Federated
World-Class Investment Manager
Federated U.S. Government Bond Fund
ANNUAL SHAREHOLDER REPORT
August 31, 2008
FINANCIAL HIGHLIGHTS
SHAREHOLDER EXPENSE EXAMPLE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
PORTFOLIO OF INVESTMENTS SUMMARY TABLES
PORTFOLIO OF INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF TRUSTEES AND FUND OFFICERS
EVALUATION AND APPROVAL OF ADVISORY CONTRACT
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
QUARTERLY PORTFOLIO SCHEDULE
Not FDIC Insured * May Lose Value * No Bank Guarantee
Financial Highlights
(For a Share Outstanding Throughout Each Period)
| Year Ended August 31 | | 2008 | | 2007 | | 2006 | | 2005 | 1 | | 2004 | ||||
| Net Asset Value, Beginning of Period | $11.04 | $11.14 | $12.16 | $11.54 | $11.10 | ||||||||||
| Income From Investment Operations: | |||||||||||||||
| Net investment income | 0.47 | 0.50 | 0.50 | 0.49 | 0.47 | ||||||||||
| Net realized and unrealized gain (loss) on investments and futures contracts | 0.44 | 0.03 | (0.75 | ) | 0.62 | 0.49 | |||||||||
| TOTAL FROM INVESTMENT OPERATIONS | 0.91 | 0.53 | (0.25 | ) | 1.11 | 0.96 | |||||||||
| Less Distributions: | |||||||||||||||
| Distributions from net investment income | (0.47 | ) | (0.50 | ) | (0.50 | ) | (0.49 | ) | (0.47 | ) | |||||
| Distributions from net realized gain on investments and futures contracts | (0.15 | ) | (0.13 | ) | (0.27 | ) | - -- | (0.05 | ) | ||||||
| TOTAL DISTRIBUTIONS | (0.62 | ) | (0.63 | ) | (0.77 | ) | (0.49 | ) | (0.52 | ) | |||||
| Net Asset Value, End of Period | $11.33 | $11.04 | $11.14 | $12.16 | $11.54 | ||||||||||
| Total Return 2 | 8.42 | % | 4.90 | % | (1.89 | )% | 9.88 | % | 8.81 | % | |||||
| Ratios to Average Net Assets: | |||||||||||||||
| Net expenses | 0.91 | % | 0.91 | % | 0.91 | % | 0.91 | % | 0.91 | % | |||||
| Net investment income | 4.14 | % | 4.52 | % | 4.46 | % | 4.22 | % | 4.18 | % | |||||
| Expense waiver/reimbursement 3 | 0.38 | % | 0.27 | % | 0.35 | % | 0.35 | % | 0.29 | % | |||||
| Supplemental Data: | |||||||||||||||
| Net assets, end of period (000 omitted) | $76,218 | $72,390 | $83,989 | $80,208 | $95,878 | ||||||||||
| Portfolio turnover | 32 | % | 9 | % | 38 | % | 25 | % | 16 | % |
1 Beginning with the year ended August 31, 2005, the Fund was audited by Ernst & Young LLP. The previous year was audited by another independent registered public accounting firm.
2 Based on net asset value, which does not reflect the sales charge, redemption fee or contingent deferred sales charge, if applicable.
3 This expense decrease is reflected in both the net expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Shareholder Expense Example
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from March 1, 2008 to August 31, 2008.
ACTUAL EXPENSES
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled "Expenses Paid During Period" to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
| | Beginning Account Value 3/1/2008 | | Ending Account Value 8/31/2008 | | Expenses Paid During Period 1 | |
| Actual | $1,000 | $1,004.90 | $4.59 | |||
| Hypothetical (assuming a 5% return before expenses) | $1,000 | $1,020.56 | $4.62 |
1 Expenses are equal to the Fund's annualized net expense ratio of 0.91%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half-year period).
Management's Discussion of Fund Performance
The fund's total return, based on net asset value, for the 12-month reporting period was 8.42% versus 10.28% for the Merrill Lynch 10+ Year Treasury Index (ML10+T), 1 the fund's benchmark index. The total return consisted of 5.79% of taxable dividends and 2.63% in capital appreciation of fund shares. The fund's total return for the most recently completed fiscal year end reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the ML10+T.
The fund's investment strategy focused on (a) duration 2 and yield curve management; and (b) allocation between the U.S. Treasury and U.S. agency sectors.
MARKET OVERVIEW
The U.S. Treasury coupon curve ended the fund's annual reporting period steeper and with both shorter-term and longer-term yields lower. The Federal Reserve lowered the federal funds target rate by 3.25% to bring the target rate to 2.00% by the end of the period. The difference, or "spread," between interest rates on Treasury securities and interest rates on U.S. government agency securities widened dramatically to over 0.75% for 10-year bonds. The increasing spread resulted in lower price appreciation for U.S. government agency bonds relative to U.S. Treasury bonds. 3
1 The Merrill Lynch 10+ Year Treasury Index is an unmanaged index which includes U.S. Treasury securities with maturities greater than 10 years. Investments cannot be made in an index.
