-----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, NcMyvNGdVGs1Hk7d/M9fQrOq8TW5rfQbu41/SzYBjIkdCjptDHe4LTZ8hba39ic+ /82ac1EC7yjOSM9B0nyuzg== 0000201801-98-000009.txt : 19980729 0000201801-98-000009.hdr.sgml : 19980729 ACCESSION NUMBER: 0000201801-98-000009 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980728 EFFECTIVENESS DATE: 19980728 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: 485BPOS SEC ACT: SEC FILE NUMBER: 002-57181 FILM NUMBER: 98672359 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-02677 FILM NUMBER: 98672360 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 485BPOS 1 1933 Act File No. 2-57181 1940 Act File No. 811-2677 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X --- Pre-Effective Amendment No. .................... Post-Effective Amendment No. 52 .................... X ------- --- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X Amendment No. 36 ................................... X ------- --- FEDERATED MUNICIPAL SECURITIES FUND, INC. (Exact Name of Registrant as Specified in Charter) Federated Investors Funds Pittsburgh, Pennsylvania 15237-7000 (Address of Principal Executive Offices) (412) 288-1900 (Registrant's Telephone Number) John W. McGonigle, Esquire, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 (Name and Address of Agent for Service) It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) x on July 30, 1998, pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a)(i) _ on __________________ pursuant to paragraph (a)(i) 75 days after filing pursuant to paragraph (a)(ii) on _________________ pursuant to paragraph (a)(ii) of Rule 485. If appropriate, check the following box: This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Copies to: Matthew G. Maloney, Esquire Dickstein Shapiro Morin & Oshinsky LLP 2101 L Street, N.W. Washington, D.C. 20037 CROSS-REFERENCE SHEET This Amendment to the Registration Statement of FEDERATED MUNICIPAL SECURITIES FUND, INC., which is comprised of three classes of shares, (1) Class A Shares, (2) Class B Shares, and (3) Class C Shares, is comprised of the following: PART A. INFORMATION REQUIRED IN A PROSPECTUS. Prospectus Heading (Rule 404(c) Cross Reference) Item 1. Cover Page....................(1-3) Cover Page. Item 2. Synopsis......................(1-3) Summary of Fund Expenses. Item 3. Condensed Financial Information...................(1-3) Financial Highlights; (1-3) Performance Information. Item 4. General Description of Registrant....................(1-3) General Information; (1-3) Investment Information; (1-3) Investment Objective; (1-3) Investment Policies; (1-3)Investment Risks; (1-3) Reducing Risks of Lower-Rated Securities; (1-3) Investment Limitations. Item 5. Management of the Fund........(1-3) Fund Information; (1-3) Management of the Fund; (1-3) Distribution of Shares; (1-3) Administration of the Fund. ---------------------- Item 6. Capital Stock and Other Securities....................(1-3) Shareholder Information; (1-3) Calling the Fund; (1-3) Account and Share Information; (1-3) Confirmations and Account Statements; (1-3) Dividends and Distributions; (1-3) Tax Information; (1-3) Federal Income Tax; (1-3) State and Local Taxes. Item 7. Purchase of Securities Being Offered.......................(1-3) Net Asset Value; (1-3) Investing in the Fund; (1-3) Purchasing Shares; (1-3) Purchasing Shares through a Financial Intermediary; (1-3) Purchasing Shares by Wire; (1-3) Purchasing Shares by Check; (1-3) Systematic Investment Program; (1-3) Retirement Plans; (1) Class A Shares; (2) Class B Shares; (3) Class C Shares. Item 8. Redemption or Repurchase (1-3) Redeeming and Exchanging Shares; (1-3) Redeeming or Exchanging Shares through a Financial Intermediary; (1-3) Redeeming or Exchanging Shares by Telephone; (1-3) Redeeming or Exchanging Shares by Mail; (1-3) Requirements for Redemption; (1-3) Requirements for Exchange; (1-3) Systematic Withdrawal Program; (1-3) Systematic Withdrawal Program("SWP") on Class B Shares; (1-3) Contingent Deferred Sales Charge; (1-3) Eliminating the Contingent Deferred Sales Charge; (1-3) Account and Share Information; (1-3) Accounts with Low Balances. Item 9. Pending Legal Proceedings.....None. PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION. Item 10. Cover Page....................(1-3) Cover page. Item 11. Table of Contents (1-3) Table of Contents. Item 12. General Information and History.......................(1-3) General Information About the Fund; (1-3) About Federated Investors. Item 13. Investment Objectives and Policies......................(1-3) Investment Objective and Policies; (1-3) Investment Limitations. Item 14. Management of the Fund (1-3) Federated Municipal Securities Fund, Inc. Management; (1-3) Director Compensation. Item 15. Control Persons and Principal Holders of Securities (1-3) Fund Ownership. Item 16. Investment Advisory and Other Services......................