-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EEc2ldOxkMLEIOLfHtTnXtR2ruSXwkVhjj3i3Y++BjHL+l5MGCKWF+cgr+hHmU4o 1UrEgOGcZQOjsPyWwnUrtQ== 0001318148-07-000570.txt : 20070330 0001318148-07-000570.hdr.sgml : 20070330 20070330133908 ACCESSION NUMBER: 0001318148-07-000570 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-57181 FILM NUMBER: 07731309 BUSINESS ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02677 FILM NUMBER: 07731310 BUSINESS ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237-7000 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 0000201801 S000009070 FEDERATED MUNICIPAL SECURITIES FUND INC C000024642 Class A Shares LMSFX C000024643 Class B Shares LMSBX C000024644 Class C Shares LMSCX 485APOS 1 form.txt 1933 Act File No. 2-57181 1940 Act File No. 811-2677 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X Pre-Effective Amendment No. .............................. Post-Effective Amendment No. 64 ............................ X and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X Amendment No. 48 .......................................... X FEDERATED MUNICIPAL SECURITIES FUND, INC. (Exact Name of Registrant as Specified in Charter) Federated Investors Funds 5800 Corporate Drive Pittsburgh, Pennsylvania 15237-7000 (Address of Principal Executive Offices) (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire Federated Investors Tower 1001 Liberty Avenue Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) (Notices should be sent to the Agent for Service) It is proposed that this filing will become effective: _ immediately upon filing pursuant to paragraph (b) _ on ___________ pursuant to paragraph (b) X 60 days after filing pursuant to paragraph (a)(i) __ on pursuant to paragraph (a)(i) _ 75 days after filing pursuant to paragraph (a)(ii) on _________________ pursuant to paragraph (a)(ii) of Rule 485. If appropriate, check the following box: This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Copies to: Matthew G. Maloney, Esquire Dickstein Shapiro LLP 1875 Eye Street, NW Washington, DC 20006 FEDERATED MUNICIPAL SECURITIES FUND, INC. PROSPECTUS MAY 31, 2007 CLASS A SHARES CLASS B SHARES CLASS C SHARES A mutual fund seeking to provide for its shareholders a high level of current income which is exempt from federal regular income tax by investing at least a majority of its assets in a portfolio of (1) long-term tax-exempt securities and (2) investment-grade, tax-exempt securities. As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. CONTENTS Risk/Return Summary What are the Fund's Fees and Expenses? What are the Fund's Investment Strategies? What are the Principal Securities in Which the Fund Invests? What are the Specific Risks of Investing in the Fund? What Do Shares Cost? How is the Fund Sold? Payments to Financial Intermediaries How to Purchase Shares How to Redeem and Exchange Shares Account and Share Information Who Manages the Fund? Legal Proceedings Financial Information Appendix A: Hypothetical Investment and Expense Information NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE 1 RISK/RETURN SUMMARY WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund's investment objective is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus. WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES? The Fund pursues its objective by investing its assets so that, normally (except as discussed herein), distributions of annual interest income are exempt from federal regular income tax. The Fund's investment adviser (Adviser) also normally (except as discussed herein) will invest the Fund's assets entirely in securities whose interest is not subject to (or not a specific preference item for purposes of) the federal alternative minimum tax for individuals and corporations (AMT), such that, normally, distributions of annual interest income also are exempt from the AMT. However, in certain circumstances (such as, for example, when there is a lack of supply of non-AMT securities or there are advantageous market conditions), to pursue the Fund's investment objective, the Adviser may invest the Fund's assets in securities that may be subject to AMT. In such circumstances, interest from the Fund's investments may be subject to the AMT. The Fund does not limit itself to securities of a particular maturity range. Currently, the Fund invests at least a majority of its assets in long-term tax- exempt securities (i.e., securities with stated maturities of 10 years or more). The Fund also will invest at least a majority of its assets in securities rated investment grade (or unrated securities of comparable quality), and may purchase securities rated below investment grade (or unrated securities of comparable quality), which are also known as junk bonds, up to 49% of its assets. The Fund may invest in derivative contracts to implement its investment strategies as more fully described herein. The Fund also may invest in certain securities as described herein that will likely cause the Fund to realize a limited amount of ordinary income or short- term capital gains (which are treated as ordinary income for federal income tax purposes). WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND? All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include: *INTEREST RATE RISKS. Prices of fixed-income securities generally fall when interest rates rise. Interest rate changes have a greater effect on prices of fixed income securities with longer durations. *CREDIT RISKS. There is a possibility that issuers of securities in which the Fund may invest may default in the payment of interest or principal on the securities when due, which would cause the Fund to lose money. Non- investment grade securities generally have a higher default risk than investment grade securities. *LIQUIDITY RISKS. Certain securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Non- investment grade securities generally have less liquidity than investment grade securities. Over-the- counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts. *TAX RISKS. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. The Fund also may invest in market discount bonds, enter into credit default swap arrangements and other derivative transactions, and engage in other permissible activities that will likely cause the Fund to realize a limited amount of ordinary income or short- term capital gains (which are treated as ordinary income for federal income tax purposes). Consequently, for each of these reasons, the Fund may receive payments, and make distributions, that are treated as ordinary income for federal income tax purposes. *LEVERAGE RISKS. Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such and investment magnify the Fund's risk of loss and potential for gain. *CALL RISKS. The Fund's performance may be adversely affected by the possi- bility that an issuer of a security held by the Fund may redeem the security prior to maturity at a price below its current market value. *SECTOR RISKS. A substantial part of the Fund's portfolio may be comprised of securities issued or credit enhanced by companies in similar businesses, or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers. *PREPAYMENT RISKS. When homeowners prepay their mortgages in response to lower interest rates, the Fund will be required to reinvest the proceeds at the lower interest rates available. Also, when interest rates fall, the price of municipal mortgage-backed securities may not rise to as great an extent as that of other fixed-income securities. *RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS. The Fund's use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Also, derivative contracts and hybrid instruments may involve other risks described in this prospectus or the Fund's Statement of Additional Information (SAI), such as interest rate, credit, liquidity and leverage risks. *RISKS ASSOCIATED WITH NON-INVESTMENT GRADE SECURITIES. The Fund may invest a portion of its assets in securities rated below investment grade (which are also known as junk bonds), which may be subject to credit, interest rate and liquidity risks than investment grade 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 or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. 2 RISK/RETURN BAR CHART AND TABLE To be Filed by Amendment 3 WHAT ARE THE FUND'S FEES AND EXPENSES? To be Filed by Amendment 4 WHAT ARE THE FUND'S INVESTMENT STRATEGIES? The Fund pursues its objective by investing its assets so that, normally (except as discussed herein), distributions of annual interest income are exempt from federal regular income tax. The Fund's investment adviser (Adviser) also normally (except as discussed herein) will invest the Fund's assets entirely in securities whose interest is not subject to (or not a specific preference item for purposes of) the federal alternative minimum tax for individuals and corporations (AMT), such that, normally, distributions of annual interest income also are exempt from the AMT. However, in certain circumstances (such as, for example, when there is a lack of supply of non-AMT securities or there are advantageous market conditions), to pursue the Fund's investment objective, the Adviser may invest the Fund's assets in securities that may be subject to AMT. In such circumstances, interest from the Fund's investments may be subject to the AMT. The Fund does not limit itself to securities of a particular maturity range. Currently, the Fund invests at least a majority of its assets in long-term tax- exempt securities (i.e., securities with stated maturities of 10 years or more). The Fund also will invest at least a majority of its assets in securities rated investment grade (or unrated securities of comparable quality) without regard to the maturity of the securities, and may purchase securities rated below investment grade (or unrated securities of comparable quality), which are also known as junk bonds, up to 49% of its assets. The amount of the Fund's assets invested in long-term or investment-grade tax- exempt securities will be determined at the time when tax-exempt securities are purchased. For example, a later increase or decrease in percentage resulting from any change in value or net assets, or from a downgrade in a security's rating/quality, will not require the Fund to sell any tax-exempt security held in the Fund's portfolio. Investment-grade securities are securities that receive investment grade ratings (i.e., generally ratings in the first, second, third or fourth highest rating category) by a nationally recognized statistical rating organization (NRSRO) or unrated securities of comparable quality. For example, securities rated "AAA," "AA," "A" or "BBB" by Standard & Poor's, an NRSRO, would be rated in the first, second, third or fourth ratings category, respectively. Securities rated below investment grade (or non-investment grade securities) are securities that do not receive investment grade ratings (i.e., generally ratings below one of the four highest rating categories) by an NRSRO or unrated securities of comparable quality. For example, securities rated "B: or "BB" by Standard & Poor's, an NRSRO, would be non-investment grade securities. The investment grade tax-exempt securities in which the Fund invests generally are subject to interest rate, credit, liquidity, tax, leverage, call, sector and prepayment risks, and the risks of investment in derivatives contracts and hybrid instruments, all as described in this Prospectus. The non-investment grade securities in which the Fund invests are subject to these risks, as well as the risks of investing in non-investment grade securities as described in this Prospectus. The Adviser of the Fund actively manages the Fund's portfolio, seeking to manage the interest rate risk and credit risk assumed by the Fund and provide superior levels of after-tax total return. The Adviser manages the Fund's interest rate risk by adjusting the duration of its portfolio. "Duration" measures the sensitivity of a security's price to changes in interest rates. The greater a portfolio's duration, the greater the potential change in the portfolio's value in response to a change in market interest rates. The Adviser will increase or reduce the Fund's portfolio duration based on its interest rate outlook. When the Adviser expects interest rates to fall, it will maintain a longer portfolio duration. When the Adviser expects interest rates to increase, it will shorten the portfolio duration. The Adviser uses hedging transactions for purposes of duration management. The Adviser considers a variety of factors in formulating its interest rate outlook, including the following: *current and expected U.S. economic growth; *current and expected interest rates and inflation; *the Federal Reserve Board's monetary policy; and *supply and demand factors related to the municipal market and the effect they may have on the returns offered for various bond maturities. The Adviser manages credit risk by performing a fundamental credit analysis on tax-exempt securities before the Fund purchases such securities. The Adviser considers various factors, including the following: *the economic feasibility of revenue bond financings and general purpose financings; *the financial condition of the issuer or guarantor; and *political developments that may affect credit quality. The Adviser monitors the credit risks of all portfolio securities on an ongoing basis by reviewing periodic financial data and ratings of NRSROs. The Adviser attempts to provide superior levels of after-tax total return.Total return consists of two components: (1) income received from the Fund's portfolio securities; and (2) changes in the market value of the Fund's portfolio securities and attendant increase or decrease in the net asset value (NAV) of Fund Shares.. The Adviser seeks total return on an after-tax basis, so that it will try to maximize tax-exempt income distributions; make limited ordinary income distributions; and minimize or eliminate capital gains distributions. In seeking to increase incremental after-tax total returns, the Fund may invest in tax-exempt securities that are trading at a price less than the original issue price (or market discount bonds), enter in credit default swap arrangements and other derivative transactions, and engage in other permissible activities that will likely cause the Fund to realize a limited amount of ordinary income or short-term capital gains (which are treated as ordinary income for federal income tax purposes) and, as a result, may result in taxable distributions to shareholders. The ordinary income derived from these investment strategies generally will be limited to approximately 5% or less of the Fund's annual distributions. The Adviser's ability to formulate an accurate interest rate outlook, coupled with effective management of the Fund's duration as described above, is critical to the Adviser's achievement of this component of its strategy. The Adviser will seek to further enhance after-tax total return by engaging in a relative value analysis; that is, the Adviser will assess the cost of a tax-exempt security compared with other tax-exempt securities and taxable securities such as U.S. Treasury obligations. The Adviser may also allocate investments in sectors of the tax- exempt market that offer the highest return. The Fund may use derivative contracts and/or hybrid instruments to implement elements of its investment strategy. For example, the Fund may use derivative contracts and/or hybrid instruments to increase or decrease the allocation of the portfolio to securities or types of securities in which the Fund may invest directly or to gain exposure to the municipal bond sector. The Fund may also, for example, use derivative contracts to: * increase or decrease the effective duration of the Fund portfolio; * obtain premiums from the sale of derivative contracts; * realize gains from trading a derivative contract; or * hedge against potential losses. There can be no assurance that the Fund's use of derivative contracts or hybrid instruments will work as intended. Because the Fund refers to municipal investments in its name, it has an investment policy that it will normally invest its assets so that at least 80% of the income that it distributes will be exempt from federal regular income tax. This policy may not be changed without shareholder approval. TEMPORARY DEFENSIVE INVESTMENTS The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to receive and distribute taxable income to investors. It may also cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders. WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS? TAX-EXEMPT SECURITIES Tax-exempt securities are fixed-income securities that, in the opinion of the bond counsel to the issuer or on the basis of another authority believed by the Adviser to be reliable, pay interest that is not subject to federal regular income taxes. Fixed-income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a "fixed income" security must repay the principal amount of the security, normally within a specified time. Typically, states, counties, cities, and other political subdivisions and authorities issue tax-exempt securities. The market categorizes tax-exempt securities by their source of repayment. GENERAL OBLIGATION BONDS General obligation bonds are supported by the issuer's power to exact property or other taxes. The issuer must impose and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to impose additional taxes may be limited by its charter or state law. SPECIAL REVENUE BONDS Special revenue bonds are payable solely from specific revenues received by the issuer such as specific taxes, assessments, tolls or fees. Bondholders may not collect from the municipality's general taxes or revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Therefore, a shortfall in the tolls normally would result in a default on the bonds. PRIVATE ACTIVITY BONDS Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds from its bonds to the company using the factory, and the company would agree to make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds. The interest on many types of private activity bonds is subject to AMT. The Fund may invest in bonds subject to AMT. TAX INCREMENT FINANCING BONDS Tax increment financing (TIF) bonds are payable from increases in taxes or other revenues attributable to projects within the TIF district. For example, a municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds would be payable solely from any increase in sales taxes collected from merchants in the area. The bonds could fail to pay principal or interest if merchants' sales, and related tax collections, failed to increase as anticipated. MUNICIPAL LEASES Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor can resell the equipment or facility but may lose money on the sale. The Fund may invest in securities supported by pools of municipal leases. The most common type of lease-backed securities is certificates of participation (COPs). However, the Fund may also invest directly in individual leases. ZERO COUPON SECURITIES Zero coupon securities do not pay interest or principal until final maturity unlike debt securities that provide periodic payments of interest (referred to as a "coupon payment"). Investors buy zero coupon securities at a price below the amount payable at maturity. The difference between the purchase price and the amount paid at maturity represents interest on the zero coupon security. Investors must wait until maturity to receive interest and principal, which increases the interest rate risks and credit risks of a zero coupon security. There are many forms of zero coupon securities. Some are issued at a discount and are referred to as zero coupon or capital appreciation bonds. Others are created from interest bearing bonds by separating the right to receive the bond's coupon payments from the right to receive the bond's principal due at maturity, a process known as coupon stripping. In addition, some securities give the issuer the option to deliver additional securities in place of cash interest payments, thereby increasing the amount payable at maturity. These are referred to as pay- in-kind or PIK securities. INVERSE FLOATERS An inverse floater has a floating or variable interest rate that moves in the opposite direction of market interest rates. When short-term market interest rates go up, the interest rate paid on the inverse floater goes down; when short-term market interest rates go down, the interest rate paid on the inverse floater goes up. Inverse floaters generally respond more rapidly to market interest rate changes than fixed-rate, tax-exempt securities. Inverse floaters are subject to interest rate risks and leverage risks. MUNICIPAL MORTGAGE-BACKED SECURITIES Municipal mortgage-backed securities are special revenue bonds, the proceeds of which may be used to provide mortgage loans for single family homes or to finance multifamily housing. Municipal mortgage-backed securities represent interest in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Municipal mortgage- backed securities generally have fixed-interest rates. PACS PACs (planned amortization classes) are a sophisticated form of municipal mort- gage-backed security issued with a companion class. PACs receive principal pay- ments and prepayments at a specified rate. In addition, PACs will receive the companies classes' shares of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs to control prepayment risks by increasing the risks to their companion classes. VARIABLE RATE DEMAND INSTRUMENTS Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also pay interest at a variable rate intended to cause the securities to trade at their face value. A Fund treats variable rate demand instruments as short-term securities even though their maturity may extend beyond 397 days because, within 397 days, their variable interest rate adjusts in response to changes in market rates and the repayment of their principal amount can be demanded. MUNICIPAL NOTES Municipal notes are short-term, tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. CREDIT ENHANCEMENT Credit enhancement consists of an arrangement in which a company agrees to pay amounts due on a fixed-income security if the issuer defaults. In some cases the company providing credit enhancement makes all payments directly to the security holders and receives reimbursement from the issuer. Normally, the credit enhancer has greater financial resources and liquidity than the issuer. For this reason, the Adviser usually evaluates the credit risk of a fixed-income security based solely upon its credit enhancement. Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed-income security. If a default occurs, these assets may be sold and the proceeds paid to the security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed-income security. DERIVATIVE CONTRACTS Derivative contracts are financial instruments that require payments based upon changes in the values of designated securities, commodities, indices, or other assets or instruments including other derivative contracts, (each a "Reference Instrument" and collectively, "Reference Instruments"). Each party to a derivative contract is referred to as a counterparty. Some derivative contracts require payments relating to an actual, future trade involving the Reference Instrument. These types of derivatives are frequently referred to as "physically settled" derivatives. Other derivative contracts require payments relating to the income or returns from, or changes in the market value of, a Reference Instrument. These types of derivatives are known as "cash settled" derivatives, since they require cash payments in lieu of delivery of the Reference Instrument. Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts. The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts. Depending on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the Reference Instrument, derivative contracts may increase or decrease the Fund's exposure to the risks of the Reference Instrument, and may also expose the fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract. Payment obligations arising in connection with derivative contracts are frequently required to be secured with collateral (in the case of OTC contracts) or margin (in the case of exchange-traded contracts, as previously noted). To the extent necessary to meet such requirements, the Fund may purchase U.S. Treasury and/or government agency securities. The Fund may not invest in a derivative contract if it is not permitted to own, invest in, or otherwise have economic exposure to the Reference Instrument (or, in the case of a Reference Instrument that is an index, the securities or derivatives that comprise the index). The Fund may trade in the following specific types and/or combinations of derivative contracts. FUTURES CONTRACTS Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a Reference Instrument at a specified price, date and time. Entering into a contract to buy a Reference Instrument is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell a Reference Instrument is commonly referred to as selling a contract or holding a short position in the Reference Instrument. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures (such as index futures and security futures). OPTIONS Option contracts (also called "options") are rights to buy or sell a Reference Instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or writer) of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option. A call option gives the holder (buyer) the right to buy the Reference Instrument from the seller (writer) of the option. A put option gives the holder the right to sell the Reference Instrument to the writer of the option. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of Reference Instruments. Options that are written on futures contracts will be subject to margin requirements similar to those applied to futures contracts. The Fund may buy or sell options on a Reference Instrument if it is permitted to own, invest, or otherwise have economic exposure to that instrument. The Fund is not required to own a Reference Instrument, in order to buy or sell an option on that Reference Instrument. SWAPS A swap contract (also known as a "swap") is a type of derivative contract in which two parties agree to pay each other (swap) the returns derived from Reference Instruments. Swaps do not always involve the delivery of the Reference Instruments by either party, and the parties might not own the Reference Instruments underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms and are known by a variety of names. Common types of swaps in which the Fund may invest include interest rate swaps, total return swaps, credit default swaps, and caps and floors. HYBRID INSTRUMENTS Hybrid instruments combine elements of two different kinds of securities or financial instruments (such as a derivative contract). Frequently, the value of a hybrid instrument is determined by reference to changes in the value of designated securities, commodities, currencies, indices, or other assets or instruments (each a, "Valuation Instrument"). Hybrid instruments can take on many forms including, but not limited to, the following forms. First, a common form of a hybrid instrument combines elements of a derivative contract with those of another security (typically a fixed-income security). In this case all or a portion of the interest or principal payable on a hybrid security is determined by reference to changes in the price of a Valuation Instrument. Second, hybrid instruments may include convertible securities with conversion terms related to a Valuation Instrument. Depending on the type and terms of the hybrid instrument, its risks may reflect a combination of the risks of investing in securities, currencies and derivative contracts. Thus, an investment in a hybrid instrument may entail significant risks in addition to those associated with traditional securities or the Valuation Instrument. Hybrid instruments are also potentially more volatile than traditional securities or the Valuation Instrument. Moreover, depending on the structure of the particular hybrid, it may expose the Fund to leverage risks or carry liquidity risks. SPECIAL TRANSACTIONS DELAYED DELIVERY TRANSACTIONS Delayed delivery transactions, including when-issued transactions, are arrange- ments in which the Fund buys securities for a set price, with payment and deliv- ery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default. These transactions create leverage risks. ASSET COVERAGE In order to secure its obligations in connection with derivative contracts or special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions. INVESTMENT RATINGS FOR INVESTMENT-GRADE SECURITIES The Adviser will determine whether a security is investment-grade based upon the credit ratings given by one or more NRSROs. For example, Standard & Poor's, an NRSRO, assigns ratings to investment-grade securities ("AAA," "AA," "A," and "BBB") based on their assessment of the likelihood of the issuer's inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment that the security is comparable to investment-grade. As disclosed in this Prospectus, the Fund may invest up to 49% of its assets in securities rated below investment-grade (or unrated securities of comparable quality). The Fund does not have a specific minimum quality rating. If a security is downgraded below any minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it. 5 WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND? INTEREST RATE RISKS Prices of fixed-income securities rise and fall in response to changes in the interest rates paid by similar securities. Generally, when interest rates rise, prices of fixed-income securities fall. However, market factors, such as the demand for particular fixed-income securities, may cause the price of certain fixed-income securities to fall while the prices of other securities rise or remain unchanged. Interest rate changes have a greater effect on the price of fixed-income securities with longer durations. Duration measures the price sensitivity of a fixed-income security to changes in interest rates. Certain factors, such as the presence of call features, may cause a particular fixed- income security, or the Fund as a whole, to exhibit less sensitivity to changes in interest rates. CREDIT RISKS Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. Non-investment grade securities generally have a higher default risk than investment grade securities. If an issuer defaults, the Fund will lose money. Many fixed-income securities receive credit ratings from NRSROs such as Standard & Poor's and Moody's Investors Service. These NRSROs assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser's credit assessment. Fixed-income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a U.S. Treasury or another baseline index security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline. Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy. CALL RISKS Call risk is the possibility that an issuer may redeem a fixed-income security before maturity (a call) at a price below its current market price. An increase in the likelihood of a call may reduce the security's price. If a fixed-income security is called, the Fund may have to reinvest the proceeds in other fixed-income securities with lower interest rates, higher credit risks or other less favorable characteristics. SECTOR RISKS A substantial part of the Fund's portfolio may be comprised of securities credit enhanced by banks, insurance companies or other companies with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political or other developments which generally affect these issuers. TAX RISKS In order to pay interest that is exempt from federal regular income tax, tax- exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. Changes or proposed changes in federal tax laws may cause the prices of tax- exempt securities to fall. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Additionally, the Fund may not be able to close out certain derivative contracts when it wants to. The Fund also may invest in market discount bonds, enter into credit default swap arrangements and other derivative transactions, and engage in other permissible activities that will likely cause the Fund to realize a limited amount of ordinary income or short- term capital gains (which are treated as ordinary income for federal income tax purposes). Consequently, for each of these reasons, the Fund may receive payments, and make distributions, that are treated as ordinary income for federal income tax purposes. Income from the Fund also may be subject to AMT. LEVERAGE RISKS Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such an investment magnify the Fund's risk of loss and potential for gain. Investments can have these same results if their returns are based on a multiple of a specified index, security or other benchmark. LIQUIDITY RISKS Trading opportunities are more limited for fixed-income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility. Non-investment grade securities generally have less liquidity than investment grade securities. Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses. OTC derivative contracts generally carry greater liquidity risk than exchange-traded contracts. PREPAYMENT RISKS Unlike traditional fixed-income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due) payments on municipal mortgage-backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment , refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a Fund holding municipal mortgage-backed securities. For example, when interest rates decline, the values of municipal mortgage- backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on municipal mortgage-backed securities. Conversely, when interest rates rise, the values of municipal mortgage-backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of municipal mortgage-backed securities, and cause their value to decline more than traditional fixed-income securities. RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS The Fund's use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts and hybrid instruments in which the Fund invests may not be correlated with changes in the value of the underlying Reference or Valuation Instruments or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivative contracts and hybrid instruments may be erroneously priced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Fourth, derivative contracts and hybrid instruments may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Fifth, a common provision in over-the-counter (OTC) derivative contracts permits the counterparty to terminate any such contract between it and the Fund, if the value of the Fund's total net assets declines below a specified level over a given time period. Factors that may contribute to such a decline (which usually must be substantial) include significant shareholder redemptions and/or a marked decrease in the market value of the Fund's investments. Any such termination of the Fund's OTC derivative contracts may adversely affect the Fund (for example, by increasing losses and/or costs, and/or preventing the Fund from fully implementing its investment strategies). Finally, derivative contracts and hybrid instruments may also involve other risks described herein or in the Fund's SAI, such as interest rate, credit, liquidity and leverage risks. RISKS ASSOCIATED WITH NON-INVESTMENT GRADE SECURITIES Securities rated below investment grade, also known as junk bonds, generally entail greater interest rate, credit and liquidity risks than investment grade securities. For example, their prices are more are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited. The Fund will invest at least a majority of its assets in securities rated investment grade (or unrated securities of comparable quality), and may purchase securities rated below investment grade (or unrated securities of comparable quality) up to 49% of its assets. 6 WHAT DO SHARES COST? You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated." The Fund generally values fixed-income securities according to prices furnished by an independent pricing service, except that fixed-income securities with remaining maturities of less than 60 days at the time of purchase are valued at amortized cost. Prices furnished by an independent pricing service are generally intended to be indicative of the bid prices currently offered to institutional investors for the securities. Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. If prices are not available from an independent pricing service, securities and derivative contracts traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the security or contract as provided by an investment dealer or other financial institution that deals in the security or contract. Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund's Board of Directors (Board). The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund's Adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate. Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund's NAV is computed. An event is considered significant if there is both an affirmative expectation that the security's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For domestic fixed-income securities, such events may occur where the cut-off time for the market information used by the independent pricing service is earlier than the end of regular trading on the NYSE. In such cases, use of fair valuation can reduce an investor's ability to seek to profit by estimating the Fund's NAV in advance of the time as of which NAV is calculated. In some cases, events affecting the issuer of a portfolio security may be considered significant events. Announcements concerning earnings, acquisitions, new products, management changes, litigation developments, a strike or natural disaster affecting the company's operations or regulatory changes or market developments affecting the issuer's industry occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE are examples of potentially significant events. There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund's NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security's present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued by an independent pricing service, or based on market quotations. The following table summarizes the minimum required investment amount and the maximum sales charge, if any, that you will pay on an investment in the Fund. Keep in mind that financial intermediaries may charge you fees for their services in connection with your Share transactions. MAXIMUM SALES CHARGES MINIMUM INITIAL/SUBSEQUENT CONTINGENT INVESTMENT FRONT-END DEFERRED SHARES OFFERED AMOUNTS1 SALES CHARGE2 SALES CHARGE3 Class A $1,500/$100 4.50% 0.00% Class B $1,500/$100 None 5.50% Class C $1,500/$100 None 1.00% 1 The minimum subsequent investment amount for Systematic Investment Programs (SIP) is $50. Financial intermediaries may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. To maximize your return and minimize the sales charges and marketing fees, purchases of Class B Shares are generally limited to $100,000 and purchases of Class C Shares are generally limited to $1,000,000. Purchases in excess of these limits may be made in Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund. See "Purchase Limits on Class B and Class C Shares" below. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event. 2 Front-End Sales Charge is expressed as a percentage of public offering price. See "Sales Charge When You Purchase." 3 See "Sales Charge When You Redeem." As shown in the table above, each class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses ("expense ratios"), as well as the compensation payable to financial intermediaries, also vary among the classes. Before you decide which class to purchase, you should review the different charges and expenses of each class carefully, in light of your personal circumstances, and consult with your financial intermediary. Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares. Among other ways, Class A Shares have a series of "breakpoints," which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under "Sales Charge When You Purchase.") On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares do not have front-end sales charges, but do impose a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and comparable to those charged to Class B Shares. You should also consider that the expense ratio for Class A Shares will be lower than that for Class B or Class C Shares. Thus, the fact that no front-end charges are ever imposed on purchases of Class B Shares and Class C Shares does not always make them preferable to Class A Shares. SALES CHARGE WHEN YOU PURCHASE The following table lists the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the table and described below. CLASS A SHARES Sales Charge as a Percentage Sales Charge of Public as a Percentage Purchase Amount Offering Price of NAV Less than $100,000 4.50% 4.71% $100,000 but less than $250,000 3.75% 3.90% $250,000 but less than $500,000 2.50% 2.56% $500,000 but less than $1 million 2.00% 2.04% $1 million or greater1 0.00% 0.00% 1 A contingent deferred sales charge of 0.75% of the redemption amount applies to Shares redeemed up to 24 months after purchase under certain investment programs where a financial intermediary received an advance payment on the transaction. 