2 Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities with shorter durations.
3 Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
The economy weakened during the period which, coupled with the continuing home price correction, resulted in a very stressful year for financial markets. Losses on mortgage-related loans forced many major financial institutions to raise substantial new capital and prompted the federal government to take unprecedented action to support financial markets. Beyond the interest rate reductions by the Federal Reserve, these actions include brokering the acquisition of Bear Stearns by JPMorgan, providing a credit facility to investment banks and enacting congressional legislation that gives a newly-created regulator stronger oversight of Fannie Mae and Freddie Mac and also gives the U.S. Treasury the authority to provide unlimited capital to Fannie Mae and Freddie Mac should it become necessary. The government actions during the reporting period were helpful in calming market fears somewhat, but considerable risk aversion remains.
Yields ended the reporting period lower with 10-year and 30-year Treasury securities at 3.81% and 4.42%, respectively, at the end of August 2008.
The 2- to 10-year Treasury yield curve steepened significantly, ending the reporting period at 144 basis points versus 40 basis points at the end of August 2007. The 10- to 30-year portion of the curve also steepened, ending the period at a yield spread of 61 basis points versus 29 basis points at the end of August 2007.
Duration and Yield Curve
The fund's income advantage added to fund performance during the 12-month reporting period, while yield curve exposure and duration had a negligible impact on fund performance. The fund's average duration ended the period at 11.1 years.
Sector Allocation
The fund's performance was negatively impacted by the fund's allocation to U.S. government agency securities, which are not included in the ML10+T. The underperformance of U.S. government agency securities is largely due to concerns about the financial strength of Fannie Mae and Freddie Mac as well as the market's heightened risk aversion.
GROWTH OF A $25,000 INVESTMENT
The graph below illustrates the hypothetical investment of $25,000 1 in Federated U.S. Government Bond Fund (the "Fund") from August 31, 1998 to August 31, 2008, compared to the Merrill Lynch 10+ Year Treasury Index (ML10+T). 2
| Average Annual Total Returns for the Period Ended 8/31/2008 | | |
| 1 Year | 8.42% | |
| 5 Years | 5.93% | |
| 10 Years | 5.85% |
Performance data quoted represents past performance which is no guarantee of future results. 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. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit FederatedInvestors.com or call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.
1 The fund's performance assumes the reinvestment of all dividends and distributions. The ML10+T has been adjusted to reflect reinvestment of dividends on securities in the index.
2 The ML10+T includes U.S. Treasury securities with maturities greater than 10 years. The ML10+T is not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the fund's performance. The index is unmanaged, and unlike the fund, is not affected by cash flows. It is not possible to invest directly in an index.
Performance data quoted represents past performance which is no guarantee of future results. 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. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit FederatedInvestors.com or call 1-800-341-7400.
Portfolio of Investments Summary Tables
At August 31, 2008, the Fund's portfolio composition 1 was as follows:
| Type of Investments | | Percentage of Total Net Assets | |
| U.S. Government Agency Securities | 46.9 | % | |
| U.S. Treasury Securities | 31.7 | % | |
| U.S. Government Agency Mortgage-Backed Securities | 12.6 | % | |
| Derivative Contracts 2 | (0.1 | )% | |
| Repurchase Agreements--Collateral 3 | 5.2 | % | |
| Cash Equivalents 4 | 8.8 | % | |
| Other Assets and Liabilities--Net 5 | (5.1 | )% | |
| TOTAL | 100.0 | % | |
At August 31, 2008, the Fund's effective maturity 6 schedule was as follows:
| Securities with an Effective Maturity of: | | Percentage of Total Net Assets | |
| Less than 10 Years 7 | 16.7 | % | |
| 10-20 Years | 30.8 | % | |
| Greater than 20 Years | 43.7 | % | |
| Derivative Contracts 2 | (0.1 | )% | |
| Repurchase Agreements--Collateral 3 | 5.2 | % | |
| Cash Equivalents 4 | 8.8 | % | |
| Other Assets and Liabilities--Net 5 | (5.1 | )% | |
| TOTAL | 100.0 | % | |
1 See the Fund's Prospectus and Statement of Additional Information for a description of the principal types of securities and derivative contracts in which the Fund invests.
2 Based upon net unrealized appreciation (depreciation) or value of the derivative contracts as applicable. Derivative contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund's performance may be larger than its unrealized appreciation (depreciation) or value may indicate. In many cases, the notional value or amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's direct investments in derivative contracts, including unrealized appreciation (depreciation), value and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this report.
3 Includes repurchase agreements purchased with cash collateral or proceeds received in securities lending transactions, as well as cash covering derivative contracts, when-issued and delayed delivery transactions.
