Federated Short Term Municipal Trust

485BPOS 1 form.htm Federated Short Term Municipal Trust

                                          1933 Act File No. 2-72277
                                          1940 Act File No. 811-3181

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933             X
                                                                 -------

    Pre-Effective Amendment No.
                                 -------                         -------

    Post-Effective Amendment No.   43                               X
                                 -------                         -------

                                    and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940     X
                                                                 -------

    Amendment No.    34                                             X
                  --------                                       -------

                     FEDERATED SHORT-TERM MUNICIPAL TRUST
              (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:

 X  immediately upon filing pursuant to paragraph (b)
    on _________________ pursuant to paragraph (b)
    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 J. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C.  20037

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Short-Term Municipal Trust

PROSPECTUS

<R>

August 31, 2005

</R>

INSTITUTIONAL SHARES

A mutual fund seeking to provide dividend income which is exempt from federal regular income tax by investing in a portfolio of tax-exempt securities with a dollar-weighted average maturity of less than three years.

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.

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 13

What Do Shares Cost? 16

How is the Fund Sold? 18

How to Purchase Shares 19

How to Redeem and Exchange Shares 21

Account and Share Information 23

Who Manages the Fund? 26

Legal Proceedings 27

Financial Information 29

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide dividend 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, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations (AMT). The Fund's dollar-weighted average portfolio maturity will be less than three years. The Fund may invest in derivatives contracts to implement its investment strategies as more fully described herein.

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:

<R>

Interest Rate Risks. Prices of tax-exempt securities generally fall when interest rates rise. Interest rate changes have a greater effect on the price of tax -exempt securities with longer durations.

</R>
<R>

Credit Risks. There is a possibility that issuers of securities in which the Fund may invest may default on the payment of interest on the securities when due, which would cause the Fund to lose money.

</R>
<R>

Liquidity Risks. Certain securities in which the Fund invests may be less readily marketable and maybe subject to greater fluctuation in price than other securities. Trading opportunities are more limited for tax-exempt securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Over-the-counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

</R>

Tax Risks. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Consequently, the Fund may receive payments 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 an investment magnify the Fund's risk of loss and potential for gain.

<R>

Call Risks. The Fund's performance may be adversely affected by the possibility 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.

</R>
<R>

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.

</R>
<R>

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.

</R>

Risks of Investing in Derivative Contracts. Changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Also, derivative contracts may involve other risks described in this prospectus, such as interest rate, credit, liquidity, and leverage risks.

<R>

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.

</R>

Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Institutional Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

The Fund's Institutional Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

<R>

The Fund's Institutional Shares total return for the six-month period from January 1, 2005 to June 30, 2005 was 0. 72%.

</R>
<R>

Within the period shown in the bar chart, the Fund's Institutional Shares highest quarterly return was 3.08% (quarter ended March 31, 1995). Its lowest quarterly return was (0. 80)% (quarter ended June 30, 2004).

</R>

Average Annual Total Return Table

Return Before Taxes is shown for the Fund's Institutional Shares. In addition, Return After Taxes is shown for the Fund's Institutional Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Lehman Brothers 1-Year Municipal Index (LB1MI) and Lehman Brothers 3-Year Municipal Index (LB3MI), broad-based market indexes. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

<R>

(For the Periods Ended December 31, 2004)

</R>

	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R> 1.43%</R>	<R>3. 91%</R>	<R>4. 23%</R>
Return After Taxes on Distributions¹	<R> 1.43%</R>	<R>3. 91%</R>	<R>4. 23%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R> 1. 84%</R>	<R>3. 85%</R>	<R>4. 20%</R>
LB1MI	<R>1. 12%</R>	<R>3. 56%</R>	<R>4. 07%</R>
LB3MI	<R> 1. 78%</R>	<R>4. 78%</R>	<R>4. 97%</R>

1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.

Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)		None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)		None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)		None
Redemption Fee (as a percentage of amount redeemed, if applicable)		None
Exchange Fee		None

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee^2,3		0.40%
Distribution (12b-1) Fee		None
Shareholder Services Fee⁴		0.25%
Other Expenses⁵		0.18%
Total Annual Fund Operating Expenses		0.83%
Total Waivers of Fund Expenses (contractual)		0.37%
Total Actual Annual Fund Operating Expenses (after waivers)		0.46%

1 The percentages shown are based on expenses for the entire fiscal year ended June 30, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage.
2 Under the investment advisory contract, the Adviser is required to reimburse the Fund's Institutional Shares the amount, limited to the amount of the advisory fee, by which the Fund's Institutional Shares aggregate annual operating expenses, including the investment advisory fee but excluding interest, taxes, brokerage commissions, expenses of registering or qualifying the Fund and its shares under federal and state laws and regulations, expenses of withholding taxes and extraordinary expenses exceed 0.45% of the Fund's Institutional Shares average daily net assets. Shareholders must approve any change to the contractual waiver/reimbursement.
3 To comply with the investment advisory contract, a portion of the management fee has been waived. The management fee paid by the Fund (after the contractual waiver) was 0.29% for the fiscal year ended June 30, 2005.
4 To comply with the investment advisory contract, a portion of the shareholder services fee has been waived. The shareholder services fee paid by the Fund's Institutional Shares (after the contractual waiver) was 0.00% for the fiscal year ended June 30, 2005.
5 To comply with the investment advisory contract, a portion of the administrative fee has been waived. Total other expenses paid by the Fund's Institutional Shares (after the contractual waiver) were 0.17% for the fiscal year ended June 30, 2005

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Institutional Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Shares operating expenses are after contractual waivers as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

1 Year	$	<R> 47</R>
3 Years	$	<R> 148</R>
5 Years	$	<R> 258</R>
10 Years	$	<R> 579</R>

What are the Fund's Investment Strategies?

<R>

The Fund will invest its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to AMT. The tax-exempt securities in which the Fund invests are investment grade at the time of purchase. The Fund's dollar-weighted average portfolio maturity is less than three years . The Fund's investment adviser (Adviser) actively manages the Fund's portfolio, emphasizing credit quality while seeking to manage the Fund's interest rate risk and provide enhanced levels of income.

</R>

The Adviser performs 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 securities on an ongoing basis by reviewing periodic financial data and ratings of nationally recognized statistical rating organizations (NRSROs).

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 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'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 attempts to provide enhanced levels of income, subject to the Fund's maturity, quality and duration constraints, through the following management techniques. The Adviser will engage 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. Finally, the Adviser will invest a portion of the portfolio in tax-exempt securities subject to AMT, which may offer higher returns.

The Fund may enter into derivatives contracts as hedging transactions, as more fully described herein. The Fund also may use derivative contracts to implement its overall investment strategies in a more cost effective or efficient manner. For example, the Fund may purchase derivatives contracts rather than individual securities to gain exposure to the municipal bond sector.

Because the Fund refers to municipal investments in its name, it has an investment policy that it will normally invest 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.

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 derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives 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 derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives 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.

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. This 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

<R>

Tax-exempt securities are fixed-income securities that, in the opinion of 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.

</R>

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.

The following describes the principal types of tax-exempt securities in which the Fund may invest:

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 could result in a default on the bonds.

<R>

Private Activity Bonds

</R>
<R>

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.

</R>
<R>

The interest on many types of private activity bonds is subject to AMT. The Fund may invest in bonds subject to AMT.

</R>

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 interests 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 mortgage-backed security issued with a company class. PACs receive principal payments and prepayments at a specified rate. In addition, PACs will receive the companies classes' share 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.

<R>

Variable Rate Demand Instruments

</R>

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. The Fund treats demand instruments as short-term securities, because their variable interest rate adjusts in response to changes in market rates, even though their stated maturity may extend beyond 13 months.

Municipal Notes

<R>

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. The Fund also invests in tax-exempt auction rate notes that are issued (without a demand feature) for a specified term, during which the interest rate may be subject to reset generally every 7, 28, or 35 days (or longer) by means of a "Dutch Auction" or similar competitive process.

</R>

CREDIT ENHANCEMENT

The Fund may invest in tax-exempt securities with 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 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 (or underlying) securities, commodities, financial indices or other assets or instruments. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset or instrument. The other party to a derivative contract is referred to as a counterparty.

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 upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument derivative contracts may increase or decrease the Fund's exposure to interest rate risks, 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, as well as combinations of these contracts:

Futures Contracts

Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date, and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. 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 commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts.

The Fund may buy or sell the following types of futures contracts: interest rate and index financial futures contracts.

Options

Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or writer) of the option receives 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 underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset 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 underlying assets or instruments, including financial indices, individual securities, and other derivative instruments, such as futures contracts, forward contracts, and swaps.

Swaps

<R>

Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets 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. Common types of swaps in which the Fund may invest include: interest rate swaps, cap and floors, total return swaps, and credit default swaps.

</R>
<R>

SPECIAL TRANSACTIONS

</R>
<R>

Delayed Delivery Transactions

</R>
<R>

Delayed delivery transactions, including when issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery 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.

</R>
<R>

Asset Coverage

</R>
<R>

In order to secure its obligations in connection with futures 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 futures contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize loss on futures contracts or special transactions.

</R>

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 nationally recognized statistical rating organizations (NRSROs). For example, Standard & Poor's (S&P), an NRSRO, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on its 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. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.

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 rate 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. The Fund attempts to manage interest rate risk by limiting its portfolio maturity and duration.

CREDIT RISKS

Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

<R>

Many fixed-income securities receive credit ratings from NRSROs such as S&P and Moody's Investors Service, Inc. These NRSROs assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk and higher credit ratings correspond to lower perceived credit risk. Credit ratings do not provide assurance against default or other loss of money. If a security has not received a rating, the Fund must rely entirely on the Adviser's credit assessment.

</R>
<R>

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 strategies

</R>

The Fund attempts to manage credit risk by purchasing investment grade securities.

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.

<R>

SECTOR RISKS

</R>

A substantial part of the Fund's portfolio may be comprised of securities credit enhanced by insurance companies, banks or companies with similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political or other developments which generally affect these entities.

<R>

TAX RISKS

</R>
<R>

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 taws 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. Consequently, the Fund may receive payments that are treated as ordinary income for federal income tax purposes. Income from the Fund may be subject to AMT.

</R>
<R>

LEVERAGE RISKS

</R>
<R>

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.

</R>
<R>

LIQUIDITY RISKS

</R>

Trading opportunities are more limited for fixed-income securities that have not received any credit ratings 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.

<R>

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.

</R>
<R>

PREPAYMENT RISKS

</R>
<R>

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.

</R>
<R>

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.

