-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cf/x1mDhKr7K90Qj7o/jcXFQm8+IFSohORoRjHauQCYHYUe1/5FZLYmixVrmjzuD gNEg3q/GvU3qGrnM19ho6w== 0000201801-96-000010.txt : 19961202 0000201801-96-000010.hdr.sgml : 19961202 ACCESSION NUMBER: 0000201801-96-000010 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02677 FILM NUMBER: 96673149 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122886520 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 Federated Municipal Securities Fund, Inc. (formerly, Liberty Municipal Securities Fund, Inc.) 20TH SEMI-ANNUAL REPORT SEPTEMBER 30, 1996 ESTABLISHED 1976 MUNICIPAL Dear Fellow Shareholder: Federated Municipal Securities Fund, Inc. was established in 1976, and I am pleased to present the 20th Semi-Annual Report for the fund covering the six-month period from April 1, 1996, to September 30, 1996. This report begins with an interview with J. Scott Albrecht, Vice President, Federated Advisers, who co-manages the fund with Mary Jo Ochson, Senior Vice President, Federated Advisers. Following the interview is a complete listing of the tax-free municipal securities that comprise the fund's holdings and the financial statements. Federated Municipal Securities Fund has provided tax-free income from a broadly diversified list of long-term municipal issues since 1976.* On September 30, 1996, the fund's $729.2 million in net assets was invested across more than 80 tax-free securities issued by municipalities across our country. The fund's weighted average effective maturity was 13.45 years. In the past six months, institutional and individual investors were concerned with inflation and the possible rise in interest rates. The rate of inflation is low, and the Federal Reserve Board did not increase interest rates. Nevertheless, the public's perception did not change. The other factor influencing tax-free bond prices was the flat tax scare, which also seems to be history. We are optimistic about tax-free bond prices -- short and long term. The performance of each share class follows:**
TOTAL RETURN INCOME CAPITAL GAIN Class A Shares 0.48% $0.31 $0.10 Class B Shares 0.03% $0.26 $0.10 Class C Shares 0.04% $0.27 $0.10
* Income may be subject to the federal alternative minimum tax and state and local taxes. ** Performance quoted is based on net asset value and reflects past performance. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period (based on offering price) for Class A Shares, Class B Shares, and Class C Shares were -4.05%, - -5.49%, and -0.91%, respectively. Thank you for investing a portion of your wealth in Federated Municipal Securities Fund, Inc. The fund is a convenient way to invest in a broad list of municipal securities. You can pursue income from the fund or seek to build your account by reinvesting your dividends and compounding tax free. Sincerely yours, [Graphic] J. Christopher Donahue President November 15, 1996 SCOTT, COULD YOU PLEASE COMMENT ON DEVELOPMENTS IN THE TAX-FREE MARKET OVER THE SIX-MONTH PERIOD FROM APRIL 1, 1996 THROUGH SEPTEMBER 30, 1996? The fixed-income markets in general have shown a considerable lack of direction during the third quarter. Economic data has given inconsistent indications as to the direction the economy is headed, which has contributed to the markets' volatility and the unstable market psychology. The considerable yield volatility should provide some indication as to the lack of direction embedded in the municipal bond market. The flat tax premium that was discounted in the municipal bond market has been diminishing since its peak in the Fall of 1995. This reflects the market's perception that the flat tax has become increasingly unlikely to occur, and that a buying opportunity existed as a result of overreaction to press reports covering the issue. Credit spreads are still narrow by historical standards (AAA to A spread is only 27 basis points), which provides the opportunity to upgrade portfolio credit quality with a minimal impact on portfolio income. The continued flatness at the long end of the yield curve (21 basis point yield difference between 15- and 30-year maturities) provides an unfavorable yield per increment of risk (duration) tradeoff beyond 15 to 19 years in maturity. HOW HAS THE MUNICIPAL MARKET FARED VERSUS OTHER FIXED-INCOME SECTORS OVER THE PAST SIX MONTHS? The municipal bond market experienced strong performance relative to the Treasury market over the reporting period. From September 1995 to February 1996, the 30-year, A-rated municipal yield was in a range of 90%-92% of comparable Treasury issues. Since that time, the flat tax passage is appearing less probable, municipal bond values increased versus those of Treasury issues. By March 1996, long-term municipal yields descended to 87.3% of long-term Treasury yields. Municipals continued to outperform Treasurys throughout the spring and summer months due to strong retail demand coupled with a limited amount of new municipal bond issuance. The valuation of municipals versus Treasurys ended the reporting period at a period low of 81.1%. IN THIS ENVIRONMENT, HOW DID FEDERATED MUNICIPAL SECURITIES FUND, INC. PERFORM WITH RESPECT TO INVESTMENT RETURN? For the six-month period ended September 30, 1996, the fund produced a total return of 0.48% for Class A Shares based on a net asset value. Total returns for Class B Shares and Class C Shares were 0.03% and 0.04%, respectively.