7 REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the table above. You or your financial intermediary must notify the Fund's Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase. In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your financial intermediary or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint ("Qualifying Accounts"). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through a financial intermediary or a through a single- participant retirement account by you, your spouse, your parents (if you are under age 21) and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs) or broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through "Section 529" college savings plans or those accounts which cannot be linked using TINs, SSNs or BINs, are not Qualifying Accounts. In order to verify your eligibility for a breakpoint discount, you will be required to provide to your financial intermediary or the Transfer Agent certain information on your New Account Form and may be required to provide account statements regarding Qualifying Accounts. If you purchase through a financial intermediary, you may be asked to provide additional information and records as required by the financial intermediary. Failure to provide proper notification or verification of eligibility for a breakpoint discount may result in your not receiving a breakpoint discount to which you are otherwise entitled. Breakpoint discounts apply only to your current purchase and do not apply retroactively to previous purchases. The sales charges applicable to the Shares offered in this prospectus, and the breakpoint discounts offered with respect to such Shares, are described in full in this prospectus. Because the prospectus is available on Federated's website free of charge, Federated does not disclose this information separately on the website. CONTINGENT UPON NOTIFICATION TO THE TRANSFER AGENT, THE SALES CHARGE AT PURCHASE OF CLASS A SHARES ONLY, MAY BE REDUCED OR ELIMINATED BY: LARGER PURCHASES {circle}purchasing Class A Shares in greater quantities to reduce the applicable sales charge; CONCURRENT AND ACCUMULATED PURCHASES {circle}combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or LETTER OF INTENT {circle}signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months (call your financial intermediary or the Fund for more information). The Fund's custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases. PURCHASE LIMITS ON CLASS B AND CLASS C SHARES In order to maximize shareholder returns and minimize sales charges and marketing fees, an investor's purchases of Class B Shares are generally limited to $100,000 and an investor's purchases of Class C Shares are generally limited to $1,000,000. In applying the limit, the dollar amount of the current purchase is added to the product obtained by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in linked Qualifying Accounts. If the sum of these two amounts would equal or exceed the limit, then the current purchase order will not be processed. Instead, the Distributor will attempt to contact the investor or the investor's financial intermediary to offer the opportunity to convert the order to Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund. ELIMINATING THE SALES CHARGE CONTINGENT UPON NOTIFICATION TO THE TRANSFER AGENT, THE SALES CHARGE WILL BE ELIMINATED WHEN YOU PURCHASE SHARES: {circle}within 120 days of redeeming Shares of an equal or greater amount; {circle}through a financial intermediary that did not receive a dealer reallowance on the purchase; {circle}with reinvested dividends or capital gains; {circle}as a shareholder that originally became a shareholder of a Federated fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV; {circle}as a Federated Life Member (Federated shareholders who originally were issued shares through the "Liberty Account," which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only); {circle}as a Director, employee or former employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or {circle}pursuant to the exchange privilege. The sales charge will not be eliminated if you purchase Shares of the Fund through an exchange of shares of Liberty U.S. Government Money Market Trust unless your Liberty shares were acquired through an exchange of shares on which the sales charge had previously been paid. SALES CHARGE WHEN YOU REDEEM Your redemption proceeds may be reduced by a sales charge, commonly referred to as a contingent deferred sales charge (CDSC). TO KEEP THE SALES CHARGE AS LOW AS POSSIBLE, THE FUND REDEEMS YOUR SHARES IN THIS ORDER: {circle}Shares that are not subject to a CDSC; and {circle}Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund). The CDSC is then calculated using the Share price at the time of purchase or redemption, whichever is lower. CLASS A SHARES If you make a purchase of Class A Shares in the amount of $1 million or more and your financial intermediary received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase. CLASS B SHARES: Shares Held Up To: CDSC 1 Year 5.50% 2 Years 4.75% 3 Years 4.00% 4 Years 3.00% 5 Years 2.00% 6 Years 1.00% 7 Years or More 0.00% CLASS C SHARES: You will pay a 1.00% CDSC if you redeem Shares within 12 months of the purchase date. If your investment qualifies for a reduction or elimination of the CDSC, you or your financial intermediary must notify the Transfer Agent at the time of redemption. If the Transfer Agent is not notified, the CDSC will apply. CONTINGENT UPON NOTIFICATION TO THE TRANSFER AGENT, YOU WILL NOT BE CHARGED A CDSC WHEN REDEEMING SHARES: {circle}following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account); {circle}representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70 1/2; {circle}purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption; {circle}purchased by Directors, employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons; {circle}purchased through a financial intermediary that did not receive an advance commission on the purchase; {circle}purchased with reinvested dividends or capital gains; {circle}redeemed by the Fund when it closes an account for not meeting the minimum balance requirements; or {circle}purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); or CLASS B SHARES ONLY {circle}which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program. HOW IS THE FUND SOLD? The Fund offers three Share classes: Class A Shares, Class B Shares and Class C Shares, each representing interests in a single portfolio of securities. The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through financial intermediaries. The Fund may not be a suitable investment for retirement plans. Under the Distributor's Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. The Distributor is a subsidiary of Federated Investors, Inc. (Federated). PAYMENTS TO FINANCIAL INTERMEDIARIES The Fund and its affiliated service providers may pay fees as described below to financial intermediaries (such as broker-dealers, banks, investment advisers or third-party administrators) whose customers are shareholders of the Fund. FRONT-END SALES CHARGE REALLOWANCES The Distributor receives a front-end sales charge on certain Share sales. The Distributor pays a portion of this charge to financial intermediaries that are eligible to receive it (the "Dealer Reallowance") and retains any remaining portion of the front-end sales charge. 8 When a financial intermediary's customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows: CLASS A SHARES DEALER REALLOWANCE AS A PERCENTAGE OF PURCHASE AMOUNT PUBLIC OFFERING PRICE Less than $100,000 4.00% $100,000 but less than $250,000 3.25% $250,000 but less than $500,000 2.25% $500,000 but less than $1 million 1.80% $1 million or greater 0.00% ADVANCE COMMISSIONS When a financial intermediary's customer purchases Shares, the financial intermediary may receive an advance commission as follows: CLASS A SHARES (FOR PURCHASES OVER $1 MILLION) ADVANCE COMMISSION AS A PERCENTAGE OF PURCHASE AMOUNT PUBLIC OFFERING PRICE First $1 million - $5 million 0.75% Next $5 million - $20 million 0.50% Over $20 million 0.25% Advance commissions are calculated on a year by year basis based on amounts invested during that year. Accordingly, with respect to additional purchase amounts, the advance commission breakpoint resets annually to the first breakpoint on the anniversary of the first purchase. Class A Share purchases under this program may be made by Letter of Intent or by combining concurrent purchases. The above advance commission will be paid only on those purchases that were not previously subject to a front-end sales charge or dealer advance commission. Certain retirement accounts may not be eligible for this program. ADVANCE COMMISSION AS A PERCENTAGE OF CLASS B SHARES PUBLIC OFFERING PRICE All Purchase Amounts Up to 5.00% ADVANCE COMMISSION AS A PERCENTAGE OF CLASS C SHARES PUBLIC OFFERING PRICE All Purchase Amounts 1.00% RULE 12B-1 FEES The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees of up to 0.75% of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund's Class B Shares and Class C Shares. When the Distributor receives Rule 12b-1 Fees, it may pay some or all of them to financial intermediaries whose customers purchase Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees. SERVICE FEES The Fund may pay Service Fees of up to 0.25% of average net assets to financial intermediaries or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated, for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial intermediaries directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial intermediaries. If a financial intermediary receives Service Fees on an account, it is not eligible to also receive Account Administration Fees on that same account. ACCOUNT ADMINISTRATION FEES The Fund may pay Account Administration Fees of up to 0.25% of average net assets to banks that are not registered as broker-dealers or investment advisers for providing administrative services to the Funds and shareholders. If a financial intermediary receives Account Administration Fees on an account, it is not eligible to also receive Service Fees or Recordkeeping Fees on that same account. RECORDKEEPING FEES The Fund may pay Recordkeeping Fees on an average net assets basis or on a per account per year basis to financial intermediaries for providing recordkeeping services to the Funds and shareholders. If a financial intermediary receives Recordkeeping Fees on an account, it is not eligible to also receive Account Administration Fees or Networking Fees on that same account. NETWORKING FEES The Fund may reimburse Networking Fees on a per account per year basis to financial intermediaries for providing administrative services to the Funds and shareholders on certain non-omnibus accounts. If a financial intermediary receives Networking Fees on an account, it is not eligible to also receive Recordkeeping Fees on that same account. ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES The Distributor may pay out of its own resources amounts (including items of material value) to certain financial intermediaries that support the sale of Shares or provide services to Fund shareholders. The amounts of these payments could be significant, and may create an incentive for the financial intermediary or its employees or associated persons to recommend or sell Shares of the Fund to you. In some cases, such payments may be made by or funded from the resources of companies affiliated with the Distributor (including the Adviser). These payments are not reflected in the fees and expenses listed in the fee table section of the Fund's prospectus and described above because they are not paid by the Fund. These payments are negotiated and may be based on such factors as the number or value of Shares that the financial intermediary sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial intermediary. These payments may be in addition to payments made by the Fund to the financial intermediary under a Rule 12b-1 Plan and/or Service Fees arrangement. In connection with these payments, the financial intermediary may elevate the prominence or profile of the Fund and/or other Federated funds within the financial intermediary's organization by, for example, placement on a list of preferred or recommended funds, and/or granting the Distributor preferential or enhanced opportunities to promote the funds in various ways within the financial intermediary's organization. You can ask your financial intermediary for information about any payments it receives from the Distributor or the Fund and any services provided. HOW TO PURCHASE SHARES You may purchase Shares through a financial intermediary, directly from the Fund or through an exchange from another Federated fund. The Fund reserves the right to reject any request to purchase or exchange Shares. Where the Fund offers more than one Share class and you do not specify the class choice on your New Account Form or form of payment (e.g., Federal Reserve wire or check), you automatically will receive Class A Shares. THROUGH A FINANCIAL INTERMEDIARY {circle}Establish an account with the financial intermediary; and {circle}Submit your purchase order to the financial intermediary before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive the next calculated NAV if the financial intermediary forwards the order to the Fund on the same day and the Fund receives payment within three business days. You will become the owner of Shares and receive dividends when the Fund receives your payment. Financial intermediaries should send payments according to the instructions in the sections "By Wire" or "By Check." DIRECTLY FROM THE FUND {circle}Establish your account with the Fund by submitting a completed New Account Form; and {circle}Send your payment to the Fund by Federal Reserve wire or check. You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or State Street Bank and Trust Company, the Fund's transfer agent. An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order. BY WIRE Send your wire to: State Street Bank and Trust Company Boston, MA Dollar Amount of Wire ABA Number 011000028 Attention: EDGEWIRE Wire Order Number, Dealer Number or Group Number Nominee/Institution Name Fund Name and Number and Account Number You cannot purchase Shares by wire on holidays when wire transfers are restricted. BY CHECK Make your check payable to THE FEDERATED FUNDS, note your account number on the check, and send it to: The Federated Funds P.O. Box 8600 Boston, MA 02266-8600 9 If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that requires a street address, send it to: The Federated Funds 30 Dan Road Canton, MA 02021 Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject ANY purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to THE FEDERATED FUNDS (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks. THROUGH AN EXCHANGE You may purchase Shares through an exchange from the same share class of another Federated fund. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have identical registrations. BY SYSTEMATIC INVESTMENT PROGRAM Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the Systematic Investment Program (SIP) section of the New Account Form or by contacting the Fund or your financial intermediary. BY AUTOMATED CLEARING HOUSE (ACH) Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form. HOW TO REDEEM AND EXCHANGE SHARES You should redeem or exchange Shares: {circle}through a financial intermediary if you purchased Shares through a financial intermediary; or {circle}directly from the Fund if you purchased Shares directly from the Fund. Shares of the Fund may be redeemed for cash or exchanged for shares of the same class of other Federated funds on days on which the Fund computes its NAV. Redemption requests may be made by telephone or in writing. THROUGH A FINANCIAL INTERMEDIARY Submit your redemption or exchange request to your financial intermediary by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your financial intermediary. DIRECTLY FROM THE FUND BY TELEPHONE You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400. If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day's NAV. BY MAIL You may redeem or exchange Shares by sending a written request to the Fund. You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form. Send requests by mail to: The Federated Funds P.O. Box 8600 Boston, MA 02266-8600 10 Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to: The Federated Funds 30 Dan Road Canton, MA 02021 All requests must include: {circle}Fund Name and Share Class, account number and account registration; {circle}amount to be redeemed or exchanged; {circle}signatures of all shareholders exactly as registered; and {circle}IF EXCHANGING, the Fund Name and Share Class, account number and account registration into which you are exchanging. Call your financial intermediary or the Fund if you need special instructions. SIGNATURE GUARANTEES Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if: {circle}your redemption will be sent to an address other than the address of record; {circle}your redemption will be sent to an address of record that was changed within the last 30 days; {circle}a redemption is payable to someone other than the shareholder(s) of record; or {circle}IF EXCHANGING (TRANSFERRING) into another fund with a different shareholder registration. A Medallion signature guarantee is designed to protect your account from fraud. Obtain a Medallion signature guarantee from a bank or trust company, savings association, credit union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE. PAYMENT METHODS FOR REDEMPTIONS Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened: {circle}an electronic transfer to your account at a financial institution that is an ACH member; or {circle}wire payment to your account at a domestic commercial bank that is a Federal Reserve System member. REDEMPTION IN KIND Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities. LIMITATIONS ON REDEMPTION PROCEEDS Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed for up to seven days: {circle}to allow your purchase to clear (as discussed below); {circle}during periods of market volatility; {circle}when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets; or {circle}during any period when the Federal Reserve wire or applicable Federal Reserve banks are closed, other than customary weekend and holiday closings. If you request a redemption of Shares recently purchased by check (including a cashier's check or certified check), money order, bank draft or ACH, your redemption proceeds may not be made available up to seven calendar days to allow the Fund to collect payment on the instrument used to purchase such Shares. If the purchase instrument does not clear, your purchase order will be cancelled and you will be responsible for any losses incurred by the Fund as a result of your cancelled order. In addition, the right of redemption may be suspended, or the payment of proceeds may be delayed, during any period: {circle}when the NYSE is closed, other than customary weekend and holiday closings; {circle}when trading on the NYSE is restricted, as determined by the SEC; or {circle}in which an emergency exists, as determined by the SEC, so that disposal of the Fund's investments or determination of its NAV is not reasonably practicable. You will not accrue interest or dividends on uncashed redemption checks from the Fund if those checks are undeliverable and returned to the Fund. EXCHANGE PRIVILEGE You may exchange Shares of the Fund into shares of the same class of another Federated fund. To do this, you must: {circle}ensure that the account registrations are identical; {circle}meet any minimum initial investment requirements; and {circle}receive a prospectus for the fund into which you wish to exchange. An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction. The Fund may modify or terminate the exchange privilege at any time. In addition, the Fund may terminate your exchange privilege if your exchange activity is found to be excessive under the Fund's frequent trading policies. See "Account and Share Information - Frequent Trading Policies." SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM You may automatically redeem or exchange Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your financial intermediary or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. Generally, it is not advisable to continue to purchase Shares subject to a sales charge while redeeming Shares using this program. SYSTEMATIC WITHDRAWAL PROGRAM (SWP) ON CLASS B SHARES You will not be charged a CDSC on SWP redemptions if: {circle}you redeem 12% or less of your account value in a single year; {circle}you reinvest all dividends and capital gains distributions; and {circle}your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.) You will be subject to a CDSC on redemption amounts that exceed the 12% annual limit. In measuring the redemption percentage, your account is valued when you establish the SWP and then annually at calendar year-end. You can redeem monthly, quarterly, or semi-annually. ADDITIONAL CONDITIONS TELEPHONE TRANSACTIONS The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions. SHARE CERTIFICATES The Fund no longer issues share certificates. If you are redeeming or exchanging Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption or exchange request. For your protection, send your certificates by registered or certified mail, but do not endorse them. ACCOUNT AND SHARE INFORMATION CONFIRMATIONS AND ACCOUNT STATEMENTS You will receive confirmation of purchases, redemptions and exchanges (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, dividends and capital gains paid. DIVIDENDS AND CAPITAL GAINS The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received. In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments. Dividends may also be reinvested without sales charges in shares of any class of any other Federated fund of which you are already a shareholder. If you have elected to receive dividends and/or capital gain distributions in cash, and your check is returned by the postal or other delivery service as "undeliverable," or you do not respond to mailings from Federated with regard to uncashed distribution checks, your distribution option will automatically be converted to having all dividends and capital gains reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution checks. If you purchase Shares just before the record date for a dividend or capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the record date for a dividend or capital gain. Contact your financial intermediary or the Fund for information concerning when dividends and capital gains will be paid. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions or exchanges cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum. TAX INFORMATION The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable at different rates depending on the source of dividend income. Capital gains are taxable at different rates depending upon the length of time the Fund holds its assets. Fund distributions are expected to be primarily dividends. Redemptions and exchanges are taxable sales. Please consult your tax adviser regarding your federal, state, and local tax liability. FREQUENT TRADING POLICIES Frequent or short-term trading into and out of the Fund can have adverse consequences for the Fund and shareholders who use the Fund as a long-term investment vehicle. Such trading in significant amounts can disrupt the Fund's investment strategies (e.g., by requiring it to sell investments at inopportune times or maintain excessive short-term or cash positions to support redemptions), increase brokerage and administrative costs and affect the timing and amount of taxable gains distributed by the Fund. Investors engaged in such trading may also seek to profit by anticipating changes in the Fund's NAV in advance of the time as of which NAV is calculated. The Fund's Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund's Shares. The Fund monitors trading in Fund Shares in an effort to identify disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund's management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund's portfolio and its performance. The Fund's frequent trading restrictions do not apply to purchases and sales of Fund Shares by other Federated funds. These funds impose the same frequent trading restrictions as the Fund at their shareholder level. In addition, allocation changes of the investing Federated fund are monitored, and the managers of the recipient fund must determine that there is no disruption to their management activity. The intent of this exception is to allow investing fund managers to accommodate cash flows that result from non-abusive trading in the investing fund, without being stopped from such trading because the aggregate of such trades exceeds the monitoring limits. Nonetheless, as with any trading in Fund Shares, purchases and redemptions of Fund Shares by other Federated funds could adversely affect the management of the Fund's portfolio and its performance. The Fund's objective is that its restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases. PORTFOLIO HOLDINGS INFORMATION Information concerning the Fund's portfolio holdings is available in the "Products" section of Federated's website at FederatedInvestors.com. A complete listing of the Fund's portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include identification of the Fund's top ten holdings, portfolio profile statistics (such as weighted average effective maturity and weighted average effective duration), recent portfolio purchase and sale transactions, and a percentage breakdown of the portfolio by credit quality. To access this information from the "Products" section of the website, click on "Portfolio Holdings" and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the "Products" section, and from the Fund's page click on the "Portfolio Holdings" or "Composition" link. A user is required to register on the website the first time the user accesses this information. You may also access from the "Products" section of the website portfolio information as of the end of the Fund's fiscal quarters. The Fund's annual and semiannual reports, which contain complete listings of the Fund's portfolio holdings as of the end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the link to the appropriate PDF. Complete listings of the Fund's portfolio holdings as of the end of the Fund's first and third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the "Products" section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC's website at www.sec.gov. WHO MANAGES THE FUND? The Board governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779. The Adviser and other subsidiaries of Federated advise approximately 148 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $237 billion in assets as of December 31, 2006. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1,243 employees. Federated provides investment products to nearly 5,500 investment professionals and institutions. PORTFOLIO MANAGEMENT INFORMATION J. SCOTT ALBRECHT J. Scott Albrecht has been the Fund's Portfolio Manager since May 1996. He is Vice President of the Fund. Mr. Albrecht joined Federated in 1989. 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 1994 through 2004. He has been a Senior Portfolio Manager since 1997 and was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a Chartered Financial Analyst and received his M.S. in Public Management from Carnegie Mellon University. The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund. 11 ADVISORY FEES The Adviser receives an annual investment advisory fee of 0.30% of the Fund's average daily net assets plus 4.50% of the Fund's gross income. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses. A discussion of the Board's review of the Fund's investment advisory contract is available in the Fund's Annual Report dated March 31, 2007. LEGAL PROCEEDINGS Since October 2003, Federated and related entities (collectively, "Federated"), and various Federated funds ("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 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. Specifically, the SEC and NYAG settled proceedings against three Federated subsidiaries involving undisclosed market timing arrangements and late trading. The SEC made findings: that Federated Investment Management Company ("FIMC"), an SEC-registered investment adviser to various Funds, and Federated Securities Corp., an SEC- registered broker-dealer and distributor for the Funds, violated provisions of the Investment Advisers Act and Investment Company Act by approving, but not disclosing, three market timing arrangements, or the associated conflict of interest between FIMC and the funds involved in the arrangements, either to other fund shareholders or to the funds' board; and that Federated Shareholder Services Company, formerly an SEC-registered transfer agent, failed to prevent a customer and a Federated employee from late trading in violation of provisions of the Investment Company Act. The NYAG found that such conduct violated provisions of New York State law. Federated entered into the settlements without admitting or denying the regulators' findings. 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 disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless (i) at least 75% of the fund's directors are independent of Federated, (ii) the chairman of each such fund is independent of Federated, (iii) no action may be taken by the fund's board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively, and (iv) the fund appoints a "senior officer" who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated's announcement which, along with previous press releases and related communications on those matters, is available in the "About Us" section of Federated's website at FederatedInvestors.com. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which 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 Funds has retained the law firm of Dickstein Shapiro LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and intend to defend this litigation. 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 Funds, there can be no assurance that these suits, ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds. 12 FINANCIAL INFORMATION FINANCIAL HIGHLIGHTS The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years. Some of the information is presented on a per Share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains. This information has been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the Fund's audited financial statements, is included in the Annual Report. To be filed by amendment 13 APPENDIX A: HYPOTHETICAL INVESTMENT AND EXPENSE INFORMATION To be filed by amendment 14 A Statement of Additional Information (SAI) dated May 31, 2007, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. The SAI contains a description of the Fund's policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your financial intermediary or the Fund at 1-800- 341-7400. These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated's website at FederatedInvestors.com. You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's website at www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees. Investment Company Act File No. 811-2677 Cusip 313913105 Cusip 313913204 Cusip 313913303 G00322-01 (5/07) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF ADDITIONAL INFORMATION MAY 31, 2007 CLASS A SHARES CLASS B SHARES CLASS C SHARES This Statement of Additional Information (SAI) is not a prospectus. Read this SAI in conjunction with the prospectus for Federated Municipal Securities Fund, Inc. (Fund), dated May 31, 2007. This SAI incorporates by reference the Fund's Annual Report. Obtain the prospectus or the Annual Report without charge by calling 1-800-341-7400. CONTENTS How is the Fund Organized?...... Securities in Which the Fund Invests... What Do Shares Cost?................... How is the Fund Sold?.................. Exchanging Securities for Shares....... Subaccounting Services................. Redemption in Kind..................... Account and Share Information.......... Tax Information........................ Who Manages and Provides Services to the Fund?.............................. How Does the Fund Measure Performance?. Who is Federated Investors, Inc.?...... Financial Information.................. Investment Ratings..................... Addresses.............................. Appendix............................... Federated Municipal Securities Fund. Inc. 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 8051601B (5/07) Federated is a registered mark of Federated Investors, Inc. 2007 {copyright}Federated Investors, Inc. -0- HOW IS THE FUND ORGANIZED? The Fund is a diversified open-end, management investment company that was established under the laws of the State of Maryland on September 10, 1976. The Board of Directors (Board) has established three classes of shares of the Fund, known as Class A Shares, Class B Shares and Class C Shares (Shares). This SAI relates to all classes of Shares. The Fund's investment adviser is Federated Investment Management Company (Adviser). SECURITIES IN WHICH THE FUND INVESTS The principal securities in which the Fund invests are discussed in the Fund's prospectus. In pursuing its investment strategy, the Fund may invest in the following securities for any purpose that is consistent with its investment objective: SECURITIES DESCRIPTIONS AND TECHNIQUES FIXED-INCOME SECURITIES Fixed-income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed-income security must repay the principal amount of the security, normally within a specified time. Fixed-income securities provide more regular income than equity securities. However, the returns on fixed-income securities are limited and normally do not increase with the issuer's earnings. This limits the potential appreciation of fixed-income securities as compared to equity securities. A security's yield measures the annual income earned on a security as a percentage of its price. A security's yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early redemption. Securities with higher risks generally have higher yields. The following describes the types of fixed-income securities, in addition to those listed in the prospectus, in which the Fund invests: ASSET-BACKED SECURITIES Asset-backed securities are payable from pools of obligations other than mortgages. Most asset-backed securities involve consumer or commercial debts with maturities of less than ten years. However, almost any type of fixed income assets (including other fixed-income securities) may be used to create an asset- backed security. Asset-backed securities may take the form of commercial paper, notes, or pass through certificates or similar securities. Asset-backed securities have prepayment risks. CREDIT ENHANCEMENT Common types of credit enhancement include guarantees, letters of credit, bond insurance and surety bonds. Credit enhancement also includes arrangements where securities or other liquid assets secure payment of a fixed-income security. If a default occurs, these assets may be sold and the proceeds paid to security's holders. Either form of credit enhancement reduces credit risks by providing another source of payment for a fixed-income security. TAX-EXEMPT COMMERCIAL PAPER Tax-exempt commercial paper is a tax-exempt issuer's obligation with a maturity of less than nine months. Tax-exempt issuers may issue commercial paper to pay for current expenditures or other permissible activities. Tax-exempt issues may constantly reissue their commercial paper and use the proceeds (or other sources) to repay maturing paper. If the tax-exempt issuer cannot continue to obtain liquidity in this fashion, its commercial paper may default. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund may invest its assets in securities of other investment companies, including the securities of affiliated money market funds, as an efficient means of carrying out its investment policies and managing its uninvested cash. These other investment companies are managed independently of the Fund and incur additional expenses. Therefore, any such investment by the Fund may be subject to duplicate expenses. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the additional expenses. DERIVATIVE CONTRACTS Derivative contracts are financial instruments that require payments based upon changes in the values of designated securities, commodities, currencies, indices, or other assets or instruments including other derivative contracts, (each a "Reference Instrument" and collectively, "Reference Instruments"). Each party to a derivative contract is referred to as a counterparty. Some derivative contracts require payments relating to an actual, future trade involving the Reference Instrument. These types of derivatives are frequently referred to as "physically settled" derivatives. Other derivative contracts require payments relating to the income or returns from, or changes in the market value of, a Reference Instrument. These types of derivatives are known as "cash settled" derivatives, since they require cash payments in lieu of delivery of the Reference Instrument. Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts. For example, the Fund could close out an open contract to buy an asset at a future date by entering into an offsetting contract to sell the same asset on the same date. If the offsetting sale price is more than the original purchase price, the Fund realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit the amount of open contracts permitted at any one time. Such limits may prevent the Fund from closing out a position. If this happens, the Fund will be required to keep the contract open (even if it is losing money on the contract), and to make any payments required under the contract (even if it has to sell portfolio securities at unfavorable prices to do so). Inability to close out a contract could also harm the Fund by preventing it from disposing of or trading any assets it has been using to secure its obligations under the contract. The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange traded contracts. Depending on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the Reference Instrument, derivative contracts may increase or decrease the Fund's exposure to the risks of the Reference Instrument, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract. The Fund may trade in the following types of derivative contracts, including combinations thereof: FUTURES CONTRACTS Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a Reference Instrument at a specified price, date and time. Entering into a contract to buy a Reference Instrument is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell a Reference Instrument is commonly referred to as selling a contract or holding a short position in the Reference Instrument. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures (such as index futures and security futures). OPTIONS Option contracts (also called "options") are rights to buy or sell a Reference Instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or writer) of the option receives a payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of Reference Instruments. Options that are written on futures contracts will be subject to margin requirements similar to those applied to futures contracts. The Fund may buy or sell options on a Reference Instrument if it is permitted to own, invest, or otherwise have economic exposure to that instrument. The Fund is not required to own a Reference Instrument, in order to buy or write an option on that Reference Instrument. The Fund may buy and/or sell the following types of options: CALL OPTIONS A call option gives the holder (buyer) the right to buy the Reference Instrument from the seller (writer) of the option. The Fund may use call options in the following ways: Buy call options on a Reference Instrument in anticipation of an increase in the value of the Reference Instrument; and Write call options on a Reference Instrument to generate income from premiums, and in anticipation of a decrease or only limited increase in the value of the Reference Instrument. If the Fund writes a call option on a Reference Instrument that it owns and that call option is exercised, the Fund foregoes any possible profit from an increase in the market price of the Reference Instrument over the exercise price plus the premium received. PUT OPTIONS A put option gives the holder the right to sell the Reference Instrument to the writer of the option. The Fund may use put options in the following ways: Buy put options on a Reference Instrument in anticipation of a decrease in the value of the Reference Instrument; and Write put options on a Reference Instrument to generate income from premiums, and in anticipation of an increase or only limited decrease in the value of the Reference Instrument. In writing puts, there is a risk that the Fund may be required to take delivery of the Reference Instrument when its current market price is lower than the exercise price. The Fund may also buy or write options, as needed, to close out existing option positions. Finally, the Fund may enter into combinations of options contracts in an attempt to benefit from changes in the prices of those options contracts (without regard to changes in the value of the Reference Instrument). SWAPS A swap contract (also known as a "swap") is a type of derivative contract in which two parties agree to pay each other (swap) the returns derived from Reference Instruments. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the Reference Instruments. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms and are known by a variety of names. Common swap agreements that the Fund may use include: INTEREST RATE SWAPS Interest rate swaps are contracts in which one party agrees to make regular payments equal to a fixed or floating interest rate times a stated principal amount (commonly referred to as a "notional principal amount") in return for payments equal to a different fixed or floating rate times the same principal amount, for a specific period. For example, a $10 million London Interbank Offered Rate (LIBOR) swap would require one party to pay the equivalent of the London Interbank Offered Rate of interest (which fluctuates) on $10 million principal amount in exchange for the right to receive the equivalent of a stated fixed rate of interest on $10 million principal amount. TOTAL RETURN SWAPS A total return swap is an agreement between two parties whereby one party agrees to make payments of the total return from a Reference Instrument (or a basket of such instruments) during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another Reference Instrument. Alternately, a total return swap can be structured so that one party will make payments to the other party if the value of a Reference Instrument increases, but receive payments from the other party if the value of that instrument decreases. CREDIT DEFAULT SWAPS A credit default swap (CDS) is an agreement between two parties whereby one party (the "Protection Buyer") agrees to make payments over the term of the CDS to the other party (the "Protection Seller"), provided that no designated event of default, restructuring or other credit related event (each a "Credit Event") occurs with respect to Reference Instrument that is usually a particular bond or the unsecured credit of an issuer, in general (the "Reference Obligation"). Many CDS are physically settled, which means that if a Credit Event occurs, the Protection Seller must pay the Protection Buyer the full notional value, or "par value," of the Reference Obligation in exchange for delivery by the Protection Buyer of the Reference Obligation or another similar obligation issued by the issuer of the Reference Obligation (the "Deliverable Obligation"). The Counterparties agree to the characteristics of the Deliverable Obligation at the time that they enter into the CDS. Alternately, a CDS can be "cash settled," which means that upon the occurrence of a Credit Event, the Protection Buyer will receive a payment from the Protection Seller equal to the difference between the par amount of the Reference Obligation and its market value at the time of the Credit Event. The Fund may be either the Protection Buyer or the Protection Seller in a CDS. If the Fund is a Protection Buyer and no Credit Event occurs, the Fund will lose its entire investment in the CDS (i.e., an amount equal to the payments made to the Protection Seller over the term of the CDS). However, if a Credit Event occurs, the Fund (as Protection Buyer) will deliver the Deliverable Obligation and receive a payment equal to the full notional value of the Reference Obligation, even though the Reference Obligation may have little or no value. If the Fund is the Protection Seller and no Credit Event occurs, the Fund will receive a fixed rate of income throughout the term of the CDS. However, if a Credit Event occurs, the Fund (as Protection Seller) will pay the Protection Buyer the full notional value of the Reference Obligation and receive the Deliverable Obligation from the Protection Buyer. A CDS may involve greater risks than if the Fund invested directly in the Reference Obligation. For example, a CDS may increase credit risk since the Fund has exposure to both the issuer of the Reference Obligation and the Counterparty to the CDS. CAPS AND FLOORS Caps and Floors are contracts in which one party agrees to make payments only if an interest rate or index goes above (Cap) or below (Floor) a certain level in return for a fee from the other party. HYBRID INSTRUMENTS Hybrid instruments combine elements of two different kinds of securities or financial instruments (such as a derivative contract). Frequently, the value of a hybrid instrument is determined by reference to changes in the value of designated securities, commodities, indices, or other assets or instruments (each a, "Valuation Instrument"). Hybrid instruments can take on many forms including, but not limited to, the following two forms: First, a common form of a hybrid instrument combines elements of a derivative contract with those of another security (typically a fixed-income security). In this case all or a portion of the interest or principal payable on a hybrid security is determined by reference to changes in the price of a Valuation Instrument. Second, hybrid instruments may include convertible securities with conversion terms related to a Valuation Instrument. Depending on the type and terms of the hybrid instrument, its risks may reflect a combination of the risks of investing in securities and derivative contracts. Thus, an investment in a hybrid instrument may entail significant risks in addition to those associated with traditional securities or the Valuation Instrument. Hybrid instruments are also potentially more volatile than traditional securities or the Valuation Instrument. Moreover, depending on the structure of the particular hybrid, it may expose the Fund to leverage risks or carry liquidity risks. CREDIT LINKED NOTE A credit linked note (CLN) is a type of hybrid instrument in which a special purpose entity issues a structured note (the "Note Issuer") with respect to which the Valuation Instrument is a single bond, a portfolio of bonds, or the unsecured credit of an issuer, in general (each a "Reference Credit"). The purchaser of the CLN (the "Note Purchaser") invests a par amount and receives a payment during the term of the CLN that equals a fixed or floating rate of interest equivalent to a high rated funded asset (such as a bank certificate of deposit) plus an additional premium that relates to taking on the credit risk of the Reference Credit. Upon maturity of the CLN, the Note Purchaser will receive a payment equal to (i) the original par amount paid to the Note Issuer, if there is no occurrence of a designated event of default, restructuring or other credit event (each, a "Credit Event") with respect to the issuer of the Reference Credit or (ii) the market value of the Reference Credit, if a Credit Event has occurred. Depending upon the terms of the CLN, it is also possible that the Note Purchaser may be required to take physical delivery of the Reference Credit in the event of Credit Event. Most credit linked notes use a corporate bond (or a portfolio of corporate bonds) as the Reference Credit. However, almost any type of fixed-income security (including foreign government securities), index, or derivative contract (such as a credit default swap) can be used as the Reference Credit. REPURCHASE AGREEMENTS Repurchase agreements are transactions in which the Fund buys a security from a dealer or bank and agrees to sell the security back at a mutually agreed-upon time and price. The repurchase price exceeds the sale price, reflecting the Fund's return on the transaction. This return is unrelated to the interest rate on the underlying security. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions, such as securities dealers, deemed creditworthy by the Adviser. The Fund's custodian or subcustodian will take possession of the securities subject to repurchase agreements. The Adviser or subcustodian will monitor the value of the underlying security each day to ensure that the value of the security always equals or exceeds the repurchase price. Repurchase agreements are subject to credit risks. REVERSE REPURCHASE AGREEMENTS Reverse repurchase agreements are repurchase agreements in which the Fund is the seller (rather than the buyer) of the securities, and agrees to repurchase them at an agreed-upon time and price. A reverse repurchase agreement may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements are subject to credit risks. In addition, reverse repurchase agreements create leverage risks because the Fund must repurchase the underlying security at a higher price, regardless of the market value of the security at the time of repurchase. HEDGING Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivative contracts, or derivative contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivative contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that (1) hedge only a portion of its portfolio, (2) use derivative contracts that cover a narrow range of circumstances or (3) involve the sale of derivative contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund. SPECIAL TRANSACTIONS INTER-FUND BORROWING AND LENDING ARRANGEMENTS The Securities and Exchange Commission (SEC) has granted an exemption that permits the Fund and all other funds advised by subsidiaries of Federated Investors, Inc. (Federated funds) to lend and borrow money for certain temporary purposes directly to and from other Federated funds. Participation in this inter-fund lending program is voluntary for both borrowing and lending Federated funds, and an inter-fund loan is only made if it benefits each participating Federated fund. Federated Investors, Inc. (Federated) administers the program according to procedures approved by the Fund's Board, and the Board monitors the operation of the program. Any inter-fund loan must comply with certain conditions set out in the exemption, which are designed to assure fairness and protect all participating Federated funds. For example, inter-fund lending is permitted only (a) to meet shareholder redemption requests, and (b) to meet commitments arising from "failed" trades. All inter-fund loans must be repaid in seven days or less. The Fund's participation in this program must be consistent with its investment policies and limitations, and must meet certain percentage tests. Inter-fund loans may be made only when the rate of interest to be charged is more attractive to the lending Federated fund than market-competitive rates on overnight repurchase agreements (Repo Rate) and more attractive to the borrowing Federated fund than the rate of interest that would be charged by an unaffiliated bank for short- term borrowings (Bank Loan Rate), as determined by the Board. The interest rate imposed on inter-fund loans is the average of the Repo Rate and the Bank Loan Rate. -1- ASSET SEGREGATION In accordance with SEC and SEC staff positions regarding the interpretation of the 1940 Act, with respect to derivatives that create a future payment obligation of the Fund, the Fund must "set aside" (referred to sometimes as "asset segregation") liquid assets, or engage in other SEC- or staff-approved measures, while the derivatives contracts are open. For example, with respect to forwards and futures contracts that are not contractually required to "cash- settle," the Fund must cover its open positions by setting aside cash or readily marketable securities equal to the contracts' full, notional value. With respect to forwards and futures that are contractually required to "cash-settle," however, the Fund is permitted to set aside cash or readily marketable securities in an amount equal to the Fund's daily marked-to-market (net) obligations, if any (i.e., the Fund's daily net liability, if any), rather than the notional value. The Fund will employ another approach to segregating assets to cover options that is sells. If the Fund sells a call option, the Fund will set aside either the Reference Instrument subject to the option, cash or readily marketable securities with a value that equals or exceeds the current market value of the Reference Instrument. In no event, will the value of the cash or readily marketable securities set aside by the Fund be less than the exercise price of the call option. If the Fund sells a put option, the Fund will set aside cash or readily marketable securities with a value that equals or exceeds the exercise price of the put option. The Fund's asset segregation approach for swap agreements varies among different types of swaps. For example, if the Fund enters into a credit default swap as the Protection Buyer, then it will set aside cash or readily marketable securities necessary to meet any accrued payment obligations under the swap. By comparison, if the Fund enters into a credit default swap as the Protection Seller, then the Fund will set aside cash or readily marketable securities equal to the full notional amount of the swap that must be paid upon the occurrence of a Credit Event. For some other types of swaps, such as interest rate swaps, the Fund will calculate the obligations of the counterparties to the swap on a net basis. Consequently, the Fund's current obligation (or rights) under this type of swap will equal only the net amount to be paid or received based on the relative values of the positions held by each counterparty to the swap (the "net amount"). The net amount currently owed by or to the Fund will be accrued daily and the Fund will set aside cash or readily marketable securities equal to any accrued but unpaid net amount owed by the Fund under the swap. The Fund may reduce the liquid assets segregated to cover obligations under a derivative contract by entering into an offsetting derivative contract. For example, if the Fund sells a put option for the same Reference Instrument as a call option the Fund has sold, and the exercise price of the call option is the same as or higher than the exercise price of the put option, then the Fund may net its obligations under the options and set aside cash or readily marketable securities (including any margin deposited for the options) with a value equal to the greater of (a) the current market value of the Reference Instrument deliverable under the call option or (b) the exercise price of the put option. By setting aside cash or readily marketable securities equal to only its net obligations under swaps and certain cash-settled derivative contracts, the Fund will have the ability to employ leverage to a greater extent than if the Fund were required to segregate cash or readily marketable securities equal to the full notional value of such contracts. The use of leverage involves certain risks. See "Risk Factors." Unless the Fund has other cash or readily marketable securities to set aside, it cannot trade assets set aside in connection with derivatives contracts or special transactions without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions. The Fund reserves the right to modify its asset segregation policies in the future to comply with any changes in the positions articulated from time to time by the SEC and its staff. Generally, special transactions do not cash-settle on a net basis. Consequently, with respect to special transactions, the Fund will set aside cash or readily marketable securities with a value that equals or exceeds the Fund's obligations. TEMPORARY DEFENSIVE INVESTMENTS The Fund may make temporary defensive investments in the following taxable securities (in addition to taxable repurchase agreement and reverse repurchase agreement investments): TREASURY SECURITIES Treasury securities are direct obligations of the federal government of the United States. Treasury securities are generally regarded as having the lowest credit risks. BANK INSTRUMENTS Bank instruments are unsecured interest bearing deposits with banks. Bank instruments include bank accounts, time deposits, certificates of deposit and banker's acceptances. Yankee instruments are denominated in U.S. dollars and issued by U.S. branches of foreign banks. Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks. AGENCY SECURITIES Agency securities are issued or guaranteed by a federal agency or other government sponsored entity (GSE) acting under federal authority. Some GSE securities are supported by the full faith and credit of the United States. These include the Government National Mortgage Association, Small Business Administration, Farm Credit System Financial Assistance Corporation, Farmer's Home Administration, Federal Financing Bank, General Services Administration, Department of Housing and Urban Development, Export-Import Bank, Overseas Private Investment Corporation, and Washington Metropolitan Area Transit Authority Bonds. Other GSE securities receive support through federal subsidies, loans or other benefits. For example, the U.S. Treasury is authorized to purchase specified amounts of securities issued by (or otherwise make funds available to) the Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and Tennessee Valley Authority in support of such obligations. A few GSE securities have no explicit financial support, but are regarded as having implied support because the federal government sponsors their activities. These include the Farm Credit System, Financing Corporation, and Resolution Funding Corporation. Investors regard agency securities as having low credit risks, but not as low as Treasury securities. CORPORATE DEBT SECURITIES Corporate debt securities are fixed-income securities issued by businesses. Notes, bonds, debentures and commercial paper are the most prevalent types of corporate debt securities. The Fund may also purchase interests in bank loans to companies. The credit risks of corporate debt securities vary widely among issuers. COMMERCIAL PAPER Commercial paper is an issuer's obligation with a maturity of less than nine months. Companies typically issue commercial paper to pay for current expenditures. Most issuers constantly reissue their commercial paper and use the proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue to obtain liquidity in this fashion, its commercial paper may default. The short maturity of commercial paper reduces both the market and credit risks as compared to other debt securities of the same issuer. INVESTMENT RISKS There are many factors which may affect an investment in the Fund. The Fund's principal risks are described in its prospectus. Additional risk factors are outlined below. CREDIT RISKS Fixed-income securities generally compensate for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a "AAA" rated general obligation security or index with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase generally in response to adverse economic or market conditions. A security's spread may also increase if the security's rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price of the security to decline. Credit risk includes the possibility that a party to a transaction involving the Fund will fail to meet its obligations. This could cause the Fund to lose the benefit of the transaction or prevent the Fund from selling or buying other securities to implement its investment strategy. The non-investment grade securities in which the Fund may invest generally have a higher default risk thaninvestment grade securities. -2- TAX RISKS In order to pay interest that is exempt from federal regular income tax, tax- exempt securities must meet certain legal requirements. Failure to meet such requirements may cause the interest received and distributed by the Fund to shareholders to be taxable. Changes or proposed changes in federal tax laws may cause the prices of tax-exempt securities to fall. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Additionally, the Fund may not be able to close out certain derivative contracts when it wants to. The Fund also may invest in market discount bonds, enter into credit default swap arrangements and other derivative transactions, and engage in other permissible activities that will likely cause the Fund to realize a limited amount of ordinary income or short- term capital gains (which are treated as ordinary income for federal income tax purposes). Consequently, for each of these reasons, the Fund may receive payments, and make distributions, that are treated as ordinary income for federal income tax purposes. Income from the Fund may be subject to AMT. LIQUIDITY RISKS Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivatives contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses. OTC derivative contracts generally carry greater liquidity risk than exchange-traded contracts. Non- investment grade securities generally have less liquidity than investment grade securities. LEVERAGE RISKS Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such an investment magnify the Fund's risk of loss and potential for gain. Investments can have these same results if their returns are based on a multiple of a specified index, security, or other benchmark. PREPAYMENT RISKS Like municipal mortgage backed securities, asset-backed securities (including fixed-income or tax-exempt securities that are pooled or collateralized) may be subject to prepayment risks and the possibility that interest and other payments may not be made. Such investments also may be subject to interest rate, credit and the other risks described in the Fund's prospectus and this SAI. RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS The Fund's use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts and hybrid instruments in which the Fund invests may not be correlated with changes in the value of the underlying Reference or Valuation Instruments or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivative contracts and hybrid instruments may be erroneously priced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Fourth, derivative contracts and hybrid instruments may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Fifth, a common provision in OTC derivative contracts permits the counterparty to terminate any such contract between it and the Fund, if the value of the Fund's total net assets declines below a specified level over a given time period. Factors that may contribute to such a decline (which usually must be substantial) include significant shareholder redemptions and/or a marked decrease in the market value of the Fund's investments. Any such termination of the Fund's OTC derivative contracts may adversely affect the Fund (for example, by increasing losses and/or costs, and/or preventing the Fund from fully implementing its investment strategies). Finally, derivative contracts and hybrid instruments may also involve other risks described herein or in the Fund's prospectus, such as interest rate, credit, liquidity and leverage risks. RISKS ASSOCIATED WITH THE INVESTMENT ACTIVITIES OF OTHER ACCOUNTS Investment decisions for the Fund are made independently from those of other accounts managed by the Adviser and accounts managed by affiliates of the Adviser. Therefore, it is possible that investment-related actions taken by such other accounts could adversely impact the Fund with respect to, for example, the value of Fund portfolio holdings, and/or prices paid to or received by the Fund on its portfolio transactions, and/or the Fund's ability to obtain or dispose of portfolio securities. Related considerations are discussed elsewhere in this SAI under "Brokerage Transactions and Investment Allocation." FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICY The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. The Fund will invest its assets so that at least 80% of the income that it distributes will be exempt from federal regular income tax. The fundamental investment objective and policy may not be changed by the Board without shareholder approval. INVESTMENT LIMITATIONS DIVERSIFICATION With respect to securities comprising 75% of the value of its total assets, the Fund will not purchase securities of any one issuer (other than cash, cash items, securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by such U.S. government securities, and securities of other investment companies) if, as a result, more than 5% of the value of its total assets would be invested in the securities of that issuer, or the Fund would own more than 10% of the outstanding voting securities of that issuer. BORROWING MONEY AND ISSUING SENIOR SECURITIES The Fund may borrow money, directly or indirectly, and issue senior securities to the maximum extent permitted under the Investment Company Act of 1940 (1940 Act). INVESTING IN REAL ESTATE The Fund may not purchase or sell real estate, provided that this restriction does not prevent the Fund from investing in issuers which invest, deal, or otherwise engage in transactions in real estate or interests therein, or investing in securities that are secured by real estate or interests therein. The Fund may exercise its rights under agreements relating to such securities, including the right to enforce security interests and to hold real estate acquired by reason of such enforcement until that real estate can be liquidated in an orderly manner. INVESTING IN COMMODITIES The Fund may not purchase or sell physical commodities, provided that the Fund may purchase securities of companies that deal in commodities. For purposes of this restriction, investments in transactions involving futures contracts and options, forward currency contracts, swap transactions and other financial contracts that settle by payment of cash are not deemed to be investments in commodities. UNDERWRITING The Fund may not underwrite the securities of other issuers, except that the Fund may engage in transactions involving the acquisition, disposition or resale of its portfolio securities, under circumstances where it may be considered to be an underwriter under the Securities Act of 1933. LENDING The Fund may not make loans, provided that this restriction does not prevent the Fund from purchasing debt obligations, entering into repurchase agreements, lending its assets to broker/dealers or institutional investors and investing in loans, including assignments and participation interests. CONCENTRATION The Fund will not make investments that will result in the concentration of its investments in the securities of issuers primarily engaged in the same industry, provided that the Fund may invest more that 25% of the value of its assets in industrial development bonds. Government securities, municipal securities and bank instruments will not be deemed to constitute an industry. As to industrial development bonds, the Fund may purchase securities of an issuer resulting in the ownership of more than 25% of the Fund's assets in one industry, and the Fund reserves the right to invest more than 25% of its assets in industrial development bonds in the same state. THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE 1940 ACT. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE. PLEDGING ASSETS The Fund will not mortgage, pledge or hypothecate any of its assets, provided that this shall not apply to the transfer of securities in connection with any permissible borrowing or to collateral arrangements in connection with permissible activities. PURCHASES ON MARGIN The Fund will not purchase securities on margin, provided that the Fund may obtain short-term credits necessary for the clearance of purchases and sales of securities, and further provided that the Fund may make margin deposits in connection with its use of financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. RESTRICTED SECURITIES The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the board, certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid, the Fund will limit their purchase, together with other illiquid securities, to 15% of its net assets. To conform to the current view of the SEC staff that only domestic bank instruments may be excluded from industry concentration limitations, as a matter of non-fundamental policy, the Fund will not exclude foreign bank instruments from industry concentration tests as long as the policy of the SEC remains in effect. The Fund applies its concentration of investments restrictions as follows: {circle}utility companies will be divided according to their services, for example, gas, gas transmissions, electric and telephone will each be considered a separate industry; {circle}financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and {circle}asset-backed securities will be classified according to the underlying assets securing such securities. DETERMINING MARKET VALUE OF SECURITIES Market values of the Fund's portfolio securities are determined as follows: {circle}futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. Options traded in the over-the- counter market are generally valued according to the mean between the last bid and the last asked price for the option as provided by an investment dealer or other financial institution that deals in the option. The Board may determine in good faith that another method of valuing such investments is necessary to appraise their fair market value; {circle}for credit default swaps, according to the prices as furnished by an independent pricing service which are based upon a valuation model incorporating default probabilities, recovery rates and other market data or factors; {circle}for fixed-income securities, according to the prices as furnished by an independent pricing service, except that fixed-income securities with remaining maturities of less than 60 days at the time of purchase are valued at amortized cost; {circle}for investment in other open-end regulated investment companies, based on net asset value (NAV); and {circle}for all other securities at fair value as determined in accordance with procedures established by and under the general supervision of the Board. Prices for fixed-income securities furnished by a pricing service may be based on a valuation matrix which incorporates both dealer-supplied valuations and electronic data processing techniques. Such prices are generally intended to be indicative of the bid prices currently offered to institutional investors for the securities, except that prices for corporate fixed-income securities traded in the United States are generally intended to be indicative of the mean between such bid prices and asked prices. The Board has approved the use of such pricing services. A number of pricing services are available, and the Fund may use various pricing services or discontinue the use of any pricing service. Prices provided by independent pricing services may be determined without relying exclusively on quoted prices and may consider institutional trading in similar groups of securities, yield, quality, stability, risk, coupon rate, maturity, type of issue, trading characteristics, and other market data or factors. From time to time, when prices cannot be obtained from an independent pricing service, securities may be valued based on quotes from broker-dealers or other financial institutions that trade the securities. WHAT DO SHARES COST? The Fund's NAV per Share fluctuates and is based on the market value of all securities and other assets of the Fund. The NAV for each class of Shares may differ due to the variance in daily net income realized by each class. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. HOW IS THE FUND SOLD? Under the Distributor's Contract with the Fund, the Distributor (Federated Securities Corp.) offers Shares on a continuous, best-efforts basis. RULE 12B-1 PLAN CLASS B SHARES AND CLASS C SHARES As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the Distributor for activities principally intended to result in the sale of Shares such as advertising and marketing of Shares (including printing and distributing prospectuses and sales literature to prospective shareholders and financial intermediaries) and providing incentives to financial intermediaries to sell Shares. The Plan is also designed to cover the cost of administrative services performed in conjunction with the sale of Shares, including, but not limited to, shareholder services, recordkeeping services and educational services, as well as the costs of implementing and operating the Plan. The Rule 12b-1 Plan allows the Distributor to contract with financial intermediaries to perform activities covered by the Plan. The Rule 12b-1 Plan is expected to benefit the Fund in a number of ways. For example, it is anticipated that the Plan will help the Fund attract and retain assets, thus providing cash for orderly portfolio management and Share redemptions and possibly helping to stabilize or reduce other operating expenses. In addition, the Plan is integral to the multiple class structure of the Fund, which promotes the sale of Shares by providing a range of options to investors. The Fund's service providers that receive asset-based fees also benefit from stable or increasing Fund assets. The Fund may compensate the Distributor more or less than its actual marketing expenses. In no event will the Fund pay for any expenses of the Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not be sufficient to cover the marketing-related expenses the Distributor has incurred. Therefore, it may take the Distributor a number of years to recoup these expenses. Federated and its subsidiaries may benefit from arrangements where the Rule 12b- 1 Plan fees related to Class B Shares may be paid to third parties who have provided the funds to make advance commission payments to financial intermediaries. ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES The Distributor may pay out of its own resources amounts (including items of material value) to certain financial intermediaries. In some cases, such payments may be made by, or funded from the resources of, companies affiliated with the Distributor (including the Adviser). While National Association of Securities Dealers (NASD) regulations limit the sales charges that you may bear, there are no limits with regard to the amounts that the Distributor may pay out of its own resources. In addition to the payments which are generally described herein and in the prospectus, the financial intermediary also may receive payments under the Rule 12b-1 Plan and/or Service Fees. In connection with these payments, the financial intermediary may elevate the prominence or profile of the Fund and/or other Federated funds within the financial intermediary's organization by, for example, placement on a list of preferred or recommended funds, and/or granting the Distributor preferential or enhanced opportunities to promote the funds in various ways within the financial intermediary's organization. You can ask your financial intermediary for information about any payments it receives from the Distributor or the Federated funds and any services provided. The following examples illustrate the types of instances in which the Distributor may make additional payments to financial intermediaries. SUPPLEMENTAL PAYMENTS The Distributor may make supplemental payments to certain financial intermediaries that are holders or dealers of record for accounts in one or more of the Federated funds. These payments may be based on such factors as the number or value of Shares the financial intermediary sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial intermediary. PROCESSING SUPPORT PAYMENTS The Distributor may make payments to financial intermediaries that sell Federated fund shares to help offset their costs associated with client account maintenance support, statement processing and transaction processing. The types of payments that the Distributor may make under this category include payment of ticket charges on a per transaction basis; payment of networking fees; and payment for ancillary services such as setting up funds on the financial intermediary's mutual fund trading system. RETIREMENT PLAN PROGRAM SERVICING PAYMENTS The Distributor may make payments to certain financial intermediaries who sell Federated fund shares through retirement plan programs. A financial intermediary may perform retirement plan program services itself or may arrange with a third party to perform retirement plan program services. In addition to participant recordkeeping, reporting, or transaction processing, retirement plan program services may include services rendered to a plan in connection with fund/investment selection and monitoring; employee enrollment and education; plan balance rollover or separation, or other similar services. OTHER BENEFITS TO FINANCIAL INTERMEDIARIES From time to time, the Distributor, at its expense, may provide additional compensation to financial intermediaries that sell or arrange for the sale of Shares. Such compensation may include financial assistance to financial intermediaries that enable the Distributor to participate in or present at conferences or seminars, sales or training programs for invited employees, client and investor events and other financial intermediary-sponsored events. The Distributor also may hold or sponsor, at its expense, sales events, conferences and programs for employees or associated persons of financial intermediaries and may pay the travel and lodging expenses of attendees. The Distributor also may provide, at its expense, meals and entertainment in conjunction with meetings with financial intermediaries. Other compensation may be offered to the extent not prohibited by applicable laws, regulations or the rules of any self-regulatory agency, such as the NASD. UNDERWRITING COMMISSIONS The following chart reflects the total front-end sales charges and contingent deferred sales charges paid in connection with the sale of Class A Shares and Class C Shares of the Fund and the amount retained by the Distributor for the last three fiscal years ended March 31, 2006: 2007 2006 2005 TOTAL SALES TOTAL SALES TOTAL SALES AMOUNT CHARGES AMOUNT CHARGES AMOUNT CHARGES RETAINED RETAINED RETAINED Class A $000 $000 $141,017 $15,737 $225,460 $56,293 Shares Class C $000 $000 $19,707 $1,603 $9,815 $3,847 Shares (TO BE FILED BY AMENDMENT.) EXCHANGING SECURITIES FOR SHARES You may contact the Distributor to request a purchase of Shares in exchange for securities you own. The Fund reserves the right to determine whether to accept your securities and the minimum market value to accept. The Fund will value your securities in the same manner as it values its assets. This exchange is treated as a sale of your securities for federal tax purposes. SUBACCOUNTING SERVICES Certain financial intermediaries may wish to use the transfer agent's subaccounting system to minimize their internal recordkeeping requirements. The transfer agent may charge a fee based on the level of subaccounting services rendered. Financial intermediaries holding Shares in a fiduciary, agency, custodial or similar capacity may charge or pass through subaccounting fees as part of or in addition to normal trust or agency account fees. They may also charge fees for other services that may be related to the ownership of Shares. This information should, therefore, be read together with any agreement between the customer and the financial intermediary about the services provided, the fees charged for those services, and any restrictions and limitations imposed. REDEMPTION IN KIND Although the Fund intends to pay Share redemptions in cash, it reserves the right, as described below, to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities. Because the Fund has elected to be governed by Rule 18f-1 under the 1940 Act, the Fund is obligated to pay Share redemptions to any one shareholder in cash only up to the lesser of $250,000 or 1% of the net assets represented by such Share class during any 90-day period. Any Share redemption payment greater than this amount will also be in cash unless the Fund's Board determines that payment should be in kind. In such a case, the Fund will pay all or a portion of the remainder of the redemption in portfolio securities, valued in the same way as the Fund determines its NAV. The portfolio securities will be selected in a manner that the Fund's Board deems fair and equitable and, to the extent available, such securities will be readily marketable. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders receiving the portfolio securities and selling them before their maturity could receive less than the redemption value of the securities and could incur certain transaction costs. ACCOUNT AND SHARE INFORMATION VOTING RIGHTS Each Share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of the Fund have equal voting rights, except that in matters affecting only a particular class, only Shares of that class are entitled to vote. Directors may be removed by the Board or by shareholders at a special meeting. A special meeting of shareholders will be called by the Board upon the written request of shareholders who own at least 10% of the Fund's outstanding Shares. As of May XX, 2007, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Shares: (TO BE FILED BY AMENDMENT.) TAX INFORMATION FEDERAL INCOME TAX The Fund intends to meet requirements of Subchapter M of the Internal Revenue Code (Code) applicable to regulated investment companies. If these requirements are not met, it will not receive special tax treatment and will be subject to federal corporate income tax. The Fund is entitled to a loss carry-forward, which may reduce the taxable income or gain that the Fund would realize, and to which the shareholder would be subject, in the future. WHO MANAGES AND PROVIDES SERVICES TO THE FUND? BOARD OF DIRECTORS 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. As of December 31, 2006, the Federated Fund Complex consisted of 45 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. As of May XX, 2007, the Fund's Board and Officers as a group owned less than 1% of each Class of the Fund's outstanding Shares. (TO BE FILED BY AMENDMENT.) INTERESTED DIRECTORS BACKGROUND AND COMPENSATION