</R>
<R>

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.

</R>

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

<R>

The Fund's use of derivative contracts 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 in which the Fund invests may not be correlated with changes in the value of the underlying asset 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 derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts 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. Derivative contracts may also involve other risks described in this prospectus, such as interest rate, credit, liquidity, and leverage risks.

</R>

What Do Shares Cost?

<R>

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) .

</R>
<R>

The Fund does not charge a front-end sales charge.

</R>
<R>

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.

</R>
<R>

The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated."

</R>
<R>

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 may be valued at amortized cost. For mortgage-backed securities, prices furnished by the independent pricing service are based on the aggregate investment value of the projected cash flows to be generated by the security. For other fixed-income securities, prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities.

</R>
<R>

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.

</R>
<R>

If prices are not available from an independent pricing service, securities, and derivatives 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.

</R>
<R>

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. 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.

</R>
<R>

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.

</R>
<R>

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.

</R>
<R>

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.

</R>

The required minimum initial investment for Fund Shares is $25,000. There is no required minimum subsequent investment amount.

An account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.

How is the Fund Sold?

<R>

The Fund offers two Share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Shares. All Share classes have different expenses which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.

</R>

The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to accounts for which financial institutions act in a fiduciary or agency capacity, or to individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans.

<R>

The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

</R>
<R>

SERVICE FEES

</R>
<R>

The Fund may pay fees (Service Fees) to financial institutions 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 institutions directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial institutions.

</R>
<R>

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

</R>
<R>

The Distributor may pay out of its own resources amounts (including items of material value) to certain financial institutions 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 institution 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 because they are not paid by the Fund.

</R>
<R>

These payments are negotiated and may be based on such factors as the number or value of Shares that the financial institution sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial institution. These payments may be in addition to payments made by the Fund to the financial institution under a Service Fees arrangement. In connection with these payments, the financial institution may elevate the prominence or profile of the Fund and/or other Federated funds within the financial institution'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 institution's organization. You can ask your financial institution for information about any payments it receives from the Distributor or the Fund and any services provided.

</R>

How to Purchase Shares

<R>

You may purchase Shares through an investment professional, 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.

</R>

THROUGH AN INVESTMENT PROFESSIONAL

Establish an account with the investment professional; and
Submit your purchase order to the investment professional 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 investment professional forwards the order to the Fund on the same day and the Fund receives payment within one business day. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
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

If you send your check by a private courier or overnight delivery service that requires a street address, send it to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

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.

<R>

THROUGH AN EXCHANGE

</R>
<R>

You may purchase Shares through an exchange from any Federated fund or share class that does not have a stated sales charge or contingent deferred sales charge, except Liberty U.S. Government Money Market Trust and Class K Shares. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have identical registrations.

</R>

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.

<R>

How to Redeem and Exchange Shares

</R>
<R>

You should redeem or exchange Shares:

</R>

through an investment professional if you purchased Shares through an investment professional; or
directly from the Fund if you purchased Shares directly from the Fund.

<R>

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.

</R>

THROUGH AN INVESTMENT PROFESSIONAL

<R>

Submit your redemption or exchange request to your investment professional 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 investment professional.

</R>

DIRECTLY FROM THE FUND

By Telephone

<R>

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

</R>

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

<R>

You may redeem or exchange Shares by sending a written request to the Fund.

</R>

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

Send requests by private courier or overnight delivery service to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

All requests must include:

<R>

amount to be redeemed or exchanged;

</R>
<R>

signatures of all shareholders exactly as registered ; and

</R>
<R>

if exchanging , the Fund Name and Share Class, account number, and account registration into which you are exchanging.

</R>

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees

<R>

Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

</R>

your redemption will be sent to an address other than the address of record;

<R>

your redemption will be sent to an address of record that was changed within the last 30 days ;

</R>
<R>

a redemption is payable to someone other than the shareholder(s) of record ; or

</R>
<R>

if exchanging (transferring) into another fund with a different shareholder registration.

</R>
<R>

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.

</R>

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:

an electronic transfer to your account at a financial institution that is an ACH member; or
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 up to seven days:

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.

<R>

EXCHANGE PRIVILEGE

</R>
<R>

You may exchange Shares of the Fund for shares of any Federated fund or share class that does not have a stated sales charge or contingent deferred sales charge, except Liberty U.S. Government Money Market Trust and Class K Shares. To do this, you must:

</R>
<R>

ensure that the account registrations are identical;

</R>
<R>

meet any minimum initial investment requirements; and

</R>
<R>

receive a prospectus for the fund into which you wish to exchange.

</R>
<R>

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

</R>
<R>

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."

</R>

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 Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption 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

<R>

You will receive confirmation of purchases, redemptions, and exchanges. In addition , you will receive periodic statements reporting all account activity, including dividends, and capital gains paid.

</R>

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.

If you purchase Shares just before the record date for a 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 capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.

ACCOUNTS WITH LOW BALANCES

<R>

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.

</R>

TAX INFORMATION

<R>

The Fund sends an annual statement of your account activity to assist you in completing your federal, state, and local tax returns. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal regular income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions and exchanges are taxable sales. Please consult your tax adviser regarding your federal, state, and local tax liability.

</R>
<R>

FREQUENT TRADING POLICIES

</R>
<R>

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.

</R>
<R>

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 12 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.

</R>
<R>

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.

</R>
<R>

PORTFOLIO HOLDINGS INFORMATION

</R>
<R>

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, weighted average effective maturity, weighted average effective duration and other portfolio characteristics, recent purchase and sale transactions and percentage breakdowns of the portfolio by credit quality.

</R>
<R>

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.

</R>
<R>

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 semi-annual 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.

</R>

Who Manages the Fund?

The Board of Trustees (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.

<R>

The Adviser and other subsidiaries of Federated advise approximately 133 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $ 179 billion in assets as of December 31, 2004. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1, 385 employees. Federated provides investment products to more than 5, 700 investment professionals and institutions.

</R>
<R>

PORTFOLIO MANAGEMENT INFORMATION

</R>

Jeff A. Kozemchak

Jeff A. Kozemchak has been the Fund's Portfolio Manager since June 1996. He is Vice President of the Fund. Mr. Kozemchak joined Federated in 1987 and has been a Senior Portfolio Manager since 1996 and a Senior Vice President of the Fund's Adviser since 1999. He was a Portfolio Manager until 1996 and a Vice President of the Fund's Adviser from 1993 to 1998. Mr. Kozemchak is a Chartered Financial Analyst and received his M.S. in Industrial Administration from Carnegie Mellon University in 1987.

<R>

The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund.

</R>

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. Under the investment advisory contract, which is subject to annual renewal by the Fund's Board of Trustees, the Adviser is required to reimburse the Fund's Institutional Shares the amount, limited to the amount of the advisory fee, by which the Fund's Institutional Shares aggregate annual operating expenses, including the investment advisory fee but excluding interest, taxes, brokerage commissions, expenses of registering or qualifying the Fund and its shares under federal and state laws and regulations, expenses of withholding taxes, and extraordinary expenses exceed 0.45% of the Fund's Institutional Shares' average daily net assets.

<R>

A discussion of the Board's review of the Fund's investment advisory contract is available in the Fund's Annual Report dated June 30, 2005.

</R>

Legal Proceedings

<R>

Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds' advisers and distributor (collectively, "Federated"), received detailed requests for information on shareholder trading activities in the Federated funds ( Funds ) from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future.

</R>
<R>

As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated's internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds' closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the "About Us" section of Federated's website at FederatedInvestors.com , and any future press releases on this subject will also be posted there.

</R>

Shortly after Federated's first public announcement concerning the foregoing matters, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. 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.

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, and seeking damages of unspecified amounts.

<R>

The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately . Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits 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, the 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.

</R>

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, whose report, along with the Fund's audited financial statements, is included in the Annual Report.

Financial Highlights

(For a Share Outstanding Throughout Each Period)

Year Ended June 30	2005		2004		2003		2002		2001
Net Asset Value, Beginning of Period	$10.27		$10.48		$10.35		$10.27		$10.03
Income From Investment Operations:
Net investment income	0.28		0.27		0.31		0.39	¹	0.44
Net realized and unrealized gain (loss) on investments and futures contracts	(0.05	)	(0.21	)	0.13		0.08	¹	0.24
TOTAL FROM INVESTMENT OPERATIONS	0.23		0.06		0.44		0.47		0.68
Less Distributions:
Distributions from net investment income	(0.28	)	(0.27	)	(0.31	)	(0.39	)	(0.44	)
Net Asset Value, End of Period	$10.22		$10.27		$10.48		$10.35		$10.27
Total Return²	2.24	%	0.53	%	4.32	%	4.63	%	6.90	%

Ratios to Average Net Assets:
Expenses	0.46	%	0.47	%	0.47	%	0.47	%	0.47	%
Net investment income	2.70	%	2.56	%	2.98	%	3.75	%¹	4.32	%
Supplemental Data:
Net assets, end of period (000 omitted)	$270,956		$330,354		$342,549		$211,835		$167,025
Portfolio turnover	31	%	35	%	28	%	33	%	58	%

1 Effective July 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended June 30, 2002, this change had no effect on the net investment income per share, net realized and unrealized gain on investments per share, or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for the periods prior to July 1, 2001 have not been restated to reflect this change in presentation.

2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

Further information about the Fund's performance is contained in the Fund's Annual Report, dated June 30, 2005, which can be obtained free of charge.

A Statement of Additional Information (SAI) dated August 31, 2005, 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 investment professional 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. 811-3181

Federated
World-Class Investment Manager

Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.

Federated Securities Corp., Distributor

Cusip 313907107

<R>

8072507A-IS (8/ 05)

</R>

Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated Short-Term Municipal Trust

PROSPECTUS

<R>

August 31, 2005

</R>

INSTITUTIONAL SERVICE SHARES

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 13

What Do Shares Cost? 16

How is the Fund Sold? 18

How to Purchase Shares 19

How to Redeem and Exchange Shares 21

Account and Share Information 24

Who Manages the Fund? 27

Legal Proceedings 28

Financial Information 29

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

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 tax-exempt securities generally fall when interest rates rise. Interest rate changes have a greater effect on the price of tax-exempt securities with longer durations.

<R>

Credit Risks. There is a possibility that issuers of securities in which the Fund may invest may default on the payment of interest on the securities when due, which would cause the Fund to lose money.

