Government & Corporate Bond Funds

Nations Funds
Notes to financial statements (continued) (unaudited)
securities equal to a specified percentage of the contract The Funds typically receive a premium from writing a
amount. This is known as the ‘‘initial margin.’’ put or call option, which would increase the Funds’
Subsequent payments (‘‘variation margin’’) are made or return in the event the option expires unexercised or is
received by a Fund each day, depending on the daily closed out at a profit. The amount of the premium would
fluctuation of the value of the contract. reflect, among other things, the relationship of the market
price of the underlying security to the exercise price of
During the period the futures contract is open, changes in
the value of the contract are recognized as an unrealized
gain or loss by ‘‘marking-to-market’’ on a daily basis to
reflect the changes in market value of the contract. When
the contract is closed, a Fund records a realized gain or
loss equal to the difference between the value of the
contract on the closing date and the value of the contract
when originally entered into.
the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call
option, a Fund limits its opportunity to profit from any
increase in the market value of the underlying security
above the exercise price of the option. By writing a put
option, a Fund assumes the risk that it may be required
to purchase the underlying security for an exercise price
higher than its then current market value, resulting in a
Risks of investments in futures contracts include the
possible adverse movement of the securities or indices
potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received.
underlying the contracts, the possibility that there may A Fund may terminate an option that it has written prior
not be a liquid secondary market for the contracts, that a to its expiration by entering into a closing purchase
change in the value of the contract may not correlate transaction in which it purchases an option having the
with a change in the value of the underlying securities, or same terms as the option written. The Fund will realize a
that the counterparty to a contract may default on its profit or loss from such transaction if the cost of such
obligation to perform.
transaction is less or more than the premium received
from the writing of the option. In the case of a put
Options: The Funds may purchase and write call and option, any loss so incurred may be partially or entirely
put options on non-U.S. stock index and interest rate offset by the premium received from a simultaneous or
futures contracts. A Fund may use such options on subsequent sale of a different put option. Because
futures contracts in connection with its hedging strategies increases in the market price of a call option will
in lieu of purchasing and writing options directly on the generally reflect increases in the market price of the
underlying securities or stock indices or purchasing and underlying security, any loss resulting from the
selling the underlying futures, and to seek to enhance repurchase of a call option is likely to be offset in whole
return. or in part by unrealized appreciation of the underlying
security owned by a Fund.
The Funds may write covered call options and put
options on securities in which they are permitted to invest Foreign currency transactions: The books and records
from time to time in seeking to attain each Fund’s of the Funds are maintained in U.S. dollars. Foreign
objective. Call options written by a Fund give the holder currencies, investments and other assets and liabilities are
the right to buy the underlying securities from the Fund translated into U.S. dollars at the current exchange rates.
at a stated exercise price; put options give the holder the Purchases and sales of investment securities and income
right to sell the underlying security to the Fund at a and expenses are translated on the respective dates of
stated price. In the case of put options, a Fund is such transactions. Net realized foreign currency gains and
required to maintain in a separate account liquid assets losses resulting from changes in exchange rates include
with a value equal to or greater than the exercise price of foreign currency gains and losses between trade date and
the underlying securities. The Funds may also write settlement date of securities transactions, foreign currency
combinations of covered puts and calls on the same transactions and the difference between the amounts of
underlying security. When the Fund purchases an option, interest and dividends recorded on the books of a Fund
it pays a premium and an amount equal to that premium and the amounts actually received. The effects of changes
is recorded as an asset. When the Fund writes an option, in foreign currency exchange rates on securities are not
it receives a premium and an amount equal to that separately identified in the Statements of operations from
premium is recorded as a liability. The asset or liability the effects of changes in market prices of those securities,
is adjusted daily to reflect the current market value of the but are included with the net realized and unrealized gain
option. or loss on securities.
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