-----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, UI7Om+Y6m3mNJOwrvi+K4+9SeOH8bCB3HJYkz7MNz2nuo+5EGwTVt1V+B92Ig2JO dc/GTXz7REGa0NWcx4iBJQ== 0000201801-97-000008.txt : 19971202 0000201801-97-000008.hdr.sgml : 19971202 ACCESSION NUMBER: 0000201801-97-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971201 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: SEC FILE NUMBER: 811-02677 FILM NUMBER: 97730567 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 [Graphic] Federated Municipal Securities Fund, Inc. 21ST SEMI-ANNUAL REPORT SEPTEMBER 30, 1997 ESTABLISHED 1976 President's Message [Graphic] Dear Fellow Shareholder: Federated Municipal Securities Fund, Inc. was established in 1976, and I am pleased to present the 21st semi-annual report for the fund. This report covers the six-month reporting period from April 1, 1997, to September 30, 1997, which is the first half of the fund's fiscal year. 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 are the financial statements and a complete listing of the tax-free municipal securities that comprise the fund's holdings. Federated Municipal Securities Fund, Inc. has provided tax-free income from a broad list of long-term municipal issues since 1976.* On September 30, 1997, the fund's $707.8 million portfolio was invested in 113 tax-free securities issued by municipalities across our country. The fund's weighted average effective maturity was 11.25 years. During the six-month reporting period, municipal bonds performed relatively well due to a combination of lower interest rates, a stable demand, and a relatively limited supply of bonds. For the six-month reporting period ended September 30, 1997, the performance of each share class was as follows:** INCOME NET ASSET VALUE TOTAL RETURN DISTRIBUTIONS INCREASE Class A Shares 6.86% $0.26 $10.31 to $10.75 = 4.25% Class B Shares 6.39% $0.21 $10.31 to $10.75 = 4.25% Class C Shares 6.40% $0.21 $10.31 to $10.75 = 4.25% 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 receive any monthly income from the fund or help increase your wealth by reinvesting your dividends so they may compound tax free. Sincerely yours, [Graphic] J. Christopher Donahue President November 15, 1997 * Income may be subject to the federal alternative minimum tax and state and local taxes. ** Performance quoted is based on net asset value, represents past performance and is not indicative of future results. 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, B, and C Shares were 2.01%, 0.77%, and 5.41%, respectively. Investment Review [Graphic] J. Scott Albrecht Vice President Federated Advisers [Graphic] Mary Jo Ochson Senior Vice President Federated Advisers [Graphic] WHAT IS YOUR REVIEW OF THE MUNICIPAL BOND MARKET ENVIRONMENT DURING THE FUND'S REPORTING PERIOD? The market environment for fixed-income investments in general, and municipal bonds in particular, has been relatively favorable. Inflation and inflation expectations, which are the major determinants of nominal interest rates, continued to be very well behaved. Municipal bond yields, as represented by the Bond Buyer 40 Index*, which have trended lower since their peak at 6.06%, stood at 5.47% on September 30, 1997. The greatest potential threat to the municipal bond market recently was the Taxpayer Relief Act of 1997. Fortunately, the impact on the municipal bond market from this new tax legislation is much more benign than was originally anticipated. Municipal bonds emerged essentially unscathed. This favorable legislative treatment--combined with lower interest rates, stable demand and a relatively limited supply of municipal bonds--provided a firm market environment. [Graphic] WHY HAVE MUNICIPALS BEEN AMONG THE BETTER PERFORMING FIXED-INCOME MARKETS? There are several reasons for the municipal bond market's strong relative performance. They have to do primarily with the municipal market's technical position, or the supply and demand for municipal bonds. The demand for municipal bonds was relatively stable, mostly due to strong institutional demand from commercial banks, property and casualty insurers, and arbitrageurs. Retail buyers or individuals are the primary component of municipal bond demand. Their participation in the market has been mixed, but has been stable enough to provide an important foundation for municipal bond prices. * The Bond Buyer 40 Index is a standard against which municipal bonds are measured. [Graphic] IN THIS ENVIRONMENT, HOW DID FEDERATED MUNICIPAL SECURITIES FUND, INC. PERFORM WITH RESPECT TO INVESTMENT RETURN OVER THE FIRST SIX MONTHS OF ITS FISCAL YEAR? For the six-month reporting period ended September 30, 1997, investors in Federated Municipal Securities Fund, Inc. Class A, B, and C Shares received competitive total returns of 6.86%, 6.39%, and 6.40%, respectively, based on net asset value.* In comparison, the Lipper General Municipal Debt Fund Average total return for the six-month reporting period was 6.55%.