</R>
<R>

Liquidity Risks. Certain securities in which the Fund invests may be less readily marketable and maybe subject to greater fluctuation in price than other securities. Trading opportunities are more limited for tax-exempt securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Over-the-counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

</R>

Tax Risks. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Consequently, the Fund may receive payments 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 an investment magnify the Fund's risk of loss and potential for gain.

<R>

Call Risks. The Fund's performance may be adversely affected by the possibility 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.

</R>
<R>

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.

</R>
<R>

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.

</R>
<R>

Risks of Investing in Derivative Contracts. Changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Also, derivative contracts may involve other risks described in this prospectus, such as interest rate, credit, liquidity, and leverage risks.

</R>
<R>

</R>

Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

The Fund's Institutional Service Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

<R>

The Fund's Institutional Service Shares total return for the six-month period from January 1, 2005 to June 30 , 2005 was 0. 59%.

</R>
<R>

Within the period shown in the bar chart, the Fund's Institutional Service Shares highest quarterly return was 3.02% (quarter ended March 31, 1995). Its lowest quarterly return was (0. 87)% (quarter ended June 30, 2004).

</R>

Average Annual Total Return Table

Return Before Taxes is shown for the Fund's Institutional Service Shares. In addition, Return After Taxes is shown for the Fund's Institutional Service Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Lehman Brothers 1-Year Municipal Index (LB1MI) and Lehman Brothers 3-Year Municipal Index (LB3MI), broad-based market indexes. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

<R>

(For the Periods Ended December 31, 2004)

</R>

	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R> 1.18%</R>	<R>3. 65%</R>	<R>3. 97%</R>
Return After Taxes on Distributions¹	<R> 1.18%</R>	<R>3. 65%</R>	<R>3. 97%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R> 1. 59%</R>	<R>3. 59%</R>	<R>3. 94%</R>
LB1MI	<R>1. 12%</R>	<R>3. 56%</R>	<R>4. 07%</R>
LB3MI	<R> 1. 78%</R>	<R>4. 78%</R>	<R>4. 97%</R>

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold Institutional Service Shares of the Fund.

Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)		None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)		None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)		None
Redemption Fee (as a percentage of amount redeemed, if applicable)		None
Exchange Fee		None

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		0.40%
Distribution (12b-1) Fee³		0.25%
Shareholder Services Fee		0.25%
Other Expenses⁴		0.18%
Total Annual Fund Operating Expenses		1.08%

1 The percentages shown are based on expenses for the entire fiscal year ended June 30, 2005. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor and administrator waived certain amounts. These are shown below along with the net expenses the Fund's Institutional Service Shares actually paid for the fiscal year ended June 30, 2005.
Total Waivers of Fund Expenses		0.37%
Total Actual Annual Fund Operating Expenses (after waivers)		0.71%
2 The Adviser has voluntarily waived a portion of the management fee. This voluntary waiver can be terminated at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.29% for the fiscal year ended June 30, 2005.
3 The distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund's Institutional Service Shares (after the voluntary waiver) was 0.00% for the fiscal year ended June 30, 2005.
4 The administrator voluntarily waived a portion of its fee. This voluntary waiver can be terminated at any time. Total other expenses paid by the Fund (after the voluntary waiver) were 0.17% for the fiscal year ended June 30, 2005.

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund's Institutional Service Shares with the cost of investing in other mutual funds.

<R>

The Example assumes that you invest $10,000 in the Fund's Institutional Service Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Service Shares operating expenses are before waivers as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

</R>

1 Year	$	110
3 Years	$	343
5 Years	$	595
10 Years	$	1,317

What are the Fund's Investment Strategies?

<R>

</R>

The Adviser performs 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 securities on an ongoing basis by reviewing periodic financial data and ratings of nationally recognized statistical rating organizations (NRSROs).

current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve'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.

HEDGING

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

TAX-EXEMPT SECURITIES

<R>

</R>
<R>

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.

</R>

The following describes the principal types of tax-exempt securities in which the Fund may invest:

General Obligation Bonds

Special Revenue Bonds

<R>

Private Activity Bonds

</R>
<R>

The interest on many types of private activity bonds is subject to AMT. The Fund may invest in bonds subject to AMT.

</R>

Municipal Mortgage-Backed Securities

<R>

</R>

PACs

<R>

Variable Rate Demand Instruments

</R>

Municipal Notes

<R>

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. The Fund also invests in tax-exempt auction rate notes that are issued (without a demand feature) for a specified term, during which the interest rate may be subject to reset generally every 7, 28, or 35 days (or longer) by means of a "Dutch Auction" or similar competitive process.

</R>

CREDIT ENHANCEMENT

DERIVATIVE CONTRACTS

<R>

</R>
<R>

</R>

The Fund may trade in the following types of derivative contracts, as well as combinations of these contracts:

Futures Contracts

The Fund may buy or sell the following types of futures contracts: interest rate and index financial futures contracts.

Options

Swaps

<R>

</R>
<R>

SPECIAL TRANSACTIONS

</R>
<R>

Delayed Delivery Transactions

</R>
<R>

Asset Coverage

</R>
<R>

</R>

Investment Ratings for Investment Grade Securities

<R>

</R>

What are the Specific Risks of Investing in the Fund?

<R>

INTEREST RATE RISKS

</R>
<R>

</R>

CREDIT RISKS

Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

<R>

</R>
<R>

The Fund attempts to manage credit risk by purchasing investment grade securities.

</R>

CALL RISKS

<R>

</R>
<R>

SECTOR RISKS

</R>

<R>

TAX RISKS

</R>
<R>

LEVERAGE RISKS

</R>
<R>

</R>

LIQUIDITY RISKS

Trading opportunities are more limited for fixed-income securities that have not received any credit ratings or are not widely held.

<R>

</R>
<R>

PREPAYMENT RISKS

</R>
<R>

</R>

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

<R>

The Fund does not charge a front-end sales charge.

</R>
<R>

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.

</R>
<R>

The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated."

</R>
<R>

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 may be valued at amortized cost. For mortgage-backed securities, prices furnished by the independent pricing service are based on the aggregate investment value of the projected cash flows to be generated by the security. For other fixed income securities, prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities.

</R>
<R>

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.

</R>
<R>

If prices are not available from an independent pricing service, securities and derivatives 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.

</R>
<R>

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.

</R>
<R>

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.

</R>

The required minimum initial investment for Fund Shares is $25,000. There is no required minimum subsequent investment amount.

How is the Fund Sold?

<R>

The Fund offers two Share classes: Institutional Shares and Institutional Service Shares, each representing interests in a single portfolio of securities. This prospectus relates only to Institutional Service Shares. All Share classes have different expenses which affect their performance. Contact your investment professional or call 1-800-341-7400 for more information concerning the other class.

</R>

The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus toretail and private banking customers of financial institutions, or to individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans.

When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

<R>

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution, administration, and customer servicing of the Fund's Institutional Service Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different marketing fees.

</R>
<R>

SERVICE FEES

</R>
<R>

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

</R>
<R>

These payments are negotiated and may be based on such factors as the number or value of Shares that the financial institution sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial institution. These payments may be in addition to payments made by the Fund to the financial institution under a Rule 12b-1 Plan and/or Service Fees arrangement. In connection with these payments, the financial institution may elevate the prominence or profile of the Fund and/or other Federated funds within the financial institution'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 institution's organization. You can ask your financial institution for information about any payments it receives from the Distributor or the Fund and any services provided.

</R>

How to Purchase Shares

<R>

</R>

THROUGH AN INVESTMENT PROFESSIONAL

Establish an account with the investment professional; and
Submit your purchase order to the investment professional 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 investment professional forwards the order to the Fund on the same day and the Fund receives payment within one business day. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
Send your payment to the Fund by Federal Reserve wire or check.

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:

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

If you send your check by a private courier or overnight delivery service that requires a street address, send it to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

<R>

THROUGH AN EXCHANGE

</R>
<R>

</R>

BY AUTOMATED CLEARING HOUSE (ACH)

<R>

How to Redeem and Exchange Shares

</R>
<R>

You should redeem or exchange Shares:

</R>

through an investment professional if you purchased Shares through an investment professional; or
directly from the Fund if you purchased Shares directly from the Fund.

<R>

</R>

THROUGH AN INVESTMENT PROFESSIONAL

<R>

</R>

DIRECTLY FROM THE FUND

By Telephone

<R>

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

</R>
<R>

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.

</R>

By Mail

<R>

You may redeem or exchange Shares by sending a written request to the Fund.

</R>

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

Send requests by private courier or overnight delivery service to:

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

All requests must include:

<R>

amount to be redeemed or exchanged;

</R>
<R>

signatures of all shareholders exactly as registered ; and

</R>
<R>

if exchanging , the Fund Name and Share Class, account number and account registration into which you are exchanging.

</R>

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees

<R>

Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

</R>

your redemption will be sent to an address other than the address of record;

<R>

your redemption will be sent to an address of record that was changed within the last 30 days ;

</R>
<R>

a redemption is payable to someone other than the shareholder(s) of record ; or

</R>
<R>

if exchanging (transferring) into another fund with a different shareholder registration.

</R>
<R>

</R>

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
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 up to seven days:

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.

<R>

EXCHANGE PRIVILEGE

</R>
<R>

ensure that the account registrations are identical;

</R>
<R>

meet any minimum initial investment requirements; and

</R>
<R>

receive a prospectus for the fund into which you wish to exchange.

</R>
<R>

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

</R>
<R>

</R>

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

<R>

You will receive confirmation of purchases, redemptions and exchanges. In addition, you will receive periodic statements reporting all account activity, including dividends and capital gains paid.

</R>

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

<R>

</R>

TAX INFORMATION

<R>

</R>
<R>

FREQUENT TRADING POLICIES

</R>
<R>

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 12 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.

</R>
<R>

PORTFOLIO HOLDINGS INFORMATION

</R>
<R>

</R>

Who Manages the Fund?

<R>

</R>
<R>

PORTFOLIO MANAGEMENT INFORMATION

</R>

Jeff A. Kozemchak

<R>

The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund.

</R>

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.

<R>

A discussion of the Board's review of the Fund's investment advisory contract is available in the Fund's Annual Report dated June 30, 2005.

</R>

Legal Proceedings

<R>

</R>
<R>

</R>

<R>

The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits 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, the 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.

</R>
<R>

Financial Information

</R>

FINANCIAL HIGHLIGHTS

This information has been audited by Ernst & Young LLP, whose report, along with the Fund's audited financial statements, is included in the Annual Report.