4 Cash Equivalents include an investment in a money market mutual fund.
5 Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities.
6 For mortgage securities, "effective maturity" is the projected weighted average life of the security reported by an independent provider of financial data. For all other investments, "effective maturity" is the unexpired period until the earliest date the investment is subject to prepayment or repurchase by the issuer (and market conditions indicate that the issuer will prepay or repurchase the investment). Derivative contracts are treated as having the same maturity as the underlying securities or index. For all other investments "effective maturity" is the unexpired period until final maturity.
7 Does not include repurchase agreements purchased with cash collateral received in securities lending transactions or cash held to cover payments on derivatives contracts and when-issued and delayed delivery transactions.
Portfolio of Investments
August 31, 2008
| Principal Amount | | | Value | ||||
| COLLATERALIZED MORTGAGE OBLIGATIONS--12.6% | |||||||
| Federal Home Loan Mortgage Corporation REMIC--6.3% | |||||||
| $ | 4,926,565 | Series 3387 PF, 2.887%, 9/15/2008 | $ | 4,821,106 | |||
| Federal National Mortgage Association REMIC--6.3% | |||||||
| 4,881,681 | Series 2008-24 PF, 3.122%, 9/25/2008 | 4,811,782 | |||||
| TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $9,734,470) | 9,632,888 | ||||||
| U.S. TREASURY--31.7% | |||||||
| U.S. Treasury Bonds--31.7% | |||||||
| 4,000,000 | 8.750%, 5/15/2020 | 5,698,125 | |||||
| 2,000,000 | 1 | 8.000%, 11/15/2021 | 2,750,443 | ||||
| 3,000,000 | 6.875%, 8/15/2025 | 3,891,254 | |||||
| 5,700,000 | 4.375%, 2/15/2038 | 5,658,134 | |||||
| 11,000,000 | PO STRIP 0.00%, 8/15/2021 | 6,170,165 | |||||
| TOTAL U.S. TREASURY (IDENTIFIED COST $21,472,429) | 24,168,121 | ||||||
| GOVERNMENT AGENCIES--46.9% | |||||||
| Federal Home Loan Bank System--17.1% | |||||||
| 5,000,000 | 5.500%, 7/20/2020 | 4,935,672 | |||||
| 5,000,000 | 7.125%, 2/15/2030 | 6,238,809 | |||||
| 1,750,000 | 5.500%, 7/15/2036 | 1,852,773 | |||||
| TOTAL | 13,027,254 | ||||||
| Federal Home Loan Mortgage Corporation--9.7% | |||||||
| 3,400,000 | 6.250%, 7/15/2032 | 3,941,825 | |||||
| 3,500,000 | 5.625%, 11/23/2035 | 3,450,208 | |||||
| TOTAL | 7,392,033 | ||||||
| Federal National Mortgage Association--20.1% | |||||||
| 3,000,000 | 5.125%, 4/15/2011 | 3,122,612 | |||||
| 4,500,000 | 6.250%, 5/15/2029 | 5,151,092 | |||||
| 3,600,000 | 2 | 7.250%, 5/15/2030 | 4,609,224 | ||||
| 2,000,000 | 6.625%, 11/15/2030 | 2,402,735 | |||||
| TOTAL | 15,285,663 | ||||||
| TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $34,221,146) | 35,704,950 | ||||||
| Shares or Principal Amount | | | Value | ||||
| MUTUAL FUND--8.8% | |||||||
| 6,689,282 | 3,4 | Government Obligations Fund, Institutional Shares, 2.21% (AT NET ASSET VALUE) | $ | 6,689,282 | |||
| REPURCHASE AGREEMENT--5.2% | |||||||
| $ | 3,986,000 | Interest in $2,500,000,000 joint repurchase agreement 2.14%, dated 8/29/2008 under which Deutsche Bank Securities, Inc. will repurchase securities provided as collateral for $2,500,594,444 on 9/2/2008. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 7/20/2038 and the market value of those underlying securities was $2,561,026,294 (purchased with proceeds from securities lending collateral). (AT COST) | 3,986,000 | ||||
| TOTAL INVESTMENTS--105.2% (IDENTIFIED COST $76,103,327) 5 | 80,181,241 | ||||||
| OTHER ASSETS AND LIABILITIES - NET--(5.2)% 6 | (3,963,222 | ) | |||||
| TOTAL NET ASSETS--100% | $ | 76,218,019 | |||||
At August 31, 2008, the Fund had the following outstanding futures contracts:
| Description | | Number of Contracts | | Notional Value | | Expiration Date | | Unrealized Depreciation |
| 7 U.S. Treasury Bond Long Futures | 145 | $17,010,313 | December 2008 | $(65,037) |
Unrealized Depreciation on Futures Contracts is included in "Other Assets and Liabilities - Net."