** The fund's performance over the reporting period was driven by its neutral duration target relative to its benchmark. The fund's core position in premium, high-coupon securities also provided positive incremental return over the reporting period. Also, sector selection was a very important factor which had a positive impact on performance. Bonds from the electric utility, health care, and transportation sectors provided the best relative performance over the reporting period. [Graphic] MONTHLY INCOME IS A PRIMARY CONSIDERATION FOR MANY INVESTORS. HOW DID THE FUND PERFORM IN TERMS OF INCOME AND YIELD? Tax-free dividends totaled $0.26 per share for Class A Shares, and $0.21 per share for Class B Shares and Class C Shares. The 30-day current net yield on September 30, 1997, was 4.02% for Class A Shares, 3.33% for Class B Shares, and 3.34% for Class C Shares based on offering price.+ The fund's Class A Shares' yield of 4.02% has taxable yield equivalents of 6.66%, 6.28%, and 5.83%, respectively, for investors in the 39.6%, 36%, and 31% federal tax brackets.++ * Performance quoted represents past performance and is not indicative of future results. 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, B, and C Shares were 2.01%, 0.77%, and 5.41%, respectively. ** Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the respective categories indicated. These figures do not reflect sales charges. + Thirty-day current net yield is calculated by dividing the net investment income per share for the 30 days ended on the date specified by the maximum offering price per share on that date. Then, the figure is compounded and annualized. ++ The taxable yield equivalents, based on offering price, for investors in the 39.6%, 36%, and 31% federal tax brackets are as follows: Class B Shares--5.51%, 5.20%, and 4.83%, respectively; Class C Shares--5.53%, 5.22%, and 4.84%, respectively. [Graphic] WHAT WERE THE FUND'S TOP HOLDINGS? At the end of the reporting period, the top five holdings were: PERCENTAGE NAME RATING OF PORTFOLIO District of Columbia, A+ 3.32% Georgetown University; 7.15% due 4/1/2021 Indianapolis, IN BBB 3.01% Airport Authority Special Facilities Revenue Bonds; 7.10% due 1/15/2017 Long Beach, CA AAA 2.62% Harbor Revenue Bonds; 5.37% due 5/15/2020 Salt Lake City, UT AAA 2.43% Hospital Authority; 8.12% due 5/15/2015 New York State BBB+ 2.43% Dormitory Authority; 5.375% due 2/15/2026 [Graphic] AS WE NEAR THE END OF 1997, DO YOU FORESEE A FAVORABLE ENVIRONMENT AHEAD FOR MUNICIPAL BOND INVESTORS? In general, yes. Inflation should continue to be negligible as a result of a high level of productivity in the U.S. economy, international competition, new technology, and the assistance provided by a relatively strong dollar. This reality should continue to provide a relatively favorable environment for fixed-income investments. Also, the supply of municipal bonds should continue to be somewhat constrained by historical standards, which should provide a favorable technical situation for the municipal market. TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED MUNICIPAL SECURITIES FUND, INC. INITIAL INVESTMENT: IF YOU HAD MADE AN INITIAL INVESTMENT OF $21,000 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 $76,178 ON 9/30/97. YOU WOULD HAVE EARNED A 6.33%* AVERAGE ANNUAL TOTAL RETURN FOR THE 21-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 9/30/97, the Class A Shares' average annual one-year, five-year, and ten-year total returns were 3.46%, 4.54%, and 7.44%, respectively. Class B Shares' average annual one-year and since-inception (7/26/94) total returns were 1.58% and 3.79%, respectively. Class C Shares' average annual one-year and since-inception (4/21/93) total returns were 6.37% and 3.78%, respectively.** [Graphic representation "A1" omitted - see appendix.] * 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. ** The total returns take into account the 4.50% sales charge for Class A Shares, the 5.50% contingent deferred sales charge for Class B Shares, and the 1.00% contingent deferred sales charge for Class C Shares. FEDERATED MUNICIPAL SECURITIES FUND, INC. ONE STEP AT A TIME: $1,000 INVESTED EACH YEAR FOR 21 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $49,921. 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 $21,000 but your account would have reached a total value of $49,921* by 9/30/97. You would have earned an average annual total return of 7.36%. 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 representation "A2" omitted - see appendix.] * This chart assumes that the subsequent annual investments are made on the last day of each anniversary month. 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. 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 October 31, 1987, 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 $50,674.* This represents a 7.38% average annual total return. As far as the Bartletts are concerned, this fund has made all the difference. [Graphic representation "A3" omitted - see appendix.] * 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. PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997 (UNAUDITED)