Financial Highlights

(For a Share Outstanding Throughout Each Period)

Year Ended June 30	2005		2004		2003		2002		2001
Net Asset Value, Beginning of Period	$10.27		$10.48		$10.35		$10.27		$10.03
Income From Investment Operations:
Net investment income	0.25		0.24		0.29		0.36	¹	0.41
Net realized and unrealized gain (loss) on investments and futures contracts	(0.05	)	(0.21	)	0.13		0.08	¹	0.24
TOTAL FROM INVESTMENT OPERATIONS	0.20		0.03		0.42		0.44		0.65
Less Distributions:
Distributions from net investment income	(0.25	)	(0.24	)	(0.29	)	(0.36	)	(0.41	)
Net Asset Value, End of Period	$10.22		$10.27		$10.48		$10.35		$10.27
Total Return²	1.99	%	0.28	%	4.06	%	4.37	%	6.64	%

Ratios to Average Net Assets:
Expenses	0.71	%	0.72	%	0.72	%	0.72	%	0.72	%
Net investment income	2.44	%	2.31	%	2.75	%	3.50	%¹	4.08	%
Expense waiver/reimbursement³	0.37	%	0.36	%	0.36	%	0.37	%	0.40	%
Supplemental Data:
Net assets, end of period (000 omitted)	$29,799		$45,616		$24,230		$28,577		$21,851
Portfolio turnover	31	%	35	%	28	%	33	%	58	%

1 Effective July 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended June 30, 2002, this change had no effect on the net investment income per share or net realized and unrealized gain on investments per share, or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for the periods prior to July 1, 2001 have not been restated to reflect this change in presentation.

3 This expense decrease is reflected in both the expense and net investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's Annual Report, dated June 30, 2005, which can be obtained free of charge.

<R>

A Statement of Additional Information (SAI) dated August 31, 2005, 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 investment professional or the Fund at 1-800-341-7400.

</R>
<R>

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.

</R>
<R>

</R>

Investment Company Act File No. 811-3181

Federated
World-Class Investment Manager

Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.

Federated Securities Corp., Distributor

Cusip 313907206

<R>

8072507A-SS (8/ 05)

</R>

Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.

FEDERATED SHORT-TERM MUNICIPAL TRUST

STATEMENT OF ADDITIONAL INFORMATION

AUGUST 31, 2005

INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for the Institutional Shares and
Institutional Service Shares of Federated Short-Term Municipal Trust (Fund),
dated August 31, 2005.

This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectuses or the Annual Report without charge by calling 1-800-341-7400.

CONTENTS

How is the Fund Organized?...............2
--------------------------
Securities in Which the Fund
-----------------------------
Invests..................................2
-------
What Do Shares Cost?.....................9
--------------------
How is the Fund Sold?....................9
---------------------
Subaccounting Services..................11
----------------------
Redemption in Kind......................11
------------------
Massachusetts Partnership Law...........11
-----------------------------
Account and Share Information...........11
-----------------------------
Tax Information.........................12
---------------
Who Manages and Provides Services
----------------------------------
to the Fund?............................12
------------
How Does the Fund Measure
--------------------------
Performance?............................22
------------
Who is Federated Investors, Inc.?.......25
---------------------------------
Financial Information...................26
---------------------
Investment Ratings......................26
------------------
Addresses...............................29
---------
Appendix.......
--------

HOW IS THE FUND ORGANIZED?

The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on May 8,
1981. The Fund's investment adviser is Federated Investment Management
Company (Adviser).

The Board of Trustees (the "Board") has established two classes of shares of
the Fund, known as Institutional Shares and Institutional Service Shares
(Shares). This SAI relates to both classes of Shares.

SECURITIES IN WHICH THE FUND INVESTS

The principal securities in which the Fund invests are discussed in its
prospectuses. In pursuing its investment strategy, the Fund may also 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 prospectuses, in which the Fund may invest:

Inverse Floaters
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go
up, the interest rate paid on the inverse floater goes down; when 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.

Tax Increment Financing Bonds
Tax increment financing (TIF) bonds are payable from increases in taxes or
other revenues attributable to projects financed by the bonds. 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 default 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 individual leases or pools
of municipal 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 and credit risks of a zero
coupon security.

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. Asset backed
securities have prepayment risks.

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 administrative 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
potential additional expenses.

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.

DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities,
commodities, currencies, financial indices or other assets. Some derivative
contracts (such as futures, forwards and options) require payments relating
to a future trade involving the underlying asset. Other derivative contracts
(such as swaps) require payments relating to the income or returns from the
underlying asset. The other party to a derivative contract is referred to as
a counterparty.

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 upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to interest
rate risks, 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, as well
as combinations of these contracts, including, but not limited to, options on
futures contracts, options on forward contracts and options on swaps.

Futures Contracts
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date and time. Entering into a contract to buy an underlying asset is
commonly referred to as buying a contract or holding a long position in the
asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
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 may buy or sell the following types of contracts: interest rate and
index financial futures contracts.

Options
Options are rights to buy or sell an underlying asset or 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 underlying assets or
instruments, including financial indices, individual securities, and other
derivative instruments, such as futures contracts. Options that are written
on futures contracts will be subject to margin requirements similar to those
applied to futures contracts.

CALL OPTIONS
A call option gives the holder (buyer) the right to buy the underlying asset
from the seller (writer) of the option. The Fund may use call options in the
following ways:
|_|" Buy call options on indices, individual securities, index futures and
financial futures in anticipation of an increase in the value of the
underlying asset or instrument; and

|_|" Write call options on indices, portfolio securities, index futures and
financial futures to generate income from premiums, and in anticipation of
a decrease or only limited increase in the value of the underlying asset.
If a call written by the Fund is exercised, the Fund foregoes any possible
profit from an increase in the market price of the underlying asset over
the exercise price plus the premium received.

PUT OPTIONS
A put option gives the holder the right to sell the underlying asset to the
writer of the option. The Fund may use put options in the following ways:

|_|" Buy put options on indices, individual securities, index futures and
financial futures in anticipation of a decrease in the value of the
underlying asset; and

|_|" Write put options on indices, portfolio securities, index futures and
financial futures to generate income from premiums, and in anticipation of
an increase or only limited decrease in the value of the underlying asset.
In writing puts, there is a risk that the Fund may be required to take
delivery of the underlying asset 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.

Swaps
Swaps are contracts in which two parties agree to pay each other (swap) the
returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party,
and the parties might not own the assets 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 including caps, floors and collars.
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 of fixed income securities, 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 Offer Rate
(LIBOR) swap would require one party to pay the equivalent of the LIBOR 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 RATE OF RETURN SWAPS
Total rate of return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset during the specified
period, in return for payments equal to a fixed or floating rate of interest
or the total return from another underlying asset.

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.

Credit Default Swaps
A credit default swap is an agreement between two parties (the
"Counterparties") whereby one party (the "Protection Buyer") agrees to make
payments over the term of the CDS to another party (the "Protection Seller"),
provided that no designated event of default (an "Event of Default") occurs
on an underlying bond, either individually or as part of a portfolio (or
"basket") of bonds, (the "Reference Bond"). If an Event of Default occurs,
the Protection Seller must pay the Protection Buyer the full notional value,
or "par value," of the Reference Bond in exchange for the Reference Bond or
another similar bond issued by the issuer of the Reference Bond (the
"Deliverable Bond"). The Counterparties agree to the characteristics of the
Deliverable Bond at the time that they enter into the CDS. The Fund may be
either the Protection Buyer or the Protection Seller in a CDS. Under normal
circumstances, the Fund will enter into a CDS for hedging purposes (as
Protection Buyer) or to generate additional income (as Protection Seller). If
the Fund is a Protection Buyer and no Event of Default occurs, the Fund will
lose its entire investment in the CDS (i.e., an amount equal to the payments
made to the Protection Seller). However, if an Event of Default occurs, the
Fund (as Protection Buyer) will deliver the Deliverable Bond and receive a
payment equal to the full notional value of the Reference Bond, even though
the Reference Bond may have little or no value. If the Fund is the Protection
Seller and no Event of Default occurs, the Fund will receive a fixed rate of
income throughout the term of the CDS. However, if an Event of Default
occurs, the Fund (as Protection Seller) will pay the Protection Buyer the
full notional value of the Reference Bond and receive the Deliverable Bond
from the Protection Buyer. A CDS may involve greater risks than if the Fund
invested directly in the Reference Bond. For example, a CDS may increase
credit risk since the Fund has exposure to both the issuer of the Reference
Bond and the Counterparty to the CDS.

Credit Linked Notes
A credit linked note ("CLN") is a type of hybrid instrument in which a
special purpose entity issues a structured note (the "Note Issuer") that is
intended to replicate a bond or a portfolio of bonds. 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 an identified bond (the "Reference Bond"). 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 neither a designated event of default
(an "Event of Default") with respect to the Reference Bond nor a
restructuring of the issuer of the Reference Bond (a "Restructuring Event")
or (ii) the value of the Reference Bond or some other settlement amount
agreed to in advance by the Note Issuer and the Note Purchaser, if an Event
of Default or a Restructuring 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 Bond in the event of an Event of Default
or a Restructuring Event. Typically, the Reference Bond is a corporate bond,
however, any type of fixed income security could be used as the Reference
Bond.

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.

TEMPORARY DEFENSIVE INVESTMENTS
The Fund may make temporary defensive investments in the following taxable
securities:

Treasury Securities
Treasury securities are direct obligations of the federal government of the
United States.

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, 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 GSEs 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, Student Loan Marketing Association,
and Tennessee Valley Authority in support of such obligations.
A few GSEs 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.

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.

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.

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.

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 place. 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.

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
The Fund may invest up to 100% of its assets in fixed income securities rated
BBB or in unrated but comparable securities. 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 benefit of the transaction or prevent the Fund from selling or
buying other securities to implement its investment strategy.

Tax Risks
In order to pay interest that is exempt form 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 municipal securities to fall. The federal
income tax treatment of payments in respect to certain derivatives contracts
is unclear. Additionally, the Fund may not be able to close out certain
derivative contracts when it wants to. Consequently, the Fund may receive
payments that are treated as ordinary income for federal income tax
purposes.

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.

Leverage Risks
Leverage risk is created when an investment exposes the Fund to a level or
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
Statement of Additional Information.

Risks of Investing in Derivative Contracts
The Fund's use of derivative contracts 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 in which the Fund invests may not be correlated
with changes in the value of the underlying asset 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
derivatives contracts may be mispriced or improperly valued and, as a result,
the Fund may need to make increased cash payments to the counterparty.
Finally, derivative contracts 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. Derivative contracts may also involve
other risks described in this Statement of Additional Information, such as
interest rate, credit, liquidity and leverage risks.

FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide dividend income which is exempt
from federal regular income tax.
The Fund attempts to achieve its investment objective by investing at least
80% of its net assets in a diversified portfolio of municipal securities or
by investing its assets so that at least 80% of its income will be tax exempt.
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 investment objective and policies may not be changed by the Fund's
Board without shareholder approval.

INVESTMENT LIMITATIONS

Diversification of Investments
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase the 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 it would own
more than 10% of the outstanding voting securities of that issuer.

Borrowing Money
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then: (a) only in amounts not in
excess of 5% of the value of its total assets; or (b) in an amount up to
one-third of the value of its total assets, including the amount borrowed.
(This borrowing provision is not for investment leverage but solely to
facilitate management of the portfolio by enabling the Fund to meet
redemption requests where the liquidation of portfolio securities is deemed
to be inconvenient or disadvantageous.) While any such borrowings are
outstanding, no net purchases of investment securities will be made by the
Fund. If, due to market fluctuations or other reasons, the value of the
Fund's assets falls below 300% of its borrowings, the Fund will reduce its
borrowings within three business days. To do this, the Fund may have to sell
a portion of its investments at a time when it may be disadvantageous to do
so.

Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value of
the total assets at the time of the borrowing.

Underwriting
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies and limitations.

Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in
municipal securities secured by real estate or interests in real estate.

Investing in Commodities
The Fund will not buy or sell commodities or commodity contracts.

Lending
The Fund will not make loans, but may acquire publicly or non- publicly
issued municipal securities as permitted by its investment objective,
policies and limitations.

Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.

Issuing Senior Securities
The Fund will not issue senior securities, except as permitted by its
investment objective and policies.

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. Government securities, municipal securities and bank instruments
will not be deemed to constitute an industry.
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 Investment Company Act of 1940 (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.

Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements that the Fund cannot
dispose of within seven days, and certain restricted securities.

For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings association having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items." Except
with respect to borrowing money, if a percentage limitation is adhered to at
the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
limitation.

DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
o 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;

o for mortgage-backed securities, based on the aggregate investment value
of the projected cash flows to be generated by the security, as furnished
by an independent pricing service;

o for other fixed income securities, according to the mean between bid
and asked 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 may be valued at amortized cost; and

o for all other securities at fair value as determined in accordance with
procedures established by and under the general supervision of the Board.

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 net asset value (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 (INSTITUTIONAL SERVICE SHARES ONLY)
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 institutions) and providing incentives to investment
professionals 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
investment professionals 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.

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS
The Distributor may pay out of its own resources amounts (including items of
material value) to certain financial institutions. In some cases, such
payments may be made by, or funded from the resources of, companies
affiliated with the Distributor (including the Adviser). While 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 institution also may receive payments
under the Rule 12b-1 Plan and/or Service Fees. In connection with these
payments, the financial institution may elevate the prominence or profile of
the Fund and/or other Federated funds within the financial institution'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 institution's
organization. You can ask your financial institution 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 institutions.

Supplemental Payments
The Distributor may make supplemental payments to certain financial
institutions 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 institution sells or may sell;
the value of client assets invested; or the type and nature of services or
support furnished by the financial institution.

Processing Support Payments
The Distributor may make payments to financial institutions 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 institution's mutual fund trading system.

Retirement Plan Program Servicing Payments
The Distributor may make payments to certain financial institutions who sell
Federated fund shares through retirement plan programs. A financial
institution 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 Institutions
From time to time, the Distributor, at its expense, may provide additional
compensation to financial institutions that sell or arrange for the sale of
Shares. Such compensation may include financial assistance to financial
institutions 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 institution-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events,
conferences and programs for employees or associated persons of financial
institutions 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 institutions. 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.

SUBACCOUNTING SERVICES

Certain investment professionals 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. Investment professionals 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 investment
professional 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.

MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Fund. To protect its
shareholders, the Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations
of the Fund.

In the unlikely event a shareholder is held personally liable for the Fund's
obligations, the Fund is required by the Declaration of Fund to use its
property to protect or compensate the shareholder. On request, the Fund will
defend any claim made and pay any judgment against a shareholder for any act
or obligation of the Fund. Therefore, financial loss resulting from liability
as a shareholder will occur only if the Fund itself cannot meet its
obligations to indemnify shareholders and pay judgments against them.

ACCOUNT AND SHARE INFORMATION

VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Trustee 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.

Trustees 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 August 1, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Shares:
HUBCO, Birmingham, AL, owned approximately 2,002,829 Shares (7.69%); Charles
Schwab & Co., Inc., San Francisco, CA owned approximately 10,830,930 Shares
(41.56%).

As of August 1, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Service
Shares: Saxon Co./PNC Bank NA, Philadelphia, PA, owned approximately
1,313,473 Shares (46.63%).

Shareholders owning 25% or more of outstanding Shares may be in control and
be able to affect the outcome of certain matters presented for a vote of
shareholders.

Charles Schwab & Co. Inc. is organized in the state of California and is a
subsidiary of Schwab Holdings ; organized in the state of Delaware.

PNC Bank NA is organized in the state of New Jersey and is a subsidiary of
PNC Bancorp Inc.; organized in the state of Delaware.

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 TRUSTEES
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, 2004, the
Federated Fund Complex consisted of 44 investment companies (comprising 133
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 August 1, 2005, the Fund's Board and Officers as a group owned less
than 1% of each class of the Fund's outstanding Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

Aggregate
Compensation
From Fund
(past Total
fiscal year) Compensation
From Fund and
Federated Fund
Name Complex
Birth Date Principal Occupation(s) for Past Five (past calendar
Address Years, year)
Positions Held with Fund Other Directorships Held and Previous
Date Service Began Position(s)
John F. Donahue* Principal Occupations: Chairman and $0 $0
Birth Date: July 28, Director or Trustee of the Federated
1924 Fund Complex; Chairman and Director,
CHAIRMAN AND TRUSTEE Federated Investors, Inc.
Began serving: May 1981 ---------------------------------------

Previous Positions: Trustee, Federated
Investment Management Company and
Chairman and Director, Federated
Investment Counseling.

J. Christopher Donahue* Principal Occupations: Principal $0 $0
Birth Date: April 11, Executive Officer and President of the
1949 Federated Fund Complex; Director or
TRUSTEE Trustee of some of the Funds in the
Began serving: October Federated Fund Complex; President,
1999 Chief Executive Officer and Director,
Federated Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Trustee, Federated
Investment Counseling; Chairman and
Director, Federated Global Investment
Management Corp.; Chairman, Federated
Equity Management Company of
Pennsylvania, Passport Research, Ltd.
and Passport Research II, Ltd.;
Trustee, Federated Shareholder
Services Company; Director, Federated
Services Company.

Previous Positions: President,
Federated Investment Counseling;
President and Chief Executive Officer,
Federated Investment Management
Company, Federated Global Investment
Management Corp. and Passport
Research, Ltd.

Lawrence D. Ellis, M.D.* Principal Occupations: Director or $1.235.13 $148,500
Birth Date: October 11, Trustee of the Federated Fund Complex;
1932 Professor of Medicine, University of
3471 Fifth Avenue Pittsburgh; Medical Director,
Suite 1111 University of Pittsburgh Medical
Pittsburgh, PA Center Downtown; Hematologist,
TRUSTEE Oncologist and Internist, University
Began serving: August of Pittsburgh Medical Center.
1987
Other Directorships Held: Member,
National Board of Trustees, Leukemia
Society of America.

Previous Positions: Trustee,
University of Pittsburgh; Director,
University of Pittsburgh Medical
Center.

* 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 TRUSTEES BACKGROUND AND COMPENSATION

Aggregate
Compensation
From Fund
(past
Fiscal year)
Total
Name Compensation
Birth Date From Fund and
Address Principal Occupation(s) for Past Federated Fund
Positions Held with Five Years, Complex
Fund Other Directorships Held and (past calendar
Date Service Began Previous Position(s) year)
Thomas G. Bigley Principal Occupation: Director or $1,358.65 $163,350
Birth Date: February Trustee of the Federated Fund
3, 1934 Complex.
15 Old Timber Trail
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Member of Executive Committee,
Began serving: Children's Hospital of Pittsburgh;
November 1994 Director, University of Pittsburgh.

Previous Position: Senior Partner,
Ernst & Young LLP.

John T. Conroy, Jr. Principal Occupations: Director or $1,358.65 $163,350
Birth Date: June 23, Trustee of the Federated Fund
1937 Complex; Chairman of the Board,
Investment Properties Investment Properties Corporation;
Corporation Partner or Trustee in private real
3838 North Tamiami estate ventures in Southwest
Trail Florida.
Suite 402
Naples, FL Previous Positions: President,
TRUSTEE Investment Properties Corporation;
Began serving: Senior Vice President, John R. Wood
November 1991 and Associates, Inc., Realtors;
President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Nicholas P. Principal Occupation: Director or $1,358.65 $163,350
Constantakis Trustee of the Federated Fund
Birth Date: September Complex.
3, 1939
175 Woodshire Drive Other Directorships Held: Director
Pittsburgh, PA and Member of the Audit Committee,
TRUSTEE Michael Baker Corporation
Began serving: October (engineering and energy services
1999 worldwide).

Previous Position: Partner, Anderson
Worldwide SC.

John F. Cunningham Principal Occupation: Director or $1,235.13 $148,500
Birth Date: March 5, Trustee of the Federated Fund
1943 Complex.
353 El Brillo Way
Palm Beach, FL Other Directorships Held: Chairman,
TRUSTEE President and Chief Executive
Began serving: April Officer, Cunningham & Co., Inc.
1999 (strategic business consulting);
Trustee Associate, Boston College.

Previous Positions: Director,
Redgate Communications and EMC
Corporation (computer storage
systems); Chairman of the Board and
Chief Executive Officer, Computer
Consoles, Inc.; President and Chief
Operating Officer, Wang
Laboratories; Director, First
National Bank of Boston; Director,
Apollo Computer, Inc.

Peter E. Madden Principal Occupation: Director or $1,235.13 $148,500
Birth Date: March 16, Trustee of the Federated Fund
1942 Complex.
One Royal Palm Way
100 Royal Palm Way Other Directorships Held: Board of
Palm Beach, FL Overseers, Babson College.
TRUSTEE
Began serving: Previous Positions: Representative,
November 1991 Commonwealth of Massachusetts
General Court; President, State
Street Bank and Trust Company and
State Street Corporation (retired);
Director, VISA USA and VISA
International; Chairman and
Director, Massachusetts Bankers
Association; Director, Depository
Trust Corporation; Director, The
Boston Stock Exchange.