1 Pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding long futures contracts.
2 All or a portion of this security is temporarily on loan to unaffiliated broker/dealers.
3 Affiliated company.
4 7-Day net yield.
5 The cost of investments for federal tax purposes amounts to $76,172,430.
6 Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities.
7 Non-income-producing security.
Note: The categories of investments are shown as a percentage of total net assets at August 31, 2008.
The following acronym is used throughout this portfolio:
| REMIC | - --Real Estate Mortgage Investment Conduit |
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
August 31, 2008
| Assets: | |||||||
| Total investments in securities, at value, including $6,689,282 of investments in an affiliated issuer (Note 5) and $3,841,020 of securities loaned (identified cost $76,103,327) | $ | 80,181,241 | |||||
| Income receivable | 577,926 | ||||||
| Receivable for shares sold | 68,650 | ||||||
| TOTAL ASSETS | 80,827,817 | ||||||
| Liabilities: | |||||||
| Payable for shares redeemed | $ | 461,691 | |||||
| Income distribution payable | 47,273 | ||||||
| Payable for Directors'/Trustees' fees | 368 | ||||||
| Payable for collateral due to broker for securities loaned | 3,986,000 | ||||||
| Payable for daily variation margin | 88,359 | ||||||
| Payable for shareholder services fee (Note 5) | 12,047 | ||||||
| Accrued expenses | 14,060 | ||||||
| TOTAL LIABILITIES | 4,609,798 | ||||||
| Net assets for 6,730,032 shares outstanding | $ | 76,218,019 | |||||
| Net Assets Consist of: | |||||||
| Paid-in capital | $ | 69,569,369 | |||||
| Net unrealized appreciation of investments and futures contracts | 4,012,877 | ||||||
| Accumulated net realized gain on investments and futures contracts | 2,635,782 | ||||||
| Distributions in excess of net investment income | (9 | ) | |||||
| TOTAL NET ASSETS | $ | 76,218,019 | |||||
| Net Asset Value, Offering Price and Redemption Proceeds Per Share: | |||||||
| $76,218,019 ÷ 6,730,032 shares outstanding, no par value, unlimited shares authorized | $11.33 |
See Notes which are an integral part of the Financial Statements
Statement of Operations
Year Ended August 31, 2008
| Investment Income: | ||||||||||||
| Interest (including income on securities loaned of $29,072) | $ | 3,611,160 | ||||||||||
| Dividend received from an affiliated issuer (Note 5) | 85,021 | |||||||||||
| TOTAL INCOME | 3,696,181 | |||||||||||
| Expenses: | ||||||||||||
| Investment adviser fee (Note 5) | $ | 438,968 | ||||||||||
| Administrative personnel and services fee (Note 5) | 150,000 | |||||||||||
| Custodian fees | 13,987 | |||||||||||
| Transfer and dividend disbursing agent fees and expenses | 62,440 | |||||||||||
| Directors'/Trustees' fees | 14,116 | |||||||||||
| Auditing fees | 22,200 | |||||||||||
| Legal fees | 15,257 | |||||||||||
| Portfolio accounting fees | 42,820 | |||||||||||
| Shareholder services fee (Note 5) | 132,145 | |||||||||||
| Account administration fee | 2,927 | |||||||||||
| Share registration costs | 21,074 | |||||||||||
| Printing and postage | 17,613 | |||||||||||
| Insurance premiums | 4,826 | |||||||||||
| Miscellaneous | 9,243 | |||||||||||
| TOTAL EXPENSES | 947,616 | |||||||||||
| Waivers and Reimbursement (Note 5): | ||||||||||||
| Waiver/reimbursement of investment adviser fee | $ | (254,028 | ) | |||||||||
| Waiver of administrative personnel and services fee | (24,270 | ) | ||||||||||
| TOTAL WAIVERS AND REIMBURSEMENT | (278,298 | ) | ||||||||||
| Net expenses | 669,318 | |||||||||||
| Net investment income | 3,026,863 | |||||||||||
| Realized and Unrealized Gain (Loss) on Investments and Futures Contracts: | ||||||||||||
| Net realized gain on investments | 2,980,192 | |||||||||||
| Net realized gain on futures contracts | 228,595 | |||||||||||
| Net change in unrealized appreciation of investments | (689,758 | ) | ||||||||||
| Net change in unrealized appreciation of futures contracts | (74,589 | ) | ||||||||||
| Net realized and unrealized gain on investments and futures contracts | 2,444,440 | |||||||||||
| Change in net assets resulting from operations | $ | 5,471,303 |
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
| Year Ended August 31 | | 2008 | | 2007 | ||||
| Increase (Decrease) in Net Assets | ||||||||
| Operations: | ||||||||
| Net investment income | $ | 3,026,863 | $ | 3,489,115 | ||||
| Net realized gain on investments and futures contracts | 3,208,787 | 1,031,690 | ||||||
| Net change in unrealized appreciation/depreciation of investments and futures contracts | (764,347 | ) | (1,086,095 | ) | ||||
| CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 5,471,303 | 3,434,710 | ||||||
| Distributions to Shareholders: | ||||||||
| Distributions from net investment income | (3,028,974 | ) | (3,487,584 | ) | ||||
| Distributions from net realized gain on investments and futures contracts | (929,383 | ) | (921,517 | ) | ||||
| CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (3,958,357 | ) | (4,409,101 | ) | ||||
| Share Transactions: | ||||||||
| Proceeds from sale of shares | 34,272,559 | 23,368,623 | ||||||
| Net asset value of shares issued to shareholders in payment of distributions declared | 3,254,309 | 2,965,788 | ||||||
| Cost of shares redeemed | (35,211,311 | ) | (36,959,703 | ) | ||||
| CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | 2,315,557 | (10,625,292 | ) | |||||
| Change in net assets | 3,828,503 | (11,599,683 | ) | |||||
| Net Assets: | ||||||||
| Beginning of period | 72,389,516 | 83,989,199 | ||||||
| End of period (including undistributed (distributions in excess of) net investment income of $(9) and $2,102, respectively) | $ | 76,218,019 | $ | 72,389,516 |
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
August 31, 2008
1. ORGANIZATION
Federated U.S. Government Bond Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The investment objective of the Fund is to pursue 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 (GAAP) in the United States of America.