(1-3) Investment Advisory Services; (1-3) Other Services. Item 17. Brokerage Allocation..........(1-3) Brokerage Transactions. Item 18. Capital Stock and Other Securities Not applicable. Item 19. Purchase, Redemption and Pricing of Securities Being Offered.................(1-3) Purchasing Shares; (1-3) Determining Net Asset Value; (1-3) Redeeming Shares. ------------- Item 20. Tax Status....................Tax Status. ---------- Item 21. Underwriters..................(1-3) See Part A - Distribution of Shares. ------------ Item 22. Calculation of Performance Data..........................(1-3) Total Return; (1-3) Yield; (1-3) Tax-Equivalent Yield; (1-3) Performance Comparisons. Item 23 Financial Statements..........(1-3) Financial Statements (Incorporated by reference into Part B, to Registrant's Annual Report dated March 31, 1998.) (File Nos. 2-57181 and 811-2677). Federated Municipal Securities Fund, Inc. Class A Shares, Class B Shares, Class C Shares PROSPECTUS The shares of Federated Municipal Securities Fund, Inc. (the "Fund") represent interests in an open-end, diversified management investment company (a mutual fund) with an investment objective of providing its shareholders a high level of current income which is exempt from federal regular income tax by investing in a professionally managed, diversified portfolio primarily limited to municipal bonds. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the information you should read and know before you invest in the Fund. Keep this prospectus for future reference. The Fund has also filed a Statement of Additional Information dated July 31, 1998, with the Securities and Exchange Commission (the "SEC"). The information contained in the Statement of Additional Information is incorporated by reference into this prospectus. You may request a copy of the Statement of Additional Information or a paper copy of this prospectus, if you have received your prospectus electronically, free of charge by calling 1-800-341-7400. To obtain other information or to make inquiries about the Fund, contact your financial institution. The Statement of Additional Information, material incorporated by reference into this document, and other information regarding the Fund are maintained electronically with the SEC at Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus dated July 31, 1998 TABLE OF CONTENTS Summary of Fund Expenses 1 Financial Highlights--Class A Shares 2 Financial Highlights--Class B Shares 3 Financial Highlights--Class C Shares 4 General Information 5 Calling the Fund 5 Year 2000 Statement 5 Investment Information 5 Investment Objective 5 Investment Policies 5 Investment Risks 8 Reducing Risks of Lower-Rated Securities 9 Investment Limitations 9 Net Asset Value 9 Investing in the Fund 10 Purchasing Shares 10 Purchasing Shares Through a Financial Intermediary 10 Purchasing Shares by Wire 11 Purchasing Shares by Check 11 Systematic Investment Program 11 Class A Shares 11 Class B Shares 12 Class C Shares 12 Redeeming and Exchanging Shares 12 Redeeming or Exchanging Shares Through a Financial Intermediary 12 Redeeming or Exchanging Shares by Telephone 12 Redeeming or Exchanging Shares by Mail 12 Requirements for Redemption 13 Requirements for Exchange 13 Systematic Withdrawal Program 13 Systematic Withdrawal Program ("SWP") on Class BShares 13 Contingent Deferred Sales Charge 13 Eliminating the Contingent Deferred Sales Charge 13 Account and Share Information 14 Confirmations and Account Statements 14 Dividends and Distributions 14 Accounts with Low Balances 14 Fund Information 14 Management of the Fund 14 Distribution of Shares 15 Administration of the Fund 16 Shareholder Information 16 Tax Information 17 Federal Income Tax 17 State and Local Taxes 17 Performance Information 17 Appendix 18
SUMMARY OF FUND EXPENSES
CLASS A CLASS B CLASS C Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.50% None None Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None None None Contingent Deferred Sales Charge (as a percentage of None 5.50%(1) 1.00%(1) original purchase price or redemption proceeds, as applicable) Redemption Fee (as a percentage of amount redeemed, if applicable) None None None Exchange Fee None None None
ANNUAL OPERATING EXPENSES (As a percentage of average net assets) Management Fee 0.55% 0.55% 0.55% 12b-1 Fee None 0.75% 0.75% Total Other Expenses (after waiver) 0.32%(2) 0.46% 0.45%(2) Shareholder Services Fee (after waiver) 0.11%(3) 0.25% 0.24%(3) Total Operating Expenses 0.87%(4) 1.76%(5) 1.75%(4)