PRINCIPAL CREDIT AMOUNT RATING* VALUE SHORT-TERM MUNICIPALS--1.0% CALIFORNIA--0.6% $ 4,000,000 California State, Trust Receipts (Series 1997) Daily VRDNs (Bank of New York, New York LIQ) A-1+ $ 4,000,000 KENTUCKY--0.0% 200,000 Kentucky Pollution Abatement & Water Resource Finance Authority Daily VRDNs (Toyota Motor Credit Corp.) AAA 200,000 PENNSYLVANIA--0.3% 600,000 New Castle, PA Area Hospital Authority, (Series 1996) Weekly VRDNs (Jameson Memorial Hospital)/ (FSA INS)/(PNC Bank, N.A. LIQ) AAA 600,000 1,500,000 Philadelphia, PA Hospitals & Higher Education Facilities Authority, Hospital Revenue Bonds (Series A of 1996) Daily VRDNs (Children's Hospital of Philadelphia)/ (Morgan Guaranty Trust Co., New York LIQ) AA 1,500,000 Total 2,100,000 TEXAS--0.0% 200,000 Harris County, TX HFDC, (Series 1994) Daily VRDNs (Methodist Hospital, Harris County, TX) AA 200,000 VIRGINIA--0.1% 300,000 Virginia Peninsula Port Authority, (Series 1997) Daily VRDNs (Ziegler Coal Holding Co.)/(Bank of America NT and SA, San Francisco LOC) A-1+ 300,000 TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 6,800,000 LONG-TERM MUNICIPALS--99.7% ALABAMA--3.2% 10,000,000 Alabama State Docks Department, Docks Facilities Refunding Revenue Bonds, 5.50% (MBIA INS)/(Original Issue Yield: 5.75%), 10/1/2022 AAA 9,920,700 2,000,000 Courtland, AL IDB, Solid Waste Disposal Revenue Bonds (Series A), 6.50% (Champion International Corp.)/ (Original Issue Yield: 6.654%), 9/1/2025 BBB 2,140,960
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED ALABAMA--CONTINUED $ 3,620,000 Jefferson County, AL, Sewer Revenue Refunding Warrants (Series 1997-A), 5.625% (FGIC INS)/(Original Issue Yield: 5.68%), 2/1/2018 AAA $ 3,715,894 6,260,000 Jefferson County, AL, Sewer Revenue Warrants (Series 1997D), 5.70% (FGIC INS)/(Original Issue Yield: 5.73%), 2/1/2018 AAA 6,460,070 Total 22,237,624 CALIFORNIA--7.5% 1,000,000 Anaheim, CA Public Financing Authority, Lease Revenue Bonds (Series 1997C), 6.00% (Anaheim Public Improvements Project)/(FSA INS), 9/1/2010 AAA 1,118,590 1,000,000 Anaheim, CA Public Financing Authority, Lease Revenue Bonds (Series 1997C), 6.00% (Anaheim Public Improvements Project)/(FSA INS), 9/1/2011 AAA 1,119,690 1,600,000 Anaheim, CA Public Financing Authority, Lease Revenue Bonds (Series 1997C), 6.00% (Anaheim Public Improvements Project)/(FSA INS), 9/1/2016 AAA 1,770,288 9,400,000 California PCFA, Refunding Revenue Bonds (Series A), 5.90% (San Diego Gas & Electric)/(Original Issue Yield: 5.934%), 6/1/2014 A 10,187,156 19,000,000 Long Beach California Harbor, Revenue Bonds, 5.375% (MBIA INS)/(Original Issue Yield: 5.75%), 5/15/2020 AAA 18,525,380 1,820,000 Los Angeles County, CA Unified School District, UT GO Bonds (Series A), 6.00% (FGIC INS), 7/1/2011 AAA 2,028,117 9,105,000 Sacramento, CA Municipal Utility District, Electric Revenue Bonds (Series 1997K), 5.70% (AMBAC INS), 7/1/2017 AAA 9,726,234 8,000,000 Sacramento, CA Municipal Utility District, Revenue Refunding Bonds, Series L, 5.20% (MBIA INS)/(Original Issue Yield: 5.35%), 7/1/2017 AAA 7,926,240 Total 52,401,695
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED DISTRICT OF COLUMBIA--7.0% $ 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 BBB+ $ 14,472,158 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 BBB+ 2,254,860 22,250,000 District of Columbia, Revenue Bonds (Series B), 7.15% (Georgetown University)/(Original Issue Yield: 7.191%), 4/1/2021 A+ 23,470,412 4,000,000 District of Columbia, Revenue Bonds, 5.625% (American University)/(AMBAC INS)/(Original Issue Yield: 5.90%), 10/1/2026 AAA 4,040,840 4,765,000 Georgetown University, 8.25%, 4/1/2018 A+ 4,958,221 Total 49,196,491 FLORIDA--3.5% 4,335,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue Yield: 9.173%), 6/1/2014 AA+ 6,185,308 665,000 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 938,142 6,635,000 Florida State Department of Transportation, Right of Way Acquisition & Bridge Construction Bonds (Series 1997A), 5.00% (Original Issue Yield: 5.10%), 7/1/2014 AA+ 6,604,678 3,000,000 Florida State, UT GO Bonds, Broward County Expressway Authority, 10.00% (Original Issue Yield: 10.105%), 7/1/2014 AA+ 4,547,940
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED FLORIDA--CONTINUED $ 6,000,000 Orlando, FL Utilites Commission, Water & Electric Refunding Revenue Bonds, 5.90% (Original Issue Yield: 6.00%), 10/1/2008 AA $ 6,684,060 Total 24,960,128 GEORGIA--2.3% 3,000,000 Dalton, GA, Combined Utility Revenue Bonds (Series 1997), 6.00% (MBIA INS), 1/1/2008 AAA 3,327,060 5,000,000 Georgia State, GO UT Bonds (Series F), 6.50%, 12/1/2007 AAA 5,804,050 6,000,000 Georgia State, UT GO, 6.00%, 9/1/2007 AAA 6,708,420 Total 15,839,530 ILLINOIS--8.2% 2,080,000 Chicago, IL, GO Library Bonds (Series 1997), 5.25% (FGIC INS)/(Original Issue Yield: 5.55%), 1/1/2012 AAA 2,087,280 2,200,000 Chicago, IL, Motor Fuel Tax Refunding Revenue Bonds, 6.125% (AMBAC INS), 1/1/2009 AAA 2,455,046 5,380,000 Cook County, IL, Refunding GO Bonds (Series 1997A), 6.25% (MBIA INS), 11/15/2010 AAA 6,127,174 8,295,000 Cook County, IL, Refunding GO Bonds (Series 1997A), 6.25% (MBIA INS), 11/15/2013 AAA 9,467,747 5,000,000 Illinois Development Finance Authority, Housing Revenue Bonds, 6.10% (Catholic Charities Housing Development Corp.), 1/1/2020 NR 5,004,550 11,340,000 Illinois Health Facilities Authority, Hospital Revenue Bonds (Series A), 9.25% (Edgewater Hospital & Medical Center, IL), 7/1/2024 NR 13,564,568 1,000,000 Illinois Health Facilities Authority, Revenue Bonds (Series 1997A), 6.00% (Loyola University Health System)/ (MBIA INS), 7/1/2012 AAA 1,097,340 1,000,000 Illinois Health Facilities Authority, Revenue Bonds (Series 1997A), 6.00% (Loyola University Health System)/ (MBIA INS), 7/1/2013 AAA 1,095,980
