it electronically,
free of charge by calling 1-800-341-7400.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated May 30, 1997
Cusip 31428Q408
Cusip 31428Q309
G01744-03 (5/97)
<PAGE>
Table of Contents
General Information About the Fund 1
Investment Objective and Policies 1
Types of Investments 1
Adjustable Rate Mortgage Securities 1
Collateralized Mortgage Obligations 1
Real Estate Mortgage Investment Conduits 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Foreign Bank Instruments 3
Futures and Options Transactions 3
Medium Term Notes and Deposit Notes 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 5
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 6
Repurchase Agreements 6
Reverse Repurchase Agreements 6
Portfolio Turnover 7
Investment Limitations 7
Federated Total Return Series, Inc. Management 8
Fund Ownership 12
Directors' Compensation 13
Director Liability 13
Investment Advisory Services 14
Adviser to the Fund 14
Advisory Fees 14
Other Services 14
Fund Administration 14
Custodian and Portfolio Accountant 14
Transfer Agent 14
Independent Auditors 14
Brokerage Transactions 14
Purchasing Shares 15
Distribution Plan and Shareholder Services 15
Determining Net Asset Value 15
Determining Market Value of Securities 16
Valuing Municipal Bonds 16
Use of Amortized Cost 16
Redeeming Shares 16
Redemption in Kind 16
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 18
About Federated Investors 19
Mutual Fund Market 19
<PAGE>
- --------------------------------------------------
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." On May 14, 1997 the Board of
Directors ("Directors") approved the Fund's name change from Federated
Total Return Limited Duration Fund to Federated Limited Duration 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 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.
<PAGE>
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%. For
the period from October 1, 1996 (start of performance) to March 31,
1997, the portfolio turnover rate was 91%. The portfolio turnover rate
is representative of only 6 months of activity.
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.
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.
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 and Director of the Corporation.
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly,
Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.;
Director, Member of Executive Committee, University of Pittsburgh;
Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation;
Senior Vice-President, John R. Wood and
Associates, Inc., Realtors; Partner or Trustee
in private real estate ventures in Southwest
Florida; formerly, President, Naples Property
Inc. and Northgate Village Development
Corporation; Director or Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank
Corp.; Director, Ryan Homes, Inc.; Director or Trustee of the Funds.
J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
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.
<PAGE>
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore
Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A.,
Western Region; Director or Trustee of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative,
Commonwealth of Massachusetts; formerly,
President, State Street Bank and Trust Company
and State Street Boston Corporation; Director or
Trustee of the Funds.
Gregor F. Meyer
Boca Grande Club
Boca Grande, FL
Birthdate: October 6, 1926
Director
Attorney, Retired Member of 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.
<PAGE>
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics; Management
Consultant; Trustee, Carnegie Endowment for
International Peace, RAND Corporation, Online
Computer Library Center, Inc., National Defense
University, U.S. Space Foundation and Czech
Management Center; President Emeritus,
University of Pittsburgh; Founding Chairman,
National Advisory Council for Environmental
Policy and Technology, Federal Emergency
Board and Czech Management Center; Director or
Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; 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.
<PAGE>
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
Funds; Treasurer of some of the Funds.
*This Director is deemed to be an
"interested person" as defined in the
Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board
between meetings of the Board.
The Funds
111 Corcoran Funds; Arrow Funds; Automated Government Money Trust;
Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Investment Portfolios;
Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities
Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and
Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond
Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc.
- - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term
U.S. Government Securities; Trust for U.S. Treasury Obligations;
Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Directors as a group own less than 1% of the Fund's
outstanding shares.
As of May 7, 1997, the following shareholders of record owned 5% or
more of the outstanding Institutional Shares of the Corporation:
Federated Securities Corp., Pittsburgh, Pennsylvania owned
approximately 322,124.7100 shares (59.87%); First Mar & Co., MFC First
National Bank, Marquette, Michigan owned approximately 127,561.4350
shares (23.71%); and Soy Capital Bank & Trust, Decatur, Illinois owned
approximately 32,920.2750 shares (6.12%).
As of May 7, 1997, the following shareholders of record owned 5% or
more of the outstanding Institutional Service Shares of the
Corporation: Anbee & Company, c/o Greatbanc Trust Company, Aurora,
Illinois owned approximately 6,512.0480 shares (59.42%); and
Trustcorp, Great Falls, Montana owned approximately 3,464.2150 shares
(31.61%).
<PAGE>
Directors' Compensation
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
COMPANY CORPORATION *# FROM FUND COMPLEX +
<S> <C> <C>
John F. Donahue, $0 $0 for the Fund and
Chairman and Director 56 other investment companies in the Fund Complex
J. Christopher Donahue, $0 $0 for the Fund and
Executive Vice President and Director 18 other investment companies in the Fund Complex
Thomas G. Bigley, $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John T. Conroy, Jr., $1109.11 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
William J. Copeland, $1109.11 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
James E. Dowd, $1109.11 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Edward L Flaherty, Jr., $1109.11 $119,615 for the Fund and
Director 56 other investment companies in the Fund Complex
Peter E. Madden, $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Gregor F. Meyer, Jr., $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
John E. Murray, Jr., $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Wesley W. Posvar, $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
Marjorie P. Smuts, $1008.14 $108,725 for the Fund and
Director 56 other investment companies in the Fund Complex
</TABLE>
*Information is furnished for the fiscal year
ended September 30, 1997.