AGGREGATE COMPENSATION FROM FUND(S) (PAST FISCAL TOTAL NAME YEAR) COMPENSATION BIRTH DATE FROM FUND ADDRESS AND POSITIONS FEDERATED HELD WITH PRINCIPAL OCCUPATION(S) FOR PAST FIVE YEARS, FUND COMPLEX FUND OTHER DIRECTORSHIPS HELD AND PREVIOUS POSITION(S) (PAST DATE SERVICE CALENDAR BEGAN YEAR) JOHN F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $0 $0 DONAHUE* Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Birth Date: Complex's Executive Committee. July 28, 1924 PREVIOUS POSITIONS: Chairman of the Federated Fund Complex; Trustee, Federated DIRECTOR Investment Management Company and Chairman and Director, Federated Investment Began Counseling. serving: September 1976 J. PRINCIPAL OCCUPATIONS: Principal Executive Officer and President of the Federated $0 $0 CHRISTOPHER Fund Complex; Director or Trustee of some of the Funds in the Federated Fund DONAHUE* Complex; President, Chief Executive Officer and Director, Federated Investors, Birth Date: Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, April 11, Federated Investment Counseling; Chairman and Director, Federated Global 1949 Investment Management Corp.; Chairman, Federated Equity Management Company of PRESIDENT Pennsylvania and Passport Research, Ltd. (Investment advisory subsidiary of AND DIRECTOR Federated); Trustee, Federated Shareholder Services Company; Director, Federated Began Services Company. serving: December PREVIOUS POSITIONS: President, Federated Investment Counseling; President and 1986 Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. LAWRENCE D. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $000.00 $180,000 ELLIS, M.D.* Professor of Medicine, University of Pittsburgh; Medical Director, University of Birth Date: Pittsburgh Medical Center Downtown; Hematologist, Oncologist and Internist, October 11, University of Pittsburgh Medical Center. 1932 3471 Fifth OTHER DIRECTORSHIPS HELD: Member, National Board of Trustees, Leukemia Society of Avenue America. Suite 1111 Pittsburgh, PREVIOUS POSITIONS: Trustee, University of Pittsburgh; Director, University of PA Pittsburgh Medical Center. DIRECTOR Began serving: August 1987
* Family relationships and reasons for "interested" status: John F. Donahue is the father of J. Christopher Donahue; both are "interested" due to the positions they hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his son-in-law is employed by the Fund's principal underwriter, Federated Securities Corp. INDEPENDENT DIRECTORS BACKGROUND AND COMPENSATION
AGGREGATE COMPENSATION FROM FUND(S) (PAST FISCAL TOTAL NAME YEAR) COMPENSATION BIRTH DATE FROM FUND ADDRESS AND POSITIONS FEDERATED HELD WITH PRINCIPAL OCCUPATION(S) FOR PAST FIVE YEARS, FUND COMPLEX FUND OTHER DIRECTORSHIPS HELD AND PREVIOUS POSITION(S) (PAST DATE SERVICE CALENDAR BEGAN YEAR) THOMAS G. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $000.00 $198,000 BIGLEY Birth Date: OTHER DIRECTORSHIPS HELD: Director, Member of Executive Committee, Children's February 3, Hospital of Pittsburgh; Director, University of Pittsburgh. 1934 15 Old PREVIOUS POSITION: Senior Partner, Ernst & Young LLP. Timber Trail Pittsburgh, PA DIRECTOR Began serving: November 1994 JOHN T. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $000.00 $198,000 CONROY, JR. Chairman of the Board, Investment Properties Corporation; Partner or Trustee in Birth Date: private real estate ventures in Southwest Florida. June 23, 1937 PREVIOUS POSITIONS: President, Investment Properties Corporation; Senior Vice Investment President, John R. Wood and Associates, Inc., Realtors; President, Naples Properties Property Management, Inc. and Northgate Village Development Corporation. Corporation 3838 North Tamiami Trail Suite 402 Naples, FL DIRECTOR Began serving: August 1991 NICHOLAS P. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $000.00 $198,000 CONSTANTAKIS Birth Date: OTHER DIRECTORSHIPS HELD: Director and Member of the Audit Committee, Michael September 3, Baker Corporation (engineering and energy services worldwide). 1939 175 PREVIOUS POSITION: Partner, Andersen Worldwide SC. Woodshire Drive Pittsburgh, PA DIRECTOR Began serving: February 1998 JOHN F. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex; $000.00 $180,000 CUNNINGHAM Director, QSGI, Inc. (technology services company). Birth Date: March 5, OTHER DIRECTORSHIPS HELD: Chairman, President and Chief Executive Officer, 1943 Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston 353 El College. Brillo Way Palm Beach, PREVIOUS POSITIONS: Director, Redgate Communications and EMC Corporation FL (computer storage systems); Chairman of the Board and Chief Executive Officer, DIRECTOR Computer Consoles, Inc.; President and Chief Operating Officer, Wang Began Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, serving: Inc. July 1999 PETER E. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $000.00 $180,000 MADDEN Birth Date: OTHER DIRECTORSHIPS HELD: Board of Overseers, Babson College. March 16, 1942 PREVIOUS POSITIONS: Representative, Commonwealth of Massachusetts General Court; One Royal President, State Street Bank and Trust Company and State Street Corporation Palm Way (retired); Director, VISA USA and VISA International; Chairman and Director, 100 Royal Massachusetts Bankers Association; Director, Depository Trust Corporation; Palm Way Director, The Boston Stock Exchange. Palm Beach, FL DIRECTOR Began serving: August 1991 CHARLES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $000.00 $198,000 MANSFIELD, Management Consultant. JR. Birth Date: PREVIOUS POSITIONS: Chief Executive Officer, PBTC International Bank; Partner, April 10, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail 1945 Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA 80 South (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of Road Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Westhampton Executive Vice President DVC Group, Inc. (marketing, communications and Beach, NY technology). DIRECTOR Began serving: July 1999 JOHN E. PRINCIPAL OCCUPATIONS: Director or Trustee, and Chairman of the Board of $000.00 $234,000 MURRAY, JR., Directors or Trustees, of the Federated Fund Complex; Chancellor and Law J.D., S.J.D. Professor, Duquesne University; Partner, Murray, Hogue & Lannis. Birth Date: December 20, OTHER DIRECTORSHIPS HELD: Director, Michael Baker Corp. (engineering, 1932 construction, operations and technical services). Chancellor, Duquesne PREVIOUS POSITIONS: President, Duquesne University; Dean and Professor of Law, University University of Pittsburgh School of Law; Dean and Professor of Law, Villanova Pittsburgh, University School of Law. PA CHAIRMAN AND DIRECTOR Began serving: February 1995 THOMAS M. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $000.00 $45,000 O'NEILL Managing Director and Partner, Navigator Management Company, L.P. (investment and Birth Date: strategic consulting). June 14, 1951 OTHER DIRECTORSHIPS HELD: Director, Midway Pacific (lumber); Board of Overseers, 95 Standish Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College. Street P.O. Box PREVIOUS POSITIONS: Chief Executive Officer and President, Managing Director and 2779 Chief Investment Officer, Fleet Investment Advisors; President and Chief Duxbury, MA Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, DIRECTOR Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Began Companies, Boston, MA; and Credit Analyst and Lending Officer, Fleet Bank. serving: October 2006 MARJORIE P. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex. $000.00 $180,000 SMUTS Birth Date: PREVIOUS POSITIONS: Public Relations/Marketing Consultant/Conference Coordinator; June 21, National Spokesperson, Aluminum Company of America; television producer; 1935 President, Marj Palmer Assoc.; Owner, Scandia Bord. 4905 Bayard Street Pittsburgh, PA DIRECTOR Began serving: February 1984 JOHN S. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $000.00 $180,000 WALSH President and Director, Heat Wagon, Inc. (manufacturer of construction temporary Birth Date: heaters); President and Director, Manufacturers Products, Inc. (distributor of November 28, portable construction heaters); President, Portable Heater Parts, a division of 1957 Manufacturers Products, Inc. 2604 William Drive PREVIOUS POSITION: Vice President, Walsh & Kelly, Inc. Valparaiso, IN DIRECTOR Began serving: January 1999 JAMES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; Prior $000.00 $134,416 WILL to June 2006, Vice Chancellor and President, Saint Vincent College. Birth Date: October 12, OTHER DIRECTORSHIPS HELD: Trustee, Saint Vincent College; Alleghany Corporation. 1938 721 E. PREVIOUS POSITIONS: Chairman, President and Chief Executive Officer, Armco, Inc.; McMurray President and Chief Executive Officer, Cyclops Industries; President and Chief Road Operating Officer, Kaiser Steel Corporation. McMurray PA DIRECTOR Began serving: April 2006
OFFICERS**
NAME BIRTH DATE POSITIONS HELD WITH FUND PRINCIPAL OCCUPATION(S) AND PREVIOUS POSITION(S) DATE SERVICE BEGAN MARY JO PRINCIPAL OCCUPATIONS: Ms. Ochson was named Chief Investment Officer of tax-exempt fixed-income products in 2004 and is OCHSON a Vice President of the Fund. She joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice Birth Date: President of the Fund's Adviser since 1996. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in September Finance from the University of Pittsburgh. 12, 1953 CHIEF INVESTMENT OFFICER Began serving: May 2004 JOHN W. PRINCIPAL OCCUPATIONS: Executive Vice President and Secretary of the Federated Fund Complex; Vice Chairman, Executive MCGONIGLE Vice President, Secretary and Director, Federated Investors, Inc. Birth Date: October 26, PREVIOUS POSITIONS: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, 1938 Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. EXECUTIVE VICE PRESIDENT Began serving: September 1976 BRIAN P. PRINCIPAL OCCUPATIONS: Senior Vice President and Chief Compliance Officer of the Federated Fund Complex; Vice President BOUDA and Chief Compliance Officer of Federated Investors, Inc.; and Chief Compliance Officer of its subsidiaries. Mr. Bouda Birth Date: joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. February 28, 1947 SR. VICE PRESIDENT Began serving: January 2006 RICHARD A. PRINCIPAL OCCUPATIONS: Principal Financial Officer and Treasurer of the Federated Fund Complex; Senior Vice President, NOVAK Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Birth Date: Inc. and Southpointe Distribution Services, Inc. December 25, 1963 PREVIOUS POSITIONS: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held TREASURER various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. Began serving: January 2006 RICHARD B. PRINCIPAL OCCUPATIONS: Vice Chairman or Vice President of some of the Funds in the Federated Fund Complex; Vice FISHER Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Birth Date: May 17, PREVIOUS POSITIONS: President and Director or Trustee of some of the Funds in the Federated Fund Complex; Executive Vice 1923 President, Federated Investors, Inc. and Director and Chief Executive Officer, Federated Securities Corp. VICE PRESIDENT Began serving: January 1985 J. SCOTT PRINCIPAL OCCUPATIONS: J. Scott Albrecht has been the Fund's Portfolio Manager since May 2004. He is Vice President of ALBRECHT the Fund. Mr. Albrecht joined Federated in 1989. He became a Senior Vice President of the Fund's Adviser in January 2005 Birth Date: and serves as a Vice President of the Fund's Adviser from 1994 through 2004. He has been a Senior Portfolio Manager June 1, since 1997 and was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a Chartered Financial Analyst and received his 1960 M.S. in Public Management from Carnegie Mellon University. VICE PRESIDENT Began serving: May 2004
**Officers do not receive any compensation from the Fund. In addition, the Fund has appointed an Anti-Money Laundering Compliance Officer. -3- COMMITTEES OF THE BOARD
MEETINGS BOARD COMMITTEE HELD COMMITTEE MEMBERS COMMITTEE FUNCTIONS DURING LAST FISCAL YEAR EXECUTIVE John F. In between meetings of the full Board, the Executive Committee generally may exercise None Donahue all the powers of the full Board in the management and direction of the business and John E. conduct of the affairs of the Corporation in such manner as the Executive Committee Murray, Jr., shall deem to be in the best interests of the Corporation. However, the Executive J.D., S.J.D. Committee cannot elect or remove Board members, increase or decrease the number of John S. Directors, elect or remove any Officer, declare dividends, issue shares or recommend Walsh to shareholders any action requiring shareholder approval. AUDIT Thomas G. The purposes of the Audit Committee are to oversee the accounting and financial Five Bigley reporting process of the Fund, the Fund`s internal control over financial reporting, John T. and the quality, integrity and independent audit of the Fund`s financial statements. Conroy, Jr. The Committee also oversees or assists the Board with the oversight of compliance with Nicholas P. legal requirements relating to those matters, approves the engagement and reviews the Constantakis qualifications, independence and performance of the Fund`s independent registered Charles F. public accounting firm, acts as a liaison between the independent registered public Mansfield, accounting firm and the Board and reviews the Fund`s internal audit function. Jr. NOMINATING Thomas G. The Nominating Committee, whose members consist of all Independent Directors, selects None Bigley and nominates persons for election to the Fund`s Board when vacancies occur. The John T. Committee will consider candidates recommended by shareholders, Independent Directors, Conroy, Jr. officers or employees of any of the Fund`s agents or service providers and counsel to Nicholas P. the Fund. Any shareholder who desires to have an individual considered for nomination Constantakis by the Committee must submit a recommendation in writing to the Secretary of the Fund, John F. at the Fund's address appearing on the back cover of this Statement of Additional Cunningham Information. The recommendation should include the name and address of both the Peter E. shareholder and the candidate and detailed information concerning the candidate's Madden qualifications and experience. In identifying and evaluating candidates for Charles F. consideration, the Committee shall consider such factors as it deems appropriate. Mansfield, Those factors will ordinarily include: integrity, intelligence, collegiality, Jr. judgment, diversity, skill, business and other experience, qualification as an John E. "Independent Director," the existence of material relationships which may create the Murray, Jr. appearance of a lack of independence, financial or accounting knowledge and Thomas M. experience, and dedication and willingness to devote the time and attention necessary O'Neill to fulfill Board responsibilities. Marjorie P. Smuts John S. Walsh James F. Will
(TO BE FILED BY AMENDMENT.) -4- BOARD OWNERSHIP OF SHARES IN THE FUND AND IN THE FEDERATED FAMILY OF INVESTMENT COMPANIES AS OF DECEMBER 31, 2006 DOLLAR RANGE OF AGGREGATE SHARES OWNED DOLLAR RANGE OF IN FEDERATED SHARES OWNED IN INTERESTED MUNICIPAL SECURITIES FEDERATED FAMILY OF BOARD MEMBER NAME FUND, INC. INVESTMENT COMPANIES John F. Donahue None Over $100,000 J. Christopher Donahue None Over $100,000 Lawrence D. Ellis, M.D. $1-$10,000 Over $100,000 INDEPENDENT BOARD MEMBER NAME Thomas G. Bigley None Over $100,000 John T. Conroy, Jr. None Over $100,000 Nicholas P. Constantakis None Over $100,000 John F. Cunningham None Over $100,000 Peter E. Madden None Over $100,000 Charles F. Mansfield, Jr. None Over $100,000 John E. Murray, Jr., J.D., S.J.D. None Over $100,000 Thomas M. O'Neill None Over $100,000 Marjorie P. Smuts None Over $100,000 John S. Walsh None Over $100,000 James F. Will None None INVESTMENT ADVISER The Adviser conducts investment research and makes investment decisions for the Fund. The Adviser is a wholly owned subsidiary of Federated. The Adviser shall not be liable to the Fund or any Fund 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. PORTFOLIO MANAGER INFORMATION The following information about the Fund's Portfolio Manager is provided as of January 31, 2007. Other Accounts Managed Total Number of Other Accounts Managed/ by J. Scott Albrecht -Total Assets* Registered Investment Companies 4 Funds/ $653.234 million Other Pooled Investment Vehicles 0 Other Accounts 0 * None of the Accounts has an advisory fee that is based on the performance of the account. Dollar value range of shares owned in the Fund: none. J. Scott Albrecht is paid a fixed base salary and a variable annual incentive. Base salary is determined within a market competitive position-specific salary range, based on the portfolio manager's experience and performance. The annual incentive amount is determined based on multiple performance criteria using a Balanced Scorecard methodology, and may be paid entirely in cash, or in a combination of cash and restricted stock of Federated Investors, Inc. (Federated). There are four weighted performance categories in the Balanced Scorecard. Investment Product Performance (IPP) is the predominant factor. Of lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction and Service, and Financial Success. The total Balanced Scorecard "score" is applied against an annual incentive opportunity that is competitive in the market for this portfolio manager role to determine the annual incentive payment. IPP is predicated on meeting rolling 1, 3, and 5 calendar year pre-tax gross total return targets versus a designated peer group of comparable accounts. If the gross total return targets are met, IPP is calculated based on 1, 3, and 5 calendar year pre-tax gross income return versus the designated peer group of comparable accounts. Performance periods are adjusted if a portfolio manager has been managing an account for less than five years; accounts with less than one-year of performance history under a portfolio manager may be excluded. As noted above, Mr. Albrecht is also the portfolio manager for other accounts in addition to the Fund. Such other accounts may have different benchmarks. The Balanced Scorecard Investment Product Performance score is calculated with an equal weighting of each account managed by the portfolio manager. In this regard, any account for which the total return target is not met will receive a score of zero. In addition, Mr. Albrecht assists in setting and implementing derivatives strategies for municipal bond accounts. A portion of the IPP score is based on Federated's senior management's assessment of his contribution in that area. Leadership/Teamwork/Communication is assessed by Federated's management. Client Satisfaction and Service is assessed by Federated's senior management based on the quality, amount and effectiveness of client support, with input from sales management. The Financial Success category is designed to tie the portfolio manager's bonus, in part, to Federated's overall financial health, and any awards are predicated on Federated's attainment of specified financial targets. Senior management determines individual Financial Success scores on a discretionary basis, considering overall contributions, including factors not fully reflected in the other Balanced Scorecard categories. As a general matter, certain conflicts of interest may arise in connection with a portfolio manager's management of a fund's investments, on the one hand, and the investments of other accounts for which the portfolio manager is responsible, on the other. For example, it is possible that the various accounts managed could have different investment strategies that, at times, might conflict with one another to the possible detriment of the Fund. Alternatively, to the extent that the same investment opportunities might be desirable for more than one account, possible conflicts could arise in determining how to allocate them. Other potential conflicts might include conflicts created by specific portfolio manager compensation arrangements, and conflicts relating to selection of brokers or dealers to execute fund portfolio trades and/or specific uses of commissions from Fund portfolio trades (for example, research, or "soft dollars"). The Adviser has structured the portfolio managers' compensation in a manner, and the Fund has adopted policies and procedures, reasonably designed to safeguard the Fund from being negatively affected as a result of any such potential conflicts. SERVICES AGREEMENT Federated Advisory Services Company, an affiliate of the Adviser, provides certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. OTHER RELATED SERVICES Affiliates of the Adviser may, from time to time, provide certain electronic equipment and software to institutional customers in order to facilitate the purchase of Fund Shares offered by the Distributor. CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING As required by SEC rules, the Fund, its Adviser, and its Distributor have adopted codes of ethics. These codes govern securities trading activities of investment personnel, Fund Directors, and certain other employees. Although they do permit these people to trade in securities, including those that the Fund could buy, as well as Shares of the Fund, they also contain significant safeguards designed to protect the Fund and its shareholders from abuses in this area, such as requirements to obtain prior approval for, and to report, particular transactions. VOTING PROXIES ON FUND PORTFOLIO SECURITIES The Board has delegated to the Adviser authority to vote proxies on the securities held in the Fund's portfolio. The Board has also approved the Adviser's policies and procedures for voting the proxies, which are described below. PROXY VOTING POLICIES The Adviser's general policy is to cast proxy votes in favor of proposals that the Adviser anticipates will enhance the long-term value of the securities being voted. Generally, this will mean voting for proposals that the Adviser believes will: improve the management of a company; increase the rights or preferences of the voted securities; and/or increase the chance that a premium offer would be made for the company or for the voted securities. The following examples illustrate how these general policies may apply to proposals submitted by a company's board of directors. However, whether the Adviser supports or opposes a proposal will always depend on the specific circumstances described in the proxy statement and other available information. On matters of corporate governance, generally the Adviser will vote for proposals to: require independent tabulation of proxies and/or confidential voting by shareholders; reorganize in another jurisdiction (unless it would reduce the rights or preferences of the securities being voted); and repeal a shareholder rights plan (also known as a "poison pill"). The Adviser will generally vote against the adoption of such a plan (unless the plan is designed to facilitate, rather than prevent, unsolicited offers for the company). On matters of capital structure, generally the Adviser will vote: against proposals to authorize or issue shares that are senior in priority or voting rights to the securities being voted; for proposals to grant preemptive rights to the securities being voted; and against proposals to eliminate such preemptive rights. On matters relating to management compensation, generally the Adviser will vote: for stock incentive plans that align the recipients' interests with the interests of shareholders without creating undue dilution; and against proposals that would permit the amendment or replacement of outstanding stock incentives with new stock incentives having more favorable terms. On matters relating to corporate transactions, the Adviser will vote proxies relating to proposed mergers, capital reorganizations, and similar transactions in accordance with the general policy, based upon its analysis of the proposed transaction. The Adviser will vote proxies in contested elections of directors in accordance with the general policy, based upon its analysis of the opposing slates and their respective proposed business strategies. Some transactions may also involve proposed changes to the company's corporate governance, capital structure or management compensation. The Adviser will vote on such changes based on its evaluation of the proposed transaction or contested election. In these circumstances, the Adviser may vote in a manner contrary to the general practice for similar proposals made outside the context of such a proposed transaction or change in the board. For example, if the Adviser decides to vote against a proposed transaction, it may vote for anti-takeover measures reasonably designed to prevent the transaction, even though the Adviser typically votes against such measures in other contexts. The Adviser generally votes against proposals submitted by shareholders without the favorable recommendation of a company's board. The Adviser believes that a company's board should manage its business and policies, and that shareholders who seek specific changes should strive to convince the board of their merits or seek direct representation on the board. In addition, the Adviser will not vote if it determines that the consequences or costs outweigh the potential benefit of voting. For example, if a foreign market requires shareholders casting proxies to retain the voted shares until the meeting date (thereby rendering the shares "illiquid" for some period of time), the Adviser will not vote proxies for such shares. PROXY VOTING PROCEDURES The Adviser has established a Proxy Voting Committee (Proxy Committee), to exercise all voting discretion granted to the Adviser by the Board in accordance with the proxy voting policies. The Adviser has hired Institutional Shareholder Services (ISS) to obtain, vote, and record proxies in accordance with the Proxy Committee's directions. The Proxy Committee directs ISS by means of Proxy Voting Guidelines, and ISS may vote any proxy as directed in the Proxy Voting Guidelines without further direction from the Proxy Committee (and may make any determinations required to implement the Proxy Voting Guidelines). However, if the Proxy Voting Guidelines require case-by-case direction for a proposal, ISS will provide the Proxy Committee with all information that it has obtained regarding the proposal and the Proxy Committee will provide specific direction to ISS. The Adviser's proxy voting procedures generally permit the Proxy Committee to amend the Proxy Voting Guidelines, or override the directions provided in such Guidelines, whenever necessary to comply with the proxy voting policies. CONFLICTS OF INTEREST The Adviser has adopted procedures to address situations where a matter on which a proxy is sought may present a potential conflict between the interests of the Fund (and its shareholders) and those of the Adviser or Distributor. This may occur where a significant business relationship exists between the Adviser (or its affiliates) and a company involved with a proxy vote. A company that is a proponent, opponent, or the subject of a proxy vote, and which to the knowledge of the Proxy Committee has this type of significant business relationship, is referred to as an "Interested Company." The Adviser has implemented the following procedures in order to avoid concerns that the conflicting interests of the Adviser have influenced proxy votes. Any employee of the Adviser who is contacted by an Interested Company regarding proxies to be voted by the Adviser must refer the Interested Company to a member of the Proxy Committee, and must inform the Interested Company that the Proxy Committee has exclusive authority to determine how the Adviser will vote. Any Proxy Committee member contacted by an Interested Company must report it to the full Proxy Committee and provide a written summary of the communication. Under no circumstances will the Proxy Committee or any member of the Proxy Committee make a commitment to an Interested Company regarding the voting of proxies or disclose to an Interested Company how the Proxy Committee has directed such proxies to be voted. If the Proxy Voting Guidelines already provide specific direction on the proposal in question, the Proxy Committee shall not alter or amend such directions. If the Proxy Voting Guidelines require the Proxy Committee to provide further direction, the Proxy Committee shall do so in accordance with the proxy voting policies, without regard for the interests of the Adviser with respect to the Interested Company. If the Proxy Committee provides any direction as to the voting of proxies relating to a proposal affecting an Interested Company, it must disclose to the Fund's Board information regarding: the significant business relationship; any material communication with the Interested Company; the matter(s) voted on; and how, and why, the Adviser voted as it did. If the Fund holds shares of another investment company for which the Adviser (or an affiliate) acts as an investment adviser, the Proxy Committee will vote the Fund's proxies in the same proportion as the votes cast by shareholders who are not clients of the Adviser at any shareholders' meeting called by such investment company, unless otherwise directed by the Board. PROXY VOTING REPORT A report on "Form N-PX" of how the Fund voted any proxies during the most recent 12-month period ended June 30 is available through Federated's website. Go to FederatedInvestors.com; select "Products;" select the Fund; then use the link to "Prospectuses and Regulatory Reports" to access the link to Form N-PX. Form N-PX filings are also available at the SEC's website at www.sec.gov. PORTFOLIO HOLDINGS INFORMATION Information concerning the Fund's portfolio holdings is available in the "Products" section of Federated's website at FederatedInvestors.com. A complete listing of the Fund's portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include identification of the Fund's top ten holdings, portfolio profile statistics (such as weighted average effective maturity and weighted average effective duration), recent portfolio purchase and sale transactions, and a percentage breakdown of the portfolio by credit quality. To access this information from the "Products" section of the website, click on "Portfolio Holdings" and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the "Products" section, and from the Fund's page click on the "Portfolio Holdings" or "Composition" link. A user is required to register on the website the first time the user accesses this information. You may also access from the "Products" section of the website portfolio information as of the end of the Fund's fiscal quarters. The Fund's annual and semiannual reports, which contain complete listings of the Fund's portfolio holdings as of the end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the link to the appropriate PDF. Complete listings of the Fund's portfolio holdings as of the end of the Fund's first and third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the "Products" section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC's website at www.sec.gov. The disclosure policy of the Fund and the Adviser prohibits the disclosure of portfolio holdings information to any investor or intermediary before the same information is made available to other investors. Employees of the Adviser or its affiliates who have access to nonpublic information concerning the Fund's portfolio holdings are prohibited from trading securities on the basis of this information. Such persons must report all personal securities trades and obtain pre-clearance for all personal securities trades other than mutual fund shares. Firms that provide administrative, custody, financial, accounting, legal or other services to the Fund may receive nonpublic information about Fund portfolio holdings for purposes relating to their services. The Fund may also provide portfolio holdings information to publications that rate, rank or otherwise categorize investment companies. Traders or portfolio managers may provide "interest" lists to facilitate portfolio trading if the list reflects only that subset of the portfolio for which the trader or portfolio manager is seeking market interest. A list of service providers, publications and other third parties who may receive nonpublic portfolio holdings information appears in the Appendix to this SAI. The furnishing of nonpublic portfolio holdings information to any third party (other than authorized governmental or regulatory personnel) requires the prior approval of the President of the Adviser and of the Chief Compliance Officer of the Fund. The President of the Adviser and the Chief Compliance Officer will approve the furnishing of nonpublic portfolio holdings information to a third party only if they consider the furnishing of such information to be in the best interests of the Fund and its shareholders. In that regard, and to address possible conflicts between the interests of Fund shareholders and those of the Adviser and its affiliates, the following procedures apply. No consideration may be received by the Fund, the Adviser, any affiliate of the Adviser or any of their employees in connection with the disclosure of portfolio holdings information. Before information is furnished, the third party must sign a written agreement that it will safeguard the confidentiality of the information, will use it only for the purposes for which it is furnished and will not use it in connection with the trading of any security. Persons approved to receive nonpublic portfolio holdings information will receive it as often as necessary for the purpose for which it is provided. Such information may be furnished as frequently as daily and often with no time lag between the date of the information and the date it is furnished. The Board receives and reviews annually a list of the persons who receive nonpublic portfolio holdings information and the purposes for which it is furnished. BROKERAGE TRANSACTIONS AND INVESTMENT ALLOCATION 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. 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 review by the Fund's Board. Investment decisions for the Fund are made independently from those of other accounts managed by the Adviser and accounts managed by affiliates of the Adviser. When the Fund and one or more of those accounts invests in, or disposes of, the same security, available investments or opportunities for sales will be allocated among the Fund and the account(s) in a manner believed by the Adviser to be equitable. While the coordination and ability to participate in volume transactions may benefit the Fund, it is possible that this procedure could adversely impact the price paid or received and/or the position obtained or disposed of by the Fund. ADMINISTRATOR Federated Administrative Services (FAS), a subsidiary of Federated, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. FAS provides these at the following annual rates, based on the average aggregate daily net assets of the Fund and most of the other Federated funds: AVERAGE AGGREGATE DAILY MAXIMUM ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS 0.150 of 1% on the first $5 billion 0.125 of 1% on the next $5 billion 0.100 of 1% on the next $10 billion 0.075 of 1% on assets over $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. FAS may voluntarily waive a portion of its fee and may reimburse the Fund for expenses. FAS also provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments for a fee based on Fund assets plus out-of- pocket expenses. CUSTODIAN State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the securities and cash of the Fund. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company, the Fund's registered transfer agent, maintains all necessary shareholder records. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The independent registered public accounting firm for the Fund, Ernst & Young LLP, conducts its audits in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require it to plan and perform its audits to provide reasonable assurance about whether the Fund's financial statements and financial highlights are free of material misstatement. FEES PAID BY THE FUND FOR SERVICES (TO BE FILED BY AMENDMENT.) Fees are allocated among classes based on their pro rata share of Fund assets, except for marketing (Rule 12b-1) fees and shareholder services fees, which are borne only by the applicable class of Shares. HOW DOES THE FUND MEASURE PERFORMANCE? The Fund may advertise Share performance by using the SEC's standard methods for calculating performance applicable to all mutual funds. The SEC also permits this standard performance information to be accompanied by non-standard performance information. Share performance reflects the effect of non-recurring charges, such as maximum sales charges, which, if excluded, would increase the total return and yield. The performance of Shares depends upon such variables as: portfolio quality; average portfolio maturity; type and value of portfolio securities; changes in interest rates; changes or differences in the Fund's or any class of Shares' expenses; and various other factors. Share performance fluctuates on a daily basis largely because net earnings and/or the value of portfolio holdings fluctuate daily. Both net earnings and offering price per Share are factors in the computation of yield and total return. AVERAGE ANNUAL TOTAL RETURNS AND YIELD Total returns are given for the one-year, five-year and ten-year periods ended March 31, 2007. Yield and Tax-Equivalent Yield are given for the 30-day period ended March 31, 2007. (TO BE FILED BY AMENDMENT.) TOTAL RETURN Total return represents the change (expressed as a percentage) in the value of Shares over a specific period of time, and includes the investment of income and capital gains distributions. The average annual total return for Shares is the average compounded rate of return for a given period that would equate a $10,000 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 NAV 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 $10,000, less any applicable sales charge, adjusted over the period by any additional Shares, assuming the annual reinvestment of all dividends and distributions. Total returns after taxes are calculated in a similar manner, but reflect additional standard assumptions required by the SEC. YIELD AND TAX-EQUIVALENT YIELD The yield of Shares is calculated by dividing: (i) the net investment income per Share earned by the Shares over a 30-day period; by (ii) the maximum offering price per Share on the last day of the period. This number is then annualized using semi-annual compounding. This means that the amount of income generated during the 30-day period is assumed to be generated each month over a 12-month period and is reinvested every six months. The tax-equivalent yield of Shares is calculated similarly to the yield, but is adjusted to reflect the taxable yield that Shares would have had to earn to equal the actual yield, assuming the maximum combined federal and state tax rate. The yield and tax-equivalent yield do not necessarily reflect income actually earned by Shares because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent financial intermediaries charge fees in connection with services provided in conjunction with an investment in Shares, the Share performance is lower for shareholders paying those fees. TAX EQUIVALENCY TABLE Set forth below is a sample of a tax-equivalency table that may be used in advertising and sales literature. This table is for illustrative purposes only and is not representative of past or future performance of the Fund. The interest earned by the tax- exempt securities owned by the Fund generally remains free from federal regular income tax and is often free from state and local taxes as well. However, some of the Fund's income may be subject to the federal alternative minimum tax and state and/or local taxes.