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Board of Trustees (the "Trustees").
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium).
- Shares of other mutual funds are valued based upon their reported NAVs.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a "bid" evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a "mid" evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
The Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.
Repurchase Agreements
It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a "securities entitlement" and exercises "control" as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
With respect to agreements to repurchase U.S. government securities and cash items, the Fund treats the repurchase agreement as an investment in the underlying securities and not as an obligation of the other party to the repurchase agreement. Other repurchase agreements are treated as obligations of the other party secured by the underlying securities. Nevertheless, the insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Expenses and Distributions
Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Distributions of net investment income are declared daily and paid monthly.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the "Code") and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. The Fund adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," on September 1, 2007. As of and during the year ended August 31, 2008, the Fund did not have a liability for any unrecognized tax expenses. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of August 31, 2008, tax years 2005 through 2008 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the commonwealth of Massachusetts.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Futures Contracts
The Fund may periodically purchase and sell financial futures contracts to manage cash flows and duration, enhance yield and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a "variation margin" account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. For the year ended August 31, 2008, the Fund had a net realized gain on futures contracts of $228,595.
Futures contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
Securities Lending
The Fund participates in a securities lending program providing for the lending of government securities to qualified brokers. The Fund normally receives cash collateral for securities loaned that is invested in short-term securities including repurchase agreements. Collateral is maintained at a minimum level of 100% of the market value of investments loaned, plus interest, if applicable. Earnings on collateral are allocated between the securities lending agent, as a fee for its services under the program, and the Fund, according to agreed-upon rates.
As of August 31, 2008, securities subject to this type of arrangement and related collateral were as follows:
| Market Value of Securities Loaned | | Market Value of Collateral |
| $3,841,020 | $3,986,000 |
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis.
3. CAPITAL STOCK
The following table summarizes share activity:
| Year Ended August 31 | | 2008 | | | 2007 | |
| Shares sold | 3,015,720 | 2,122,798 | ||||
| Shares issued to shareholders in payment of distributions declared | 288,795 | 267,406 | ||||
| Shares redeemed | (3,131,852 | ) | (3,372,342 | ) | ||
| NET CHANGE RESULTING FROM SHARE TRANSACTIONS | 172,663 | (982,138 | ) |
4. FEDERAL TAX INFORMATION
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended August 31, 2008 and 2007, was as follows:
| | 2008 | | 2007 | |
| Ordinary income 1 | $3,028,974 | $3,619,649 | ||
| Long-term capital gains | $ 929,383 | $ 789,452 |
1 For tax purposes, short-term capital gain distributions are considered ordinary income distributions.
As of August 31, 2008, the components of distributable earnings on a tax basis were as follows:
| Undistributed ordinary income | | $ 92,271 |
| Undistributed long-term capital gain | $2,547,568 | |
| Net unrealized appreciation | $4,008,811 |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for the deferral of losses on wash sales.
At August 31, 2008, the cost of investments for federal tax purposes was $76,172,430. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized depreciation resulting from futures contracts was $4,008,811. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $4,008,811 and net unrealized depreciation from investments for those securities having an excess of cost over value of $0.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company is the Fund's investment adviser (the "Adviser"). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.60% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, 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. For the year ended August 31, 2008, the Adviser voluntarily waived $249,963 of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
| Administrative Fee | | Average Aggregate Daily Net Assets of the Federated Funds |
| 0.150% | on the first $5 billion | |
| 0.125% | on the next $5 billion | |
| 0.100% | on the next $10 billion | |
| 0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. FAS can modify or terminate this voluntary waiver at any time at its sole discretion. For the year ended August 31, 2008, the net fee paid to FAS was 0.172% of average daily net assets of the Fund. The Fund currently accrues the minimum administrative fee; therefore the fee as a percentage of average aggregate daily net assets is greater than the amounts presented in the chart above. FAS waived $24,270 of its fee.