(1) For shareholders of Class B Shares, the contingent deferred sales charge is 5.50% in the first year declining to 1.00% in the sixth year and 0.00% thereafter. For shareholders of Class C Shares, the contingent deferred sales charge assessed is 1.00% of the lesser of the original purchase price or the net asset value of Shares redeemed within one year of their purchase date. For a more complete description, see "Contingent Deferred Sales Charge." (2) Total other expenses for Class AShares and Class CShares have been reduced to reflect the voluntary waivers of portions of the shareholder services fee described in Note (3) below. Total other expenses are expected to be 0.46% and 0.46%, respectively for Class AShares and Class CShares absent the waivers described in Note (3). (3) The shareholder services fee for Class A Shares and Class C Shares have been reduced to reflect the voluntary waivers of portions of the shareholder services fee. The shareholder service provider can terminate these voluntary waivers at any time at its sole discretion. The maximum shareholder services fee is 0.25%. (4) The total operating expenses for Class A Shares and Class C Shares are expected to be 1.01% and 1.76%, respectively, absent the voluntary waivers described in note 2 above. The Total Operating Expenses for Class A and Class B Shares were 0.86%, and 1.75%, respectively, for the fiscal year ended March 31, 1998. Class A Shares would have been 1.00%, absent the voluntary waiver of a portion of the shareholder services fee. (5) Class B Shares convert to Class A Shares (which pay lower ongoing expenses) approximately eight years after purchase. The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. For more complete descriptions of the various costs and expenses, see "How to Purchase Shares" and "Fund Information." Wire-transferred redemptions of less than $5,000 may be subject to additional fees. LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE CLASS A CLASS B CLASS C You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return, (2) redemption at the end of each time period, and (3) payment of the maximum sales charge. 1 Year $ 53 $ 75 $ 28 3 Years $ 72 $ 99 $ 55 5 Years $ 91 $119 $ 95 10 Years $147 $183 $206
You would pay the following expenses on the same investment, assuming no redemption. 1 Year $ 53 $ 18 $ 18 3 Years $ 72 $ 55 $ 55 5 Years $ 91 $ 95 $ 95 10 Years $147 $183 $206
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. FINANCIAL HIGHLIGHTS--CLASS ASHARES FEDERATED MUNICIPAL SECURITIES FUND, INC. (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 8, 1998, on the Fund's financial statements for the year ended March 31, 1998, and on the following table for the periods presented, is included in the Annual Report, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, which may be obtained from the Fund.
YEAR ENDED MARCH 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 NET ASSET VALUE, $10.31 $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 $10.03 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS Net investment income 0.46 0.55 0.66 0.67 0.66 0.66 0.67 0.71 0.72 0.72 Net realized and unrealized gain (loss) on investments 0.64 (0.36) (0.09) (0.05) (0.40) 0.64 0.37 0.14 0.21 0.23 Total from investment operations 1.10 0.19 0.57 0.62 0.26 1.30 1.04 0.85 0.93 0.95 LESS DISTRIBUTIONS Distributions from net investment income (0.46) (0.55) (0.66) (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) Distributions in excess of net investment income(a) (0.01) (0.05) -- -- -- -- -- -- -- -- Distributions from net realized gain on investments (0.03) (0.10) (0.01) (0.23) (0.02) -- -- -- -- -- Total distributions (0.50) (0.70) (0.67) (0.90) (0.68) (0.66) (0.67) (0.71) (0.72) (0.72) NET ASSET VALUE, END OF PERIOD $10.91 $10.31 $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 TOTAL RETURN(B) 11.28% 1.84% 5.32% 5.90% 2.10% 12.13% 10.05% 8.42% 9.20% 9.76% RATIOS TO AVERAGE NET ASSETS Expenses 0.86% 0.93% 0.98% 0.92% 0.84% 0.80% 0.84% 0.89% 0.90% 0.95% Net investment income 4.70% 5.37% 5.97% 6.17% 5.59% 5.81% 6.17% 6.77% 6.80% 7.07% Expense waiver/ reimbursement(c) 0.14% 0.14% 0.13% -- -- -- -- -- -- -- SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $591,310 $595,515 $663,538 $708,712 $714,384 $706,126 $590,118 $511,611 $474,797 $440,445 Portfolio turnover 64% 33% 29% 41% 27% 13% 8% 45% 25% 58%
(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 income 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. FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1998, WHICH CAN BE OBTAINED FREE OF CHARGE. FINANCIAL HIGHLIGHTS--CLASS B SHARES FEDERATED MUNICIPAL SECURITIES FUND, INC. (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 8, 1998, on the Fund's financial statements for the year ended March 31, 1998, and on the following table for the periods presented, is included in the Annual Report, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, which may be obtained from the Fund.