Charles F. Mansfield, Principal Occupations: Director or $1,358.65 $163,350
Jr. Trustee of the Federated Fund
Birth Date: April 10, Complex; Management Consultant;
1945 Executive Vice President, DVC Group,
80 South Road Inc. (marketing, communications and
Westhampton Beach, NY technology) (prior to 9/1/00).
TRUSTEE
Began serving: April Previous Positions: Chief Executive
1999 Officer, PBTC International Bank;
Partner, Arthur Young & Company (now
Ernst & Young LLP); Chief Financial
Officer of Retail Banking Sector,
Chase Manhattan Bank; Senior Vice
President, HSBC Bank USA (formerly,
Marine Midland Bank); Vice
President, Citibank; Assistant
Professor of Banking and Finance,
Frank G. Zarb School of Business,
Hofstra University.

John E. Murray, Jr., Principal Occupations: Director or $1,482.16 $178,200
J.D., S.J.D. Trustee of the Federated Fund
Birth Date: December Complex; Chancellor and Law
20, 1932 Professor, Duquesne University;
Chancellor, Duquesne Partner, Murray, Hogue & Lannis.
University
Pittsburgh, PA Other Directorships Held: Director,
TRUSTEE Michael Baker Corp. (engineering,
Began serving: construction, operations and
February 195 technical services).

Previous Positions: President,
Duquesne University; Dean and
Professor of Law, University of
Pittsburgh School of Law; Dean and
Professor of Law, Villanova
University School of Law.

Marjorie P. Smuts Principal Occupations: Director or $1,235.13 $148,500
Birth Date: June 21, Trustee of the Federated Fund
1935 Complex; Public Relations/Marketing
4905 Bayard Street Consultant/Conference Coordinator.
Pittsburgh, PA
TRUSTEE Previous Positions: National
Began serving: Spokesperson, Aluminum Company of
February 1984 America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

John S. Walsh Principal Occupations: Director or $1,235.13 $148,500
Birth Date: November Trustee of the Federated Fund
28, 1957 Complex; President and Director,
2604 William Drive Heat Wagon, Inc. (manufacturer of
Valparaiso, IN construction temporary heaters);
TRUSTEE President and Director,
Began serving: April Manufacturers Products, Inc.
1999 (distributor of portable
construction heaters); President,
Portable Heater Parts, a division of
Manufacturers Products, Inc.

Previous Position: Vice President,
Walsh & Kelly, Inc.

OFFICERS**
------------------------------------------------------------------------------

Name
Birth Date
Address
Positions Held with Fund
-----------------------------Principal Occupation(s) and Previous Position(s)
Date Service Began
Principal Occupations: Vice President of some of the
John B. Fisher Funds in the Federated Fund Complex; and President and
Birth Date: May 16, 1956 Director of the Institutional Sales Division of
PRESIDENT Federated Securities Corp., which is a wholly owned
Began Serving: November 2004 subsidiary of Federated. Mr. Fisher is responsible for
the distribution of Federated's products and services
to investment advisors, insurance companies,
retirement plans, and corporations. In addition, Mr.
Fisher serves as President and Director of Federated
Investment Counseling, a wholly owned subsidiary of
Federated involved in the management of separate
accounts and sub-advised mandates. He is also
President, Technology, Federated Services Corp.
responsible for the technological infrastructure of
the various Federated companies. He is also Director,
Edgewood Securities Corp., as well as Director,
Federated Investors Trust Company.

Previous Positions: Senior Vice President of Federated
Investment Counseling.
John W. McGonigle Principal Occupations: Executive Vice President and
Birth Date: October 26, 1938 Secretary of the Federated Fund Complex; Executive
EXECUTIVE VICE PRESIDENT AND Vice President, Secretary and Director, Federated
SECRETARY Investors, Inc.
Began serving: May 1981
Previous Positions: Trustee, Federated Investment
Management Company and Federated Investment
Counseling; Director, Federated Global Investment
Management Corp., Federated Services Company and
Federated Securities Corp.

Richard J. Thomas Principal Occupations: Principal Financial Officer and
Birth Date: June 17, 1954 Treasurer of the Federated Fund Complex; Senior Vice
TREASURER President, Federated Administrative Services.
Began serving:
Previous Positions: Vice President, Federated
Administrative Services; held various management
positions within Funds Financial Services Division of
Federated Investors, Inc.

Richard B. Fisher Principal Occupations: Vice Chairman or Vice President
Birth Date: May 17, 1923 of some of the Funds in the Federated Fund Complex;
VICE PRESIDENT Vice Chairman, Federated Investors, Inc.; Chairman,
Began serving: May 1981 Federated Securities Corp.

Previous Positions: President and Director or Trustee
of some of the Funds in the Federated Fund Complex;
Executive Vice President, Federated Investors, Inc.
and Director and Chief Executive Officer, Federated
Securities Corp.

Mary Jo Ochson Principal Occupations: Ms. Ochson was named Chief
Birth Date: September 12, Investment Officer of tax-exempt fixed income products
1953 in 2004. She joined Federated in 1982 and has been a
CHIEF INVESTMENT OFFICER Senior Portfolio Manager and a Senior Vice President
Began serving: May 2004 of the Fund's Adviser since 1996. Ms. Ochson is a
Chartered Financial Analyst and received her M.B.A. in
Finance from the University of Pittsburgh.

Jeff A. Kozemchak Jeff A. Kozemchak has been the Fund's Portfolio
Birth Date: January 15, 1960 Manager since June 1996. He is Vice President of the
VICE PRESIDENT Fund. Mr. Kozemchak joined Federated in 1987 and has
Began serving: November 1998 been a Senior Portfolio Manager since 1996 and a
Senior Vice President of the Fund's Adviser since
1999. He was a Portfolio Manager until 1996 and a Vice
President of the Fund's Adviser from 1993 to 1998. Mr.
Kozemchak is a Chartered Financial Analyst and
received his M.S. in Industrial Administration from
Carnegie Mellon University in 1987.

** Officers do not receive any compensation from the Fund.
------------------------------------------------------------------------------

COMMITTEES OF THE BOARD
Meetings
Held
During
Last
Board Committee Fiscal
Committee Members Committee Functions Year
Executive John F. Donahue In between meetings of the full Board, Six
John E. Murray, the Executive Committee generally may
Jr., J.D., S.J.D. exercise all the powers of the full Board
in the management and direction of the
business and conduct of the affairs of
the Trust in such manner as the Executive
Committee shall deem to be in the best
interests of the Trust. However, the
Executive Committee cannot elect or
remove Board members, increase or
decrease the number of Trustees, elect or
remove any Officer, declare dividends,
issue shares or recommend to shareholders
any action requiring shareholder approval.

Audit Thomas G. Bigley The purposes of the Audit Committee are Nine
John T. Conroy, to oversee the accounting and financial
Jr. reporting process of the Fund, the Fund`s
Nicholas P. internal control over financial
Constantakis reporting, and the quality, integrity and
Charles F. independent audit of the Fund`s financial
Mansfield, Jr. statements. The Committee also oversees
or assists the Board with the oversight
of compliance with legal requirements
relating to those matters, approves the
engagement and reviews the
qualifications, independence and
performance of the Fund`s independent
registered public accounting firm, acts
as a liaison between the independent
registered public accounting firm and the
Board and reviews the Fund`s internal
audit function.

NominatingThomas G. Bigley The Nominating Committee, whose members Two
John T. Conroy, consist of all Independent Trustees,
Jr. selects and nominates persons for
Nicholas P. election to the Fund`s Board when
Constantakis vacancies occur. The Committee will
John F. consider candidates recommended by
Cunningham shareholders, Independent Trustees,
Peter E. Madden officers or employees of any of the
Charles F. Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who
John E. Murray, desires to have an individual considered
Jr. for nomination by the Committee must
Marjorie P. Smuts submit a recommendation in writing to the
John S. Walsh Secretary of the Fund, at the Fund 's
address appearing on the back cover of
this Statement of Additional Information.
The recommendation should include the
name and address of both the shareholder
and the candidate and detailed
information concerning the candidate's
qualifications and experience. In
identifying and evaluating candidates for
consideration, the Committee shall
consider such factors as it deems
appropriate. Those factors will
ordinarily include: integrity,
intelligence, collegiality, judgment,
diversity, skill, business and other
experience, qualification as an
"Independent Trustee," the existence of
material relationships which may create
the appearance of a lack of independence,
financial or accounting knowledge and
experience, and dedication and
willingness to devote the time and
attention necessary to fulfill Board
responsibilities.

BOARD OWNERSHIP OF SHARES IN THE FUND AND IN THE FEDERATED FAMILY OF
INVESTMENT COMPANIES AS OF DECEMBER 31, 2004
------------------------------------------------------------------------------
Aggregate
Dollar Range of
Shares Owned in
Federated
Dollar Range of Family of
Interested Shares Owned Investment
Board Member Name in Fund Companies
John F. Donahue None Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. None 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, None Over $100,000
Jr.
John E. Murray, Jr., None Over $100,000
J.D., S.J.D.
Marjorie P. Smuts None Over $100,000
John S. Walsh None Over $100,000

------------------------------------------------------------------------------

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.

The Adviser must waive the portion of its advisory fee that increases the
Fund's aggregate annual operating expenses above 0.45% of its average daily
net assets. The Fund's operating expenses include the advisory fee but
exclude interest, taxes, brokerage commissions, expenses of registering the
Fund and its shares under federal and state laws, expenses of withholding
taxes, and extraordinary expenses.

Portfolio Manager Information
The following information about the Fund's Portfolio Manager is provided as
of the end of the Fund's most recently completed fiscal year.

Total Number of
Other Accounts Managed by Other
Jeff A. Kozemchak Accounts Managed/Total Assets*
Registered Investment 12 / $8,101.62
Companies
Other Pooled Investment 0 / $0
Vehicles
Other Accounts 0 / $0

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

Jeff Kozemchak 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 funds. 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 funds. These performance periods are adjusted if the portfolio
manager has been managing the fund for less than five years; funds with less
than one year of performance history under the portfolio manager may be
excluded. As noted above, Mr. Kozemchak is also the portfolio manager for
other accounts in addition to the Fund. Such other accounts may have
different benchmarks. The Balanced Scorecard IPP core 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.

Leadership/Teamwork/Communication is assessed by the Chief Investment Officer
in charge of the portfolio manager's group, with input from the portfolio
manager's co-workers.

Client Satisfaction and Service is assessed by Federated's senior management
considering the quality, amount, and effectiveness of client support
activities, with input from sales management.