Shareholder Services Fee
The Fund may pay fees (Service Fees) up to 0.25% of the average daily net assets of the Fund's Shares to financial intermediaries or to Federated Shareholder Services Company (FSSC) for providing services to shareholders and maintaining shareholder accounts. Subject to the terms described in the Expense Limitation note, FSSC may voluntarily reimburse the Fund for shareholder services fees. This voluntary reimbursement can be modified or terminated at any time. For the year ended August 31, 2008, FSSC received $981 of fees paid by the Fund.
Expense Limitation
The Adviser and its affiliates (which may include FAS and FSSC) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total operating expenses (as shown in the Financial Highlights) paid by the Fund (after the voluntary waivers and reimbursements) will not exceed 0.91% for the fiscal year ending August 31, 2009. Although these actions are voluntary, the Adviser and its affiliates have agreed to continue these waivers and/or reimbursements at least through October 31, 2009.
General
Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Transactions with Affiliated Companies
Affiliated holdings are mutual funds which are managed by the Adviser or an affiliate of the Adviser. The Adviser has agreed to reimburse the Fund for certain investment adviser fees as a result of transactions in other affiliated mutual funds. For the year ended August 31, 2008, the Adviser reimbursed $4,065. Transactions with the affiliated company during the year ended August 31, 2008 were as follows:
| Affiliate | | Balance of Shares Held 8/31/2007 | | Purchases/ Additions | | Sales/ Reductions | | Balance of Shares Held 8/31/2008 | | Value | | Dividend Income |
| Government Obligations Fund-- Institutional Shares | - -- | 29,807,227 | 23,117,945 | 6,689,282 | $6,689,282 | $85,021 |
6. LINE OF CREDIT
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate of 0.65% over the federal funds rate. As of August 31, 2008, there were no outstanding loans. During the year ended August 31, 2008, the Fund did not utilize the LOC.
7. INTERFUND LENDING
Pursuant to an Exemptive Order issued by the SEC, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the funds to borrow from other participating affiliated funds. As of August 31, 2008, there were no outstanding loans. During the year ended August 31, 2008, the program was not utilized.
8. LEGAL PROCEEDINGS
Since October 2003, Federated Investors, Inc. and related entities (collectively, "Federated") and various Federated funds ("Federated Funds") have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. These lawsuits began to be filed shortly after Federated's first public announcement that it had received requests for information on shareholder trading activities in the Federated Funds from the SEC, the Office of the New York State Attorney General ("NYAG") and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay for the benefit of fund shareholders additional disgorgement and a civil money penalty in the aggregate amount of an additional $72 million. Federated entities have also been named as defendants in several additional lawsuits that are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Federated Funds retained the law firm of Dickstein Shapiro LLP to represent the Federated Funds in these lawsuits. Federated and the Federated Funds and their respective counsel have been defending this litigation, and none of the Federated Funds remains a defendant in any of the lawsuits (though some could potentially receive any recoveries as nominal defendants). Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys' fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Federated Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Federated Fund redemptions, reduced sales of Federated Fund shares or other adverse consequences for the Federated Funds.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, FASB released Statement on Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157), which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management has concluded that the adoption of FAS 157 is not expected to have a material impact on the Fund's net assets or results of operations.
In addition, in March 2008, FASB released Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" (FAS 161). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. At this time, management is evaluating the implications of adopting FAS 161 and its impact on the financial statements and the accompanying notes.
10. FEDERAL TAX INFORMATION (UNAUDITED)
For the year ended August 31, 2008, the amount of long-term capital gains designated by the Fund was $929,383.
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FEDERATED U.S. GOVERNMENT BOND FUND:
We have audited the accompanying statement of assets and liabilities of Federated U.S. Government Bond Fund (the "Fund"), including the portfolio of investments, as of August 31, 2008, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended August 31, 2004 were audited by another independent registered public accounting firm whose report, dated October 20, 2004, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2008, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Federated U.S. Government Bond Fund at August 31, 2008, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
October 16, 2008
Board of Trustees and Fund Officers
The Board is responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. The following tables give information about each Board member and the senior officers of the Fund. Where required, the tables separately list Board members who are "interested persons" of the Fund (i.e., "Interested" Board members) and those who are not (i.e., "Independent" Board members). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Board members listed is 5800 Corporate Drive, Pittsburgh, PA 15237-7000; Attention: Mutual Fund Board. As of December 31, 2007, the Federated Fund Complex consisted of 40 investment companies (comprising 148 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Board member oversees all portfolios in the Federated Fund Complex and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Fund Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
INTERESTED TRUSTEES BACKGROUND
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| John F. Donahue* Birth Date: July 28, 1924 TRUSTEE Began serving: May 1985 | Principal Occupations: Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Complex's Executive Committee. Previous Positions: Chairman of the Federated Fund Complex; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. | |
| J. Christopher Donahue* Birth Date: April 11, 1949 PRESIDENT AND TRUSTEE Began serving: January 2000 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. | |
* Family relationships and reasons for "interested" status: John F. Donahue is the father of J. Christopher Donahue; both are "interested" due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries.