YEAR ENDED MARCH 31, 1998 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 0.38 0.47 0.56 0.40 Net realized and unrealized gain (loss) on investments 0.64 (0.37) (0.09) (0.03) Total from investment operations 1.02 0.10 0.47 0.37 LESS DISTRIBUTIONS Distributions from net investment income (0.38) (0.47) (0.56) (0.40) Distributions in excess of net investment income(b) (0.01) (0.04) -- -- Distributions from net realized gain on investments (0.03) (0.10) (0.01) (0.11) Total distributions (0.42) (0.61) (0.57) (0.51) NET ASSET VALUE, END OF PERIOD $10.91 $10.31 $10.82 $10.92 TOTAL RETURN(C) 10.30% 0.94% 4.40% 3.49% RATIOS TO AVERAGE NET ASSETS Expenses 1.75% 1.82% 1.86% 1.84%* Net investment income 3.81% 4.50% 5.23% 5.94%* SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $87,304 $77,536 $58,296 $18,201 Portfolio turnover 64% 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 income tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1998, WHICH CAN BE OBTAINED FREE OF CHARGE. FINANCIAL HIGHLIGHTS--CLASS C SHARES FEDERATED MUNICIPAL SECURITIES FUND, INC. (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) The following table has been audited by Deloitte & Touche LLP, the Fund's independent auditors. Their report dated May 8, 1998, on the Fund's financial statements for the year ended March 31, 1998, and on the following table for the periods presented, is included in the Annual Report, which is incorporated by reference. This table should be read in conjunction with the Fund's financial statements and notes thereto, which may be obtained from the Fund.
YEAR ENDED MARCH 31, 1998 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 0.37 0.46 0.56 0.58 0.52 Net realized and unrealized gain (loss) on investments 0.65 (0.36) (0.09) (0.05) (0.48) Total from investment operations 1.02 0.10 0.47 0.53 0.04 LESS DISTRIBUTIONS Distributions from net investment income (0.37) (0.46) (0.56) (0.58) (0.52) Distributions in excess of net investment income(b) (0.02) (0.05) -- -- -- Total distributions from net investment income (0.39) (0.51) (0.56) (0.58) (0.52) Distributions from net realized gain on investments (0.03) (0.10) (0.01) (0.23) (0.02) Total distributions (0.42) (0.61) (0.57) (0.81) (0.54) NET ASSET VALUE, END OF PERIOD $10.91 $10.31 $10.82 $10.92 $11.20 TOTAL RETURN(C) 10.31% 0.95% 4.42% 4.96% 0.17% RATIOS TO AVERAGE NET ASSETS Expenses 1.74% 1.81% 1.82% 1.81% 1.80%* Net investment income 3.83% 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) $17,616 $20,544 $25,914 $22,389 $22,066 Portfolio turnover 64% 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 income 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. FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1998, WHICH CAN BE OBTAINED FREE OF CHARGE. GENERAL INFORMATION The Fund was incorporated under the laws of the State of Maryland on September 10, 1976. Shares of the Fund are offered in three classes of shares known as Class A Shares, Class B Shares, and Class C Shares ("Shares") which represent interests in a single portfolio of securities. The Fund is designed for individuals and institutions seeking a high level of current income which is exempt from federal regular income tax as a convenient means of accumulating an interest in a professionally managed, diversified portfolio primarily limited to municipal bonds. The Fund's current net asset value and offering price may be found in the mutual funds section of local newspapers under "Federated" and the appropriate class designation listing. CALLING THE FUND Call the Fund at 1-800-341-7400. YEAR 2000 STATEMENT Like other mutual funds and business organizations worldwide, the Fund's service providers (among them, the adviser, distributor, administrator, and transfer agent) must ensure that their computer systems are adjusted to properly process and calculate date-related information from and after January 1, 2000. Many software programs and, to a lesser extent, the computer hardware in use today cannot distinguish the year 2000 from the year 1900. Such a design flaw could have a negative impact in the handling of securities trades, pricing and accounting services. The Fund and its service providers are actively working on necessary changes to computer systems to deal with the year 2000 issue and believe that systems will be year 2000 compliant when required. Analysis continues regarding the financial impact of instituting a year 2000 compliant program on its operations. INVESTMENT INFORMATION INVESTMENT OBJECTIVE 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. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the investment policies described in this prospectus. Unless otherwise noted, the investment objective and the policies and limitations described below cannot be changed without approval of shareholders. The Fund may invest no more than 35% of its net assets in lower quality municipal bonds. These bonds will usually offer higher yields than higher-rated bonds, but involve greater investment risk at the time of issue. (See "Investment Risks.") INVESTMENT POLICIES ACCEPTABLE INVESTMENTS The Fund invests its assets so that at least 80% of its annual interest income is exempt from federal regular income tax. The Fund pursues its investment objective by investing at least 65% of its portfolio in municipal bonds. Municipal bonds are debt obligations issued by or on behalf of states, territories, and