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED ILLINOIS--CONTINUED $ 16,000,000 Illinois State, UT GO Bonds, 5.125% (FGIC INS), 12/1/2004 AAA $ 16,635,840 Total 57,535,525 INDIANA--6.1% 6,200,000 Indiana Health Facilty Financing Authority, Hospital Revenue Bonds, 6.625% (Floyd Memorial Hospital, IN)/ (Original Issue Yield: 6.902%), 2/15/2022 A 6,546,456 19,000,000 Indianapolis, IN Airport Authority, Special Facilities Revenue Bonds, 7.10% (Federal Express Corp.)/(Original Issue Yield: 7.178%), 1/15/2017 BBB 21,282,850 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 10,433,400 4,500,000 LaPorte County, IN Hospital Authority, Hospital Facility Revenue Refunding Bonds, 6.25% (LaPorte Hospital, Inc., IN)/(Original Issue Yield: 6.35%), 3/1/2012 Baa1 4,669,830 Total 42,932,536 LOUISIANA--3.1% 6,000,000 De Soto Parish, LA Environmental Improvement Authority, Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018 A- 7,040,040 3,550,000 St. Charles Parish, LA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (Louisiana Power & Light Co.)/ (Original Issue Yield: 7.04%), 12/1/2022 BBB 3,841,384 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 10,815,500 Total 21,696,924 MARYLAND--1.9% 12,220,000 Maryland State Community Development Administration, SFM Revenue Bonds (5th Series), 6.75%, 4/1/2026 Aa 13,032,752
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED MASSACHUSETTS--4.3% $ 10,000,000 Commonwealth of Massachusetts, UT GO Bonds (Series 1997C), 5.00% (Original Issue Yield: 5.30%), 8/1/2017 A+ $ 9,598,200 33,800,000 (a)Massachusetts IFA, Solid Waste Disposal Sr. Lien Revenue Bonds (Series A), 9.00% (Massachusetts Recycling Association), 8/1/2016 NR 12,844,000 2,200,000 Massachusetts State HFA, Rental Housing Mortgage Revenue Bonds, 1995 Series E, 5.90% (AMBAC INS), 7/1/2025 AAA 2,240,414 6,000,000 Nantucket, MA, UT GO Bonds, 5.00% (MBIA INS)/ (Original Issue Yield: 5.28%), 7/15/2017 AAA 5,794,800 Total 30,477,414 MINNESOTA--3.1% 8,000,000 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 8,500,240 12,000,000 VRDC/IVRC Trust, GO Inverse Variable Rate Certificates, 6.873% (Regents of University of Minnesota), 5/18/2012 AA 13,650,000 Total 22,150,240 MISSISSIPPI--1.4% 9,875,000 Mississippi State, UT GO Bonds (Series A), 5.125% (Original Issue Yield: 5.35%), 7/1/2015 AA 9,855,941 MISSOURI--1.3% 9,010,000 Kansas City, MO, UT GO Bonds, Series B, 5.125% (Original Issue Yield: 5.25%), 2/1/2017 AA 8,916,747 NEW MEXICO--0.8% 5,000,000 Farmington, NM, PCR Refunding Bonds (Series A), 7.20% (Southern California Edison Co.)/(Original Issue Yield: 7.30%), 4/1/2021 A+ 5,446,750
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED NEW YORK--12.1% $ 3,000,000 Municipal Assistance Corp. of New York, Revenue Bonds (Series 67), 7.625% (Original Issue Yield: 7.698%), 7/1/2008 AA $ 3,244,170 7,500,000 New York City, NY, Residual Interest Tax-Exempt Securities (Series PA-147), 6.5197%, 8/1/2007 NR 8,240,625 15,115,000 New York State Dormitory Authority, Educational Facilities Revenue Bonds, 5.50% (State University of New York)/(Original Issue Yield: 6.106%), 5/15/2026 BBB+ 14,963,397 17,800,000 New York State Dormitory Authority, Revenue Bonds (Series B), 5.375% (New York State Department of Mental Hygiene)/(Original Issue Yield: 5.97%), 2/15/2026 BBB+ 17,208,328 12,055,000 New York State Local Government Assistance Corp., Refunding Revenue Bonds (Series A), 6.00% (AMBAC INS), 4/1/2007 AAA 13,362,003 10,100,000 New York State Local Government Assistance Corp., Refunding Revenue Bonds (Series A), 6.00% (AMBAC INS), 4/1/2008 AAA 11,231,705 2,000,000 New York State Mortgage Agency, Mortgage Revenue Bonds ( Series 30-B), 6.65% (FHA GTD), 10/1/2025 Aa 2,123,460 6,300,000 Port Authority of New York and New Jersey, Special Project Bonds (Series 6), 6.00% (JFK International Air Terminal LLC)/(MBIA INS), 12/1/2006 AAA 6,886,782 7,000,000 Port Authority of New York and New Jersey, Special Project Bonds (Series 6), 6.00% (JFK International Air Terminal LLC)/(MBIA INS), 12/1/2007 AAA 7,672,070 Total 84,932,540 NORTH CAROLINA--1.3% 9,000,000 Martin County, NC IFA, (Series 1995) Solid Waste Disposal Revenue Bonds, 6.00% (Weyerhaeuser Co.), 11/1/2025 A 9,341,460