#The aggregate compensation is provided for the
Corporation which is comprised of four
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.
<PAGE>
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. For the period
from October 1, 1996 (start of performance) to March 31, 1997, the
Fund's Adviser earned $10,080, all
of which was voluntarily waived.
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. For the period from October 1, 1996,
(start of performance) to March 31, 1997, the Fund incurred costs for
administrative services of $77,500, all of which was voluntarily
waived.
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 Directors.
The adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the
Fund or to the adviser and may include: advice as to the advisability
of investing in securities; security analysis and reports; economic
studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services.
Research services provided by brokers and dealers may be used by the
adviser or 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. For the period from October 1, 1996 (start of
performance) to March 31, 1997, the Fund paid no brokerage
commissions.
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.
For the period from October 1, 1996 (start of performance) to March
31, 1997, payments in the amount of $14 were made to financial
institutions by Institutional Service Shares, pursuant to the
Distribution Plan, of which $11 was voluntarily waived. In addition,
for the period from October 1, 1996 (start of performance) to March
31, 1997, payments in the amount of $6,286 and $14 were made pursuant
to the Shareholder Services Agreement for Institutional Shares and
Institutional Service Shares, respectively, of which all and $0,
respectively, were voluntarily waived.
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.
<PAGE>
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.
Cumulative total return reflects the Fund's total performance over a
specified period of time. The Fund's cumulative total return is
reflective of 6 months of Fund activity since the Fund's date of
initial public offering. The Fund's cumulative total returns for the
period from October 1, 1996 (start of performance) to March 31, 1997,
were 3.08% for Institutional Shares and 3.07% for Institutional
Service Shares.
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.
The Fund's yield for the thirty-day period ended March 31, 1997, was
6.64% for Institutional Shares and 6.48% for Institutional Service
Shares.
<PAGE>
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.
o Lehman Brothers High Yield Index covers the universe of fixed
rate, publicly issued, noninvestment grade debt registered with
the SEC. All bonds included in the High Yield Index must be
dollar-denominated and nonconvertible and have at least one year
remaining to maturity and an outstanding par value of at least
$100 million. Generally securities must be rated Ba1 or lower by
Moody's Investors Service, including defaulted issues. If no
Moody's rating is available, bonds must be rated BB+ or lower by
S&P; and if no S&P rating is available, bonds must be rated
below investment grade by Fitch Investor's Service. A small
number of unrated bonds is included in the index; to be eligible
they must have previously held a high yield rating or have been
associated with a high yield issuer, and must trade accordingly.
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 ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000
funds available.
About Federated Investors Federated Investors is dedicated to meeting
investor needs which is reflected in its investment decision
making-structured, straightforward, and consistent. This has resulted
in a history of competitive performance with a range of competitive
investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted
in sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio
managers, analysts, and traders dedicated to specific market sectors.
These traders handle trillions of dollars in annual trading volume.
In the government sector, as of December 31, 1996, Federated Investors
managed 9 mortgage-backed, 5 government/agency and 17 government money
market mutual funds, with assets approximating $6.3 billion, $1.7
billion and $23.6 billion, respectively. Federated trades
approximately $309 million in U.S. government and mortgage-backed
securities daily and places $17 billion in repurchase agreements each
day. Federated introduced the first U.S. government fund to invest in
U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since
1982 and currently manages nearly $30 billion in government funds
within these maturity ranges.
In the corporate bond sector, as of December 31, 1996, Federated
Investors managed 12 money market funds and 17 bond funds with assets
approximating $17.2 billion and $4.0 billion, respectively.
Federated's corporate bond decision making--based on intensive,
diligent credit analysis--is backed by over 21 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the
first high-yield bond funds in the industry. In 1983, Federated was
one of the first fund managers to participate in the asset-backed
securities market, a market totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated'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 and global
portfolios.
Mutual Fund Market
Thirty-seven percent of American households are pursuing their
financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the
more than 6,000 funds available.*
Federated Investors, through its subsidiaries, distributes mutual
funds for a variety of investment applications. Specific markets
include:
Institutional Clients
Federated Investors meets the needs of more than 4,000
institutional clients nationwide by managing and servicing
separate accounts and mutual funds for a variety of
applications, including defined benefit and defined
contribution programs, cash management, and asset/liability
management. Institutional clients include corporations,
pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors.
The marketing effort to these institutional clients is headed
by John B. Fisher, President, Institutional Sales Division.
Bank Marketing
Other institutional clients include close relationships with
more than 1,600 banks and trust organizations. Virtually all
of the trust divisions of the top 100 bank holding companies
use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by 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--we have over 2,000 broker/dealer
and bank broker/dealer relationships across the
country--supported by more wholesalers than any other mutual
fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in
several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by
James F. Getz, President, Federated Securities Corp.
* Source: Investment Company Institute.