possessions of the United States, including the District of Columbia, and their political subdivisions, agencies, and instrumentalities, the interest on which is exempt from federal regular income tax. CHARACTERISTICS The Fund may invest in both investment grade and lower rated municipal bonds. The Fund invests 65% of its assets in municipal bonds which have the same characteristics assigned by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P") to bonds of investment grade quality ("BBB" rated or better). The Fund will limit its purchases of municipal bonds rated Ba and BB or below (commonly known as "junk bonds") to no more than 35% of its net assets. Changes in economic conditions or other circumstances are more likely to weaken capacity to make principal and interest payments than higher rated bonds. If a rated bond loses its rating or has its rating reduced after the Fund has purchased it, the Fund is not required to drop the bond from the portfolio, but will consider doing so. In certain cases, the Fund's adviser may choose bonds which are unrated if it judges the bonds to have the same characteristics as otherwise permissible municipal bonds. There is no limit to portfolio maturity. A description of the ratings categories is contained in the Appendix to this prospectus. RESTRICTED AND ILLIQUID SECURITIES The Fund may invest in restricted securities. Restricted securities are any securities in which the Fund may invest pursuant to its investment objective and policies but which are subject to restrictions on resale under federal securities law. Under criteria established by the Directors, certain restricted securities are determined to be liquid. To the extent that restricted securities are not determined to be liquid, the Fund will limit their purchase together with other illiquid securities and repurchase agreements providing for settlement in more than seven days after notice to 15% of its net assets. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Fund may purchase municipal bonds on a when-issued or delayed delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The seller's failure to complete these transactions may cause the Fund to miss a price or yield considered to be advantageous. Settlement dates may be a month or more after entering into these transactions, and the market value of the securities purchased may vary from the purchase prices. The Fund may dispose of a commitment prior to settlement if the Fund's investment adviser deems it appropriate to do so. In addition, the Fund may enter in transactions to sell its purchase commitments to third parties at current market values and simultaneously acquire other commitments to purchase similar securities at later dates. The Fund may realize short-term profits or losses upon the sale of such commitments. TEMPORARY INVESTMENTS From time to time on a temporary basis, or when the investment adviser determines that market conditions call for a temporary defensive posture, the Fund may invest in short-term tax-exempt or taxable temporary investments. These temporary investments include: notes issued by or on behalf of municipal or corporate issuers; obligations issued or guaranteed by the U.S. government, its agencies, or instrumentalities; other debt securities; commercial paper; certificates of deposit of banks; and repurchase agreements (arrangements in which the organization selling the Fund a bond or temporary investment agrees at the time of sale to repurchase it at a mutually agreed upon time and price). There are no rating requirements applicable to temporary investments. However, the investment adviser will limit temporary investments to those it considers to be of good quality. The Fund intends to invest no more than 20% of its assets in temporary investments. Although the Fund is permitted to make taxable, temporary investments, there is no current intention of generating income subject to federal regular income tax. INVERSE FLOATERS The Fund may invest in securities known as "inverse floaters" which represent interests in municipal securities. The Fund intends to purchase inverse floaters to assist in pursuing its investment objective. These obligations pay interest rates that vary inversely with changes in the interest rates of specified short-term municipal securities or an index of short-term municipal securities. The interest rates on inverse floaters will typically decline as short-term market interest rates increase and increase as short-term market rates decline. Inverse floaters will generally respond to changes in market interest rates more rapidly than fixed-rate long-term securities (typically twice as fast). As a result, the market values of inverse floaters will generally be more volatile than the market values of fixed-rate municipal securities. Typically, the portion of the portfolio invested in inverse floaters will be subject to additional volatility. FINANCIAL FUTURES The Fund may purchase and sell interest rate and index financial futures contracts. These financial futures contracts may be used to hedge all or a portion of its portfolio against changes in the market value of portfolio securities and interest rates, provide additional liquidity, and accomplish its current strategies in a more expeditious fashion. Financial futures contracts call for the delivery of particular debt instruments at a certain time in the future. The