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED 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: 7.29%), 5/15/2020 AAA $ 1,095,160 OKLAHOMA--1.7% 3,780,000 Enid, OK Municipal Authority, Sales Tax & Utility Refunding Revenue Bonds, 5.50% (AMBAC INS), 2/1/2004 AAA 3,988,278 7,500,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.60% (American Airlines)/(Original Issue Yield: 7.931%), 12/1/2030 BBB- 8,270,775 Total 12,259,053 PENNSYLVANIA--8.8% 700,000 Easton, PA, GO UT, 6.40% accrual (FGIC INS)/(Original Issue Yield: 6.40%), 6/1/2012 AAA 327,299 2,210,000 Elizabeth Forward, PA School District, GO UT Bonds, 6.75% accrual (MBIA INS)/(Original Issue Yield: 6.75%), 9/1/2018 AAA 716,857 2,210,000 Elizabeth Forward, PA School District, GO UT, 6.75% accrual (MBIA INS)/(Original Issue Yield: 6.75%), 9/1/2019 AAA 676,415 1,300,000 Latrobe, PA Industrial Development Authority, College Revenue Bonds, 6.75% (St. Vincent College, PA)/(Original Issue Yield: 7.00%), 5/1/2024 Baa1 1,402,375 1,010,000 Mars, PA Area School District, Series B GO UT, 6.60% accrual (FGIC INS)/(Original Issue Yield: 6.60%), 9/1/2021 AAA 274,579 800,000 Millcreek Township School District, PA, GO UT Bonds, 7.15% accrual (FGIC INS)/(Original Issue Yield: 7.15%), 8/15/2002 AAA 645,520
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED PENNSYLVANIA--CONTINUED $ 1,080,000 Northeastern York County, PA, GO UT Refunding Bonds, 6.35% accrual (FGIC INS)/(Original Issue Yield: 6.35%), 9/1/2012 AAA $ 498,474 560,000 Penn Hills Township, PA, GO UT Bonds (Series B), 5.30% accrual (AMBAC INS)/(Original Issue Yield: 5.30%), 6/1/2007 AAA 353,326 500,000 Penn Hills Township, PA, GO UT Bonds, 5.20% accrual (AMBAC INS)/(Original Issue Yield: 5.20%), 12/1/2006 AAA 325,980 490,000 Penn Hills Township, PA, GO UT Bonds, 5.20% accrual (AMBAC INS)/(Original Issue Yield: 5.20%), 6/1/2006 AAA 327,002 7,250,000 Pennsylvania EDFA, Revenue Bonds, 7.60% (Macmillan Bloedel LTD Partnership)/(Original Issue Yield: 7.65%), 12/1/2020 BBB- 8,401,155 8,000,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 39B), 6.875%, 10/1/2024 AA+ 8,634,000 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 A+ 4,409,560 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: 7.45%), 3/1/2021 AAA 14,379,596 1,000,000 Philadelphia, PA Gas Works, Refunding Revenue Bonds (Series C), 7.00% accrual (AMBAC INS)/(Original Issue Yield: 7.00%), 1/1/2001 AAA 867,990 15,000,000 Philadelphia, PA School District, UT GO (Series B), 5.50% (AMBAC INS)/(Original Issue Yield: 5.95%), 9/1/2025 AAA 15,056,100 1,000,000 Philadelphia, PA Water & Sewer, Revenue Bonds (MBIA INS)/(Original Issue Yield: 7.00%), 10/1/2008 AAA 582,660 650,000 Philadelphia, PA Water & Sewer, Revenue Bonds, 7.00% accrual (MBIA INS)/(Original Issue Yield: 7.00%), 10/1/2006 AAA 425,211
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED PENNSYLVANIA--CONTINUED $ 1,115,000 Reading, PA, GO UT Bonds (Series B), 7.05% (MBIA INS)/(Original Issue Yield: 7.05%), 3/1/2010 AAA $ 594,027 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 2,193,220 1,000,000 State Public School Building Authority, PA, Refunding Revenue Bonds (Series B), 6.65% accrual (Reading, PA School District)/(MBIA INS)/(Original Issue Yield: 6.65%), 7/15/2007 AAA 627,280 Total 61,718,626 TENNESSEE--3.5% 13,000,000 Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds, 8.50% (NorthCrest Medical Center)/(Original Issue Yield: 8.875%), 4/1/2024 NR 14,370,590 10,000,000 Tennessee State, Refunding UT GO Bonds (Series B), 5.50%, 5/1/2003 AA+ 10,625,600 Total 24,996,190 TEXAS--10.8% 4,000,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A), 7.875% (Texas Utilities Electric Co.), 3/1/2021 BBB+ 4,423,080 12,750,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.25% (American Airlines)/(Original Issue Yield: 7.428%), 11/1/2030 BBB- 14,161,170 2,000,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds (Series A), 6.875% (Champion International Corp.)/ (Original Issue Yield: 7.15%), 12/1/2028 BBB 2,183,300 2,200,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series 1997A, 6.00% (Memorial Hospital System)/ (MBIA LOC), 6/1/2011 AAA 2,434,234 4,000,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series 1997A, 6.00% (Memorial Hospital System)/(MBIA LOC), 6/1/2012 AAA 4,423,000
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED TEXAS--CONTINUED $ 5,200,000 Harris County, TX, UT GO Subordiate Lien Toll Road Revenue Bond, 7.00%, 8/15/2010 AA $ 6,272,084 3,360,000 Houston, TX Hotel Occupancy Tax, Sr. Lien Refunding Revenue Bonds, 6.00% (FSA INS), 7/1/2004 AAA 3,658,570 3,700,000 Red River Authority, TX, PCR Bonds, 6.875% (Hoechst Celanese Corp.)/(Original Issue Yield: 6.939%), 4/1/2017 A+ 4,018,385 6,925,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.50% (Richardson Medical Center, TX)/(Original Issue Yield: 6.72%), 12/1/2012 BBB- 7,259,131 1,000,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.75% (Richardson Medical Center, TX)/(Original Issue Yield: 6.82%), 12/1/2023 BBB- 1,064,360 12,450,000 San Antonio, TX Electric & Gas, Revenue Refunding Bonds, 5.00% (Original Issue Yield: 6.10%), 2/1/2017 AA 11,971,547 5,000,000 Tarrant County, TX Health Facilities Development Corp., System Revenue Bonds (Series 1997A), 5.75% (Texas Health Resources System)/(MBIA INS), 2/15/2015 AAA 5,320,600 6,555,000 Texas A & M University Permanent University Fund, Revenue Bonds, 5.40%, 7/1/2003 AAA 6,932,240 1,500,000 Texas State, UT GO Veterans Housing Assistance, 7.00%, 12/1/2025 AA 1,615,845 Total 75,737,546 UTAH--2.4% 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: 8.17%), 5/15/2015 AAA 17,230,860 WASHINGTON--2.3% 5,900,000 Washington State, Refunding UT GO Bonds (Series R-96C), 6.00%, 7/1/2004 AA+ 6,435,071
Federated Municipal Securities Fund, Inc.