* These returns were below average, primarily as a result of fund holdings in paper de-inking issues involving plants that convert office waste paper to recycled, marketable pulp. Weakness in pulp prices drove down the value of the bonds over the past 12 months. AS AN INCOME-ORIENTED FUND, HOW DID FEDERATED MUNICIPAL SECURITIES FUND, INC. PERFORM IN TERMS OF INCOME AND DISTRIBUTION RATE? Very well. The fund provided a distribution rate on September 30, 1996, of 5.69% based on offering price.** For investors in the 39.6%, 36%, and 31% tax brackets, this yield is the equivalent to taxable yields of 9.42%, 8.89% and 8.25%, respectively. The above-average income distribution was primarily the result of a concentration in higher yielding sectors of the municipal market, such as hospital and housing bonds. Perhaps one of the most important considerations for shareholders over the long term is the fund's record of balancing gains and losses for securities sold so as not to distribute any net realized capital gains, which are taxable. The fund has also avoided market discount bonds that could produce taxable ordinary income for shareholders. * Performance quoted is based on net asset value and reflects past performance. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period (based on offering price) for Class A Shares, Class B Shares, and Class C Shares were -4.05%, - -5.49%, and -0.91%, respectively. ** Distribution rate reflects actual distribution made to shareholders. It is calculated by dividing the monthly annualized dividend plus short-term capital gains, if any, by the average 30-day offering price. WHAT WERE THE FUND'S TOP HOLDINGS? At the end of the period, the top five holdings were:
% OF NAME RATING+ PORTFOLIO Indianapolis, Indiana Airport Authority Special Facilities Revenue Bonds; 7.10% due 1/15/2017 BBB 3.84% Long Beach, California Harbor Revenue Bonds; 5.37% due 5/15/2020 Aaa 3.81% District of Columbia Revenue Bonds; 7.15% due 4/1/2021 A+ 3.29% Pennsylvania EDFA Wastewater Treatment Revenue Bonds; 7.60% due 12/1/2024 BBB+ 3.15% San Antonio, Texas Electric & Gas Revenue Refunding Bonds; 5.00% due 2/1/2017 Aa1 2.84%
+ Bond ratings are by Standard & Poor's Ratings Group or Moody's Investors Service, two independent municipal bond rating agencies. TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) INITIAL INVESTMENT: IF YOU HAD MADE AN INITIAL INVESTMENT OF $20,000 IN THE CLASS A SHARES OF FEDERATED MUNICIPAL SECURITIES FUND, INC. ON 10/4/76, REINVESTED YOUR DIVIDENDS AND CAPITAL GAINS, AND DIDN'T REDEEM ANY SHARES, YOUR ACCOUNT WOULD BE WORTH $66,674 ON 9/30/96. YOU WOULD HAVE EARNED A 6.21%* AVERAGE ANNUAL TOTAL RETURN FOR THE 20-YEAR INVESTMENT LIFE SPAN. One key to investing wisely is to reinvest all tax-free distributions in fund shares. This increases the number of shares on which you can earn future tax-free dividends, and you gain the benefit of compounding tax-free. As of 9/30/96, the Class A Shares' average annual one-year, five-year and ten-year total returns were -2.82%, 4.92%, and 6.39%, respectively. Class B Shares' average annual one-year and since inception (7/26/94) total returns were -4.68%, and 1.70%, respectively. Class C Shares' average annual one-year and since inception (4/21/93) total returns were -0.06% and 2.76%, respectively. Graphic omitted, see appendix A * Total return represents the change in the value of an investment in Class A Shares after reinvesting all income and capital gains, and takes into account the 4.50% sales charge applicable to an initial investment in Class A Shares. Data quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so an investor's shares, when redeemed, may be worth more or less than their original cost. FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) ONE STEP AT A TIME: $1,000 INVESTED EACH YEAR FOR 20 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $45,079. With this approach, the key is consistency. If you had started investing $1,000 annually in the Class A Shares of Federated Municipal Securities Fund, Inc. on 10/4/76, reinvested your dividends and capital gains and didn't redeem any shares, you would have invested only $20,000 but your account would have reached a total value of $45,079* by 9/30/96. You would have earned an average annual total return of 7.24%. A practical investment plan helps you pursue a high level of income through tax-free municipal bonds. Through systematic investing, you buy shares on a regular basis and reinvest all tax-free