Financial success is assessed to tie the portfolio manager's bonus, in part,
to Federated's overall financial health. In making this assessment,
Federated's senior management considers the following factors: growth of the
portfolio manager's funds (assets under management and revenues), net fund
flows relative to industry trends for the product category, supporting the
appropriate number of funds to improve efficiency and enhance strong fund
performance, growth in assets under management and revenues attributable to
the portfolio manager's Department, and Departmental expense management.
Although a number of these factors are quantitative in nature, the overall
assessment for this category is based on management's judgment. The
financial success score is lowered if Federated's overall financial targets
are not achieved.

In addition, Jeff Kozemchak was awarded a grant of restricted Federated
stock. Awards of restricted stock are discretionary and are made in variable
amounts based on the subjective judgment of Federated's senior management.

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 manager's 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 Trustees, 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 Investor
Responsibility Research Center (IRRC) to obtain, vote, and record proxies in
accordance with the Proxy Committee's directions. The Proxy Committee
directs IRRC by means of Proxy Voting Guidelines, and IRRC 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, IRRC will provide the Proxy Committee
with all information that it has obtained regarding the proposal and the
Proxy Committee will provide specific direction to IRRC. 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, weighted average effective maturity, weighted average effective
duration and other portfolio characteristics, recent purchase and sale
transactions and percentage breakdowns 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 Funds' 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[s]. 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
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. 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 rate of the average aggregate daily net assets of all
Federated funds as specified below:

Average Aggregate Daily
Maximum Net Assets of the
Administrative Fee 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

For the Year Ended June 30 2005 2004 2003
Advisory Fee Earned $1,338,202 $1,556,642 $1,302,479
Advisory Fee Reduction 374,228 378,890 343,574
Administrative Fee 254,928 295,119 244,866
12b-1 Fee:
Institutional Service -- -- --
Shares
Shareholder Services Fee:
Institutional Shares -- -- --
Institutional Service 92,946 -- --
Shares

------------------------------------------------------------------------------

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.

If the Fund's expenses are capped at a particular level, the cap does not
include reimbursement to the Fund of any expenses incurred by shareholders
who use the transfer agent's subaccounting facilities.

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.

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 June 30, 2005.

Yield and Tax-Equivalent Yield are given for the 30-day period ended June 30,
2005.

30-Day Period 1 Year 5 Years 10 Years
Institutional
Shares:
Total Return
Before Taxes N/A 2.24% 3.70% 3.76%
After Taxes on N/A 2.24% 3.70% 3.76%
Distributions
After Taxes on
Distributions and N/A 2.41% 3.66% 3.77%
Sale of Shares
Yield 2.66% N/A N/A N/A
Tax-Equivalent Yield 4.09% N/A N/A N/A
--------------------------------------------------------------------------------

------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years 10 Years
Institutional
Service Shares:
Total Return
Before Taxes N/A 1.99% 3.45% 3.50%
After Taxes on N/A 1.98% 3.44% 3.50%
Distributions
After Taxes on
Distributions and N/A 2.16% 3.40% 3.51%
Sale of Shares
Yield 2.42% N/A N/A N/A
Tax-Equivalent Yield 3.72% N/A N/A N/A
------------------------------------------------------------------------------

------------------------------------------------------------------------------

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 investment professionals and broker/dealers 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 municipal 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 2005 Multistate Municipal Fund
Tax Bracket:
Federal 10.00% 15.00% 25.00% 28.00% 33.00% 35.00%
Joint Return: $0 - $14,601 - $59,401 - $119,951 - $182,801 - Over
$14,600 $59,400 ------------- ----------- ---------- -----------
$119,950 $182,800 $326,450 $326,450
Single Return: $0 - $7,301 - $29,701 - $71,951 - $150,151 - Over
----------- ------------ ------------- ----------- ---------- -----------
$7,300 $29,700 $71,950 $150,150 $326,450 $326,450
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.
------------------------------------------------------------------------------

PERFORMANCE COMPARISONS
Advertising and sales literature may include:

o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;

o charts, graphs and illustrations using the Fund's returns, or returns
in general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;

o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the Fund; and

o information about the mutual fund industry from sources such as the
Investment Company Institute.

The Fund may compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments, including
federally insured bank products such as bank savings accounts, certificates
of deposit and Treasury bills.

The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.

You may use financial publications and/or indices to obtain a more complete
view of Share performance. When comparing performance, you should consider
all relevant factors such as the composition of the index used, prevailing
market conditions, portfolio compositions of other funds, and methods used to
value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:

Lipper Inc.
Lipper Inc. assumes the reinvestment of all capital gains distributions and
income dividends and ranks funds in various fund categories by making
comparative calculations using total return. Total return takes into account
any change in offering price over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "intermediate municipal
bond funds" category in advertising and sales literature.

The Lehman Brothers 1-Year Municipal Index
The Lehman Brothers 1-Year Municipal Index is an unmanaged index of municipal
bonds issued after January 1, 1991, with a minimum credit rating of at least
Baa, which have been issued as part of a deal of at least $50 million, have a
maturity value of at least $3 million and mature in at least one, but not
more than two years. As of January 1996, the index also includes zero coupon
bonds and bonds subject to the alternative minimum tax.

The Lehman Brothers 3-Year Municipal Index
The Lehman Brothers 3-Year Municipal Index is an unmanaged index of municipal
bonds issued after January 1, 1991, with a minimum credit rating of at least
Baa, which have been issued as part of a deal of at least $50 million, have a
maturity value of at least $3 million, and a maturity range of 1-5 years. As
of January 1996, the index also includes zero coupon bonds and bonds subject
to the alternative minimum tax.

Morningstar, Inc.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.

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, 2004, Federated managed 34 equity funds totaling
approximately $26.0 billion in assets across growth, value, equity income,
international, index and sector allocation styles.

Taxable Fixed Income
As of December 31, 2004, Federated managed 31 taxable bond funds including:
high-yield, multi-sector, mortgage-backed, U.S. government, U.S. corporate
and international, with assets approximating $17.7 billion.

Tax Free Fixed Income
As of December 31, 2004, Federated managed 15 municipal bond funds with
approximately $3.4 billion in assets and 22 municipal money market funds with
approximately $24.4 billion in total assets.

Money Market Funds
As of December 31, 2004, Federated managed $110.6 billion in assets across 53
money market funds, including 19 government, 11 prime, 22 municipal and 1
euro-denominated with assets approximating $43.9 billion, $42.1 billion,
$24.4 billion and $58.9 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 June 30, 2005
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Short-Term Municipal Trust dated June 30, 2005.

INVESTMENT RATINGS

STANDARD AND POOR'S 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.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favourable
business or economic developments. A 'CC' rating indicates that default of
some kind appears probable. 'C' ratings signal imminent default.

MOODY'S INVESTORS SERVICE 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.

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.

MOODY'S INVESTORS SERVICE 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.

STANDARD AND POOR'S 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.

ADDRESSES

FEDERATED SHORT-TERM MUNICIPAL TRUST

Institutional Shares
Institutional Service 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

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
State Street Bank and Trust Company
HSBC

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP

LEGAL COUNSEL
Dickstein Shapiro Moran & Oshinsky LLP
Reed Smith LLP

SERVICE PROVIDERS
Wilshire Associates, Inc.
Bloomberg
Factset

SECURITY PRICING SERVICES
FT Interactive Data
Reuters

RATINGS AGENCIES
S&P

PERFORMANCE REPORTING/PUBLICATIONS
Fidelity-Strategic Advisors
Lipper
Morningstar
NASDAQ
Value Line
Thompson Financial

OTHER
Investment Company Institute

PART C. OTHER INFORMATION

Item 23. Exhibits:

(a) (i) Conformed copy of Restatement and Amendment
No. 5 of the Declaration of Trust of the
Registrant; (18)
(ii) Conformed copy of Amendment No. 6 to the
Amended and Restated Declaration of Trust
of the Registrant; (19)
(b) (i) Copy of the By-Laws of the Registrant; (13)
(ii) Copy of Amendment No. 5 to the By-Laws of
the Registrant; (16)
(iii) Copy of Amendment No. 6 to the By-Laws of
the Registrant; (16)
(iv) Copy of Amendment No. 7 to the By-Laws of
the Registrant; (16)
(v) Copy of Amendment No. 8 to the By-Laws of
the Registrant; (16)
(vi) Copy of Amendment No. 9 to the By-Laws of
the Registrant; (21)
(vii) Copy of Amendment No. 10 to the By-Laws of
the Registrant; (22)
(c) Copy of Specimen Certificate for Shares of
Beneficial Interest of the Registrant; (13)
(d) (i) Conformed copy of the Investment Advisory
Contract of the Registrant; (9)
(ii) Conformed copy of Amendment No. 1 to
Investment Advisory Contract of the
Registrant; (19)
(iii) Conformed copy of Amendment to Investment
Advisory Contract of the Registrant; (19)
(e) (i) Conformed copy of the Distributor's
Contract of the Registrant; (11)
(ii) Conformed copy of the Amendment to
Distributor's Contract of the Registrant; (19)
(iii) Amendment to Distributor's Contracts between
the Federated Funds and Federated Securities
Corp. (22)
(iv) 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);
(f) Not applicable;
(g) (i) Conformed copy of the Custodian Agreement
of the Registrant; (11)
(ii) Conformed copy of Amendment to the
Custodian Agreement of the Registrant; (20)
(iii) Conformed copy of Domestic Custody Fee
Schedule; (16)
(h) (i) Conformed copy of Amended and Restated Agreement
for Fund Accounting Services, Administrative
Services, Transfer Agency Services and Custody
Services Procurement; (17)
(ii) Conformed copy of Amendment for Fund
Accounting Services, Administrative Services,
Shareholder Transfer Agency Services and
Custody Services Procurement; (21)
(iii) The Registrant hereby incorporates the
conformed copy of the Amendment No. 2 to
the Amended and Restated Agreement for Fund
Accounting Services, Administrative
Services, Transfer Agency Services and
Custody Services Procurement from Item
(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 the Amendment No. 3 to
the Amended and Restated Agreement for Fund
Accounting Services, Administrative
Services, Transfer Agency Services and
Custody Services Procurement from Item
(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) The responses described in Item 23 (e)(iii)
are hereby incorporated by reference;
(vi) The Registrant hereby incorporates by
reference the conformed copy of the
Agreement for Administrative Services from
Item 23 (h)(vix) of the Federated Index
Trust Registration Statement on Form
N-1A, filed with the Commission on
December 30, 2003. (File Nos. 33- 33852
and 811-6061);
(vii) 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 (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);
(viii) 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)
(ix) 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)(ix) of
the Federated Total Return Government
Bond Fund Registration Statement on Form
N-1A filed with the Commission on April
28, 2005. (File Nos. 33-60411 and
811-07309).
(x) The Registrant hereby incorporates by
referenced the conformed copy of
Amendment No. 3 to the Agreement for
Administrative Services between
Federated Administrative Services Company
and the Registrant dated June 1, 2005,
form Item 23 (h)(ii) of the Cash Trust
Series, Inc. Registration Statement on
Form N-1A, filed with the Commission on
July 27, 2005. (File Nos. 33-29838 and
811-5843).
(i) Conformed copy of Opinion and Consent of
Counsel as to the legality of shares being
registered; (2)
(j) Conformed copy of the Consent of Independent
Registered Public Accountants; (+)
(k) Not applicable;
(l) Copy of Initial Capital Understanding; (13)
(m) (i) Conformed Copy of Rule 12b-1 Plan of the
Registrant; (11)
(ii) The responses described in Item 23(e)(iii)
are hereby incorporated by reference;
(iii) Copy of Distribution Plan of the
Registrant; (22)