PRINCIPAL CREDIT AMOUNT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED WASHINGTON--CONTINUED $ 9,665,000 Washington State, UT GO (Series A), 5.75% (Original Issue Yield: 5.875%), 7/1/2014 AA+ $ 10,040,969 Total 16,476,040 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), 12/1/2011 NR 1,786,000 20,000,000 (a)Marion County, WV County Commission, Solid Waste Facility Revenue Bonds (Series 1993), 7.75% (American Power Paper Recycling), 12/1/2011 NR 9,400,000 Total 11,186,000 WYOMING--1.3% 8,460,000 Sweetwater County, WY IDA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (FMC Corp.), 6/1/2024 BBB 9,333,918 TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $686,583,248) 700,987,690 TOTAL INVESTMENTS (IDENTIFIED COST $693,383,248)(B) $ 707,787,690
Securities that are subject to Alternative Minimum Tax represent 26.9% 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 $696,727,565. The net unrealized appreciation of investments on a federal tax basis amounts to $11,060,125 which is comprised of $43,425,925 appreciation and $32,365,800 depreciation at September 30, 1997. * Please refer to the Appendix of the Statement of Additional Information for an explanation of the credit ratings. Note: The categories of investments are shown as a percentage of net assets ($702,942,882) at September 30, 1997. The following acronyms are used throughout this portfolio: AMBAC --American Municipal Bond Assurance Corporation COL --Collateralized EDFA - --Economic Development Financing Authority FGIC --Financial Guaranty Insurance Company FHA --Federal Housing Administration FSA --Financial Security Assurance GO --General Obligation GTD --Guaranty HFA --Housing Finance Authority HFDC - --Health Facility Development Corporation IDA --Industrial Development Authority IDB --Industrial Development Bond IFA --Industrial Finance Authority INS - --Insured LIQ --Liquidity Agreement 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 MASSACHUSETTS IFA, SOLID WASTE DISPOSAL SR. LIEN REVENUE BONDS (SERIES A), 9.00% (MASSACHUSETTS RECYCLING ASSOCIATION) There are $173 million face amount of these Senior Lien Revenue Bonds currently outstanding. On August 12, 1997, the obligor filed a petition for relief under Chapter 11 of the Federal Bankruptcy Code. On September 30, 1997, the Bankruptcy Court approved the terms of a settlement under which a new owner would acquire the facility subject to a portion of the Senior Lien Revenue Bonds. The new owner will then enter into a 15-year lease guaranteed by the company that built the facility. The settlement calls for the transfer and lease to take place before October 31, 1997. The settlement also anticipates that the Senior Lien Revenue Bonds may be replaced with refunding bonds in the face amount of $56.3 million by July 31, 1998. The Senior Lien Revenue Bonds will not produce any income until exchanged for such refunding bonds. MARION COUNTY, WV COUNTY COMMISSION, SOLID WASTE FACILITY REVENUE BONDS (SERIES 1993), 7.75% - 8.25% (AMERICAN POWER PAPER RECYCLING) There are $210.4 million face amount of these Revenue Bonds currently outstanding. On March 27, 1997, certain holders of the Revenue Bonds entered into a settlement agreement with the obligor, its partners, and certain of their affiliates. In accordance with the settlement agreement, on May 30, 1997, the obligor filed a petition for relief under Chapter 7 of the Federal Bankruptcy Code. At the same time, one of the obligor's limited partners filed a petition for relief under Chapter 11 of the Federal Bankruptcy Code. On July 1, 1997, the Bankruptcy Court approved the transfer of the facility to the obligor's limited partner subject to the Revenue Bonds. Counsel to the bondholders has indicated that this transfer should take place by October 31, 1997. The settlement agreement anticipates that, not less than six-months after the transfer, the limited partnership will be acquired by a new owner subject to the issuance of refunding bonds in the aggregate face amount of $110 million. The Revenue Bonds will not produce any income until exchanged for such refunding bonds. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1997 (UNAUDITED) ASSETS: Total investments in securities, at value (identified cost $693,383,248, and $ 707,787,690 tax cost $696,727,565) Cash 27,246 Income receivable 13,023,066 Receivable for shares sold 257,826 Total assets 721,095,828 LIABILITIES: Payable for investments purchased $ 14,991,588 Payable for shares redeemed 127,896 Income distribution payable 2,773,463 Accrued expenses 259,999 Total liabilities 18,152,946 NET ASSETS for 65,382,372 shares outstanding $ 702,942,882 NET ASSETS CONSIST OF: Paid in capital $ 688,686,889 Net unrealized appreciation of investments 14,404,442 Accumulated net realized gain on investments 3,177,096 Distributions in excess of net investment income (3,325,545) Total Net Assets $ 702,942,882 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE: CLASS A SHARES: Net Asset Value Per Share ($598,193,047 / 55,639,338 shares outstanding) $10.75 Offering Price Per Share (100/95.50 of $10.75)* $11.26 Redemption Proceeds Per Share $10.75 CLASS B SHARES: Net Asset Value Per Share ($86,694,085 / 8,063,641 shares outstanding) $10.75 Offering Price Per Share $10.75 Redemption Proceeds Per Share (94.50/100 of $10.75)* $10.16 CLASS C SHARES: Net Asset Value Per Share ($18,055,750 / 1,679,393 shares outstanding) $10.75 Offering Price Per Share $10.75 Redemption Proceeds Per Share (99.00/100 of $10.75)* $10.64
* See "Investing in the Fund" in the Prospectus. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