TAXABLE YIELD EQUIVALENT FOR 2007 MULTISTATE MUNICIPAL FUND TAX BRACKET: FEDERAL 10.00% 15.00% 25.00% 28.00% 33.00% 35.00% Joint Return: $0 - $15,651 - $63,701 - $128,501 - $195,851 - Over 15,650 63,700 128,500 195,850 349,700 $349,700 Single Return: $0 - $7,826 - $31,851 - $77,101 - $160,851 - Over 7,825 31,850 77,100 160,850 349,700 $349,700 TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT 0.50% 0.56% 0.59% 0.67% 0.69% 0.75% 0.77% 1.00% 1.11% 1.18% 1.33% 1.39% 1.49% 1.54% 1.50% 1.67% 1.76% 2.00% 2.08% 2.24% 2.31% 2.00% 2.22% 2.35% 2.67% 2.78% 2.99% 3.08% 2.50% 2.78% 2.94% 3.33% 3.47% 3.73% 3.85% 3.00% 3.33% 3.53% 4.00% 4.17% 4.48% 4.62% 3.50% 3.89% 4.12% 4.67% 4.86% 5.22% 5.38% 4.00% 4.44% 4.71% 5.33% 5.56% 5.97% 6.15% 4.50% 5.00% 5.29% 6.00% 6.25% 6.72% 6.92% 5.00% 5.56% 5.88% 6.67% 6.94% 7.46% 7.69% 5.50% 6.11% 6.47% 7.33% 7.64% 8.21% 8.46% 6.00% 6.67% 7.06% 8.00% 8.33% 8.96% 9.23% 6.50% 7.22% 7.65% 8.67% 9.03% 9.70% 10.00% 7.00% 7.78% 8.24% 9.33% 9.72% 10.45% 10.77% 7.50% 8.33% 8.82% 10.00% 10.42% 11.19% 11.54% 8.00% 8.89% 9.41% 10.67% 11.11% 11.94% 12.31% 8.50% 9.44% 10.00% 11.33% 11.81% 12.69% 13.08% 9.00% 10.00% 10.59% 12.00% 12.50% 13.43% 13.85% 9.50% 10.56% 11.18% 12.67% 13.19% 14.18% 14.62% 10.00% 11.11% 11.76% 13.33% 13.89% 14.93% 15.38% 10.50% 11.67% 12.35% 14.00% 14.58% 15.67% 16.15% 11.00% 12.22% 12.94% 14.67% 15.28% 16.42% 16.92%
Note: The maximum marginal tax rate for each bracket was used in calculating the taxable yield equivalent. Furthermore, additional state and local taxes paid on comparable taxable investments were not used to increase federal deductions. WHO IS FEDERATED INVESTORS, INC.? Federated and its subsidiaries are dedicated to providing you with world-class investment management. With offices in Pittsburgh, New York City and Frankfurt, Federated is a firm with independent research, product breadth and industry standing. Federated seeks to achieve superior and sustainable investment performance for a broad array of global clients through a disciplined investment process and an information advantage created by proprietary fundamental research. Federated is distinctive in our disciplined process that integrates proprietary research with trading and portfolio management. FEDERATED FUNDS OVERVIEW EQUITIES As of December 31, 2006, Federated managed 48 equity funds totaling approximately $28.7 billion in assets across growth, value, equity income, international, index and sector allocation styles. TAXABLE FIXED-INCOME As of December 31, 2006, Federated managed 35 taxable bond funds including: high-yield, multi-sector, mortgage-backed, U.S. government, U.S. corporate and international, with assets approximating $15.2 billion. TAX FREE FIXED-INCOME As of December 31, 2006, Federated managed 14 municipal bond funds with approximately $2.9 billion in assets and 22 municipal money market funds with approximately $27.6 billion in total assets. MONEY MARKET FUNDS As of December 31, 2006, Federated managed $155.2 billion in assets across 51 money market funds, including 17 government, 11 prime, 22 municipal and 1 euro- denominated with assets approximating $63.5 billion, $64.0 billion, $27.6 billion and $82.9 million. The Chief Investment Officers responsible for oversight of the various investment sectors within Federated are: Stephen F. Auth, CFA, for Global Equity; Robert J. Ostrowski, CFA, for Taxable Fixed-Income; Mary Jo Ochson, CFA, for Tax Free Fixed-Income; and Deborah A. Cunningham, CFA, for Money Market Funds. FINANCIAL INFORMATION The Financial Statements for the Fund for the fiscal year ended March 31, 2007 are incorporated herein by reference to the Annual Report to Shareholders of Federated Municipal Securities Fund, Inc. dated March 31, 2007. INVESTMENT RATINGS STANDARD AND POOR'S (S&P) LONG-TERM DEBT RATING DEFINITIONS AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA--Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A--High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. BB--Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment-grade. B--Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, CC, C--High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default. D--In payment default. The 'D' rating category is used when payments on a financial commitment are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on a financial commitment are jeopardized. MOODY'S INVESTORS SERVICE (MOODY'S) LONG-TERM DEBT RATINGS AAA-- Bonds and preferred stock 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 and preferred stock 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 risk appear somewhat larger than the Aaa securities. A-- Bonds and preferred stock 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 and preferred stock 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 and preferred stock which are rated 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 and preferred stock 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 and preferred stock 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 and preferred stock which are rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C-Bonds and preferred stock which are rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. NR--Indicates that both the bonds and the obligor or credit enhancer are not currently rated by S&P or Moody's with respect to short-term indebtedness. However, management considers them to be of comparable quality to securities rated A-1 or P-1. NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt rated AAA by S&P or Aaa by Moody's. NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt rated AA by S&P or Aa by Moody's. NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt rated A by S&P or Moody's. FITCH RATINGS LONG-TERM DEBT RATING DEFINITIONS AAA--HIGHEST CREDIT QUALITY. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA--VERY HIGH CREDIT QUALITY. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A--HIGH CREDIT QUALITY. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB--GOOD CREDIT QUALITY. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. BB--SPECULATIVE. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment-grade. B--HIGHLY SPECULATIVE. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favourable business and economic environment. MOODY'S COMMERCIAL PAPER RATINGS PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well established industries, high rates of return on funds employed, conservative capitalization structure with moderate reliance on debt and ample asset protection, broad margins in earning coverage of fixed financial charges and high internal cash generation, and well-established access to a range of financial markets and assured sources of alternate liquidity. PRIME-2--Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt 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. S&P COMMERCIAL PAPER RATINGS A-1-- A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. FITCH RATINGS COMMERCIAL PAPER RATING DEFINITIONS F-1--Indicates the strongest capacity for timely payment of financial commitments relative to other issuers or issues in the same country. Under their national rating scale, this rating is assigned to the "best" credit risk relative to all others in the same country and is normally assigned to all financial commitments issued or guaranteed by the sovereign state. Where the credit risk is particularly strong, a "+" is added to the assigned rating. F-2-- Indicates a satisfactory capacity for timely payment of financial commitments relative to other issuers or issues in the same country. However, the margin of safety is not as great as in the case of the higher ratings. A.M. BEST LONG-TERM DEBT RATINGS An A.M. Best Long-Term Debt Rating (issue credit rating) is an opinion as to the issuer's ability to meet its financial obligations to security holders when due. These ratings are assigned to debt and preferred stock issues. AAA-EXCEPTIONAL. Assigned to issues where the issuer has, in A.M. Best's opinion, an exceptional ability to meet the terms of the obligation. AA-VERY STRONG. Assigned to issues where the issuer has, in A.M. Best's opinion, a very strong ability to meet the terms of the obligation. A-STRONG. Assigned to issues where the issuer has, in A.M. Best's opinion, a strong ability to meet the terms of the obligation. BBB-ADEQUATE. Assigned to issues where the issuer has, in A.M. Best's opinion, an adequate ability to meet the terms of the obligation; however, is more susceptible to changes in economic or other conditions. BB-SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's opinion, speculative credit characteristics, generally due to a moderate margin of principal and interest payment protection and vulnerability to economic changes. . B-VERY SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's opinion, very speculative credit characteristics, generally due to a modest margin of principal and interest payment protection and extreme vulnerability to economic changes. . CCC, CC, C-EXTREMELY SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's opinion, extremely speculative credit characteristics, generally due to a minimal margin of principal and interest payment protection and/or limited ability to withstand adverse changes in economic or other conditions. D-IN DEFAULT. In default on payment of principal, interest or other terms and conditions. The rating also is utilized when a bankruptcy petition, or similar action, has been filed. Ratings from "aa" to "ccc" may be enhanced with a "+" (plus) or "-" (minus) to indicate whether credit quality is near the top or bottom of a category. A company's Long-Term Credit Rating also may be assigned an Under Review modifier ("u") that generally is event-driven (positive, negative or developing) and indicates that the company's A.M. Best Rating opinion is under review and may be subject to near-term change. Ratings prefixed with an ("i") denote indicative ratings. Ratings may also be assigned a Public Data modifier ("pd") which indicates that a company does not subscribe to A.M. Best's interactive rating process. A.M. BEST SHORT-TERM DEBT RATINGS An A.M. Best Short-Term Debt Rating (issue credit rating) is an opinion as to the issuer's ability to meet its obligations having maturities generally less than one year, such as commercial paper. AMB-1+ -STRONGEST. Assigned to issues where the issuer has, in A.M. Best's opinion, the strongest ability to repay short-term debt obligations. AMB-1 -OUTSTANDING. Assigned to issues where the issuer has, in A.M. Best's opinion, an outstanding ability to repay short-term debt obligations. AMB-2 -SATISFACTORY. Assigned to issues where the issuer has, in A.M. Best's opinion, a satisfactory ability to repay short-term debt obligations. AMB-3 -ADEQUATE. Assigned to issues where the issuer has, in A.M. Best's opinion, an adequate ability to repay short-term debt obligations; however, adverse economic conditions will likely lead to a reduced capacity to meet its financial commitments on short-term debt obligations. AMB-4 -SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's opinion, speculative credit characteristics and is vulnerable to economic or other external changes, which could have a marked impact on the company's ability to meet its commitments on short-term debt obligations. D-IN DEFAULT. In default on payment of principal, interest or other terms and conditions. The rating also is utilized when a bankruptcy petition, or similar action, has been filed. A company's Short-Term Credit Rating also may be assigned an Under Review modifier ("u") that generally is event-driven (positive, negative or developing) and indicates that the company's A.M. Best Rating opinion is under review and may be subject to near-term change. Ratings prefixed with an ("i") denote indicative ratings. A.M. BEST RATING OUTLOOK A.M. Best Credit Ratings (aaa to c) are assigned a Rating Outlook that indicates the potential direction of a company's rating for an intermediate period, generally defined as the next 12 to 36 months. Public Data Ratings are not assigned an Outlook. Ratings Outlooks are as follows: POSITIVE-Indicates a company's financial/market trends are favorable, relative to its current rating level, and if continued, the company has a good possibility of having its rating upgraded. NEGATIVE-Indicates a company is experiencing unfavorable financial/market trends, relative to its current rating level, and if continued, the company has a good possibility of having its rating downgraded. STABLE-Indicates a company is experiencing stable financial/market trends and that there is a low likelihood that its rating will change in the near term. -5- ADDRESSES FEDERATED MUNICIPAL SECURITIES FUND, INC. Class A Shares Class B Shares Class C Shares Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 DISTRIBUTOR Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 INVESTMENT ADVISER Federated Investment Management Company Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP 200 Clarendon Street Boston, MA 02116-5072 -6- APPENDIX The following is a list of persons other than the Adviser and its affiliates that may receive nonpublic portfolio holdings information concerning the Fund: CUSTODIAN State Street Bank and Trust Company SECURITIES LENDING AGENT N/A INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP LEGAL COUNSEL Dickstein Shapiro LLP Reed Smith LLP SERVICE PROVIDERS Bloomberg Factset Wilshire Associates, Inc. SECURITY PRICING SERVICES Reuters Standard & Poor's FT Interactive Data Bear Stearns RATINGS AGENCIES Standard & Poor's PERFORMANCE REPORTING/PUBLICATIONS Fidelity-Strategic Advisors Lipper Morningstar NASDAQ Reuters Value Line Wiesenberger/Thomson Financial OTHER Investment Company Institute Astec Consulting Group, Inc. Endnotes PART C. OTHER INFORMATION. Item 23. Exhibits: a) Conformed Copy of Articles of Restatement of the Registrant (including Amendment Nos. 4-13); (20) b) (i) Copy of By-Laws of the Registrant (including Amendment Nos. 11-13); (20) (ii) Copy of Amendment #14 to the By-Laws of the Registrant(22) (iii) Copy of Amendment #15 to the By-Laws (23) (iv) Copy of Amendment #16 to the By-Laws of the Registrant (24) (v) Copy of Amendment #17 to the By-Laws of the Registrant (25) (vi) Copy of Amendment #18 to the By-Laws of the Registrant (25) c) Copies of Specimen Certificates for Shares of Capital Stock of the Registrant's Class A Shares, Class B Shares and Class C Shares; (16) d) (i) Conformed Copy of Investment Advisory Contract of the Registrant;(9) (ii) Conformed copy of Amendment dated June 1, 2001 to the Investment Advisory Contract of the Registrant; (21) e) (i) Conformed Copy of Distributor's Contract of the Registrant; (12) (ii) Conformed Copy of Exhibit A to the Distributor's Contract of the Registrant; (20) (iii) Conformed Copy of Exhibit B to the Distributor's Contract of the Registrant; (20) (iv) Conformed Copy of Distributor's Contract (Class B Shares) including Exhibit 1 and Schedule A and B; (17) (v) The Registrant hereby incorporates the conformed copy of the specimen Mutual Funds Sales and Service Agreement; Mutual Funds Service Agreement; and Plan Trustee/Mutual Funds Service Agreement from Item 24(b)(6) of the Cash Trust Series II Registration Statement on Form N-1A, filed with the Commission on July 24, 1995 (File Numbers 33-38550 and 811-6269); (vi) Conformed copy of Amendment dated June 1, 2001 to Distributor's Contract of the Registrant; (21) (vii) Conformed copy of Amendment dated October 1, 2003 to Distributor's Contract of the Registrant (23) f) Not applicable; g) (i) Conformed Copy of Custodian Contract of the Registrant; (13) (ii) Conformed Copy of Custodian Fee Schedule; (17) (iii) Conformed copy of Amendment to Custodian Contract of the Registrant; (21) h) (i) Conformed Copy of Amended and Restated Agreement for Fund Accounting Services, Administrative Services, Transfer Agency Services and Custodian Services Procurement; (15) (ii) The responses described in Item 23(e) (v) are hereby incorporated by reference. (iii) The Registrant hereby incorporates the conformed copy of Amendment No. 2 to the Amended & Restated Agreement for Fund Accounting Services, Administrative Services, Transfer Agency Services and Custody Services Procurement from Item 23 (h) (v) of the Federated U.S. Government Securities: 2-5 Years Registration Statement on Form N-1A, filed with the Commission on March 30, 2004. (File Nos. 2-75769 and 811-3387); (iv) The Registrant hereby incorporates the conformed copy of Amendment No. 3 to the Amended & Restated Agreement for Fund Accounting Services, Administrative Services, Transfer Agency Services and Custody Services Procurement from Item 23 (h) (v) of the Federated U.S. Government Securities: 2-5 Years Registration Statement on Form N-1A, filed with the Commission on March 30, 2004. (File Nos. 2-75769 and 811-3387); (v) Conformed Copy of Principal Shareholder Services Agreement (Class B Shares) including Exhibit 1 and Schedule A and B; (17) (vi) Conformed Copy of Shareholders Services Agreement (Class B Shares) including Exhibit 1 and Schedule A; (17) (vii) The Registrant hereby incorporates by reference the conformed copy of the Agreement for Administrative Services, with Exhibit 1 and Amendments 1 and 2 attached, between Federated Administrative Services and the Registrant from Item 23(h) (iv) of the Federated Total Return Series, Inc. Registration Statement on Form N-1A, filed with the Commission on November 29, 2004. (File Nos. 33-50773 and 811- 7115); (viii) The Registrant hereby incorporates the conformed copy of the Second Amended and Restated Services Agreement, with attached Schedule 1 revised 6/30/04, from Item 23(h) (vii) of the Cash Trust Series, Inc. Registration Statement on Form N-1A, filed with the Commission on July 29, 2004. (File Nos. 33-29838 and 811-5843) (ix) The Registrant hereby incorporates the conformed copy of the Financial Administration and Accounting Services Agreement, with attached Exhibit A revised 6/30/04, from Item (h) (viii) of the Cash Trust Series, Inc. Registration Statement on Form N-1A, filed with the Commission on July 29, 2004. (File Nos. 33-29838 and 811-5843) (x) The Registrant hereby incorporates the conformed copy of Transfer Agency and Service Agreement between the Federated Funds and State Street Bank and Trust Company from Item 23(h)(viii)of the Federated Total Return Government Bond Fund Registration Statement on Form N- 1A, filed with the Commission on April 28, 2006 (File Nos. 33-60411 and 811- 07309); (xi) Conformed copy of the Financial Administration and Accounting Services Agreement, with attached Exhibit A revised 1/1/07; (+) i) Conformed Copy of Opinion and Consent of Counsel as to legality of shares being registered; (2); j) Conformed Copy of Consent of Independent Registered Public Accounting Firm; (25) k) Not applicable; l) Conformed Copy of Initial Capital Understanding; (2) m) (i) Conformed Copy of Distribution Plan of the Registrant; (12) (ii) Conformed Copy of Exhibit A of Distribution Plan of the Registrant; (20) (iii) The responses described in Item 23(e) (v) are hereby incorporated by reference. (ii) Conformed Copy of Exhibit 1 and Schedule A to Distribution Plan (Class B Shares) of the Registrant; (17) (iii) Conformed copy of Distribution Plan (including Exhibit A) of the Registrant;(23) n) The Registrant hereby incorporates the Copy of the Multiple Class Plan and attached Exhibits from Item (n) of the Federated Income Trust Registration Statement on Form N-1A, filed with the Commission on March 31, 2005. (File Nos. 2-75366 and 811-3352) (i) Conformed Copy of the Multiple Class Plan and attached Exhibits; (+) o) (i) Conformed Copy of Power of Attorney of the Registrant; (20) (ii) Conformed Copy of Power of Attorney Director of the Registrant; ((25)) (iii) Conformed Copy of Power of Attorney of Director of the Registrant; ((25)) (iv) Conformed Copy of Power of Attorney of Treasurer of the Registrant; ((25)) p) (i) The Registrant hereby incorporates the copy of the Code of Ethics for Access Persons from Item 23(p) of the Money Market Obligations Trust Registration Statement on Form N-1A filed with the Commission on February 26, 2004. (File Nos. 33-31602 and 811-5950). (ii) The Registrant hereby incorporates the conformed copy of the Federated Investors, Inc. Code of Ethics for Access Persons, effective 1/1/2005, from Item 23(p) of the Money Market Obligations Trust Registration Statement on Form N-1A, filed with the Commission on February 25, 2005. (File Nos. 33-31602 and 811-5950); + All exhibits have been filed electronically. 2. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 1 on Form S-5 filed November 29, 1976. (File Nos. 2-57181 and 811-2677) 9. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 36 on Form N-1A filed July 17, 1990. (File Nos. 2-57181 and 811-2677) 11. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 38 on Form N-1A filed July 22, 1992. (File Nos. 2-57181 and 811-2677) 12. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 42 on Form N-1A filed May 25, 1994. (File Nos. 2-57181 and 811-2677) 13. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 45 on Form N-1A filed May 25, 1995. (File Nos. 2-57181 and 811-2677) 15. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 48 on Form N-1A filed May 28, 1996. (File Nos. 2-57181 and 811-2677) 16. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 50 on Form N-1A filed May 29, 1997. (File Nos. 2-57181 and 811-2677) 17. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 51 on Form N-1A filed May 29, 1998. (File Nos. 2-57181 and 811-2677) 20. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 56 on Form N-1A filed May 25, 2001. (File Nos. 2- 57181 and 811-2677) 21. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 57 on Form N-1A filed May 29, 2002. (File Nos. 2- 57181 and 811-2677) 22. Response is incorporated by reference to Registrant's Post Effective Amendment No. 58 on Form N-1A filed May 28, 2003. (File Nos. 2- 57181 and 811-2677) 23. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 59 on From N-1A filed June 1, 2004. 24. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 60 on From N-1A filed May 27, 2005. 25. Response is incorporated by reference to Registrant's Post- Effective Amendment No. 60 on From N-1A filed May 27, 2005. Item 24. Persons Controlled by or Under Common Control with the Fund: None Item 25. Indemnification: (11) Item 26. Business and Other Connections of Investment Adviser: For a description of the other business of the investment adviser, see the section entitled "Who Manages the Fund?" in Part A. The affiliations with the Registrant of two of the Trustees and two of the Officers of the investment adviser are included in Part B of this Registration Statement under "Who Manages and Provides Services to the Fund?" The remaining Trustees of the investment adviser and, in parentheses, their principal occupations are: Thomas R. Donahue, (Chief Financial Officer, Federated Investors, Inc.), 1001 Liberty Avenue, Pittsburgh, PA, 15222-3779 and Mark D. Olson (a principal of the firm, Mark D. Olson & Company, L.L.C. and Partner, Wilson, Halbrook & Bayard, P.A.), 800 Delaware Avenue, P.O. Box 2305, Wilmington, DE 19899-2305. The remaining Officers of the investment adviser are: President/ Chief Executive Officer and Trustee: John B. Fisher Vice Chairman: William D. Dawson, III Senior Vice Presidents: Todd Abraham J. Scott Albrecht Joseph M. Balestrino Randall Bauer Jonathan C. Conley Deborah A. Cunningham Mark E. Durbiano Donald T. Ellenberger Susan R. Hill Robert M. Kowit Jeffrey A. Kozemchak Mary Jo Ochson Robert J. Ostrowski Ihab Salib Paige Wilhelm Vice Presidents: Nancy J.Belz G. Andrew Bonnewell Hanan Callas Jerry Conner James R. Crea, Jr. Karol Crummie Lee R. Cunningham, II B. Anthony Delserone,Jr. William Ehling Eamonn G. Folan Richard J. Gallo John T. Gentry Kathyrn P. Glass Patricia L. Heagy William R. Jamison Nathan H. Kehm John C. Kerber J. Andrew Kirschler Marian R. Marinack Kevin McCloskey John W. McGonigle Natalie F. Metz Thomas J. Mitchell Joseph M. Natoli Bob Nolte Mary Kay Pavuk Jeffrey A. Petro John Polinski Rae Ann Rice Brian Ruffner Roberto Sanchez-Dahl,Sr. John Sidawi Michael W. Sirianni, Jr. Christopher Smith Kyle Stewart Mary Ellen Tesla Timothy G. Trebilcock Paolo H. Valle Stephen J. Wagner Mark Weiss George B. Wright Assistant Vice Presidents: Jerome Conner Richard Cumberledge Jason DeVito Bryan Dingle Timothy Gannon James Grant Tracey L. Lusk Ann Manley Karl Mocharko Joseph Mycka Nick Navari Gene Neavin Liam O'Connell Rae Ann Rice Brian Ruffner Nichlas S. Tripodes Secretary: G. Andrew Bonnewell Treasurer: Thomas R. Donahue Assistant Treasurer: Denis McAuley, III The business address of each of the Officers of the investment adviser is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222- 3779. These individuals are also officers of a majority of the investment advisers to the investment companies in the Federated Fund Complex described in Part B of this Registration Statement. Item 27. Principal Underwriters: (a) Federated Securities Corp. the Distributor for shares of the Registrant, acts as principal underwriter for the following open-end investment companies, including the Registrant: Cash Trust Series, Inc.; Cash Trust Series II; Federated Adjustable Rate Securities Fund; Federated American Leaders Fund, Inc.; Federated Core Trust; Federated Core Trust II, L.P.; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fixed Income Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; 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 Intermediate Government Fund, Inc. Federated International Series, Inc.; Federated Investment Series Funds, Inc.; Federated Managed Allocation Portfolios; Federated Managed Pool Series; Federated MDT Series; Federated Municipal High Yield Advantage Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Securities Income Trust; Federated Short-Term Municipal Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Total Return Government Bond Fund; 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 World Investment Series, Inc.; Intermediate Municipal Trust; Edward Jones Money Market Fund and Money Market Obligations Trust. (b) (1) (2) (3) Positions and Offices Positions and Offices With Distributor Name With Registrant _____________________ _________________ _____________________ Chairman: Richard B. Fisher Vice President Executive Vice Vice President, Assistant Secretary and Director: Thomas R. Donahue President and Director: Thomas E. Territ Vice President and Director: Peter J. Germain Treasurer and Director: Denis McAuley III Senior Vice Presidents: Michael Bappert Michael Benacci Richard W. Boyd Charles L. Davis, Jr. Laura M. Deger Peter W. Eisenbrandt Theodore Fadool, Jr. Christopher Fives James S. Hamilton James M. Heaton Harry J. Kennedy Michael W. Koenig Anne H. Kruczek Amy Michaliszyn Richard C. Mihm Keith Nixon Solon A. Person, IV Chris Prado Brian S. Ronayne Colin B. Starks Robert F. Tousignant William C. Tustin Paul Uhlman Vice Presidents: Irving Anderson Dan Berry John B. Bohnet Edward R. Bozek Jane E. Broeren-Lambesis Daniel Brown Bryan Burke Mark Carroll Dan Casey Scott Charlton Steven R. Cohen James Conely Kevin J. Crenny G. Michael Cullen Beth C. Dell Ron Dorman Donald C. Edwards Lee England Timothy Franklin Peter Germain Jamie Getz Scott Gundersen Peter Gustini Dayna C. Haferkamp Raymond J. Hanley Vincent L. Harper, Jr. Bruce E. Hastings Jeffrey S. Jones Ed Koontz Christopher A. Layton Michael H. Liss Michael R. Manning Michael Marcin Martin J. McCaffrey Mary A. McCaffrey Richard C. Mihm Vincent T. Morrow Doris T. Muller Alec H. Neilly Rebecca Nelson John A. O'Neill James E. Ostrowski Stephen Otto Brian Paluso Mark Patsy Richard Paulson Robert F. Phillips Josh Rasmussen Richard A. Recker Ronald Reich Christopher Renwick Diane M. Robinson Timothy A. Rosewicz Thomas S. Schinabeck Edward J. Segura Peter Siconolfi Edward L. Smith John A. Staley Jack L. Streich Mark Strubel Michael Vahl David Wasik G. Walter Whalen Stephen White Jeff Wick Lewis Williams Edward J. Wojnarowski Michael P. Wolff Erik Zettlemayer Paul Zuber Assistant Vice Presidents: Robert W. Bauman William Rose Secretary: C. Todd Gibson Assistant Treasurer: Lori A. Hensler Richard A. Novak The business address of each of the Officers of Federated Securities Corp. is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779. (c) Not applicable Item 28. Location of Accounts and Records All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one of the following locations: Registrant Reed Smith LLP Investment Management Group (IMG) Federated Investors Tower 12th Floor 1001 Liberty Avenue Pittsburgh, PA 15222-3779 (Notices should be sent to the Agent for Service at above address) Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 State Street Bank and P.O. Box 8600 Trust Company Boston, MA 02266-8600 ("Custodian, Transfer Agent and Dividend Disbursing Agent") Federated Services Company Federated Investors Tower ("Administrator") 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Federated Investment Federated Investors Tower Management Company 1001 Liberty Avenue ("Adviser") Pittsburgh, PA 15222-3779 Item 29. Management Services: Not applicable Item 30. Undertakings: Registrant hereby undertakes to comply with the provisions of Section 16 (c) of the 1949 Act with respect to the removal of Trustees/Directors and the calling of special shareholder meetings by shareholders. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, FEDERATED MUNICIPAL SECURITIES FUND, INC., CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT TO ITS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 30th day of March 2007. FEDERATED MUNICIPAL SECURITIES FUND, INC. BY: /s/ George F. Magera George F. Magera, Assistant Secretary March 30, 2007 Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated: NAME TITLE DATE By: /s/ George F. Magera Attorney In Fact March 30, 2007 George F. Magera for the Persons ASSISTANT SECRETARY Listed Below John F. Donahue* Chairman and Director J. Christopher Donahue* President and Director (Principal Executive Officer) Richard B. Fisher* Vice Chairman Richard J. Thomas* Treasurer (Principal Financial Officer) Thomas G. Bigley* Director John T. Conroy, Jr.* Director Nicholas P. Constantakis* Director John F. Cunningham* Director Lawrence D. Ellis, M.D.* Director Peter E. Madden* Director Charles F. Mansfield, Jr.* Director John E. Murray, Jr., J.D., S.J.D.* Director Marjorie P. Smuts* Director John S. Walsh* Director * By Power of Attorney EX-99.FAAS 2 faas.txt Exhibit h(xi) under Form N-1A Exhibit (10) under Item 601/Reg. S-K FINANCIAL ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT THIS AGREEMENT dated as of January 1, 2007 is made, severally and not jointly (except that the parties agree that the calculation required by Section XIII hereunder shall be joint and not several) by each of the investment companies listed on Exhibit A hereto (each, a "Trust") and State Street Bank and Trust Company ("State Street"). WHEREAS, each Trust is registered as a management investment company under the Investment Company Act of 1940, as amended (the "1940 Act") with authorized and issued shares of capital stock or beneficial interest (the "Shares"); WHEREAS, certain Trusts subject to this Agreement are "series companies" as defined in Rule 18f-2(a) under the 1940 Act and, as used in this Agreement, the term "Portfolio" refers to either (i) an individual portfolio of such a series company or (ii) an investment company that is not organized as a series company, and the term "Portfolios" refers to all such portfolios and investment companies, collectively; WHEREAS, Shares of each Portfolio may be subdivided into "classes" as provided in Rule 18f-3 under the 1940 Act; WHEREAS, the Trust desires to retain State Street as financial administrator (the "Financial Administrator") to furnish certain financial administrative services on behalf of the Portfolios; WHEREAS, the Trust desires to retain State Street as accounting agent (the "Accounting Agent") to perform certain accounting and recordkeeping services on behalf of the Portfolios; and WHEREAS, State Street is willing to perform such services on the terms provided herein. NOW, THEREFORE, the parties agree as follows: I. APPOINTMENT A. Of State Street as the Financial Administrator The Trust hereby appoints State Street to act as Financial Administrator with respect to the Trust for purposes of providing certain financial administrative services for the period and on the terms set forth in this Agreement. State Street accepts such appointment and agrees to render the financial administrative services stated herein. The Trust will initially consist of the Portfolios identified on Exhibit A hereto. In the event that the Trust establishes one or more additional Portfolios with respect to which it wishes to retain the Financial Administrator to act as financial administrator hereunder, the Trust shall notify the Financial Administrator in writing (including by facsimile or electronic mail communication). Upon such notification, such Portfolio shall become subject to the provisions of this Agreement to the same extent as the existing Portfolios, except to the extent that such provisions (including those relating to compensation and expenses payable by the Trust and its Portfolios) may be modified with respect to each additional Portfolio in writing by the Trust and the Financial Administrator at the time of the addition of the Portfolio. B. Of State Street as the Accounting Agent The Trust hereby appoints State Street to act as Accounting Agent with respect to the Portfolios for purposes of providing certain accounting and recordkeeping services for the period and on the terms set forth in this Agreement. State Street accepts such appointment and agrees to render the accounting and recordkeeping services stated herein. The Trust will initially consist of the Portfolios identified on Exhibit A. In the event that the Trust establishes one or more additional Portfolios with respect to which it wishes to retain the Accounting Agent to act as accounting agent hereunder, the Trust shall notify the Accounting Agent in writing (including by facsimile or electronic mail communication). Upon such notification, such Portfolio shall become subject to the provisions of this Agreement to the same extent as the existing Portfolios, except to the extent that such provisions (including those relating to compensation and expenses payable by the Trust and its Portfolios) may be modified with respect to each additional Portfolio in writing by the Trust and the Accounting Agent at the time of the addition of the Portfolio. II. REPRESENTATIONS and WARRANTIES A. By State Street. State Street represents and warrants that: 1. It is a Massachusetts trust company, duly organized and existing under the laws of The Commonwealth of Massachusetts; 2. It has the corporate power and authority to carry on its business in The Commonwealth of Massachusetts; 3. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; 4. No legal or administrative proceedings have been instituted or threatened which would impair State Street's ability to perform its duties and obligations under this Agreement; 5. Its entrance into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of State Street or any law or regulation applicable to it; and 6. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 1 B. By the Trust. The Trust represents and warrants that: 1. It is duly organized, existing and in good standing under the laws of the jurisdiction in which it was formed; 2. It has the power and authority under applicable laws and by its organizational documents to enter into and perform this Agreement; 3. All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; 4. With respect to each Portfolio, it is an investment company properly registered under the 1940 Act; 5. A registration statement under the 1940 Act (and if Shares of the Portfolio are offered publicly, under the Securities Act of 1933, as amended (the "1933 Act")) has been filed and will be effective and remain effective during the term of this Agreement. The Trust also warrants that as of the effective date of this Agreement, all necessary filings under the securities laws of the states in which the Trust offers or sells its Shares have been made; 6. No legal or administrative proceedings have been instituted or threatened which would impair the Trust's ability to perform its duties and obligations under this Agreement; 7. Its entrance into this Agreement will not cause a material breach or be in material conflict with any other agreement or obligation of the Trust or any law or regulation applicable to it; and 8. As of the close of business on the date of this Agreement, the Trust is authorized to issue its Shares. III.DUTIES of STATE STREET A. As the Financial Administrator. The Financial Administrator shall provide the following services, in each case, subject to the control, supervision and direction of the respective Trust and its Board of Trustees/Directors (the "Board") and in accordance with procedures which may be established from time to time between the Trust and the Financial Administrator (including the procedures established in the "Service Level Agreement" as defined in Section V of this Agreement): 1. Compile, review and deliver to the Trust, fund performance statistics including Securities and Exchange Commission (the "SEC") yields, distribution yields and total returns; 2. Prepare and submit for approval by officers of the Trust a fund expense budget, review expense calculations and arrange for payment of the Trust's expenses; 3. Prepare and submit for approval the annual Statement of Position 93-2 ("ROCSOP") adjustment based in part on the tax provision information provided by Federated Administrative Services. 4. Prepare for review and approval by officers of the Trust financial information required for the Trust's annual and semi-annual reports, proxy statements and other communications required or otherwise to be sent to shareholders; review text of "President's Letter to Shareholders" and "Management's Discussion of Financial Performance" as included in shareholder reports (which shall also be subject to review by the Trust's legal counsel); 5. Prepare for review by an officer of and legal counsel for the Trust the Trust's periodic financial reports required to be filed with the SEC on Form N-SAR and financial information required by Form N-1A, Form N-14, Form N-Q and Form 24F-2 and such other reports, forms or filings as may be mutually agreed upon; 6. Prepare reports relating to the business and affairs of the Trust as may be mutually agreed upon and not otherwise prepared by the Trust's investment adviser, custodian, legal counsel or independent accountants; 7. Oversee and review calculations of fees paid to State Street and to the Trust's investment adviser, shareholder servicing agent, distributor, custodian, fund administrator, fund accountant and transfer and dividend disbursing agent ("Transfer Agent"), in addition to the oversight and review of all asset based fee calculations; 8. Prepare fund income forecasts and submit for approval by officers of the Trust, recommendations for fund income dividend distributions; 9. Maintain continuing awareness of significant emerging regulatory and legislative developments which may affect the Trust, and provide related planning assistance where requested or appropriate; 10.Complete monthly preferred shares "asset coverage" test (as that term is defined in Section 18(h) of the 1940 Act) (the "1940 Act Test") following the compliance procedures contained in Exhibit D attached hereto, as such Exhibit may be amended from time to time by mutual agreement of the parties (the "Compliance Procedures"); 11.Complete monthly preferred shares basic maintenance amount test for Fitch Ratings, Ltd. ("Fitch") (the "Fitch Preferred Shares Basic Maintenance Test") following the Compliance Procedures; and 12.Complete monthly preferred shares basic maintenance amount test for Moody's Investors Service, Inc. ("Moody's") (the "Moody's Preferred Shares Basic Maintenance Test") following the Compliance Procedures. The Financial Administrator shall provide the office facilities and the personnel required by it to perform the services contemplated herein. B. As the Accounting Agent. The Accounting Agent shall provide the following services, in each case, subject to the control, supervision and direction of the respective Trust and its Board and in accordance with procedures which may be established from time to time between the Trust and the Accounting Agent (including the procedures established in the "Service Level Agreement" as defined in Section V of this Agreement): 1. Books of Account. The Accounting Agent shall maintain the books of account of the Trust and shall perform the following duties in the manner prescribed by the respective Trust's currently effective prospectus, statement of additional information or other governing document, certified copies of which have been supplied to the Accounting Agent (a "Governing Document") (including the procedures established in the Service Level Agreement): a. Value the assets of each Portfolio using: primarily, market quotations (including the use of matrix pricing) supplied by the independent pricing services selected by the Accounting Agent in consultation with the Trust's investment adviser (the "Adviser") and approved by the Board; secondarily, if a designated pricing service does not provide a price for a security that the Accounting Agent believes should be available by market quotation, the Accounting Agent may obtain a price by calling brokers designated by the Adviser, or if the Adviser does not supply the names of such brokers, the Accounting Agent will attempt on its own to find brokers to price the security, subject to approval by the Adviser; thirdly, for securities for which no market price is available, the Valuation Committee overseen by the Board (the "Committee") will determine a fair value in good faith; or fourthly, such other procedures as may be adopted by the Board. Consistent with Rule 2a-4 under the 1940 Act, estimates may be used where necessary or appropriate. The Accounting Agent is not the guarantor of the accuracy of the securities prices received from such pricing agents and the Accounting Agent is not liable to the Trust for errors in valuing a Portfolio's assets or calculating the net asset value (the "NAV") per share of such Portfolio or class when the calculations are based upon inaccurate prices provided by pricing agents. The Accounting Agent will provide daily to the Adviser the security prices used in calculating the NAV of each Portfolio, for its use in preparing exception reports for those prices on which the Adviser has a comment. Further, upon receipt of the exception reports generated by the Adviser, the Accounting Agent will diligently pursue communication regarding exception reports with the designated pricing agents; b. Determine the NAV per share of each Portfolio and/or class, at the time and in the manner from time to time determined by the Board and as set forth in the Prospectus of such Portfolio; 2 c. Prepare the weekly or bi-weekly mark-to-market reports and analysis in compliance with Rule 2a-7 for each of the money market portfolios. d. Monitor the triggers used to determine when the ITG fair value pricing procedures may be invoked, as further detailed on attached Exhibit C (the Fair Value Pricing Authorization), and inform the appropriate Federated personnel that triggers had been met. e. Calculate the net income of each of the Portfolios, if any; f. Calculate realized capital gains or losses of each of the Portfolios resulting from sale or disposition of assets, if any; g. Calculate the expense accruals for each fund/class of shares; h. Determine the dividend factor for all daily dividend funds; i. Maintain the general ledger and other accounts, books and financial records of the Trust, including for each Portfolio, as required under Section 31(a) of the 1940 Act and the rules thereunder in connection with the services provided by State Street j. At the request of the Trust, prepare various reports or other financial documents in accordance with generally accepted accounting principles as required by federal, state and other applicable laws and regulations; and k. Such other similar services as may be reasonably requested by the Trust. The Trust shall provide timely prior notice to the Accounting Agent of any modification in the manner in which such calculations are to be performed as prescribed in any revision to the Trust's Governing Document. The Accounting Agent shall not be responsible for any revisions to the manner in which such calculations are to be performed unless such revisions are communicated in writing to the Accounting Agent. 2. Records. The Accounting Agent shall create and maintain all records relating to its activities and obligations under this Agreement in such a manner as will meet the obligations of the Trust under the 1940 Act, specifically Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Trust and shall at all times during the regular business hours of the Accounting Agent be open for inspection by duly authorized officers, employees or agents of the Trust and employees and agents of the SEC. Subject to Section XVII.B below, the Accounting Agent shall preserve for the period required by law the records required to be maintained thereunder. 3 IV. DUTIES of the TRUST A. Delivery of Documents. The Trust will promptly deliver, upon request, to the Financial Administrator copies of each of the following documents and all future amendments and supplements, if any: 1. The Trust's organizational documents; 2. The Trust's currently effective registration statements under the 1933 Act (if applicable) and the 1940 Act and the Trust's Prospectus(es) and Statement(s) of Additional Information (collectively, the "Prospectus") relating to all Portfolios and all amendments and supplements thereto as in effect from time to time; 3. Certified copies of resolutions of the Board authorizing (a) the Trust to enter into this Agreement and (b) certain individuals on behalf of the Trust and its third-party agents to (i) give instructions to the Financial Administrator pursuant to this Agreement and (ii) authorize the payment of expenses; 4. The investment advisory agreements between the Trust and the Advisers; and 5. Such other certificates, documents or opinions which the Financial Administrator may, in its reasonable discretion, deem necessary or appropriate in the proper performance of its duties. The Trust shall provide, or shall cause its third-party agent to provide, timely notice to the Accounting Agent of all data reasonably required by the Accounting Agent for performance of its duties described in Section III.B hereunder. The Trust's failure to provide such timely notice shall excuse the Accounting Agent from the performance of such duties, but only to the extent the Accounting Agent's performance is prejudiced by the Trust's failure. State Street is authorized and instructed to rely upon any and all information it receives from the Trust or its third-party agent that it reasonably believes to be genuine. State Street shall have no responsibility to review, confirm or otherwise assume any duty with respect to the accuracy or completeness of any data supplied to it by or on behalf of the Trust. State Street shall value the Trust's securities and other assets utilizing prices obtained from sources designated by the Trust, or the Trust's duly- authorized agent, on a Price Source Authorization substantially in the form attached hereto as Exhibit B or otherwise designated by means of Proper Instructions (as such term is defined herein) (collectively, the "Authorized Price Sources"). State Street shall not be responsible for any revisions to the methods of calculation adopted by the Trust unless and until such revisions are communicated in writing to State Street. B. Proper Instructions. The Trust and its third-party agents shall communicate to State Street by means of Proper Instructions. Proper Instructions shall mean (i) a writing signed or initialed by one or more persons as the Board shall have from time to time authorized or (ii) a communication effected directly between the Trust or its third-party agent and State Street by electro-mechanical or electronic devices, provided that the Trust and State Street have approved such procedures. State Street may rely upon any Proper Instruction believed by it to be genuine and to have been properly issued by or on behalf of the Trust. Oral instructions shall be considered Proper Instructions if State Street reasonably believes them to have been given by a person authorized to give such instructions. The Trust and its third-party agents shall cause all oral instructions to be confirmed in accordance with clauses (i) or (ii) above, as appropriate. The Trust and its third-party agents shall give timely Proper Instructions to State Street in regard to matters affecting accounting practices and State Street's performance pursuant to this Agreement. V. PERFORMANCE GOALS: A. The Trust and State Street have developed mutually acceptable performance goals dated January 1, 2007, and as may be amended from time to time, regarding the manner in which they expect to deliver and receive the services under this Agreement (hereinafter referred to as "Service Level Agreement"). The parties agree that such Service Level Agreement reflects performance goals and any failure to perform in accordance with the provisions thereof shall not be considered a breach of contract that gives rise to contractual or other remedies. It is the intention of the parties that the sole remedy for failure to perform in accordance with the provisions of the Service Level Agreement, or any dispute relating to performance goals set forth in the Service Level Agreement, will be a meeting of the parties to resolve the failure pursuant to the consultation procedure described in Sections V. B. and V.C. below. Notwithstanding the foregoing, the parties hereby acknowledge that any party's failure (or lack thereof) to meet the provisions of the Service Level Agreement, while not in and of itself a breach of contract giving rise to contractual or other remedies, may factor into the Trust's reasonably determined belief regarding the standard of care exercised by State Street hereunder. B. Consultation Procedure. If a party hereto is unable to meet the provisions of the Service Level Agreement, or in the event that a dispute arises relating to performance goals set forth in the Service Level Agreement, either party to this Agreement shall address any concerns it may have by requiring a consultation with the other party. C. Purpose of Consultation Procedure. The purpose of the consultation procedure is to endeavor to resolve any failure to meet the provisions of the Service Level Agreement. If a consultation occurs under this Section V, all parties must negotiate in good faith to endeavor to: 1. implement changes which will enable the Service Level Agreement provisions to be met - such changes may include, but are not limited to, modification of either or both parties' respective operational resources; 2. agree to alternative Service Level Agreement provisions which meet the parties' respective business requirements; or 3. otherwise find a solution such that within a reasonable time after the consultation, the inability to meet the Service Level Agreement provision(s) is reasonably expected to be less likely to occur in the future. VI. COMPLIANCE WITH GOVERNMENTAL RULES and REGULATIONS; RECORDS The Trust assumes full responsibility for its compliance with all securities, tax, commodities and other laws, rules and regulations applicable to it. VII. WARRANTIES If, prior to the Accounting Agent's calculation of the current NAV, the Trust or its third-party agent notifies the Accounting Agent that any of its accounting services are erroneous in any material respect, the Accounting Agent shall endeavor in a timely manner to correct such failure. Third-parties that are selected by and approved by the Trust and from which the Accounting Agent may obtain certain data included in the accounting services are solely responsible for the contents of such data and the Trust agrees to make no claim against the Accounting Agent arising out of the contents of such third-party data including, but not limited to, the accuracy thereof. VIII. FORCE MAJEURE The parties will maintain throughout the term of this Agreement, such contingency plans as are reasonably believed to be necessary and appropriate to recover the parties' operations from the occurrence of a disaster and which are consistent with any statute or regulation to which the parties are subject that imposes business resumption and contingency planning standards. The parties agree to provide to one another a summary of their respective contingency plans as they relate to the systems used to provide the services hereunder and to provide periodic updates of such summary upon a party's reasonable request. If any party is unable to carry out any of its obligations under this Agreement because of conditions beyond its reasonable control, including, but not limited to, acts of war or terrorism, work stoppages, fire, civil disobedience, delays associated with hardware malfunction or availability, riots, rebellions, storms, electrical failures, acts of God, and similar occurrences ("Force Majeure"), this Agreement will remain in effect and the non-performing party's obligations shall be suspended without liability for a period equal to the period of the continuing Force Majeure (which such period shall not exceed fifteen (15) business days), provided that: (1) where reasonably practicable, the non-performing party gives the other party prompt notice describing the Force Majeure, including the nature of the occurrence and its expected duration and, where reasonably practicable, continues to furnish regular reports with respect thereto during the period of Force Majeure; (2) the suspension of obligations is of no greater scope and of no longer duration than is required by the Force Majeure; (3) no obligations of any party that accrued before the Force Majeure are excused as a result of the Force Majeure; and 4 (4) the non-performing Party uses reasonable efforts to remedy its inability to perform as quickly as possible. IX. INSTRUCTIONS and ADVICE At any time, State Street may apply to any officer of the Trust for instructions and may consult with its own legal counsel with respect to any matter arising in connection with the services to be performed by State Street under the terms of this Agreement. At any time, State Street may consult with outside counsel for the Trust or the independent accountants for the Trust ("Trust Advisers") at the expense of the Trust, provided that State Street first obtains consent of the Trust which shall not be unreasonably withheld, with respect to any matter arising in connection with the services to be performed by State Street under the terms of this Agreement. In its capacity as the Financial Administrator or as the Accounting Agent under the terms of this Agreement, State Street shall not be liable, and shall be indemnified by the Trust or appropriate Portfolio for any action taken or omitted by it in good faith reliance upon any instructions or advice provided to State Street by a Trust Adviser or upon any paper or document reasonably believed by it to be genuine and to have been signed by the proper person or persons. State Street shall not be held to have notice of any change of authority of any person until receipt of written notice thereof from the Trust. Nothing in this paragraph shall be construed as imposing upon State Street any obligation to seek such instructions or advice, or to act in accordance with such advice when received. X. NOTICES All notices shall be in writing and deemed given when delivered in person, by facsimile, by overnight delivery through a commercial courier service, or by registered or certified mail, return receipt requested. Notices shall be addressed to each party at its address set forth below, or such other address as the recipient may have specified by earlier notice to the sender: If to State Street:LaFayette Corporate Center 2 Avenue de LaFayette, 4 South Boston, MA 02111 ATTN: Michael E. Hagerty Telephone: (617) 662-3630 Facsimile: (617) 662-3690 With a copy to: State Street Bank and Trust Company 2 Avenue de LaFayette, 2nd Floor P.O. Box 5049 Boston, MA 02206-5049 ATTN: Mary Moran Zeven, Esq. Telephone: (617) 662-1783 Facsimile: (617) 662-3805 5 If to the Trust: 5800 Corporate Drive Pittsburgh, PA 15237-7010 ATTN: Richard A. Novak, Treasurer Telephone: (412) 288-7045 Facsimile: (412) 288-8719 XI. CONFIDENTIALITY State Street agrees that, except as otherwise required by law or in connection with any required disclosure to a banking or other regulatory authority, it will keep confidential all records and information in its possession relating to the Trust or its beneficiaries and will not disclose the same to any person except at the request or with the written consent of the Trust. XII. LIMITATION of LIABILITY and INDEMNIFICATION State Street shall be held to a standard of reasonable care in carrying out its duties under this Agreement. State Street shall be responsible for the performance of only such duties as are set forth in this Agreement and, except as otherwise provided under Section XVI, shall have no responsibility for the actions or activities of any other party, including other service providers. State Street shall have no liability for any error of judgment or mistake of law or for any loss or damage resulting from the performance or nonperformance of its duties hereunder unless caused by or resulting from the negligence, reckless misconduct, willful malfeasance or lack of good faith of State Street, its officers or employees and, in such event, such liability will be subject to the limitations set forth in Section XIII herein. STATE STREET SHALL NOT BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES) IN ANY WAY DUE TO THE TRUST'S USE OF THE SERVICES DESCRIBED HEREIN OR THE PERFORMANCE OF OR FAILURE TO PERFORM STATE STREET'S OBLIGATIONS UNDER THIS AGREEMENT. This disclaimer applies without limitation to claims regardless of the form of action, whether in contract (including negligence), strict liability, or otherwise and regardless of whether such damages are foreseeable. The Trust will indemnify and hold harmless State Street and its stockholders, directors, officers, employees, agents, and representatives (collectively, the "Trust Indemnified Persons") for, and will pay to the Trust Indemnified Persons the amount of, any actual and direct damages, whether or not involving a third- party claim (collectively, the "Damages"), arising from or in connection with (i) any act or omission by State Street (or any of its affiliates) pursuant to this Agreement which does not constitute negligence, reckless misconduct, willful malfeasance or lack of good faith in fulfilling the terms and obligations of this Agreement, (ii) any act or omission by the Trust (or any of its affiliates) which constitutes a breach of any representation, warranty, term, or obligation contained in this Agreement, or (iii) any act or omission by the Trust (or any of its affiliates) which constitutes negligence, reckless misconduct, willful malfeasance, or lack of good faith in fulfilling the terms and obligations of this Agreement. The remedies provided in this paragraph are not exclusive of or limit any other remedies that may be available to State Street or any other Trust Indemnified Person. State Street will indemnify and hold harmless the Trust, and its respective shareholders, trustees, directors, officers, agents, and representatives (collectively, the "State Street Indemnified Persons") for, and will pay to the State Street Indemnified Persons the amount of, any Damages, arising from or in connection with (i) any act or omission by State Street (or any of its affiliates) which constitutes a breach of any representation, warranty, term, or obligation contained in this Agreement or (ii) any act or omission by State Street (or any of its affiliates) which constitutes negligence, reckless misconduct, willful malfeasance, or lack of good faith in fulfilling the terms and obligations of this Agreement; provided, however, that State Street shall not be required to provide indemnification for damages arising from errors caused by inaccurate prices received from independent pricing services and reasonably relied upon by State Street. In the event that State Street is required to provide indemnification under this Section XII, its liability shall be limited as described under Section XIII below. The remedies provided in this paragraph are not exclusive of or limit any other remedies that may be available to the Trust or any other State Street Indemnified Person. The indemnification and limitation of liability contained herein shall survive the termination of this Agreement. XIII. EXCLUSIVE REMEDY State Street's total cumulative liability under this Agreement for all of the Trusts in the aggregate during any calendar year shall be limited to actual or direct damage up to the aggregate amount of two (2) times the fees earned by State Street under Section XVI hereunder during the calendar year (or annualized period) preceding the event giving rise to liability. XIV. SERVICES NOT EXCLUSIVE The services of State Street to the Trust are not to be deemed exclusive and State Street shall be free to render similar services to others. State Street shall be deemed to be an independent contractor and shall, unless otherwise expressly provided herein or authorized by the Trust from time to time, have no authority to act or represent the Trust in any way or otherwise be deemed an agent of the Trust. XV. TERM; TERMINATION; AMENDMENT A. Term. This Agreement shall become effective on the date first written above and shall remain in full force and effect for a period of four (4) years from the effective date (the "Initial Term") and shall automatically continue in full force and effect after such Initial Term unless either party terminates this Agreement by written notice to the other party at least six (6) months prior to the expiration of the Initial Term. During the Initial Term and upon reasonable prior notice to State Street and or the circumstances, the Treasurer of the funds may, at any time, and from time to time, as approved by the Board, remove funds from the list of funds on Exhibit A for purposes of selecting another service provider; provided, however, that the number of funds so removed within any calendar year shall not exceed five (5). Additionally, if State Street (or any of its affiliates) engages in (i) any act or omission which constitutes a breach of any representation, warranty, term, or obligation contained in this Agreement or (ii) any act or omission which constitutes negligence, reckless misconduct, willful malfeasance, or lack of good faith in fulfilling the terms and obligations of this Agreement, then each Trust or series thereof, shall have the right to immediately terminate this Agreement. B. Termination. Either party may terminate this Agreement at any time after the Initial Term upon at least six (6) months' prior written notice to the other party. Termination of this Agreement with respect to any given Portfolio shall in no way affect the continued validity of this Agreement with respect to any other Portfolio. Upon termination of this Agreement, the Trust shall pay to State Street such compensation and any reimbursable expenses as may be due under the terms hereof as of the date of such termination, including reasonable out- of-pocket expenses associated with such termination. C. Amendment. This Agreement may be modified or amended from time to time by the mutual agreement of the parties hereto. No amendment to this Agreement shall be effective unless it is in writing and signed by a duly authorized representative of each party. The term "Agreement", as used herein, includes all schedules and attachments hereto and any future written amendments, modifications, or supplements made in accordance herewith. XVI. FEES, EXPENSES and EXPENSE REIMBURSEMENT State Street shall receive from the Trust such compensation for its services provided pursuant to this Agreement as may be agreed to from time to time as set forth in the Financial Administration and Accounting Services Fee Schedule between the parties (the "Fee Schedule"), attached as Schedule 1, approved by the parties. In the event of substantial change in the mix of types of Portfolios or in the event of new types of Portfolios offered by the Trust or modifications or changes to the service delivery requirements, the parties shall review the existing fee structure and an appropriate adjustment to the fee, if any, shall be negotiated by the parties within ninety (90) days. The fees are accrued daily and billed monthly and shall be due and payable upon receipt of the invoice. Upon the termination of this Agreement before the end of any month, the fee for the part of the month before such termination shall be prorated according to the proportion which such part bears to the full monthly period and shall be payable upon the date of termination of this Agreement. In addition, the Trust shall reimburse State Street for its out-of-pocket costs and expenses incurred in connection with this Agreement with respect to reasonable attorney's fees incurred by State Street to collect any charges due under this Agreement. The Trust agrees to promptly reimburse State Street for any equipment and supplies specially ordered by or for the Trust (with the Trust's consent) through State Street and for any other expenses not contemplated by this Agreement that State Street may incur on the Trust's behalf at the Trust's request and with the Trust's consent. Each party will bear all expenses that are incurred in its operation and not specifically assumed by the other party. Expenses to be borne by the Trust include, but are not limited to: Organization expenses; cost of services of independent accountants and outside legal and tax counsel (including such counsel's review of the Trust's registration statement, proxy materials, federal and state tax qualification as a regulated investment company and other reports and materials prepared by State Street under this Agreement); cost of any services contracted for by the Trust directly from parties other than State Street; cost of trading operations and brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for the Trust; investment advisory fees; taxes, insurance premiums and other fees and expenses applicable to its operation; costs incidental to any meetings of shareholders including, but not limited to, legal and accounting fees, proxy filing fees and the costs of preparation, printing and mailing of any proxy materials; costs incidental to Board meetings, including fees and expenses of Board members; the salary and expenses of any officer, director/trustee or employee of the Trust; costs incidental to the preparation, printing and distribution of the Trust's registration statements and any amendments thereto and shareholder reports; cost of typesetting and printing of prospectuses; cost of preparation and filing of the Trust's tax returns, Form N-1A or N-2, Form N-14, Form N-Q and Form N-SAR, and all notices, registrations and amendments associated with applicable federal and state tax and securities laws; fidelity bond and directors' and officers' liability insurance; and cost of independent pricing services used in computing the Trust's NAV. State Street is authorized to and may employ or associate with such person or persons as it may deem desirable to assist it in performing its duties under this Agreement; provided, however, that the compensation of such person or persons shall be paid by State Street and State Street shall be as fully responsible to the Trust for the acts and omissions of any such person or persons as it is for its own acts and omissions. XVII. ASSIGNMENT; SUCCESSOR AGENT A. Assignment. This Agreement shall not be assigned by either party without the prior written consent of the other party, except that either party may assign to a successor all of or a substantial portion of its business, or to a party controlling, controlled by, or under common control with such party. B. Successor Agent. This Agreement shall be binding on and shall inure to the benefit of each party and to their successors and permitted assigns. If a successor agent for the Trust shall be appointed by the Trust, State Street shall upon termination deliver to such successor agent all properties of the Trust held by it hereunder. In the event that no written order designating a successor agent or Proper Instructions shall have been delivered to State Street on or before the date when such termination shall become effective, then State Street shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $100,000,000, all properties held by State Street under this Agreement. Thereafter, such bank or trust company shall be the successor of State Street under this Agreement. XVIII.ENTIRE AGREEMENT This Agreement (including all schedules and attachments hereto) constitutes the entire Agreement between the parties with respect to the subject matter hereof and terminates and supersedes all prior agreements, representations, warranties, commitments, statements, negotiations and undertakings with respect to such services to be performed hereunder whether oral or in writing. XIX. WAIVER The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver nor shall it deprive such party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement. Any waiver must be in writing signed by the waiving party. XX. HEADINGS NOT CONTROLLING Headings used in this Agreement are for reference purposes only and shall not be deemed a part of this Agreement. XXI. SURVIVAL After expiration or termination of this Agreement, all provisions relating to payment (Section XVI and the Fee Schedule) shall survive until completion of required payments. In addition, all provisions regarding termination (Section XV), indemnification, warranty, liability and limits thereon (Section XII and Section XIII) shall survive, unless and until the expiration of any time period specified elsewhere in this Agreement with respect to the provision in question. XXII. SEVERABILITY In the event any provision of this Agreement is held illegal, invalid, void or unenforceable, the balance shall remain in effect, and if any provision is inapplicable to any person or circumstance it shall nevertheless remain applicable to all other persons and circumstances. XXIII.GOVERNING LAW; JURISDICTION This Agreement shall be deemed to have been made in The Commonwealth of Massachusetts and shall be governed by and construed under and in accordance with the laws of The Commonwealth of Massachusetts without giving effect to its conflict of laws principles and rules. The parties agree that any dispute arising herefrom shall be subject to the exclusive jurisdiction of courts sitting in The Commonwealth of Massachusetts. XXIV. REPRODUCTION OF DOCUMENTS This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 6 XXV. REMOTE ACCESS SERVICES ADDENDUM State Street and the Trust agree to be bound by the terms of the Remote Access Services Addendum attached hereto as Exhibit E. XXVI. MISCELLANEOUS The execution and delivery of this Agreement have been authorized by the Board of the Trust and signed by an authorized officer of the Trust, acting as such, and neither such authorization by the Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any member of the Board or shareholders of the Trust, but bind only the property of the Trust, or Portfolio, as provided in the organizational documents. Each party agrees to promptly sign all documents and take any additional actions reasonably requested by the other to accomplish the purposes of this Agreement. [Remainder of Page Intentionally Blank] 7 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. STATE STREET BANK AND TRUST COMPANY By: /s/ Michael E. Hagerty Name: Michael E. Hagerty Title: Senior Vice President Date: December 29, 2006 INVESTMENT COMPANIES (Listed on Exhibit A hereto) By: /s/ Richard A. Novak Name: Richard A. Novak Title: Treasurer Date: December 28, 2006 8 EXHIBIT A TO THE FINANCIAL ADMINISTRATION ACCOUNTING AND SERVICES AGREEMENT (UPDATED AS OF 01/01/07) Federated Municipal Securities Fund, Inc. 9 EXHIBIT B PRICE SOURCE AUTHORIZATION To: State Street Bank and Trust Company From: Federated Investors, Inc. Client Name: Federated Investors, Inc. Client Address:Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 Date: January 1, 2007 Re: PRICE SOURCE AUTHORIZATION Reference is made to the Financial Administration and Accounting Services Agreement dated January 1, 2007 between the registered investment companies, or series thereof, listed on Exhibit A to the Financial Administration and Accounting Services Agreement (each, a "Trust") and State Street Bank and Trust Company ("State Street"). Capitalized terms used in this Price Source Authorization or in any attachment or supplement shall have the meanings provided in the Financial Administration and Accounting Services Agreement unless otherwise specified. Pursuant to the Financial Administration and Accounting Services Agreement, the Trust hereby directs State Street to calculate the net asset value ("NAV") of the Trust or, if applicable, its Series, in accordance with the terms of each Trusts' or Series' currently effective Prospectus. State Street will perform the NAV calculation subject to the terms and conditions of the Financial Administration and Accounting Services Agreement and this Authorization. The Trust hereby authorizes State Street to use the pricing sources specified on the attached Authorization Matrix (as amended from time to time) as sources for prices of assets in calculating the net asset value of the Trust. The Trust understands that State Street does not assume responsibility for the accuracy of the quotations provided by the specified pricing sources and that State Street shall have no liability for any incorrect data provided by the pricing sources specified by the Trust, except as provided under the Financial Administration and Accounting Services Agreement (including agreed upon tolerance checks as to the data furnished and calculating the net asset value of the Trust in accordance with the data furnished to State Street). The Trust also acknowledges that prices supplied by the Funds or an affiliate may be subject to approval of the Trust's Board and are not the responsibility of State Street. The Trust agrees to indemnify and hold State Street harmless as provided under the Financial Administration and Accounting Services Agreement. State Street agrees that written notice of any change in the name of any specified pricing source will be sent to the Trust as such information is available to State Street. Kindly acknowledge your acceptance of the terms of this letter in the space provided below. (CLIENT/FUND NAME) By: /s/ Richard A. Novak The foregoing terms are hereby accepted. Title: -Treasurer, Federated Funds STATE STREET BANK AND TRUST COMPANY By: /s/ Leo O'Donnell Title: Vice President AUTHORIZATION MATRIX AUTHORIZATION MATRIX TO BE ATTACHED TO PRICE SOURCE AUTHORIZATION DATED _1/1/2007__ CLIENT: _FEDERATED INVESTORS __EFFECTIVE DATE: January 01, 2007(supersedes prior Authorization Matrices)