earnings. An investment plan works for you when you invest only $1,000 annually. You can take it one step at a time. Put time, money, and compounding to work! [Graphic] omitted, see appendix B * No method of investing can guarantee a profit or protect against loss in down markets. However, by investing regularly over time and buying shares at various prices, investors can purchase more shares at lower prices, and all accumulated shares have the ability to pay income to the investor. Because such a plan involves continuous investment, regardless of changing price levels, the investor should consider whether or not to continue purchases through periods of low price levels. FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR TAX-FREE INCOME Larry and Barbara Bartlett are a fictional couple who, like all other tax-sensitive shareholders, want to keep more of what they earn. Larry owns a successful architectural firm and Barbara is a marketing executive. Their combined income puts them in the 39.6% federal tax bracket. On September 30, 1986, the Bartletts invested $25,000 in the Class A Shares of Federated Municipal Securities Fund, Inc. As this chart shows, in 10 years, their original $25,000 investment has grown to $46,456 -- that's $22,705 in tax-free income.* This represents a 6.39% average annual total return. As far as the Bartletts are concerned, this fund has made all the difference. [Graphic] omitted, see appendix C * Income may be subject to the federal alternative minimum tax and state and local taxes. This hypothetical scenario is provided for illustrative purposes only and does not represent the results obtained by any particular shareholder. Past performance does not guarantee future results. FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996 (UNAUDITED)
PRINCIPAL CREDIT AMOUNT RATING* VALUE SHORT-TERM MUNICIPALS -- 1.3% KENTUCKY -- 0.5% $ 4,000,000 Kentucky Pollution Abatement & Water Resource Finance Authority Daily VRDNs (Toyota Motor Credit Corp.) NR $ 4,000,000 NEW YORK -- 0.8% 6,000,000 New York City, NY, (Series 1994) Daily VRDNs (Chase Manhattan Bank N.A., New York A+ 6,000,000 LOC) TOTAL SHORT-TERM MUNICIPALS 10,000,000 (AT AMORTIZED COST) LONG-TERM MUNICIPALS -- 97.5% ALASKA -- 4.0% 10,500,000 Valdez, AK Marine Terminal, Refunding Revenue Bonds (Series C), 5.65% (BP AA- 10,144,680 Pipeline Inc.), 12/1/2028 20,000,000 Valdez, AK Marine Terminal, Revenue Refunding Bonds (Series B), 5.50% (BP AA- 18,896,000 Pipeline Inc.), 10/1/2028 Total 29,040,680 ARIZONA -- 1.5% 10,000,000 Salt River Project, AZ Agricultural Improvement & Power District, Electric System Revenue Bonds (Series A), 7.875% (United States Treasury PRF)/ (Original Issue Yield: Aaa 10,670,800 7.916%), 1/1/1998 (@102) CALIFORNIA -- 6.1% 5,000,000 California PCFA, Refunding Revenue Bonds (Series A), 5.90% (San Diego Gas & Electric)/(Original Issue Yield: 5.934%), 6/1/2014 A2 5,181,300 11,290,000 California PCFA, Solid Waste Disposal Revenue Bonds, 6.875% (Browning-Ferris Industries, Inc.)/(Original Issue Yield: 6.95%), A 12,000,254 11/1/2027 29,000,000 Long Beach California Harbor, Revenue Bonds, 5.375% (MBIA INS)/(Original Issue Aaa 27,512,590 Yield: 5.75%), 5/15/2020 Total 44,694,144
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED DISTRICT OF COLUMBIA -- 6.1% $ 12,775,000 District of Columbia Hospital Authority, Revenue Refunding Bonds (Series A), 7.125% (Medlantic Healthcare Group)/(Original Issue Yield: 7.30%), 8/15/2019 Baa1 $ 13,246,270 2,000,000 District of Columbia Hospital Authority, Revenue Refunding Bonds (Series B), 7.00% (Medlantic Healthcare Group)/(Original Issue Yield: 7.282%), 8/15/2015 Baa1 2,076,880 22,250,000 District of Columbia, Revenue Bonds (Series B), 7.15% (Georgetown University)/(Original Issue Yield: 7.191%), 4/1/2021 A+ 23,774,570 4,765,000 Georgetown University, 8.25%, AA- 5,119,325 4/1/2018 Total 44,217,045 FLORIDA -- 1.5% 4,335,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue Yield: 9.173%), AA 6,056,168 6/1/2014 665,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(United States Treasury COL)/(Original Issue Yield: 9.173%), 6/1/2014 Aaa 927,343 3,000,000 Florida State, UT GO Bonds, Broward County Expressway Authority, 10.00% (Original Issue Yield: 10.105%), 7/1/2014 AA 4,483,560 Total 11,467,071 GEORGIA -- 1.8% 5,000,000 Georgia Municipal Electric Authority, Power Revenue Bonds (Series O), 8.125%, A+ 5,324,150 1/1/2017 2,500,000 Georgia Municipal Electric Authority, Revenue Refunding Bonds (Series Q), 8.375% (Original Issue Yield: 8.397%), 1/1/2016 AA- 2,669,625