(n) The Registrant hereby incorporates the
conformed copy of the Multiple Class
Plan from Item (n) of the Federated GNMA
Trust Registration Statement on Form N-1A,
filed with the Commission on March 29,
2004. (File Nos. 2-75670 and 811-3375).
(o) (i) Conformed copy of power of Attorney of
Registrant; (19)
(ii) Conformed copy of power of Attorney of
Chief Investment Officer; (19)
(p) The Registrant hereby incorporates the
conformed copy of the Code of Ethics for
Access Persons from Item 23(p) of
the Federated High Yield Trust,
Registration Statement on Form N-1A filed
with the Commission on April 28, 2003.
(File Nos. 2-91091 and 811-4018).

+ All exhibits have been filed electronically.

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed August 4, 1981. (File Nos.
2-72277 and 811-3181)
9. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 15 on Form N-1A filed August 24,
1989. (File Nos. 2-72277 and 811-3181)
10. Response is incorporated by reference to Registrant's Post
Effective Amendment No. 17 on Form N-1A filed August 22, 1990.
(File Nos. 2-72277 and 811-3181).
11. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 26 on Form N-1A filed August 26,
1994. (File Nos. 2-72277 and 811-3181)
13. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 29 on Form N-1A filed April 25, 1996.
(File Nos. 2-72277 and 811-3181)
16. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 34 on Form N-1A filed June 30, 1998.
(File Nos. 2-72277 and 811-3181)
17. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 35 on Form N-1A filed August 26,
1998. (File Nos. 2-72277 and 811-3181)
18. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 36 on Form N-1A filed July 1, 1999.
(File Nos. 2-72277 and 811-3181)
19. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 39 on Form N-1A filed August 28,
2001. (File Nos. 2-72277 and 811-3181)
20. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 40 on Form N-1A filed August 23,
2002. (File Nos. 2-72277 and 811-3181)
21. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 41 on Form N-1A filed August 29, 2003.
22. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 42 on Form N-1A filed August 30, 2004.

Item 24. Persons Controlled by or Under Common Control with Registrant:
--------------------------------------------------------------
None

Item 25. Indemnification: (10)
----------------

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: Keith M. Schappert

Vice Chairman: William D. Dawson, III

Senior Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
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
Richard Tito

Vice Presidents: Todd A. Abraham
Randall S. Bauer
Nancy J.Belz
G. Andrew Bonnewell
Lee R. Cunningham, II
B. Anthony Delserone,Jr.
Eamonn G. Folan
Richard J. Gallo
John T. Gentry
Patricia L. Heagy
William R. Jamison
Nathan H. Kehm
John C. Kerber
J. Andrew Kirschler
Marian R. Marinack
Kevin McCloskey
Natalie F. Metz
Thomas J. Mitchell
Joseph M. Natoli
Mary Kay Pavuk
Jeffrey A. Petro
Ihab L. Salib
Roberto Sanchez-Dahl, Sr.
John Sidawi
Michael W. Sirianni, Jr.
Christopher Smith
Timothy G. Trebilcock
Paolo H. Valle
Stephen J. Wagner
Paige M. Wilhelm
George B. Wright

Assistant Vice Presidents: Lori Andrews
Hanan Callas
Jerome Conner
James R. Crea, Jr.
Karol M. Crummie
Richard Cumberledge
Kathyrn P. Glass
James Grant
Tracey L. Lusk
Ann Manley
Karl Mocharko
Gene Neavin
Bob Nolte
Liam O'Connell
Rae Ann Rice
Brian Ruffner
Kyle D. Stewart
Mary Ellen Tesla
Nichlas S. Tripodes
Mark Weiss

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 Municipal
Income Fund; 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 Municipal High Yield
Advantage Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal
Securities Income Trust; Federated Premier
Intermediate Municipal Income Fund; Federated
Premier Municipal Income Fund; 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

President-Institutional
Sales and Director: John B. Fisher

Executive Vice
Vice President, Assistant
Secretary and Director: Thomas R. Donahue

President-Broker/Dealer
And Director: James F. Getz

Vice President, Assistant
Secretary and Director: Peter J. Germain

Treasurer and Director: Denis McAuley III

Senior Vice Presidents: Mark W. Bloss
Richard W. Boyd
Laura M. Deger
Peter W. Eisenbrandt
Theodore Fadool, Jr.
Christopher Fives
James S. Hamilton
James M. Heaton
Harry J. Kennedy
Anne H. Kruczek
Amy Michaliszyn
Keith Nixon
Solon A. Person, IV
Ronald M. Petnuch
Colin B. Starks
Thomas E. Territ
Robert F. Tousignant
Paul Uhlman

Vice Presidents: Irving Anderson
Dan Berry
John B. Bohnet
Edward R. Bozek
Jane E. Broeren-Lambesis
Bryan Burke
Craig Burness
David J. Callahan
Mark Carroll
Dan Casey
Scott Charlton
Steven R. Cohen
Mary J. Combs
James Conely
Kevin J. Crenny
G. Michael Cullen
Beth C. Dell
Ron Dorman
Donald C. Edwards
Lee England
Timothy Franklin
Jamie Getz
Joseph D. Gibbons
Scott Gundersen
Dayna C. Haferkamp
Raymond J. Hanley
Vincent L. Harper, Jr.
Bruce E. Hastings
Christopher L. Johnston
Stephen Kittel
Michael W. Koenig
Ed Koontz
Theodore J. Kravits, Jr.
Christopher A. Layton
Michael H. Liss
Michael R. Manning
Michael Marcin
Martin J. McCaffrey
Mary A. McCaffrey
Richard C. Mihm
Chris Milliken
Vincent T. Morrow
Doris T. Muller
Alec H. Neilly
Rebecca Nelson
James E. Ostrowski
Mark Patsy
Thomas A. Peter III
Robert F. Phillips
Chris Randal
Josh Rasmussen
Richard A. Recker
Christopher Renwick
Diane M. Robinson
Brian S. Ronayne
Timothy A. Rosewicz
Thomas S. Schinabeck
Edward J. Segura
Peter Siconolfi
Edward L. Smith
John A. Staley
Jeffrey A. Stewart
Mark Strubel
Kevin Stutz
William C. Tustin
Michael Vahl
G. Walter Whalen
Stephen White
Jeff Wick
Patrick M. Wiethorn
Lewis Williams
Edward J. Wojnarowski
Michael P. Wolff

Assistant Vice Presidents: Lisa A. Toma
Robert W. Bauman
Charles L. Davis, Jr.
Brian F. Palusa
William Rose

Secretary: C. Todd Gibson

The business address of each of the Officers of Federated Securities
Corp. is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779.

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

Federated Shareholder P.O. Box 8600
Services Company Boston, MA 02266-8600
("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

State Street Bank and P.O. Box 8600
Trust Company Boston, MA 02266-8600
("Custodian")

Item 29. Management Services: Not applicable.
-------------------

Item 30. Undertakings:
------------

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 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 SHORT-TERM
MUNICIPAL TRUST, 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, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 26th day of August, 2005.

FEDERATED SHORT-TERM MUNICIPAL TRUST

BY: /s/ George F. Magera
George F. Magera, Assistant Secretary
August 26, 2005

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 August 26, 2005
George F. Magera For the Persons
ASSISTANT SECRETARY Listed Below

John F. Donahue* Chairman and Trustee

J. Christopher Donahue* President and Trustee
(Principal Executive Officer)

Richard J. Thomas* Treasurer
(Principal Financial Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

Nicholas P. Constantakis* Trustee

John F. Cunningham* Trustee

Lawrence D. Ellis, M.D.* Trustee

Peter E. Madden* Trustee

Charles F. Mansfield, Jr.* Trustee

John E. Murray, Jr.* Trustee

Marjorie P. Smuts* Trustee

John S. Walsh* Trustee

* By Power of Attorney

Federated World-Class Investment Manager

Federated Short-Term Municipal Trust

PROSPECTUS

INSTITUTIONAL SHARES

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

Average Annual Total Return Table

(For the Periods Ended December 31, 2004)

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

EXAMPLE

What are the Fund's Investment Strategies?

HEDGING

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

TAX-EXEMPT SECURITIES

General Obligation Bonds

Special Revenue Bonds

Private Activity Bonds

Municipal Mortgage-Backed Securities

PACs

Variable Rate Demand Instruments

Municipal Notes

CREDIT ENHANCEMENT

DERIVATIVE CONTRACTS

Futures Contracts

Options

Swaps

SPECIAL TRANSACTIONS

Delayed Delivery Transactions

Asset Coverage

Investment Ratings for Investment Grade Securities

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

CREDIT RISKS

CALL RISKS

SECTOR RISKS

TAX RISKS

LEVERAGE RISKS

LIQUIDITY RISKS

PREPAYMENT RISKS

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

How is the Fund Sold?

SERVICE FEES

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Wire

By Check

THROUGH AN EXCHANGE

BY AUTOMATED CLEARING HOUSE (ACH)

How to Redeem and Exchange Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

By Mail

Signature Guarantees

PAYMENT METHODS FOR REDEMPTIONS

Redemption in Kind

LIMITATIONS ON REDEMPTION PROCEEDS

EXCHANGE PRIVILEGE

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

FREQUENT TRADING POLICIES

PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

PORTFOLIO MANAGEMENT INFORMATION

Jeff A. Kozemchak

Federated
World-Class Investment Manager

Federated
World-Class Investment Manager

Federated
World-Class Investment Manager