INVESTMENT INCOME: Interest $ 20,398,572 EXPENSES: Investment advisory fee $ 2,095,479 Administrative personnel and services fee 266,584 Custodian fees 36,660 Transfer and dividend disbursing agent fees and expenses 256,362 Directors'/Trustees' fees 10,827 Auditing fees 9,243 Legal fees 2,052 Portfolio accounting fees 75,412 Distribution services fee--Class B Shares 309,280 Distribution services fee--Class C Shares 73,814 Shareholder services fee--Class A Shares 755,031 Shareholder services fee--Class B Shares 103,093 Shareholder services fee--Class C Shares 24,605 Share registration costs 27,450 Printing and postage 30,681 Insurance premiums 2,850 Taxes 48,669 Miscellaneous 3,618 Total expenses 4,131,710 Waivers-- Waiver of shareholder services fee--Class A Shares (422,818) Waiver of shareholder services fee--Class C Shares (984) Total waivers (423,802) Net expenses 3,707,908 Net investment income 16,690,664 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 3,211,891 Net change in unrealized appreciation (depreciation) of investments 26,415,082 Net realized and unrealized gain on investments 29,626,973 Change in net assets resulting from operations $ 46,317,637
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED (UNAUDITED) YEAR ENDED SEPTEMBER 30, MARCH 31, 1997 1997 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS-- Net investment income $ 16,690,664 $ 38,070,897 Net realized gain (loss) on investments ($3,211,891 and $(439,197), respectively, as computed for federal tax purposes) 3,211,891 (30,587) Net change in unrealized appreciation/depreciation 26,415,082 (25,442,823) Change in net assets resulting from operations 46,317,637 12,597,487 DISTRIBUTIONS TO SHAREHOLDERS-- Distributions from net investment income Class A Shares (14,661,236) (33,864,603) Class B Shares (1,639,284) (3,157,991) Class C Shares (390,144) (1,067,075) Distributions in excess of net investment income Class A Shares -- (2,893,224) Class B Shares -- (332,555) Class C Shares -- (99,766) Distributions from net realized gains Class A Shares -- (5,887,308) Class B Shares -- (554,488) Class C Shares -- (229,139) Change in net assets resulting from distributions to shareholders (16,690,664) (48,086,149) SHARE TRANSACTIONS-- Proceeds from sale of shares 71,403,257 161,534,404 Net asset value of shares issued to shareholders in payment of distributions 8,797,670 30,227,698 declared Cost of shares redeemed (100,479,866) (210,426,834) Change in net assets resulting from share transactions (20,278,939) (18,664,732) Change in net assets 9,348,034 (54,153,394) NET ASSETS: Beginning of period 693,594,848 747,748,242 End of period $ 702,942,882 $ 693,594,848
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. FINANCIAL HIGHLIGHTS--CLASS A SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED (UNAUDITED) SEPTEMBER 30, YEAR ENDED MARCH 31, 1997 1997 1996 1995 1994 1993 NET ASSET VALUE, BEGINNING OF PERIOD $10.31 $10.82 $10.92 $11.20 $11.62 $10.98 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.26 0.55 0.66 0.67 0.66 0.66 Net realized and unrealized gain (loss) on investments 0.44 (0.36) (0.09) (0.05) (0.40) 0.64 Total from investment operations 0.70 0.19 0.57 0.62 0.26 1.30 LESS DISTRIBUTIONS Distributions from net investment income (0.26) (0.55) (0.66) (0.67) (0.66) (0.66) Distributions in excess of net investment income(a) -- (0.05) -- -- -- -- Total distributions from net investment income (0.26) (0.60) (0.66) (0.67) (0.66) (0.66) Distributions from net realized gain on investments -- (0.10) (0.01) (0.23) (0.02) -- Total distributions (0.26) (0.70) (0.67) (0.90) (0.68) (0.66) NET ASSET VALUE, END OF PERIOD $10.75 $10.31 $10.82 $10.92 $11.20 $11.62 TOTAL RETURN(B) 6.86% 1.84% 5.32% 5.90% 2.10% 12.13% RATIOS TO AVERAGE NET ASSETS Expenses 0.92%* 0.93% 0.98% 0.92% 0.84% 0.80% Net investment income 4.85%* 5.37% 5.97% 6.17% 5.59% 5.81% Expense waiver/reimbursement(c) 0.14%* 0.14% 0.13% -- -- -- SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $598,193 $595,515 $663,538 $708,712 $714,384 $706,126 Portfolio turnover 35% 33% 29% 41% 27% 13%
* Computed on an annualized basis. (a) Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal tax purposes. (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. FINANCIAL HIGHLIGHTS--CLASS B SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED (UNAUDITED) SEPTEMBER 30, YEAR ENDED MARCH 31, 1997 1997 1996 1995(A) NET ASSET VALUE, BEGINNING OF PERIOD $10.31 $10.82 $10.92 $11.06 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.21 0.47 0.56 0.40 Net realized and unrealized gain (loss) on investments 0.44 (0.37) (0.09) (0.03) Total from investment operations 0.65 0.10 0.47 0.37 LESS DISTRIBUTIONS Distributions from net investment income (0.21) (0.47) (0.56) (0.40) Distributions in excess of net investment income(b) -- (0.04) -- -- Total distributions from net investment income (0.21) (0.51) (0.56) (0.40) Distributions from net realized gain on investments -- (0.10) (0.01) (0.11) Total distributions (0.21) (0.61) (0.57) (0.51) NET ASSET VALUE, END OF PERIOD $10.75 $10.31 $10.82 $10.92 TOTAL RETURN(C) 6.39% 0.94% 4.40% 3.49% RATIOS TO AVERAGE NET ASSETS Expenses 1.81%* 1.82% 1.86% 1.84%* Net investment income 3.98%* 4.50% 5.23% 5.94%* SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $86,694 $77,536 $58,296 $18,201 Portfolio turnover 35% 33% 29% 41%