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED GEORGIA -- CONTINUED $ 5,000,000 Metropolitan Atlanta Rapid Transit Authority, Sales Tax Revenue Bonds (Series J), 8.00% (United States Treasury PRF)/(Original Issue Yield: Aaa $ 5,410,650 8.043%), 7/1/1998 (@102) Total 13,404,425 ILLINOIS -- 5.8% 5,000,000 Illinois Development Finance Authority, Housing Revenue Bonds, 6.10% (Catholic Charities Housing Development Corp.), 1/1/2020 NR 4,514,300 14,430,000 Illinois Health Facilities Authority, Hospital Revenue Bonds (Series A), 9.25% (Edgewater Hospital & Medical Center, IL), 7/1/2024 NR 15,215,569 6,250,000 Illinois State Sales Tax, Revenue Bonds (Series H), 7.625% (United States Treasury PRF)/(Original Issue Yield: 7.645%), 6/15/1998 Aaa 6,723,688 (@102) 16,000,000 Illinois State, UT GO Bonds, 5.125% (FGIC INS), 12/1/2004 Aaa 16,201,280 Total 42,654,837 INDIANA -- 6.7% 6,200,000 Indiana Health Facilities Finance Authority, Hospital Revenue Bonds, 6.625% (Floyd Memorial Hospital, IN)/ (Original Issue Yield: A 6,366,408 6.902%), 2/15/2022 26,000,000 Indianapolis, IN Airport Authority, Special Facilities Revenue Bonds, 7.10% (Federal Express Corp.)/ (Original Issue Yield: BBB 27,734,460 7.178%), 1/15/2017 10,000,000 Kokomo, IN Hospital Authority, Revenue Refunding Bonds, 6.35% (St. Joseph Hospital, IN)/(Original Issue Yield: 6.40%), 8/15/2013 BBB 9,869,900 4,500,000 LaPorte County, IN Hospital Authority, Hospital Facility Revenue Refunding Bonds, 6.25% (LaPorte Hospital, Inc., IN)/(Original Issue BBB 4,418,190 Yield: 6.35%), 3/1/2012 Total 48,388,958
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED LOUISIANA -- 2.8% $ 6,000,000 De Soto Parish, LA Environmental Improvement Authority, Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018 A- $ 6,825,720 3,550,000 St. Charles Parish, LA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (Louisiana Power & Light Co.)/ (Original Issue Yield: BBB+ 3,691,468 7.04%), 12/1/2022 10,000,000 St. James Parish, LA, Solid Waste Disposal Revenue Bonds, 7.70% (Freeport McMoRan, Inc.)/(Original Issue Yield: 7.75%), 10/1/2022 NR 10,237,400 Total 20,754,588 MARYLAND -- 1.7% 12,220,000 Maryland State Community Development Administration, SFM Revenue Bonds (5th Series), 6.75%, 4/1/2026 Aa 12,652,832 MASSACHUSETTS -- 2.7% 33,800,000(a)Massachusetts IFA, Solid Waste Disposal Sr. Lien Revenue Bonds (Series A), 9.00% (Massachusetts Recycling Association), NR 17,269,096 8/1/2016 2,200,000 Massachusetts State HFA, Rental Housing Mortgage Revenue Bonds, 1995 Series E, 5.90% (AMBAC INS), 7/1/2025 Aaa 2,169,794 Total 19,438,890 MICHIGAN -- 2.7% 15,455,000 Michigan State Hospital Finance Authority, Revenue Bonds, 5.25% (St. John Hospital, MI)/(AMBAC INS)/ (Original Issue Yield: Aaa 14,454,134 5.65%), 5/15/2026 500,000 Michigan State Hospital Finance Authority, Revenue Bonds, Providence Hospital, 7.00% (Daughters of Charity)/(Original Issue Aa 540,785 Yield: 7.04%), 11/1/2021
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED MICHIGAN -- CONTINUED $ 5,000,000 Royal Oak, MI Hospital Finance Authority, Refunding Revenue Bonds, 5.25% (William Beaumont Hospital, MI)/(Original Issue Yield: AA $ 4,672,000 5.943%), 1/1/2020 Total 19,666,919 MINNESOTA -- 2.3% 16,900,000 St. Paul, MN Housing & Redevelopment Authority, Hospital Revenue Refunding Bonds (Series A), 6.625% (Healtheast, MN)/(Original Issue Yield: 6.687%), 11/1/2017 BBB- 16,994,809 NEW MEXICO -- 0.7% 5,000,000 Farmington, NM, PCR Refunding Bonds (Series A), 7.20% (Southern California Edison Co.)/(Original Issue Yield: 7.30%), 4/1/2021 Aa3 5,422,700 NEW YORK -- 10.7% 3,000,000 Municipal Assistance Corp. of New York, Revenue Bonds (Series 67), 7.625% (Original Issue Yield: 7.698%), 7/1/2008 AA- 3,285,990 18,000,000 New York City Municipal Water Finance Authority, Revenue Bonds (Series A), 5.50% (Original Issue Yield: 6.25%), 6/15/2020 A 16,965,000 13,600,000 New York City, NY IDA, Special Facility Revenue Bonds, 6.00% (Terminal One Group Association)/ (Original Issue Yield: A 13,393,416 6.45%), 1/1/2019 10,000,000 New York City, NY, UT GO Bonds (Series B), 6.00% (Original Issue Yield: BBB+ 9,604,100 6.25%), 8/15/2026 5,000,000 New York State Environmental Facilities Corp., Solid Waste Disposal Revenue Bonds, 6.10% (Occidental Petroleum Corp.)/(Original Issue Yield: 6.214%), 11/1/2030 BBB 4,871,700 2,000,000 New York State Mortgage Agency, Mortgage Revenue Bonds (Series 30-B), 6.65% Aa 2,063,500 (FHA GTD), 10/1/2025
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED NEW YORK -- CONTINUED $ 13,000,000 New York State Power Authority, Revenue Bonds (Series V), 8.00% (United States Treasury PRF), 1/1/1998 (@102) AA $ 13,885,040 9,000,000 Triborough Bridge & Tunnel Authority, NY, General Purpose Revenue Bonds (Series O), 7.70% (United States Treasury PRF), 1/1/1999 Aaa 9,802,800 (@101.5) 4,300,000 Triborough Bridge & Tunnel Authority, NY, Revenue Refunding Bonds (Series L), 8.125% (Original Issue Yield: 8.22%), 1/1/2012 Aa 4,588,659 Total 78,460,205 NORTH CAROLINA -- 3.2% 9,000,000 Martin County, NC IFA, (Series 1995) Solid Waste Disposal Revenue Bonds, 6.00% (Weyerhaeuser Co.), 11/1/2025 A 9,039,240 13,500,000 North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue Refunding Bonds, 7.875% (United States Treasury PRF), Aaa 14,410,710 1/1/1998 (@102) Total 23,449,950 OHIO -- 0.2% 1,000,000 Franklin County, OH Hospital Facility Authority, Hospital Revenue Refunding & Improvement Bonds, 7.25% (Riverside United Methodist Hospital)/(MBIA INS)/(Original Issue Yield: Aaa 1,095,110 7.29%), 5/15/2020 OKLAHOMA -- 1.1% 7,500,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.60% (American Airlines)/(Original Issue Yield: 7.931%), 12/1/2030 Baa2 8,043,600