Security Type PRIMARY SECONDARY TERTIARY PRICING PRICING VALUATION SOURCE SOURCE SOURCE LOGIC DEFAULT POINT LOGIC EQUITIES U.S. LISTED EQUITIES (NYSE, AMEX) REUTERS THOMSON/ILX FT LAST MEAN MARKET Interactive CLOSE Data U.S. OTC EQUITIES REUTERS THOMSON/ILX FT NOCP MEAN MARKET (NASDAQ) Interactive CLOSE Data FOREIGN EQUITIES REUTERS THOMSON/ILX FT LAST MEAN MARKET Interactive CLOSE Data LISTED ADR'S REUTERS THOMSON/ILX FT LAST MEAN MARKET Interactive CLOSE Data FIXED INCOME MUNICIPAL BONDS Standard & FT BLOOMBERG BID EVALUATED Poor's Interactive 4:00 pm* Data 4:00 pm* MORTGAGE BACKED BEAR STEARNS REUTERS FT / Based on EVALUATED 4:00 pm* 4:00 pm* BLOOMBERG Cash Flows TREASURIES BEAR STEARNS REUTERS FT / BID side EVALUATED 4:00 pm* 4:00 pm* BLOOMBERG quote ABS, HIGH GRADE CORPORATES, CONVERTIBLE BONDS, YANKEE / REUTERS FT BLOOMBERG MEAN EVALUATED BRADY BONDS 4:00 pm* Interactive Data 3:00 pm* HIGH YIELD CORPORATES (BBB- OR BELOW, INCLUDES NA, NR, FT REUTERS BLOOMBERG MEAN EVALUATED ETC.) Interactive 4:00 pm* Data 3:00 pm* EUROBONDS/FOREIGN BONDS FT FRI CORP BLOOMBERG LAST BID Interactive Data OTHER ASSETS OPTIONS REUTERS BLOOMBERG MEAN LAST MARKET CLOSE FUTURES REUTERS BLOOMBERG SETTLEMENT NON - LISTED ADR'S FT BLOOMBERG LAST MEAN Interactive Data CREDIT DEFAULT SWAPS BEAR STEARNS Mid Level EVALUATED 4:00 pm* Quote MUTUAL FUNDS Accounting BLOOMBERG MARKET Agent CLOSE EXCHANGE RATES World BLOOMBERG SNAPSHOT 4:00PM Markets Money Market Pricing FT REUTERS BLOOMBERG Interactive Data
* TIMES FOR DOMESTIC BOND FEEDS ARE SUPPLIED BY THE INDIVIDUAL VENDORS TO INDICATE THE TIMING OF THEIR EVALUATION PRICE SOURCE AND METHODOLOGY AUTHORIZATION INSTRUCTIONS: FOR EACH SECURITY TYPE ALLOWED BY THE TRUST'S PROSPECTUS, PLEASE INDICATE THE PRIMARY, SECONDARY AND TERTIARY SOURCE TO BE USED IN CALCULATING NET ASSET VALUE FOR THE TRUST IDENTIFIED. NOTE: IF INVESTMENT MANAGER IS A PRICING SOURCE, PLEASE SPECIFY EXPLICITLY. STATE STREET PERFORMS A DATA QUALITY REVIEW PROCESS AS SPECIFIED IN THE SOURCES STATUS PRICING MATRIX ON THE NAVIGATOR PRICING SYSTEM WHICH SPECIFIES PRICING TOLERANCE THRESHOLDS, INDEX AND PRICE AGING DETAILS. THE SOURCES STATUS PRICING MATRIX WILL BE PROVIDED FOR YOUR INFORMATION AND REVIEW. AUTHORIZED BY: /S/ RICHARD A. NOVAK 12/28/06ACCEPTED: /S/ MICHAEL E. HAGERTY 12/29/06_________ TRUST OFFICER STATE STREET VICE PRESIDENT EXPLANATION OF FIELDS Client: Indicate the name of the Client and the Trust name or if multiple trusts, attach a list of trust names Primary Indicate the primary source for prices for the security type. Source: If an Investment Manager is a pricing source, please specify explicitly. Secondary Indicate the secondary source for prices for the security type. Source: If an Investment Manager is a pricing source, please specify explicitly. Tertiary Indicate the tertiary (3rd level) source for prices for the security Source: type. If an Investment Manager is a pricing source, please specify explicitly. Pricing Indicate the price type to be referenced for the security type: Ask, Bid, Close, Evaluated, Last, Official Close etc.- Logic: Please note that the closing price reported by an exchange (which may sometimes be referred to by the exchange or one or more pricing agents as the "official close", the "official closing price" or other similar term) will be taken to be the "most recent sale price" for purposes of this section. In these instances, it is believed to be representative of the value at the close of the exchange. Pricing Indicate the price type to be referenced for the security type: Default Ask, Bid, Close, Evaluated, Last, etc. in the instance where the Logic: preferred price type is not available. Valuation That point in time where the market inputs needed for the applicable Point: valuation process/model are taken from market sources (trading market or counterparty) Authorized Provide the signature of the person authorizing the completion of By: the Price Source Authorization Date: Indicate the date the Price Source Authorization was completed EXHIBIT C FAIR VALUE PRICING AUTHORIZATION AUTHORIZATION MATRIX To: State Street Bank and Trust Company From: Federated Investors, Inc. Client Name: Federated Investors, Inc. Client Address: Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA. 15222-3779 Date: January 1, 2007 Re: FAIR VALUE PRICING AUTHORIZATION Reference is made to the Financial Administration and Accounting Services Agreement dated January 1, 2007 between the Trust and State Street Bank and Trust Company ("State Street"). Capitalized terms used in this Fair Value Pricing Authorization or in any attachment or supplement shall have the meanings provided in the Financial Administration and Accounting Services Agreement unless otherwise specified. Pursuant to the Financial Administration and Accounting Services Agreement, the Fund hereby directs State Street to calculate the net asset value ("NAV") of the Trust or, if applicable, its Series, in accordance with the terms of the Trusts' or Series' currently effective Prospectus or other governing documents. State Street will perform the NAV calculation subject to the terms and conditions of the Financial Administration and Accounting Services Agreement, Price Source Authorization, and this Authorization. The Trust hereby authorizes State Street to use the Fair Value pricing source specified on the attached Fair Value Pricing Authorization Form to obtain adjustment factors to be applied to the closing prices of the securities of the Trust or the Series to calculate a fair-value-adjusted market value to be used in the calculation of the net asset value of the Trust or its Series. The Trust understands that State Street does not assume responsibility for the accuracy of the adjustment factors or other fair value pricing information provided by the specified fair value vendor and that State Street shall have no liability for any incorrect data provided by said vendor specified by the Trust, except as may arise from State Street's lack of reasonable care in applying any adjustment factors to the closing prices of the Trusts' or Series' securities and/or (if applicable) calculating the fair value adjusted net asset value of the Trust or Series in accordance with the data furnished to State Street. The Trust agrees to indemnify and hold State Street harmless from any claim, loss or damage arising as a result of using Fair Value adjustment factors or prices furnished by any specified Fair Value pricing source. The Trust agrees to notify State Street promptly in writing if the fair value pricing procedures authorized by the Trust's Board have been changed. Kindly acknowledge your acceptance of the terms of this letter in the space provided below. By: /s/ Richard A. Novak The foregoing terms are hereby accepted. [Authorized Officer of the Trust] Title: Treasurer STATE STREET BANK AND TRUST COMPANY By: /s/ Leo O'Donnell Vice President AUTHORIZATION MATRIX FUND ENTITY NAME: FEDERATED INVESTORS EFFECTIVE DATE: 1-1-2007 FAIR VALUE PRICING SOURCE: ITG MARKET TRIGGER(S) WITH TIMING 1) THE FIRST TRIGGER INCORPORATES 2 NIKKEI 225 FUTURES CONTRACTS * a) NIA Index (Most recent contract trading in Singapore) b) NXA Index (Most recent contract trading in Chicago) TIMING: NIA Index at 1AM EST/2AM EDT - NXA Index at 4PM EST/EDT * THE FOLLOWING CHART DETAILS THE APPROPRIATE TRIGGERS IN THE EVENT THAT ONE OR MORE OF THE ABOVE MARKETS IS CLOSED.
JAPANESE SINGAPORE (NIA INDEX) / CHICAGO (NXA INDEX) STOCK MARKET Open / Open Open / Closed Closed / Closed / Closed Open Open NIA/NXA (from 1-2AM GLOBEX S&P 500 NXA (from 4AM GLOBEX S&P 500 to 4PM; 1-2 AM depending (from Japanese close to 4PM) (from Japanese close on Japanese close to 4PM - Symbol - Symbol SPA SPA Index or Index or ESA ESA Index Index Closed NXA (from prior day's GLOBEX S&P 500 NXA (from GLOBEX S&P 500 4PM to current 4AM) (from prior day's prior day's (from prior day's 4PM to current 4PM to current 4PM to current 4PM) - Symbol 4PM) 4PM) - Symbol SPA Index or SPA Index or ESA Index ESA Index
2) THE SECOND TRIGGER IS BASED ON THE S&P 500 a) S&P 500 (SPX Index) TIMING: 11:30AM EST/EDT - 4:05PM EST/EDT Note: GMT may change to and from DST on a different schedule than the U.S. Special attention must be made to know when changes to DST occur to ensure the prices are determined at the correct time. THRESHOLD TO REQUEST CLIENT DETERMINATION TO INVOKE FAIR VALUE** (+ or -): 0.5 % or greater in either trigger ** THE FINAL DETERMINATION TO INVOKE FAIR VALUE IS MADE BY FEDERATED'S GLOBAL EQUITY TRADERS AT THE TIME OF NOTIFICATION (4:15PM) BY STATE STREET THAT EITHER OF THE TWO TRIGGERS HAVE BEEN ACHIEVED. Authorized By: /s/ Richard A. Novak Name: Richard A. Novak Title: Treasurer Officer of the Trust Date: 12/28/06 Accepted By: /s/ Michael E. Hagerty Name: Michael E. Hagerty Vice President State Street Bank and Trust Company Date: 12/29/06 Fund Entity Indicate trust name or if multiple trusts or series of a trust, Name attach a complete list Effective Date the trusts are to begin using Fair Value Pricing Source at SSC Date Fair Value Name of Fair Value Pricing Source to be used Pricing Source Market Name of Trigger used to determine when to invoke Fair Value Pricing Trigger(s) procedures, i.e., S&P 500, Nikkei Timing of A specific time at which the Trigger determines Fair Value Pricing Trigger(s) procedures should be initiated, i.e., Japan close to 4 PM EST (Nikkei Futures), 4 PM EST prior day to 4 PM EST current day (S&P500) Threshold Minimum percentage of movement of designated Trigger to determine to Invoke that a request for authorization should occur to invoke Fair Value. Fair Value Authorized Provide signature of the Trust Officer authorizing the completion of By the Fair Value Pricing Authorization Form Accepted By Provide signature of a Vice President from State Street Fund Group accepting the completion of the Fair Value Pricing Authorization Form EXHIBIT D COMPLIANCE PROCEDURES EXHIBIT AUTHORIZATION MATRIX COMPLIANCE PROCEDURES 1940 ACT PREFERRED SHARES ASSET COVERAGE SECTION 18(H) OF THE INVESTMENT COMPANY ACT OF 1940 "Asset coverage" of a class of senior security of an issuer which is a stock means the ratio which the value of the total assets of such issuer, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness of such issuer plus the aggregate of the involuntary liquidation preference of such class of senior security which is a stock. The involuntary liquidation preference of a class of senior security which is a stock shall be deemed to mean the amount to which such class of senior security would be entitled on involuntary liquidation of the issuer in preference to a security junior to it. FREQUENCY: MONTHLY, as of the last business day of each month CALCULATION:Determine whether the Asset Coverage is at least 200%
Total fund net assets + accrued unpaid dividends on pfd shs {divide} Value of senior securities representing indebtedness + liquidation preference on pfd shares + liquidation preference on pfd shs + value of senior securities representing indebtedness + accrued unpaid dividends on pfd shs = Asset Coverage Percentage > or = 200% = Fund Passes Test < 200% = Fund Fails Test
TOLERANCE: State Street Fund Administration (SSFA) will complete the test on a monthly basis and report the results of the test to Federated Investors Inc. Once SSFA has notified Federated of the test results, Federated may impose certain restrictions on trading. CURE PERIOD: Should the Fund fail to maintain the 1940 Act Preferred Shares Asset Coverage as of a given Valuation Date (the last business day of each month), the cure date is as of the LAST business day of the month following such Valuation Date. PREFERRED SHARES BASIC MAINTENANCE AMOUNT: FREQUENCY: MONTHLY REPORTING DEADLINES:As of the Closing Time (February 18, 2003), on a pro forma basis assuming the receipt of the net proceeds from the sale of the AMPS and using portfolio holdings and valuations as of the close of business on any day not more than six business days prior to the Closing Time (provided that the total net assets of the Fund as of the Closing Time have not declined by more than 5% or more from such valuation date). [Note: Compliance as of the Closing Time (using portfolio holdings and valuations as of the Closing Time) with the Investment Company Act Preferred Shares Asset Coverage is also required. On the first business day after the date of original issue (i.e., February 18, 2003) of the preferred shares (by 5 pm ET); as of the close of business on original issue date On the seventh business day after each monthly Valuation Date (by 5 pm ET), as of the Valuation Date In instances of failure to satisfy Preferred Shares Basic Maintenance Amount as of any Valuation Date, on the seventh business day after the Preferred Shares Basic Maintenance Cure Date (Deadline = the 14th business day after the failure Valuation Date) (by 5 pm ET), as of the Preferred Shares Basic Maintenance Cure Date On the seventh business day after the Fund has redeemed Common Shares (by 5 pm ET) On the seventh business day after the ratio of the Discounted Value of (Fitch or Moody's) Eligible Assets to the Preferred Shares Basic Maintenance Amount as of any monthly Valuation Date is less than or equal to 105% (by 5 pm ET) [Note: This adds nothing to the existing requirement to furnish a report as of each Valuation Date]. On the seventh business day after a request by Moody's or Fitch (by 5pm ET), as of the date of such request On the second business day prior to the first day of a Special Rate Period (by 11 am ET), as of the third business day prior to the first day of the Special Rate Period and assuming for purposes of the calculation that (a) the Maximum Rate is the Maximum Rate on such third business day as if such day were the Auction date for the proposed Special Rate Period and (b) the Moody's and Fitch Discount Factors are determined by reference to an Exposure Period of 8 weeks. CURE PERIOD: Should the Fund fail to satisfy the Preferred Shares Basic Maintenance Amount as of a given Valuation Date (the last business day of each month), the cure date is as of the SEVENTH business day following such Valuation Date. CALCULATION: To ensure that the eligible assets (assets discounted based upon Fitch's and Moody's ratings, as described below) of the Fund are greater than the Fund's basic maintenance amount (as described below). If the eligible assets are less than the basic maintenance amount, the Fund fails the test. BASIC MAINTENANCE AMOUNT (BMA): The Fund's basic maintenance amount is the sum of the following:
BMA Component Calculation 1. Sum of: a.LIQUIDATION VALUE OF THE OUTSTANDING SHARES OF PREFERRED STOCK Number of The product of the number of Preferred Shares outstanding on the Valuation Date multiplied by the liquidation preferred price of $25,000 (plus the product of the number of shares of any other series of preferred shares outstanding shares on such date multiplied by the liquidation preference of such shares) plus any redemption premium applicable outstanding * to Preferred Shares (or other preferred shares) then subject to redemption liquidation price of preferred shares FEDERATED TO INFORM SSFA OF ANY INSTANCE OF A REDEMPTION PREMIUM. b. CURRENT PERIOD DIVIDEND EXPOSURE For each series The aggregate amount of dividends that will have accumulated at the respective Applicable Rates (whether or not of preferred earned or declared) to (but not including) the first respective Dividend Payment Dates for Preferred Shares shares: outstanding that follows such Valuation Date (plus the aggregate amount of dividends, whether or not earned Number of or declared, that will have accumulated in respect of other outstanding preferred shares to, but not preferred including, the first respective dividend payment dates for such other shares that follow such Valuation Date) shares outstanding * $25,000 * Auction rate * (# of days in dividend period / 365 [if dividend period = 7 days or 360 [for all other dividend periods]) c.PROJECTED DIVIDEND AMOUNT For each series The aggregate amount of dividends that would accumulate on shares of each series of Preferred Shares of preferred shares: # of preferred shares outstanding * $25,000 * Maximum Rate* Volatility Factor * # of days from first Dividend Payment Date following Valuation Date through the 49th day after Valuation Date 365 [if dividend period = 7 days] or 360 [for all other dividend periods] outstanding from such first respective Dividend Payment Date therefore through the 49th day after such Maximum rate= Valuation Date, RATE MULTIPLE (1.10 if prevailing rating is Aa3 or higher for Moody's, and AA- or higher for Fitch) MULTIPLIED BY (A) THE "AA" FINANCIAL COMPOSITE COMMERCIAL PAPER RATE (in the case of Minimum Rate Periods and Special Rate Periods of fewer than 183 Rate Period Days) OR (B) THE TREASURY BILL RATE in the case of Special Rate Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days. at the Maximum Rate (calculated as if such Valuation Date were the Auction Date for the Rate Period commencing FEDERATED TO on such Dividend Payment Date) NOTIFY SSFA IN CASE OF : * SPECIAL RATE PERIOD * CREDIT RATING FOR PREFERRED SHARES FALLS BELOW AA3 FOR MOODY'S OR AA- FOR FITCH * IF A FAILURE TO DEPOSIT OCCURS * IF ALL OUTSTANDING SHARES ARE SUBJECT TO SUBMITTED HOLD ORDERS for a Minimum Rate Period of shares of such series to commence on such Dividend Payment Date, assuming, solely for purposes of the foregoing, that if on such Valuation Date the Fund shall have delivered a Notice of Special Rate Period to the Auction Agent with respect to shares of such series, such Maximum Rate shall be the HIGHER OF i.the Maximum Rate for the Special Rate Period of shares of such series to commence on such Dividend Payment Date AND ii.the Maximum Rate for a Minimum Rate Period of shares of such series to commence on such Dividend Payment Date, multiplied by the greater of iii. the Moody's Volatility Factor (if Moody's is then rating the Preferred Shares) and SSFA WILL USE A VOLATILITY RATE OF 2.75 FOR CONSERVATISM. iv. the Fitch Volatility Factor (if Fitch is then rating the Preferred Shares) applicable to a Minimum Rate Period, OR, in the event the Fund shall have delivered a Notice of Special Rate Period to the Auction Agent with respect to such shares of such series designating a Special Rate Period consisting of 56 Rate Period Days or more the greater of v.the Moody's Volatility Factor and vi. Fitch Volatility Factor applicable to a Special Rate Period of that length (plus the aggregate amount of dividends that would accumulate at the maximum dividend rate or rates on any other preferred stock outstanding from such respective dividend payment dates through the 56th day after such Valuation Date, as established by or pursuant to the respective statements supplementary establishing and fixing the rights and preferences of such other preferred shares), (except that if such Valuation Date occurs at a time when a Failure to Deposit (or, in the case of preferred stock other than Preferred Shares, a failure similar to a Failure to Deposit) has occurred that has not been cured, the dividend for purposes of calculation would accumulate at the current dividend rate then applicable to the shares in respect of which such failure has occurred AND for those days during the period described in this subparagraph (C) in respect of which the Applicable Rate in effect immediately prior to such Dividend Payment Date will remain in effect (or, in the case of preferred shares other than Preferred Shares, in respect of which the dividend rate or rates in effect immediately prior to such respective dividend payment dates will remain in effect), the dividend for purposes of calculation would accumulate at such Applicable Rate (or other rate or rates, as the case may be) in respect of those days) d. THE AMOUNT OF ANTICIPATED EXPENSES OF THE FUND FOR THE 90 DAYS SUBSEQUENT TO SUCH VALUATION DATE. Current daily expense accrual * 90 days e. THE AMOUNT OF THE FUND'S MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY FEDERATED TO in respect of Preferred Shares (and similar amounts payable in respect of other preferred shares, as of such INFORM SSFA IF Valuation Date. SUCH SITUATION MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY as of any Valuation Date, shall mean the aggregate amount of EXISTS. Gross-up Payments that would be due if the Fund were to make Taxable Allocations, with respect to any taxable Estimated year, estimated based upon dividends paid and the amount of undistributed realized net capital gains and other taxable taxable income earned by the Fund, as of the end of the calendar month immediately preceding such Valuation distribution Date, and assuming such Gross-up Payments are fully taxable. (capital gain + taxable income) to preferred shares * 38.6% federal tax. f. THE AMOUNT OF ANY INDEBTEDNESS OR OBLIGATIONS OF THE FUND SENIOR IN RIGHT OF PAYMENT TO THE PREFERRED FEDERATED TO SHARES; and INFORM SSFA IF SUCH SITUATION EXISTS. g. ANY CURRENT LIABILITIES as of such Valuation Date to the extent not reflected in any of 1a through 1f Liabilities (including, without limitation, any payables for Municipal Obligations purchased as of such Valuation Date and from the trial any liabilities incurred for the purpose of clearing securities transactions) balance. 2. LESS: Less: the face value of The value of (i.e., for purposes of current Moody's guidelines, any of the a.cash, Fund's assets b.short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and irrevocably c.short-term securities that are the direct obligation of the U.S. government, provided in each case that such deposited by securities mature on or prior to the date upon which any of 1a through 1g become payable, otherwise the the Fund for Moody's Discounted Value) the payment of of any of the Fund's assets irrevocably deposited by the Fund for the payment of any of 1a through 1g any of 1a through 1g.
FITCH
FITCH ELIGIBLE ASSETs: Eligible Asset Calculation Component 1. Cash, Cash per trial balance 2. Receivables for Receivable for Municipal Obligations Sold per trial balance. Ensure that the receivables are due to settle Municipal within five business days of the Valuation Date. Obligations Sold, or 3. Unrealized Gain Unrealized Gain from Hedging Transactions' shall mean, as of any Valuation Date, (1) in the case of a swap from Hedging contract (including total return swaps and interest rate swaps), the amount, if any, that the Fund would Transactions receive if the swap contract were terminated as of the Valuation Date, (2) in the case of an interest rate futures contract, the amount, if any, that the Fund would receive if it were to eliminate its open futures position as of the Valuation Date by entering into an offsetting contract of the same specifications or (3) in the case of an option on interest rate futures contracts, the Market Value thereof as of the Valuation Date. For the purpose of determining the Discounted Value of any Unrealized Gain from Hedging Transactions, (i) unrealized gain from a swap contract shall be treated in the same manner as a Municipal Obligation, except that the issuer rating assigned to the swap counterparty shall be used, and (ii) unrealized gain from an interest rate futures contract or an option on interest rate futures contracts shall be deemed to have a rating of A by Fitch. The amount of any unrealized loss from hedging transactions as of any Valuation Date shall be treated as a reduction to Fitch Eligible Assets. 4. Municipal Obligation that a. Pays interest FEDERATED TO INFORM SSFA IN ANY INSTANCE WHERE INTEREST IS NOT PAID IN CASH. in cash, b. Does not have FEDERATED TO INFORM SSFA IN ANY INSTANCE WHERE FITCH'S RATINGS HAVE BEEN SUSPENDED. its Fitch rating suspended by Fitch, and c. Is part of an ISSUER SIZE FROM BLOOMBERG WILL BE USED TO DETERMINE ELIGIBILITY. SSFA TO PERFORM THE ANALYSIS BASED ON CUSIP issue of AND NOTIFY FEDERATED OF ANY ISSUES BELOW $10,000,000. FEDERATED WILL DETERMINE AND COMMUNICATE TO SSFA WHETHER Municipal OR NOT THE CUSIP IS PART OF AN OVERALL ISSUE OF AT LEAST $10,000,000. Obligations of at least $10,000,000 For purposes of applying the following requirements for Single Issuer Concentration, State Concentration and applying the applicable Fitch Discount Factor: 1. If a Municipal Obligation is not rated by Fitch but is rated by Moody's AND S&P, such Municipal Obligation (excluding short- term Municipal Obligations) will be deemed to have the Fitch rating which is the LOWER of the Moody's and S&P rating. 2. If a Municipal Obligation is not rated by Fitch but is rated by Moody's OR S&P, such Municipal Obligation (excluding short- term Municipal Obligations) will be deemed to have such rating. SSFA WILL OBTAIN RATINGS FROM BLOOMBERG FOR NEW BUYS AND FOR THE ENTIRE PORTFOLIO MONTHLY. A. SINGLE ISSUER CONCENTRATION: 1. Municipal For purposes of identifying single issuers, the first six digits of the municipal security's cusip will be Obligations considered the issuer identifier. It is possible that the six digit cusip may represent a conduit rather than issued by any one the true issuer. Therefore, if any issuer exceeds the set limit, SSFA will research the true issuer on issuer and rated Bloomberg and notify Federated. BB or lower, or not rated, may comprise no more than 4% of total Fitch Eligible Assets. 2. The total amount identified in item 1 (above), together with any Municipal Obligations issued by the same issuer and rated BBB by Fitch may comprise no more than 6% of total Fitch Eligible Assets. 3. The total amount identified in item 2 (above) together with any Municipal Obligations issued by the same issuer and rated A by Fitch may comprise no more than 10% of total Fitch Eligible Assets. 4. The total amount identified in item 3 (above) together with any Municipal Obligations issued by the same issuer and rated AA by Fitch may comprise no more than 20% of total Fitch Eligible Assets. For purposes of FOR PURPOSES OF THIS TEST, SSFA WILL ASSUME THAT THE RATING PROVIDED BY BLOOMBERG IS FOR THE OBLIGATION AND the calculations BASED SOLELY ON THE UNDERLYING CREDIT ENHANCEMENT, UNLESS INFORMATION IS SUPPLIED BY FEDERATED. in items 1 - 4 (above), any Municipal Obligation backed by the guaranty, letter of credit or insurance issued by a third party shall be deemed to be issued by such third party if the issuance of such third party credit is the sole determinant of the rating on such Municipal Obligations; and any Municipal Obligation for which the nominal issuer is a conduit for a third party the obligations of which are the sole source of revenues for the payment of such Municipal Obligation shall be deemed to be issued by such third party. B. STATE CONCENTRATION: 1. Municipal Obligations issued by issuers located within a single state or territory and rated BB or lower or not rated may comprise no more than 12% of total Fitch Eligible Assets. 2. The total amount identified in item 1 (above), together with any Municipal Obligations issued by issuers located within the same state or territory and rated BBB by Fitch may comprise no more than 20% of total Fitch Eligible Assets. 3. The total amount identified in item 2 (above) together with any Municipal Obligations issued by issuers located within the same state or territory and rated A by Fitch may comprise no more than 40% of total Fitch Eligible Assets. 4. The total amount identified in item 3 (above) together with any Municipal Obligations issued by issuers located within the same state or territory and rated AA by Fitch may comprise no more than 60% of total Fitch Eligible Assets For purposes of applying the foregoing requirements for Single Issuer Concentration and State Concentration: 1.Eligible Assets shall be calculated without including cash; and 2.Municipal Obligations rated F1 by Fitch or, if not rated by Fitch, rated MIG-1, VMIG-1 or P-1 by Moody's; or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P shall be considered to have a long-term rating of A. ADJUSTMENTS TO FITCH'S ELIGIBLE ASSETS FOR FUTURES, OPTIONS AND FORWARD COMMITMENTS: 1. For purposes of determining whether the Fund has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets which the Fund is obligated to deliver or receive pursuant to an outstanding option shall be as follows: a.assets SSFA will test whether the written call options expire within 49 days after the Valuation Date. subject to IF THE 49 DAY LIMIT TEST IS NOT PASSED, SSFA WILL CONTACT FEDERATED TO DETERMINE WHETHER THE WRITTEN CALL call options OPTIONS ARE EXCHANGE-TRADED AND "READILY REVERSIBLE". written by the Fund which are either exchange- traded and "readily reversible" or which expire within 49 days after the date as of which such valuation is made shall be valued at the LESSER OF: i.Discounted Value and ii.the exercise price of the call option written by the Fund; b. assets subject to call options written by the Fund not meeting the requirements of clause (a) of this sentence shall have NO VALUE; c.assets subject to put options written by the Fund shall be valued at the LESSER OF: i.the exercise price and ii.the Discounted Value of the subject security; and d. Where FEDERATED TO INFORM SSFA OF THE VARIOUS SECURITIES OF THE CLASS OF SECURITIES IF SUCH SITUATION EXISTS. delivery may be made to the Fund with any security of a class of securities, the Fund shall assume it will take delivery of the security with the lowest Discounted Value. 2. For purposes of determining whether the Fund has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the following amounts shall be SUBTRACTED from the aggregate Discounted Value of the Fitch Eligible Assets held by the Fund: a.10% of the exercise price of a written call option; b. the exercise price of any written put option; c.the settlement price of the underlying futures contract if the Fund writes put options on a futures contract d. 105% of the Market Value of the underlying futures contracts if the Fund writes call options on a futures contract and does not own the underlying contract. 3. For purposes of determining whether the Fund has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Forward Commitments will be the Discounted Value as calculated by applying the respective Fitch Discount Factor.