INDEPENDENT TRUSTEES BACKGROUND
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Thomas G. Bigley Birth Date: February 3, 1934 TRUSTEE Began serving: November 1994 | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Director, Member of Executive Committee, Children's Hospital of Pittsburgh; Director, University of Pittsburgh. Previous Position: Senior Partner, Ernst & Young LLP. | |
| John T. Conroy, Jr. Birth Date: June 23, 1937 TRUSTEE Began serving: August 1991 | Principal Occupations: Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida; Assistant Professor in Theology at Barry University and Blessed Edmund Rice School for Pastoral Ministry. Previous Positions: President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. | |
| Nicholas P. Constantakis Birth Date: September 3, 1939 TRUSTEE Began serving: January 1999 | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Director and Chairman of the Audit Committee, Michael Baker Corporation (engineering and energy services worldwide). Previous Position: Partner, Andersen Worldwide SC. | |
| John F. Cunningham Birth Date: March 5, 1943 TRUSTEE Began serving: January 1999 | Principal Occupations: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, QSGI, Inc. (technology services company); Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. | |
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Peter E. Madden Birth Date: March 16, 1942 TRUSTEE Began serving: August 1991 | Principal Occupation: Director or Trustee of the Federated Fund Complex. Other Directorships Held: Board of Overseers, Babson College. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. | |
| Charles F. Mansfield, Jr. Birth Date: April 10, 1945 TRUSTEE Began serving: January 1999 | Principal Occupations: Director or Trustee of the Federated Fund Complex; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President DVC Group, Inc. (marketing, communications and technology). | |
| John E. Murray, Jr., J.D., S.J.D. Birth Date: December 20, 1932 TRUSTEE Began serving: February 1995 | Principal Occupations: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Complex; Chancellor and Law Professor, Duquesne University; Partner, Murray, Hogue & Lannis. Other Directorships Held: Director, Michael Baker Corp. (engineering, construction, operations and technical services). Previous Positions: President, Duquesne University; Dean and Professor of Law, University of Pittsburgh School of Law; Dean and Professor of Law, Villanova University School of Law. | |
| R. James Nicholson Birth Date: February 4, 1938 TRUSTEE Began serving: January 2008 | Principal Occupations: Director or Trustee of the Federated Fund Complex; Senior Counsel, Brownstein Hyatt Farber Schrek, P.C.; Former Secretary of the U.S. Dept. of Veterans Affairs; Former U.S. Ambassador to the Holy See; Former Chairman of the Republican National Committee. Other Directorships Held: Director, Horatio Alger Association. Previous Positions: Colonel, U.S. Army Reserve; Partner, Calkins, Kramer, Grimshaw and Harring, P.C.; General Counsel, Colorado Association of Housing and Building; Chairman and CEO, Nicholson Enterprises, Inc. (real estate holding company); Chairman and CEO, Renaissance Homes of Colorado. | |
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Thomas M. O'Neill Birth Date: June 14, 1951 TRUSTEE Began serving: October 2006 | Principal Occupations: Director or Trustee of the Federated Fund Complex; Managing Director and Partner, Navigator Management Company, L.P. (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank. | |
| Marjorie P. Smuts Birth Date: June 21, 1935 TRUSTEE Began serving: May 1985 | Principal Occupations: Director or Trustee of the Federated Fund Complex; formerly, Public Relations/Marketing Consultant/Conference Coordinator. Previous Positions: National Spokesperson, Aluminum Company of America; television producer; President, Marj Palmer Assoc.; Owner, Scandia Bord. | |
| John S. Walsh Birth Date: November 28, 1957 TRUSTEE Began serving: January 1999 | Principal Occupations: Director or Trustee of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. | |
| James F. Will Birth Date: October 12, 1938 TRUSTEE Began serving: April 2006 | Principal Occupations: Director or Trustee of the Federated Fund Complex; formerly, Vice Chancellor and President, Saint Vincent College. Other Directorships Held: Trustee, Saint Vincent College; Alleghany Corporation. Previous Positions: Chairman, President and Chief Executive Officer, Armco, Inc.; President and Chief Executive Officer, Cyclops Industries; President and Chief Operating Officer, Kaiser Steel Corporation. | |
OFFICERS
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years and Previous Position(s) |
| John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: June 1995 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Complex; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. | |
| Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; VicePresident, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. | |
| Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: May 1985 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Complex; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. | |
| Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Complex; Vice President and Chief Compliance Officer of Federated Investors, Inc.; Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. | |
| Name Birth Date Positions Held with Trust Date Service Began | | Principal Occupation(s) for Past Five Years and Previous Position(s) |
| Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S. in Industrial Administration from Carnegie Mellon University. | |
| Todd A. Abraham Birth Date: February 10, 1966 VICE PRESIDENT Began serving: August 2005 | Principal Occupations: Todd A. Abraham is Vice President of the Fund. Mr. Abraham has been a Portfolio Manager since 1995, a Vice President of the Fund's Adviser since 1997 and a Senior Vice President of the Fund's Adviser beginning 2007. Mr. Abraham joined Federated in 1993 as an Investment Analyst and served as Assistant Vice President of the Fund's Adviser from 1995 to 1997. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992-1993. Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in Finance from Loyola College. | |