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED PENNSYLVANIA -- 10.5% $ 750,000 Geisinger Authority, PA Health System, Revenue Bonds, 7.625% (United States Treasury PRF)/(Original Issue Yield: 7.697%), 7/1/1999 AA $ 825,810 (@102) 1,300,000 Latrobe, PA Industrial Development Authority, College Revenue Bonds, 6.75% (St. Vincent College, PA)/ (Original Issue Yield: Baa1 1,318,655 7.00%), 5/1/2024 6,250,000 Pennsylvania EDFA, Revenue Bonds, 7.60% (Macmillan Bloedel LTD Partnership)/(Original Issue Yield: 7.65%), 12/1/2020 Baa2 6,942,875 20,500,000 Pennsylvania EDFA, Wastewater Treatment Revenue Bonds (Series A), 7.60% (Sun Co., Inc.)/(Original Issue Yield: 7.653%), 12/1/2024 BBB+ 22,781,035 8,000,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 39B), 6.875%, AA 8,424,480 10/1/2024 4,000,000 Pennsylvania State Higher Education Facilities Authority, Hospital Revenue Bonds (Series A), 7.25% (Allegheny General Hospital)/(Original Issue Yield: 7.40%), 9/1/2017 AA- 4,295,480 12,865,000 Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series A), 7.375% (Medical College of Pennsylvania)/(United States Treasury PRF)/ (Original Issue Yield: AAA 14,375,351 7.45%), 3/1/2021 15,000,000 Philadelphia, PA School District, UT GO (Series B), 5.50% (AMBAC INS)/(Original Issue Yield: 5.95%), 9/1/2025 Aaa 14,545,500 2,000,000 Sayre, PA, Health Care Facilities Authority, Revenue Bonds (Series A), 7.10% (Guthrie Healthcare System, PA)/(AMBAC INS)/(Original Issue Yield: 7.175%), 3/1/2017 Aaa 2,206,400 Total 75,715,586
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED TENNESSEE -- 1.9% $ 13,000,000 Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds, 8.50% (Jesse Holman Jones Hospital Corp, TN)/(Original Issue Yield: 8.875%), 4/1/2024 NR $ 13,902,070 TEXAS -- 14.5% 4,000,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A), 7.875% (Texas Utilities Electric Co.), 3/1/2021 BBB 4,433,400 12,750,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.25% (American Airlines)/(Original Issue Yield: 7.428%), Baa2 13,579,515 11/1/2030 2,000,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds (Series A), 6.875% (Champion International Corp.)/(Original Issue Yield: Baa1 2,074,300 7.15%), 12/1/2028 3,360,000 Houston, TX Hotel Occupancy Tax, Sr. Lien Refunding Revenue Bonds, 6.00% (FSA Aaa 3,566,808 INS), 7/1/2004 18,000,000 Houston, TX Water & Sewer System, Junior Lien Refunding Revenue Bonds (Series A), 5.25% (FGIC INS)/(Original Issue Yield: Aaa 16,889,760 5.60%), 12/1/2025 3,700,000 Red River Authority, TX, PCR Bonds, 6.875% (Hoechst Celanese Corp.)/(Original Issue Yield: 6.939%), 4/1/2017 AA- 3,956,299 7,220,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.50% (Richardson Medical Center, TX)/(Original Issue BBB- 7,256,244 Yield: 6.72%), 12/1/2012 1,000,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.75% (Richardson Medical Center, TX)/(Original Issue BBB- 1,018,670 Yield: 6.82%), 12/1/2023 22,450,000 San Antonio, TX Electric & Gas, Revenue Refunding Bonds, 5.00% (Original Issue Aa1 20,482,258 Yield: 6.10%), 2/1/2017 1,950,000 Texas State, UT GO Veterans Housing Assistance, 7.00%, 12/1/2025 AA 2,046,642
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED TEXAS -- CONTINUED $ 16,000,000 Texas State, Veterans Land UT GO Bonds (Series 1996), 5.25% (Original Issue Yield: AA $ 14,698,560 5.50%), 12/1/2026 12,505,000 Travis County, Texas Housing Finance Corp., SFM Revenue Bonds, 7.10% (GNMA AAA 13,118,245 COL), 10/1/2027 3,000,000 Tyler, TX Health Facilities Development Corp., Revenue Bonds, 6.75% (East Texas Medical Center)/(Original Issue Yield: 7.00%), NR 3,022,620 11/1/2025 Total 106,143,321 UTAH -- 5.5% 20,000,000 Intermountain Power Agency, UT, Power Supply Refunding Revenue Bonds (Series 1996D), 5.00% (Original Issue Yield: AA- 17,921,600 5.40%), 7/1/2021 13,500,000 Salt Lake City, UT Hospital Authority, Hospital Revenue Refunding Bonds (Series A), 8.125% (IHC Hospitals Inc., UT)/(United States Treasury COL)/ (Original Issue Yield: AAA 16,148,970 8.17%), 5/15/2015 2,500,000 Salt Lake City, UT Hospital Authority, Hospital Revenue Refunding Bonds (Series B), 8.125% (IHC Hospitals Inc., UT)/(Original Issue Yield: AA 2,683,525 8.17%), 5/15/2015 2,650,000 Utah State HFA, Single Family Mortgage Bonds, 1995 Issue I, 5.95%, 1/1/2024 Aaa 2,573,256 Total 39,327,351 WASHINGTON -- 0.7% 5,000,000 Pilchuck Development Public Corp., WA, Special Facilities Airport Revenue Bonds (Series 1993), Tramco, Inc. Project, 6.00% (Goodrich BBB+ 4,807,700 (B.F.) Co.), 8/1/2023
FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.)