* Computed on an annualized basis. (a) Reflects operations for the period from July 26, 1994 (date of initial public offering) to March 31, 1995. (b) Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (See Notes which are an integral part of the Financial Statements) FEDERATED 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, 1997 1997 1996 1995 1994(A) NET ASSET VALUE, BEGINNING OF PERIOD $10.31 $10.82 $10.92 $11.20 $11.70 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.20 0.46 0.56 0.58 0.52 Net realized and unrealized gain (loss) on investments 0.45 (0.36) (0.09) (0.05) (0.48) Total from investment operations 0.65 0.10 0.47 0.53 0.04 LESS DISTRIBUTIONS Distributions from net investment income (0.21) (0.46) (0.56) (0.58) (0.52) Distributions in excess of net investment income(b) -- (0.05) -- -- -- Total distributions from net investment income (0.21) (0.51) (0.56) (0.58) (0.52) Distributions from net realized gain on investments -- (0.10) (0.01) (0.23) (0.02) Total distributions (0.21) (0.61) (0.57) (0.81) (0.54) NET ASSET VALUE, END OF PERIOD $10.75 $10.31 $10.82 $10.92 $11.20 TOTAL RETURN(C) 6.40% 0.95% 4.42% 4.96% 0.17% RATIOS TO AVERAGE NET ASSETS Expenses 1.80%* 1.81% 1.82% 1.81% 1.80%* Net investment income 3.96%* 4.51% 5.16% 5.28% 4.70%* Expense waiver/reimbursement(d) 0.01%* 0.01% 0.04% -- -- SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $18,056 $20,544 $25,914 $22,389 $22,066 Portfolio turnover 35% 33% 29% 41% 27%
* Computed on an annualized basis. (a) Reflects operations for the period from April 21, 1993 (date of initial public offering) to March 31, 1994. (b) Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (d) 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. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (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 60 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. Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal income tax purposes. 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. At March 31, 1997, the Fund, for federal tax purposes, had a capital loss carryforward of $30,587, which will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire as follows: EXPIRATION YEAR EXPIRATION AMOUNT 2005 $30,587 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. 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, 1997, par value shares ($0.01 per share) authorized were as follows: PERCENTAGE OF PAR VALUE SHARE CLASS NAME CAPITAL STOCK AUTHORIZED Class A Shares 375,000,000 Class B Shares 250,000,000 Class C Shares 375,000,000 Total shares authorized 1,000,000,000 Transactions in capital stock were as follows:
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 MARCH 31, 1997 CLASS A SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 5,418,039 $ 57,101,848 11,574,693 $121,849,621 Shares issued to shareholders in payment of distributions declared 748,809 7,909,291 2,586,707 27,181,535 Shares redeemed (8,300,730) (87,688,017) (17,732,936) (185,898,913) Net change resulting from Class A Share transactions (2,133,882) $(22,676,878) (3,571,536) $ (36,867,757) SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 MARCH 31, 1997 CLASS B SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 1,337,195 $ 14,107,695 3,354,939 $ 35,239,171 Shares issued to shareholders in payment of distributions declared 64,403 680,340 203,345 2,136,903 Shares redeemed (859,497) (9,057,125) (1,426,287) (14,965,753) Net change resulting from Class B Share transactions 542,101 $ 5,730,910 2,131,997 $ 22,410,321 SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 MARCH 31, 1997 CLASS C SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 19,875 $ 193,714 423,472 $ 4,445,612 Shares issued to shareholders in payment of distributions declared 19,706 208,039 86,450 909,260 Shares redeemed (353,225) (3,734,724) (912,686) (9,562,168) Net change resulting from Class C Share transactions (313,644) $ (3,332,971) (402,764) $ (4,207,296) Net change resulting from share transactions (1,905,425) $(20,278,939) (1,842,303) $ (18,664,732)
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE --Federated Advisers, 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 average daily net assets of the Fund, 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. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Class B Shares and Class C Shares. The Plan provides that the Fund may incur distribution expenses according to the following schedule annually, to compensate FSC. PERCENTAGE OF AVERAGE SHARE CLASS NAME DAILY NET ASSETS Class B Shares 0.75% Class C Shares 0.75% FSC may voluntarily choose to waive any portion of its fee. FSC 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 average daily net assets of each class of 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 Fund 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, 1997, were as follows: PURCHASES $244,793,264 SALES $250,132,711 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 J. Crilley Kelly 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 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] Cusip 313913105 Cusip 313913204 Cusip 313913303 8110104 (11/97) [Graphic] A1. 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. The "x" axis reflects computation periods from 2/26/69 to 9/30/97. The "y" axis is measured in increments of $100,000 ranging from $0 to $700,000 and indicates that the ending value of hypothetical initial investment of $29,000 in the fund's Class A Shares, assuming the reinvestment of capital gains and dividends,would have grown to $606,799 on 9/30/97. A2. 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. The "x" axis reflects computation periods from 2/26/69 to 9/30/97. The "y" axis is measured in increments of $40,000 ranging from $0 to $320,000 and indicates that the ending value of hypothetical yearly investments of $1,000 in the fund's Class A Shares, assuming the reinvestment of capital gains and dividends,would have grown to $301,288 on 9/30/97. A3. 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 beneath it. The "x" axis reflects computation periods from 9/30/82 to 9/30/97. The "y" axis is measured in increments of $25,000 ranging from $0 to $225,000 and indicates that the ending value of a hypothetical initial investment of $5,000 and subsequent monthly investments of $250 over 15 years in the fund's Class A Shares would have grown to $211,829 on 9/30/97. -----END PRIVACY-ENHANCED MESSAGE-----