Investment Commentary and Annual Report to ... - Western Asset

Annual Report to ShareholdersNotes to Financial Statements—ContinuedFollowing is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fairvalue:Investments inSecuritiesBalance as of December 31, 2007 $ —Accrued Premiums/Discounts —Realized Gain (Loss) —Change in unrealized appreciation (depreciation) —Net purchases (sales) —Transfers in and/or out of Level 3 461,086Balance as of December 31, 2008 $461,086Security TransactionsSecurity transactions are accounted for as of the trade date. Realized gains and losses from security transactions are reportedon an identified cost basis for both financial reporting and federal income tax purposes.For the year ended December 31, 2008, security transactions (excluding short-term investments) were as follows:PurchasesProceeds from SalesU.S. Gov’t. Securities Other U.S. Gov’t. Securities Other$34,710,194 $61,383,111 $58,927,457 $57,066,135Foreign Currency TranslationAssets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars using currency exchange ratesdetermined prior to the close of trading on the New York Stock Exchange, usually at 2:00 p.m. Eastern time. Purchases and salesof securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions.The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are includedwith the net realized and unrealized gain or loss on investment securities.Repurchase AgreementsThe Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy.Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, a fund takes possession of anunderlying debt obligation subject to an obligation of the seller to repurchase, and of the fund to resell, the obligation at anagreed-upon price and time, thereby determining the yield during a fund’s holding period. When entering into repurchase agreements,it is the Fund’s policy that its custodian acting on the fund’s behalf, or a third party custodian take possession of the underlyingcollateral securities, the market value of which, at all times, at least equals the principal amount of the repurchasetransaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of thecollateral is marked to market to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has theright to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declinesduring the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to theseller of the security, realization of the collateral by the Fund may be delayed or limited.Reverse Repurchase AgreementsThe Fund may enter into reverse repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fundsells a security subject to an obligation to repurchase the security from the buyer at an agreed-upon time and price, therebydetermining the yield to the buyer during the buyer’s holding period. A reverse repurchase agreement involves the risk, among others,that the market value of the collateral retained by the fund may decline below the price of the securities the fund has sold but isobligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement files forbankruptcy or becomes insolvent, the fund’s use of the proceeds of the agreement may be restricted pending a determination by the30