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS -- CONTINUED WEST VIRGINIA -- 1.6% $ 3,800,000(a)Marion County, WV County Commission, Solid Waste Disposal Facility Revenue Bonds, 8.25% (American Power Paper Recycling), NR $ 1,864,014 12/1/2011 20,000,000(a)Marion County, WV County Commission, Solid Waste Facility Revenue Bonds (Series 1993), 7.75% (American Power Paper Recycling), NR 9,712,000 12/1/2011 Total 11,576,014 WYOMING -- 1.2% 8,460,000 Sweetwater County, WY IDA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (FMC Corp.), 6/1/2024 BBB 8,939,428 TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST 710,929,033 $711,340,523) TOTAL INVESTMENTS $ 720,929,033 (IDENTIFIED COST $721,340,523)(B)
Securities that are subject to Alternative Minimum Tax represent 39.04% of the portfolio as calculated based upon total portfolio market value. (a) Non-income producing security. (b) The cost of investments for federal tax purposes amounts to $722,468,690. The net unrealized depreciation of investments on a federal tax basis amounts to $1,539,657 which is comprised of $32,503,618 appreciation and $34,043,275 depreciation at September 30, 1996. * Please refer to the Appendix of the Statement of Additional Information for an explanation of the credit ratings. Current credit ratings are unaudited. Note: The categories of investments are shown as a percentage of net assets ($729,252,646) at September 30, 1996. The following acronyms are used throughout this portfolio: AMBAC -- American Municipal Bond Assurance Corporation COL -- Collateralized FGIC -- Financial Guaranty Insurance Company FHA -- Federal Housing Administration FSA -- Financial Security Assurance GNMA -- Government National Mortgage Association GO -- General Obligation GTD -- Guaranty HFA -- Housing Finance Authority IDA -- Industrial Development Authority IFA -- Industrial Finance Authority INS -- Insured LOC -- Letter of Credit MBIA -- Municipal Bond Investors Assurance PCR -- Pollution Control Revenue PCFA -- Pollution Control Finance Authority PRF -- Prerefunded SFM -- Single Family Mortgage UT -- Unlimited Tax VRDNs -- Variable Rate Demand Notes (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1996 (UNAUDITED) ASSETS: Total investments in securities, at value (identified cost $ $720,929,033 721,340,523 and tax cost $722,468,690) Income receivable 15,207,606 Receivable for investments sold 13,014,089 Receivable for shares sold 6,399,554 Total assets 755,550,282 LIABILITIES: Payable for investments purchased $ 22,114,166 Payable for shares redeemed 454,119 Income distribution payable 3,491,795 Payable to Bank 14,165 Accrued expenses 223,391 Total liabilities 26,297,636 Net Assets for 69,739,072 shares $729,252,646 outstanding NET ASSETS CONSIST OF: Paid in capital $734,548,225 Net unrealized depreciation of (411,490) investments Accumulated net realized loss on (3,774,694) investments Undistributed net investment (1,109,395) income Total Net Assets $729,252,646 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: CLASS A SHARES: Net Asset Value Per Share $10.46 ($634,089,786 ÷ 60,638,561 shares outstanding) Offering Price Per Share $10.95 (100/95.50 of $10.46)* Redemption Proceeds Per Share $10.46 CLASS B SHARES: Net Asset Value Per Share $10.46 ($71,449,911 ÷ 6,832,871 shares outstanding) Offering Price Per Share $10.46 Redemption Proceeds Per Share $ 9.88 (94.50/100 of $10.46)** CLASS C SHARES: Net Asset Value Per Share $10.46 ($23,712,949 ÷ 2,267,640 shares outstanding) Offering Price Per Share $10.46 Redemption Proceeds Per Share $10.36 (99.00/100 of $10.46)**
* See "What Shares Cost" in the Prospectus. ** See "Contingent Deferred Sales Charge" in the Prospectus. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) STATEMENT OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) INVESTMENT INCOME: Interest $ 23,976,191 EXPENSES: Investment advisory fee $2,229,131 Administrative personnel and services fee 277,163 Custodian fees 46,416 Transfer and dividend disbursing agent 208,943 fees and expenses Directors'/Trustees' fees 8,357 Auditing fees 8,978 Legal fees 5,771 Portfolio accounting fees 74,897 Distribution services fee -- Class C 92,998 Shares Distribution services fee -- Class B 241,336 Shares Shareholder services fee -- Class A 805,087 Shares Shareholder services fee -- Class C 30,999 Shares Shareholder services fee -- Class B 80,445 Shares Share registration costs 25,938 Printing and postage 65,611 Insurance premiums 6,268 Taxes 57,775 Miscellaneous 4,864 Total expenses 4,270,977 Waivers -- Waiver of shareholder services fee -- $(450,849) Class A Shares Waiver of shareholder services fee -- (1,240) Class C Shares Total waivers (452,089) Net expenses 3,818,888 Net investment income 20,157,303 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investments (3,770,484) Net change in unrealized depreciation of (13,843,673) investments Net realized and unrealized loss on (17,614,157) investments Change in net assets resulting from $ 2,543,146 operations
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED (UNAUDITED) YEAR ENDED SEPTEMBER 30, MARCH 31, 1996 1996 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS -- Net investment income $ 20,157,303 $ 44,749,297 Net realized gain (loss) on investments ($3,770,484, net loss, and $6,671,235, net gain, respectively, as computed for (3,770,484) 7,079,845 federal tax purposes) Net change in unrealized appreciation (13,843,673) (13,521,713) (depreciation) Change in net assets resulting from 2,543,146 38,307,429 operations DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income Class A Shares (19,034,760) (41,611,908) Class C Shares (621,523) (1,219,692) Class B Shares (1,629,187) (1,898,925) Distributions from net realized gains Class A Shares (5,887,310) (894,502) Class C Shares (229,139) (30,361) Class B Shares (554,488) (44,667) Change in net assets resulting from (27,956,407) (45,700,055) distributions to shareholders SHARE TRANSACTIONS-- Proceeds from sale of shares 100,619,027 314,593,464 Net asset value of shares issued to shareholders in payment of distributions declared 15,892,010 27,833,467 Cost of shares redeemed (109,593,372) (336,588,031) Change in net assets resulting from share 6,917,665 5,838,900 transactions Change in net assets (18,495,596) (1,553,726) NET ASSETS: Beginning of period 747,748,242 749,301,968 End of period (including undistributed net investment income of $0 and $18,772, respectively) $ 729,252,646 $ 747,748,242