| Donald T. Ellenberger Birth Date: July 24, 1958 VICE PRESIDENT Began serving: November 2005 | Principal Occupations: Donald T. Ellenberger is Vice President of the Fund. He joined Federated in 1996 as a Portfolio Manager and a Vice President of a Federated advisory subsidiary. He became a Senior Vice President of the Fund's Adviser in January 2005 and served as a Vice President of the Fund's Adviser from 1997 through 2004. From 1986 to 1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr. Ellenberger received his M.B.A. in Finance from Stanford University. | |
Evaluation and Approval of Advisory
Contract - May 2008
FEDERATED U.S. GOVERNMENT BOND FUND (THE "FUND")
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2008. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below. The Board considered that evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize "economies of scale" as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional reports in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's evaluation, accompanying data and additional reports covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or "peer group" funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be particularly useful, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because, simply put, they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; and different portfolio management techniques made necessary by different cash flows. The Senior Officer did not consider these fee schedules to be significant in determining the appropriateness of mutual fund advisory contracts.
The Senior Officer reviewed reports compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are highly important in judging the reasonableness of proposed fees.
The Fund's performance fell below the median of the relevant peer group for both the one- and three-year periods ending December 31, 2007. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including reports on the compensation and benefits Federated derived from its relationships with the Federated funds. These reports covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The reports also discussed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate.
Federated furnished reports, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation reports unreliable. The allocation reports were considered in the analysis by the Board but were determined to be of limited use.
The Board and the Senior Officer also reviewed a report compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's evaluation also discussed the notion of possible realization of "economies of scale" as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with "breakpoints" that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the Fund's most recently completed fiscal year, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
The Senior Officer's evaluation noted his belief that the information and observations contained in his evaluation supported a finding that the proposed management fees are reasonable, and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.
In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that most shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Voting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on "Form N-PX" of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the "Products" section of the website, click on the "Prospectuses and Regulatory Reports" link under "Related Information," then select the appropriate link opposite the name of the Fund; or select the name of the Fund and from the Fund's page, click on the "Prospectuses and Regulatory Reports" link. Form N-PX filings are also available at the SEC's website at www.sec.gov.
Quarterly Portfolio Schedule
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on "Form N-Q." These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the "Products" section of Federated's website at FederatedInvestors.com by clicking on "Portfolio Holdings" under "Related Information," then selecting the appropriate link opposite the name of the Fund; or select the name of the Fund and from the Fund's page, click on the "Portfolio Holdings" link.
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
World-Class Investment Manager
Federated U.S. Government Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
Cusip 314284100
G00569-01 (10/08)
Federated is a registered mark of Federated Investors, Inc. 2008 (c)Federated Investors, Inc.
| (1) | The aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant to its accountant during the fiscal year in which the services are provided; |
| (2) | Such services were not recognized by the registrant, the registrant’s adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant at the time of the engagement to be non-audit services; and |
| (3) | Such services are promptly brought to the attention of the Audit Committee of the issuer and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee. |
| (f) | NA |
| (g) | Non-Audit Fees billed to the registrant, the registrant’s investment adviser, and certain entities controlling, controlled by or under common control with the investment adviser: |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies |
| Not Applicable |
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies |
| Not Applicable |
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers |
| Not Applicable |
| Registrant | Federated U.S. Government Bond Fund |
| By | /S/ Richard A. Novak |
| Richard A. Novak | |
| Principal Financial Officer | |
| Date | October 22, 2008 |
| Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | |
| By | /S/ ___J. Christopher Donahue |
| J. Christopher Donahue | |
| Principal Executive Officer | |
| Date | October 22, 2008 |
| By | /S/ ___Richard A. Novak |
| Richard A. Novak | |
| Principal Financial Officer | |
| Date | October 22, 2008 |