DISCOUNTING FITCH'S ASSETS: Once the above procedures have been performed, determine the discounted market value for each security. Discount each security as follows: RATING CATEGORY EXPOSURE PERIOD AAA* AA* A* BBB* F1** UNRATED*** 7 weeks 151% 159% 166% 173% 136% 225% 8 weeks or less but greater than 7 weeks 154% 161% 168% 176% 137% 231% 9 weeks or less but greater than 8 weeks 158% 163% 170% 177% 138% 240% * Fitch rating. ** Municipal Obligations rated F2 by Fitch, which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long- term rating. *** Municipal Obligations rated less than BBB by Fitch or unrated. Notwithstanding the foregoing: 1. The Fitch Discount Factor for short-term Municipal Obligations will be 115%, so long as: a.Such Municipal Obligations are rated at least F2 by Fitch (or, if not rated by Fitch, rated MIG-1, VMIG-1 or P-1 by Moody's or at least A-1+ or SP-1+ by S&P) and b. Mature or have a demand feature at par exercisable in 30 days or less, and 2. No Fitch Discount Factor will be applied to cash or to Receivables for Municipal Obligations Sold. When the Fund sells a Municipal Obligation and agrees to repurchase such Municipal Obligation at a future date, such Municipal Obligation shall be valued at its Discounted Value for purposes of determining Fitch Eligible Assets, and the amount of the repurchase price of such Municipal Obligation shall be included as a liability for purposes of calculating the Preferred Shares Basic Maintenance Amount. When the Fund purchases a Fitch Eligible Asset and agrees to sell it at a future date, such Fitch Eligible Asset shall be valued at the amount of cash to be received by the Fund upon such future date, provided that the counterparty to the transaction has a long-term debt rating of at least A by Fitch and the transaction has a term of no more than 30 days; otherwise, such Fitch Eligible Asset shall be valued at the Discounted Value of such Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible Asset for purposes of determining the SSFA WILL Preferred Shares Basic Maintenance Amount to the extent it is ASSUME THIS 1. subject to any material lien, mortgage, pledge, security interest or security agreement of any kind PARAGRAPH IS (collectively, "Liens"), except for NOT a.Liens which are being contested in good faith by appropriate proceedings and which Fitch (if Fitch is then APPLICABLE rating the Preferred Shares) has indicated to the Fund will not affect the status of such asset as a Fitch UNLESS Eligible Asset, INFORMATION b. Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, IS PROVIDED c.Liens to secure payment for services rendered or cash advanced to the Fund by the Fund's investment adviser, BY custodian or the Auction Agent, FEDERATED. d. Liens by virtue of any repurchase agreement, and e.Liens in connection with any futures margin account or swap contract; or 2. deposited irrevocably for the payment of any liabilities.
MOODY'S
MOODY'S ELIGIBLE ASSETs: Eligible Asset Calculation Component 1. Cash, Cash per trial balance 2. Receivables for Receivable for Municipal Obligations Sold per trial balance. Ensure that the receivables are due to settle Municipal within five business days of the Valuation Date. Obligations Sold, or 3. Unrealized Gain Unrealized Gain from Hedging Transactions' shall mean, as of any Valuation Date, (1) in the case of a swap from Hedging contract (including total return swaps and interest rate swaps), the amount, if any, that the Fund would Transactions receive if the swap contract were terminated as of the Valuation Date, (2) in the case of an interest rate futures contract, the amount, if any, that the Fund would receive if it were to eliminate its open futures position as of the Valuation Date by entering into an offsetting contract of the same specifications or (3) in the case of an option on interest rate futures contracts, the Market Value thereof as of the Valuation Date. For the purpose of determining the Discounted Value of any Unrealized Gain from Hedging Transactions, (i) unrealized gain from a swap contract shall be treated in the same manner as a Municipal Obligation, except that the issuer rating assigned to the swap counterparty shall be used, and (ii) unrealized gain from an interest rate futures contract or an option on interest rate futures contracts shall be deemed to have a rating of A by Moody's. The amount of any unrealized loss from hedging transactions as of any Valuation Date shall be treated as a reduction to Moody's Eligible Assets. 4. Municipal Obligation that a.Pays interest FEDERATED TO INFORM SSFA IN ANY INSTANCE WHERE INTEREST IS NOT PAID IN CASH. in cash, b. Does not FEDERATED TO INFORM SSFA IN ANY INSTANCE WHERE MOODY'S RATINGS HAVE BEEN SUSPENDED. have its Moody's rating suspended by Moody's, and c.Is part of an ISSUER SIZE FROM BLOOMBERG WILL BE USED TO DETERMINE ELIGIBILITY. SSFA TO PERFORM THE ANALYSIS BASED ON CUSIP issue of AND NOTIFY FEDERATED OF ANY ISSUES BELOW $10,000,000. FEDERATED WILL DETERMINE AND COMMUNICATE TO SSFA WHETHER Municipal OR NOT THE CUSIP IS PART OF AN OVERALL ISSUE OF AT LEAST $10,000,000. Obligations of at least $10,000,000 For purposes of applying the following requirements for Single Issuer Concentration, State Concentration and applying the applicable Moody's Discount Factor, except as the Fund is otherwise advised in writing by Moody's: 1. if a Municipal Obligation is not rated by Moody's but is rated by Fitch and S&P, such Municipal Obligation (excluding short- term Municipal Obligations) will be deemed to have the Moody's rating which is equivalent to the lower of the Fitch and S&P ratings; 2. if a Municipal Obligation is not rated by Moody's but is rated by Fitch or S&P, such Municipal Obligation (excluding short- term Municipal Obligations) will be deemed to have the Moody's equivalent of such rating. SSFA WILL OBTAIN RATINGS FROM BLOOMBERG FOR NEW BUYS AND FOR THE ENTIRE PORTFOLIO MONTHLY. FEDERATED TO INFORM SSFA IN ANY INSTANCE WHERE THE FUND IS ADVISED IN WRITING BY MOODY'S THAT THE FOREGOING DOES NOT APPLY TO A MUNICIPAL OBLIGATION HELD BY THE FUND A. SINGLE ISSUER CONCENTRATION: 1. Municipal For purposes of identifying single issuers, the first six digits of the municipal security's cusip will be Obligations considered the issuer identifier. It is possible that the six digit cusip may represent a conduit rather than issued by any one the true issuer. Therefore, if any issuer exceeds the set limit, SSFA will research the true issuer on issuer and rated Bloomberg and notify Federated. Ba or lower by Moody's or not rated by Moody's may comprise no more than 4% of total Moody's Eligible Assets. 2. The total amount identified in item 1 (above), together with any Municipal Obligations issued by the same issuer and rated Baa by Moody's may comprise no more than 6% of total Moody's Eligible Assets. 3. The total amount identified in item 2 (above) together with any Municipal Obligations issued by the same issuer and rated A by Moody's may comprise no more than 10% of total Moody's Eligible Assets. 4. The total amount identified in item 3 (above) together with any Municipal Obligations issued by the same issuer and rated Aa by Moody's may comprise no more than 20% of total Moody's Eligible Assets. For purposes of FOR PURPOSES OF THIS TEST, SSFA WILL ASSUME THAT THE RATING PROVIDED BY BLOOMBERG IS FOR THE OBLIGATION AND NOT the calculations BASED SOLELY ON THE UNDERLYING CREDIT ENHANCEMENT, UNLESS INFORMATION IS SUPPLIED BY FEDERATED. in items 1 - 4 (above), any Municipal Obligation backed by the guaranty, letter of credit or insurance issued by a third party shall be deemed to be issued by such third party if the issuance of such third party credit is the sole determinant of the rating on such Municipal Obligations; and any Municipal Obligation for which the nominal issuer is a conduit for a third party the obligations of which are the sole source of revenues for the payment of such Municipal Obligation shall be deemed to be issued by such third party. B. STATE CONCENTRATION: 1. Municipal Obligations issued by issuers located within a single state or territory and rated Ba or lower by Moody's or not rated by Moody's may comprise no more than 12% of total Moody's Eligible Assets. 2. The total amount identified in item 1 (above), together with any Municipal Obligations issued by issuers located within a single state or territory and rated Baa by Moody's may comprise no more than 20% of total Moody's Eligible Assets. 3. The total amount identified in item 2 (above) together with any Municipal Obligations issued by issuers located within a single state or territory and rated A by Moody's may comprise no more than 40% of total Moody's Eligible Assets. 4. The total amount identified in item 3 (above) together with any Municipal Obligations issued by issuers located within a single state or territory and rated Aa by Moody's may comprise no more than 60% of total Moody's Eligible Assets. For purposes of applying the foregoing requirements for Single Issuer Concentration and State Concentration: 1. Eligible Assets shall be calculated without including cash; and 2. Municipal Obligations rated MIG-1, VMIG-1 or P-1 by Moody's or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, or if not rated by S&P, rated F1 by Fitch, shall be considered to have a long-term rating of A. ADJUSTMENTS TO MOODY'S ELIGIBLE ASSETS FOR FUTURES, OPTIONS AND FORWARD COMMITMENTS: 1. For purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which the Fund is obligated to deliver or receive pursuant to an outstanding option shall be as follows: a.assets SSFA will test whether the written call options expire within 49 days after the Valuation Date. subject to IF THE 49 DAY LIMIT TEST IS NOT PASSED, SSFA WILL CONTACT FEDERATED TO DETERMINE WHETHER THE WRITTEN CALL call options OPTIONS ARE EXCHANGE-TRADED AND "READILY REVERSIBLE". written by the Fund which are either exchange- traded and "readily reversible" or which expire within 49 days after the date as of which such valuation is made shall be valued at the LESSER OF: i.Discounted Value and ii.the exercise price of the call option written by the Fund; b. assets subject to call options written by the Fund not meeting the requirements of clause (A) of this sentence shall have NO VALUE; c.assets subject to put options written by the Fund shall be valued at the LESSER OF: i.the exercise price and ii.the Discounted Value of the subject security; and d. where FEDERATED TO INFORM SSFA OF THE VARIOUS SECURITIES OF THE CLASS OF SECURITIES IF SUCH SITUATION EXISTS. delivery may be made to the Fund with any security of a class of securities, the Fund shall assume it will take delivery of the security with the lowest Discounted Value. 2. For purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the following amounts shall be SUBTRACTED from the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund: a.10% of the exercise price of a written call option; b. the exercise price of any written put option; c.the settlement price of the underlying futures contract if the Fund writes put options on a futures contract; and d. 105% of the Market Value of the underlying futures contracts if the Fund writes call options on a futures contract and does not own the underlying contract. 3. For purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of all FORWARD COMMITMENTS will be the Discounted Value as calculated by applying the respective Moody's Discount Factor.
DISCOUNTING MOODY'S ASSETS: Once the above procedures have been performed, determine the discounted market value for each security. Discount each security as follows: RATING CATEGORY EXPOSURE PERIOD AAA* AA* A* BAA* (V)MIG-1** UNRATED*** 7 weeks.................. 151% 159% 166% 173% 136% 225% 8 weeks or less but greater than 7 weeks 154% 161% 168% 176% 137% 231% 9 weeks or less but greater than 8 weeks 158% 163% 170% 177% 138% 240% * Moody's rating (or, if not rated by Moody's, see above). ** Municipal Obligations rated MIG-1 or VMIG-1 (or, if not rated by Moody's, see above), which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long-term rating. *** Municipal Obligations rated less than Baa3 by Moody's (or, if not rated by Moody's, see above) or unrated. Securities rated below Baa by Moody's (or, if not rated by Moody's, see above) and unrated securities, which are securities rated by neither Moody's, S&P or Fitch, may not exceed 10% of Moody's Eligible Assets. Notwithstanding the foregoing: 1. The Moody's Discount Factor for short-term Municipal Obligations will be 115%, so long as a) such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's (or if not rated by Moody's, rated at least F1 by Fitch or at least A-1+/AA or SP-1+/AA by S&P) and b) mature or have a demand feature at par exercisable in 30 days or less, and 2. No Moody's Discount Factor will be applied to cash or to Receivables for Municipal Obligations Sold.
When the Fund sells a Municipal Obligation and agrees to repurchase such Municipal Obligation at a future date, such Municipal Obligation shall be valued at its Discounted Value for purposes of determining Moody's Eligible Assets and the amount of the repurchase price of such Municipal Obligation shall be included as a liability for purposes of calculating the Preferred Shares Basic Maintenance Amount. When the Fund purchases a Moody's Eligible Asset and agrees to sell it at a future date, such Moody's Eligible Asset shall be valued at the amount of cash to be received by the Fund upon such future date, provided that the counterparty to the transaction has a long-term debt rating of at least A2 from Moody's and the transaction has a term of no more than 30 days; otherwise, such Moody's Eligible Asset shall be valued at the Discounted Value of such Moody's Eligible Asset. Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset for purposes of determining the SSFA WILL Preferred Shares Basic Maintenance Amount to the extent it is ASSUME THIS 1. subject to any Liens, except for PARAGRAPH IS a.Liens which are being contested in good faith by appropriate proceedings and which Moody's (if Moody's is then NOT rating the Preferred Shares) has indicated to the Fund will not affect the status of such asset as a Moody's APPLICABLE Eligible Asset, UNLESS b. Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, INFORMATION c.Liens to secure payment for services rendered or cash advanced to the Fund by the Fund's investment adviser, IS PROVIDED custodian or the Auction Agent, BY d. Liens by virtue of any repurchase agreement, and FEDERATED. e.Liens in connection with any futures margin account or swap contract; or 1. deposited irrevocably for the payment of any liabilities.
EXHIBIT E REMOTE ACCESS SERVICES ADDENDUM REMOTE ACCESS SERVICES ADDENDUM TO FINANCIAL ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT ADDENDUM to that certain Financial Administration and Accounting Services Agreement dated as of January 1, 2007 (the "Services Agreement") between each of the investment companies listed on Exhibit A to the Services Agreement (the "Customer") and State Street Bank and Trust Company, including its subsidiaries and affiliates ("State Street"). State Street has developed and utilizes proprietary accounting and other systems in conjunction with the custodian services which State Street provides to the Customer. In this regard, State Street maintains certain information in databases under its control and ownership which it makes available to its customers (the "Remote Access Services"). THE SERVICES State Street agrees to provide the Customer, and its designated investment advisors, consultants or other third parties authorized by State Street ("Authorized Designees") with access to In~SightSM as described in Exhibit A to this Addendum or such other systems as may be offered from time to time (the "System") on a remote basis. SECURITY PROCEDURES The Customer agrees to comply, and to cause its Authorized Designees to comply, with remote access operating standards and procedures and with user identification or other password control requirements and other security procedures as may be issued from time to time by State Street for use of the System and access to the Remote Access Services. The Customer agrees to advise State Street immediately in the event that it learns or has reason to believe that any person to whom it has given access to the System or the Remote Access Services has violated or intends to violate the terms of this Addendum and the Customer will cooperate with State Street in seeking injunctive or other equitable relief. The Customer agrees to discontinue use of the System and Remote Access Services, if requested, for any security reasons cited by State Street. FEES Fees and charges for the use of the System and the Remote Access Services and related payment terms shall be as set forth in the Financial Administration and Accounting Services Fee Schedule in effect from time to time between the parties (the "Fee Schedule"). The Customer shall be responsible for any tariffs, duties or taxes imposed or levied by any government or governmental agency by reason of the transactions contemplated by this Addendum, including, without limitation, federal, state and local taxes, use, value added and personal property taxes (other than income, franchise or similar taxes which may be imposed or assessed against State Street). Any claimed exemption from such tariffs, duties or taxes shall be supported by proper documentary evidence delivered to State Street. PROPRIETARY INFORMATION/INJUNCTIVE RELIEF The System and Remote Access Services described herein and the databases, computer programs, screen formats, report formats, interactive design techniques, formulae, processes, systems, software, know-how, algorithms, programs, training aids, printed materials, methods, books, records, files, documentation and other information made available to the Customer by State Street as part of the Remote Access Services and through the use of the System and all copyrights, patents, trade secrets and other proprietary rights of State Street related thereto are the exclusive, valuable and confidential property of State Street and its relevant licensors (the "Proprietary Information"). The Customer agrees on behalf of itself and its Authorized Designees to keep the Proprietary Information confidential and to limit access to its employees and Authorized Designees (under a similar duty of confidentiality) who require access to the System for the purposes intended. The foregoing shall not apply to Proprietary Information in the public domain or required by law to be made public. The Customer agrees to use the Remote Access Services only in connection with the proper purposes of this Addendum. The Customer will not, and will cause its employees and Authorized Designees not to, (i) permit any third party to use the System or the Remote Access Services, (ii) sell, rent, license or otherwise use the System or the Remote Access Services in the operation of a service bureau or for any purpose other than as expressly authorized under this Addendum, (iii) use the System or the Remote Access Services for any fund, trust or other investment vehicle without the prior written consent of State Street, or (iv) allow or cause any information transmitted from State Street's databases, including data from third party sources, available through use of the System or the Remote Access Services, to be published, redistributed or retransmitted for other than use for or on behalf of the Customer, as State Street's customer. The Customer agrees that neither it nor its Authorized Designees will modify the System in any way; enhance or otherwise create derivative works based upon the System; nor will the Customer or Customer's Authorized Designees reverse engineer, decompile or otherwise attempt to secure the source code for all or any part of the System. The Customer acknowledges that the disclosure of any Proprietary Information, or of any information which at law or equity ought to remain confidential, will immediately give rise to continuing irreparable injury to State Street inadequately compensable in damages at law and that State Street shall be entitled to obtain immediate injunctive relief against the breach or threatened breach of any of the foregoing undertakings, in addition to any other legal remedies which may be available. AUTHORIZATION MATRIX LIMITED WARRANTIES State Street represents and warrants that it is the owner of and has the right to grant access to the System and to provide the Remote Access Services contemplated herein. Because of the nature of computer information technology, including but not limited to the use of the Internet, and the necessity of relying upon third party sources, and data and pricing information obtained from third parties, the System and Remote Access Services are provided "AS IS", and the Customer and its Authorized Designees shall be solely responsible for the investment decisions, results obtained, regulatory reports and statements produced using the Remote Access Services. State Street and its relevant licensors will not be liable to the Customer or its Authorized Designees for any direct or indirect, special, incidental, punitive or consequential damages arising out of or in any way connected with the System or the Remote Access Services, nor shall either party be responsible for delays or nonperformance under this Addendum arising out of any cause or event beyond such party's control. EXCEPT AS EXPRESSLY SET FORTH IN THIS ADDENDUM, STATE STREET, FOR ITSELF AND ITS RELEVANT LICENSORS, EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES CONCERNING THE SYSTEM AND THE SERVICES TO BE RENDERED HEREUNDER, WHETHER EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE. INFRINGEMENT State Street will defend or, at our option, settle any claim or action brought against the Customer to the extent that it is based upon an assertion that access to the System or use of the Remote Access Services by the Customer under this Addendum constitutes direct infringement of any patent or copyright or misappropriation of a trade secret, provided that the Customer notifies State Street promptly in writing of any such claim or proceeding and cooperates with State Street in the defense of such claim or proceeding. Should the System or the Remote Access Services or any part thereof become, or in State Street's opinion be likely to become, the subject of a claim of infringement or the like under any applicable patent or copyright or trade secret laws, State Street shall have the right, at State Street's sole option, to (i) procure for the Customer the right to continue using the System or the Remote Access Services, (ii) replace or modify the System or the Remote Access Services so that the System or the Remote Access Services becomes noninfringing, or (iii) terminate this Addendum without further obligation. TERMINATION Either party to the Services Agreement may terminate this Addendum (i) for any reason by giving the other party at least one-hundred and eighty (180) days' prior written notice in the case of notice of termination by State Street to the Customer or thirty (30) days' notice in the case of notice from the Customer to State Street of termination, or (ii) immediately for failure of the other party to comply with any material term and condition of the Addendum by giving the other party written notice of termination. This Addendum shall in any event terminate within ninety (90) days after the termination of the Services Agreement. In the event of termination, the Customer will return to State Street all copies of documentation and other confidential information in its possession or in the possession of its Authorized Designees. The foregoing provisions with respect to confidentiality and infringement will survive termination for a period of three (3) years. MISCELLANEOUS This Addendum and the exhibits hereto constitute the entire understanding of the parties to the Services Agreement with respect to access to the System and the Remote Access Services. This Addendum cannot be modified or altered except in a writing duly executed by each of State Street and the Customer and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. By its execution of the Services Agreement, the Customer accepts responsibility for its and its Authorized Designees' compliance with the terms of this Addendum. AUTHORIZATION MATRIX EXHIBIT A TO REMOTE ACCESS SERVICES ADDENDUM TO FINANCIAL ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT IN~SIGHTSM System Product Description In~SightSM provides bilateral information delivery, interoperability, and on-line access to State Street. In~SightSM allows users a single point of entry into State Street's diverse systems and applications. Reports and data from systems such as Investment Policy MonitorSM, Multicurrency HorizonSM, Securities Lending, Performance & Analytics, and Electronic Trade Delivery can be accessed through In~SightSM. This Internet-enabled application is designed to run from a Web browser and perform across low-speed data lines or corporate high-speed backbones. In~SightSM also offers users a flexible toolset, including an ad-hoc query function, a custom graphics package, a report designer, and a scheduling capability. EX-99.MCP 3 mcp.txt REVISED 3/1/07 Exhibit n(i) under Form N-1A Exhibit (99) under Item 601/Reg. S-K CLASS C SHARES EXHIBIT TO MULTIPLE CLASS PLAN 1. SEPARATE ARRANGEMENT AND EXPENSE ALLOCATION For purposes of Rule 18f-3 under the Act, the basic distribution and shareholder servicing arrangement of the Class C Shares will consist of sales by financial intermediaries in consideration of an advance commission of up to 1.0% of the public offering price, paid by the principal underwriter. Financial intermediaries may also provide shareholder services and may receive shareholder services fees therefor. Additionally, the principal underwriter and financial intermediaries may receive distribution and/or administrative service fees under the 12b-1 Plan. In cases where the principal underwriter has advanced a commission to the financial intermediary, such 12b-1 fees will be paid to the financial intermediary beginning in the thirteenth month after purchase. In consideration of advancing commissions, the principal underwriter will receive the contingent deferred sales charges paid upon redemption of Class C Shares and payments made under the 12b-1 Plan for twelve months following the purchase. In connection with this basic arrangement, Class C Shares will bear the following fees and expenses: FEES AND EXPENSES MAXIMUM AMOUNT ALLOCATED CLASS C SHARES CONTINGENT DEFERRED 1.0% of the share price at the time of purchase or SALES CHARGE redemption, whichever is lower if redeemed within twelve ("CDSC") months following purchase SHAREHOLDER SERVICE Up to 25 basis points (0.25%) of the average daily net asset FEE value 12B-1 FEE As set forth in the attached Schedule REDEMPTION FEE As set forth in the attached Schedule OTHER EXPENSES Itemized expenses incurred by the Fund with respect to holders of Class C Shares as described in Section 3 of the Plan 2. CONVERSION AND EXCHANGE PRIVILEGES For purposes of Rule 18f-3, Class C Shares have the following conversion rights and exchange privileges at the election of the shareholder: CONVERSION RIGHTS: None EXCHANGE PRIVILEGES: Class C Shares may be exchanged for Class C Shares of any other Fund. Such Funds will include the Class C Shares of the MDT Funds effective upon Federated Investors Inc.'s acquisition of a majority of the limited liability interests in the investment adviser to the MDT Funds, MDTA LLC. In any exchange, the shareholder shall receive shares having the same aggregate net asset value as the shares surrendered. Exchanges to any other Class shall be treated in the same manner as a redemption and purchase. REVISED 3/1/07 3. EXCEPTIONS TO BASIC ARRANGEMENTS For purposes of Rules 22d-1 and 6c-10 under the Act, unless otherwise specified on the Schedule to this Exhibit, the scheduled variations contingent deferred sales charges are as follows: (A) WAIVER OF CDSC Contingent upon notification of the Fund's principal underwriter or transfer agent, no CDSC will be imposed on redemptions: * following the death of the last surviving shareholder or post-purchase disability, as defined in Section 72(m) (7) of the Internal Revenue Code of 1986; * representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70 1/2; * of Shares that were reinvested within 120 days of a previous redemption; * of Shares held by Directors, Trustees, employees, former employees and sales representatives of the Fund, the Adviser, the principal underwriter and their affiliates, employees of any investment professional that sells Shares according to a sales agreement with the principal underwriter, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons; * of Shares purchased through a financial intermediary that did not receive an advance commission on the purchase; * of Shares purchased with reinvested dividends or capital gains; * imposed by the Fund when it closes an account for not meeting the minimum balance requirements; and * of Shares which were purchased pursuant to an exchange privilege if the Shares were held for the applicable CDSC holding period. 4. REDEMPTION FEE For purposes of Rule 11a-3 under the Act, any redemption fee received upon the redemption or exchange of Class C Shares will be applied to fees incurred or amount expended in connection with such redemption or exchange. The balance of any redemption fees shall be paid to the Fund. A Fund shall waive any redemption fee with respect to (i) non-participant directed redemptions or exchanges involving Class C Shares held in retirement plans established under Section 401(a) or 401(k) of the Internal Revenue Code (the "Code"), custodial plan accounts established under Section 493(b)(7) of the Code, or deferred compensation plans established under Section 457 of the Code; and (ii) redemptions or exchanges involving Class C Shares held in plans administered as college savings programs under Section 529 of the Code. REVISED 3/1/07 SCHEDULE OF FUNDS OFFERING CLASS C SHARES The Funds set forth on this Schedule each offer Class C Shares on the terms set forth in the Class C Shares Exhibit to the Multiple Class Plan, in each case as indicated below. The 12b-1 fees indicated are the maximum amounts authorized based on the average daily net asset value. Actual amounts accrued may be less. CLASS C SHARES SUBJECT TO THE BASIC LOAD SCHEDULE MULTIPLE CLASS COMPANY 12B-1 FEE REDEMPTION FEE Series FEDERATED AMERICAN LEADERS FUND, INC. 0.75% None FEDERATED EQUITY FUNDS: FEDERATED ATLAS FUND 0.75% 2% ON SHARES REDEEMED OR EXCHANGED WITHIN 90 DAYS OF PURCHASE Federated Capital Appreciation Fund 0.75% None Federated Kaufmann Fund 0.75% None Federated Kaufmann Small Cap Fund 0.75% None Federated Large Cap Growth Fund 0.75% None Federated Market Opportunity Fund 0.75% None Federated Mid Cap Growth Strategies Fund 0.75% None Federated Strategic Value Fund 0.75% None Federated Technology Fund 0.75% None FEDERATED EQUITY INCOME FUND, INC. 0.75% None FEDERATED FIXED INCOME SECURITIES, INC.: Federated Strategic Income Fund 0.75% None FEDERATED GOVERNMENT INCOME SECURITIES, INC. 0.75% None FEDERATED HIGH INCOME BOND FUND, INC. 0.75% 2% on shares redeemed or exchanged within 90 days of purchase FEDERATED INCOME SECURITIES TRUST: Federated Capital Income Fund 0.75% None Federated Fund for U.S. Government Securities 0.75% None Federated Muni and Stock Advantage Fund 0.75% None Federated Real Return Bond Fund 0.75% None Federated Stock and California Muni Fund 0.75% None FEDERATED INDEX TRUST Federated Max-Cap Index Fund 0.75% None Federated Mini-Cap Index Fund 0.75% None REVISED 3/1/07 CLASS C SHARES SUBJECT TO THE BASIC LOAD SCHEDULE (CONTINUED) MULTIPLE CLASS COMPANY 12B-1 REDEMPTION FEE Series FEE FEDERATED INTERNATIONAL SERIES, INC.: Federated International Bond Fund 0.75% None Federated International Equity Fund 0.75% 2% on shares redeemed or exchanged within 30 days of purchase FEDERATED INVESTMENT SERIES FUNDS, INC.: Federated Bond Fund 0.75% None FEDERATED MANAGED ALLOCATION PORTFOLIOS: Federated Balanced Allocation Fund 0.75% None FEDERATED MUNICIPAL SECURITIES FUND, INC. 0.75% None FEDERATED MUNICIPAL SECURITIES INCOME TRUST: Federated Municipal High Yield Advantage Fund 0.75% None FEDERATED STOCK AND BOND FUND, INC. 0.75% None FEDERATED TOTAL RETURN SERIES, INC.: Federated Total Return Bond Fund 0.75% None FEDERATED WORLD INVESTMENT SERIES, INC.: Federated International Capital Appreciation Fund 0.75% 2% on shares redeemed or exchanged within 30 days of purchase Federated International High Income Fund 0.75% None Federated International Small Company Fund 0.75% 2% on shares redeemed or exchanged within 30 days of purchase Federated International Value Fund 0.75% 2% on shares redeemed or exchanged within 30 days of purchase MONEY MARKET OBLIGATIONS TRUST: Liberty U.S. Government Money Market Trust 0.75% None -----END PRIVACY-ENHANCED MESSAGE-----