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) FINANCIAL HIGHLIGHTS -- CLASS A SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED (UNAUDITED) SEPTEMBER YEAR ENDED MARCH 31, 30, 1996 1996 1995 1994 1993 1992 1991 1990 1989 1988 NET ASSET VALUE, BEGINNING OF $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 $10.03 $10.80 PERIOD INCOME FROM INVESTMENT OPERATIONS Net investment 0.29 0.66 0.67 0.66 0.66 0.67 0.71 0.72 0.72 0.73 income Net realized and unrealized gain (loss) on investments (0.24) (0.09) (0.05) (0.40) 0.64 0.37 0.14 0.21 0.23 (0.77) Total from investment operations 0.05 0.57 0.62 0.26 1.30 1.04 0.85 0.93 0.95 (0.04) LESS DISTRIBUTIONS Distributions from net investment (0.31) (0.66) (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) income Distributions from net realized gain on investments (0.10) (0.01) (0.23) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 Total (0.41) (0.67) (0.90) (0.68) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) distributions NET ASSET VALUE, END OF PERIOD $10.46 $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 $10.03 TOTAL RETURN(A) 0.48% 5.32% 5.90% 2.10% 12.13% 10.05% 8.42% 9.20% 9.76% (0.17%) RATIOS TO AVERAGE NET ASSETS Expenses 0.93%* 0.98% 0.92% 0.84% 0.80% 0.84% 0.89% 0.90% 0.95% 0.95%* Net investment income 5.60%* 5.97% 6.17% 5.59% 5.81% 6.17% 6.77% 6.80% 7.07% 7.28%* Expense waiver/ reimbursement(b) 0.14%* 0.13% -- -- -- -- -- -- -- -- SUPPLEMENTAL DATA Net assets, end of period (000 $634,090 $663,538 $708,712 $714,384 $706,126 $590,118 $511,611 $474,797 $440,445 $388,916 omitted) Portfolio 17% 29% 41% 27% 13% 8% 45% 25% 58% 55% turnover
* Computed on an annualized basis. (a) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (b) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) FINANCIAL HIGHLIGHTS -- CLASS B SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED (UNAUDITED) YEAR ENDED SEPTEMBER 30, MARCH 31, 1996 1996 1995(A) NET ASSET VALUE, BEGINNING OF PERIOD $10.82 $10.92 $11.06 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.25 0.56 0.40 Net realized and unrealized gain (loss) (0.25) (0.09) (0.03) on investments Total from investment operations 0.00 0.47 0.37 LESS DISTRIBUTIONS Distributions from net investment income (0.26) (0.56) (0.40) Distributions from net realized gain on (0.10) (0.01) (0.11) investments Total distributions (0.36) (0.57) (0.51) NET ASSET VALUE, END OF PERIOD $10.46 $10.82 $10.92 TOTAL RETURN(B) 0.03% 4.40% 3.49% RATIOS TO AVERAGE NET ASSETS Expenses 1.84%* 1.86% 1.84%* Net investment income 4.77%* 5.23% 5.94%* SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $71,450 $58,296 $18,201 Portfolio turnover 17% 29% 41%
* Computed on an annualized basis. (a) Reflects operations for the period from July 26, 1994 (date of initial public investment) to March 31, 1995. (b) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (c) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) FINANCIAL HIGHLIGHTS -- CLASS C SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Six Months Ended (unaudited) September 30, Year Ended March 31, 1996 1996 1995 1994(a) Net asset value, beginning of period $10.82 $10.92 $11.20 $11.70 Income from investment operations Net investment income 0.26 0.56 0.58 0.52 Net realized and unrealized gain (loss) on investments (0.25) (0.09) (0.05) (0.48) Total from investment operations 0.01 0.47 0.53 0.04 Less distributions Distributions from net investment income (0.27) (0.56) (0.58) (0.52) Distributions from net realized gain on investments (0.10) (0.01) (0.23) (0.02) Total distributions (0.37) (0.57) (0.81) (0.54) Net asset value, end of period $10.46 $10.82 $10.92 $11.20 Total return(b) 0.04% 4.42% 4.96% 0.17% Ratios to average net assets Expenses 1.81%* 1.82% 1.81% 1.80%* Net investment income 4.75%* 5.16% 5.28% 4.70%* Expense waiver/reimbursement(c) 0.01%* 0.04% - - Supplemental data Net assets, end of period (000 omitted) $23,713 $25,914 $22,389 $22,066 Portfolio turnover 17% 29% 41% 27%
* Computed on an annualized basis. (a) Reflects operations for the period from April 20, 1993 (date of initial public investment) to March 31, 1994. (b) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (c) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. (FORMERLY, LIBERTY MUNICIPAL SECURITIES FUND, INC.) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) 1. ORGANIZATION Federated Municipal Securities Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund offers three classes of shares: Class A Shares, Class B Shares and Class C Shares. The investment objective of the fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles. INVESTMENT VALUATIONS -- Municipal bonds are valued by an independent pricing service, taking into consideration yield, liquidity, risk, credit quality, coupon, maturity, type of issue, and any other factors or market data the pricing service deems relevant. Short-term securities are valued at the prices provided by an independent pricing service. However, short-term securities with remaining maturities of sixty days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and expenses are accrued daily. Bond premium and discount, if applicable, are amortized as required by the Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are recorded on the ex-dividend date. FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its income. Accordingly, no provisions for federal tax are necessary. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. INVESTMENT RISK -- Although the Fund has a diversified portfolio, the Fund has 13% of its portfolio invested in lower rated and comparable quality unrated high yield securities. Investments in higher yield securities are accomplished by a greater degree of credit risk and the risk tends to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER -- Investment transactions are accounted for on the trade date. 3. CAPITAL STOCK At September 30, 1996, par value shares ($ 0.01 per share) authorized were as follows:
# OF PAR VALUE CLASS NAME CAPITAL STOCK AUTHORIZED Class A 375,000,000 Class B 250,000,000 Class C 375,000,000
Transactions in capital stock were as follows:
September 30, 1996 March 31, 1996 Class A Shares Shares Amount Shares Amount Shares sold 7,408,888 $ 78,152,479 23,530,576 $ 259,873,935 Shares issued to shareholders in payment of distributions declared 1,356,694 14,286,256 2,377,750 26,169,718 Shares redeemed (9,471,777) (99,364,084) (29,468,002) (325,138,363) Net change resulting from Class A Share transactions (706,195) $ (6,925,349) (3,559,676) $ (39,094,710) September 30, 1996 March 31, 1996 Class B Shares Shares Amount Shares Amount Shares sold 1,856,532 $ 19,511,346 4,157,827 $ 45,890,492 Shares issued to shareholders in payment of distributions declared 103,012 1,085,079 91,690 1,011,056 Shares redeemed (516,216) (5,421,657) (526,969) (5,813,110) Net change resulting from Class B Share transactions 1,443,328 $ 15,174,768 3,722,548 $ 41,088,438 September 30, 1996 March 31, 1996 Class C Shares Shares Amount Shares Amount Shares sold 281,497 $ 2,955,202 797,328 $ 8,829,037 Shares issued to shareholders in payment of distributions declared 49,401 520,675 59,235 652,693 Shares redeemed (459,059) (4,807,632) (511,334) (5,636,558) Net change resulting from Class C Share transactions (128,161) $ (1,331,755) 345,229 $ 3,845,172 Net change resulting from share transactions 608,972 $ 6,917,664 508,101 $ 5,838,900
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE -- Federated Advisors, the Fund's investment adviser, (the "Adviser"), receives for its services an annual investment advisory fee equal to (a) a maximum of 0.30% of the Fund's average daily net assets, and (b) 4.50% of the gross income of the fund, excluding capital gains or losses. ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FServ is based on the level of average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors for the period. The administrative fee received during the period of the Administrative Services Agreement shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION SERVICES FEE -- The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp., the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Corporation's Class B and Class C Shares. The Plan provides that the Fund may incur distribution expenses according to the following schedule annually, to compensate Federated Securities Corp. PERCENTAGE OF AVERAGE DAILY SHARE CLASS NAME DAILY NET ASSETS Class B Shares 0.75% Class C Shares 0.75%
The distributor may voluntarily choose to waive any portion of its fee. The distributor can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of daily average net assets of each class shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the size, type, and number of accounts and transactions made by shareholders. PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records for which it receives a fee. The fee is based on the level of the Fund's average daily net assets for the period, plus out-of-pocket expenses. GENERAL -- Certain of the Officers and Directors of the Corporation are Officers and Directors or Trustees of the above companies. 5. INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the period ended September 30, 1996, were as follows: PURCHASES $122,549,518 SALES $126,487,806 DIRECTORS John F. Donahue Thomas G. Bigley John T. Conroy, Jr. William J. Copeland J. Christopher Donahue James E. Dowd Lawrence D. Ellis, M.D. Edward L. Flaherty, Jr. Peter E. Madden Gregor F. Meyer John E. Murray, Jr. Wesley W. Posvar Marjorie P. Smuts OFFICERS John F. Donahue Chairman J. Christopher Donahue President Edward C. Gonzales Executive Vice President John W. McGonigle Executive Vice President, Treasurer, and Secretary Richard B. Fisher Vice President S. Elliott Cohan Assistant Secretary Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including possible loss of principal. This report is authorized for distribution to prospective investors only when preceded or accompanied by the fund's prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information. [Graphic] Federated Investors Federated Investors Tower Pittsburgh, PA 15222-3779 Federated Securities Corp. is the distributor of the fund and is a subsidiary of Federated Investors. Cusip 313913105 Cusip 313913204 Cusip 313913303 8110104 (11/96) Appendix A. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color-coded mountain chart is a visual representation of the narrative text above it, which shows that an initial investment of $20,000 in Federated Municipal Securities Fund, Inc. in 1976 would have grown to $66,674. The `x'' axis reflects the cost of investment, the ``y'' axis reflects computation periods from 1976 to 1996, and the right margin reflects a total investment range from $0 to $70,000. The chart further indicates the ending market value attributable to principal, as well as the ending market value attributable to capital gains and reinvested dividends. B. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color-coded mountain chart is a visual representation of the narrative text above it, which shows that an yearly investment of $1,000 in Federated Municipal Securities Fund, Inc. in 1976 would have grown to $45,079. The `x'' axis reflects the cost of investment, the ``y'' axis reflects computation periods from 1976 to 1996, and the right margin reflects a total investment range from $0 to $48,000. The chart further indicates the ending market value attributable to principal, as well as the ending market value attributable to capital gains and reinvested dividends. C. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color-coded mountain chart is a visual representation of the narrative text above it, which shows that an investment of $25,000 in Federated Municipal Securities Fund, Inc. in 1976 would have grown to $46,456. The `x'' axis reflects the cost of investment, the ``y'' axis reflects computation periods from 1986 to 1996, and the right margin reflects a total investment range from $0 to $50,000. The chart further indicates the ending market value attributable to principal, as well as the ending market value attributable to capital gains and reinvested dividends. -----END PRIVACY-ENHANCED MESSAGE-----