seller of the contract agrees to make delivery of the type of instrument called for in the contract and the buyer agrees to take delivery of the instrument at the specified future time. As a matter of investment policy, which may be changed without shareholder approval, the Fund may not purchase or sell futures contracts if immediately thereafter the sum of the amount of margin deposits on the Fund's existing futures positions would exceed 5% of the market value of the Fund's total assets. When the Fund purchases futures contracts, an amount of readily marketable securities equal to the underlying commodity value of the futures contracts (less any related margin deposits) will be deposited in a segregated account with the Fund's custodian (or the broker, if legally permitted). These securities will collateralize the position and thereby insure that the use of such futures contract is unleveraged. RISKS When the Fund uses financial futures, there is a risk that the prices of the securities subject to the futures contracts may not correlate perfectly with the prices of the securities in the Fund's portfolio. This may cause the futures contract to react differently than the portfolio securities to market changes. In addition, the Fund's investment adviser could be incorrect in its expectations about the direction or extent of market factors such as interest rate movements. In these events, the Fund may lose money on the futures contract. It is not certain that a secondary market for positions in futures contracts will exist at all times. Although the investment adviser will consider liquidity before entering into futures transactions, there is no assurance that a liquid secondary market on an exchange or otherwise will exist for any particular futures contract at any particular time. The Fund's ability to establish and close out futures positions depends on this secondary market. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES The Fund may invest its assets in securities of other investment companies as an efficient means of carrying out its investment policies. It should be noted that investment companies incur certain expenses, such as management fees, and, therefore, any investment by the Fund in shares of other investment companies may be subject to such duplicate expenses. PORTFOLIO TURNOVER Securities in the Fund's portfolio will be sold whenever the Fund's investment adviser believes it is appropriate to do so in light of the Fund's investment objective, without regard to the length of time a particular security may have been held. The Fund's adviser does not anticipate that portfolio turnover will result in adverse tax consequences. Any such trading will increase the Fund's portfolio turnover rate and transaction costs. MUNICIPAL BONDS Municipal bonds are generally issued to finance public works, such as airports, bridges, highways, housing, hospitals, mass transportation projects, schools, streets, and water and sewer works. They are also issued to repay outstanding obligations, to raise funds for general operating expenses, and to make loans to other public institutions and facilities. Municipal bonds include industrial development bonds issued by or on behalf of public authorities to provide financing aid to acquire sites or construct and equip facilities for privately or publicly owned corporations. The availability of this financing encourages these corporations to locate within the sponsoring communities and thereby increases local employment. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith and credit and taxing power for the payment of principal and interest. Interest on and principal of revenue bonds, however, are payable only from the revenue generated by the facility financed by the bond or other specified sources of revenue. Revenue bonds do not represent a pledge of credit or create any debt of or charge against the general revenues of a municipality or public authority. Industrial development bonds are typically classified as revenue bonds. Private activity bonds are typically one type of "revenue" bonds. In most cases, lower quality bonds are private activity bonds or other revenue bonds which are not payable from general tax revenues. Municipal bonds may carry fixed, floating or inverse floating rates of interest. Fixed rate bonds bear interest at the same rate from issuance until maturity. The interest rate on floating rate bonds is subject to adjustment based upon changes in market interest rates or indices, such as a bank's prime rate or a published market index. The interest rate may be adjusted at specified intervals or immediately upon any change in the applicable index rate. The interest rate for most floating rate bonds varies directly with changes in the index rate, so that the market value of the bond will approximate its stated value at the time of each adjustment. However, inverse floating rate bonds have interest rates that vary inversely with changes in the applicable index rate, such that the bond's interest rate rises when market interest rates fall and fall when market rates rise. The market value of floating rate bonds is less sensitive than fixed rate bonds to changes in market interest rates. In contrast, the market value of inverse floating rate bonds is more sensitive to market rate changes than fixed or floating rate bonds. The affect of market rate changes on bonds depends upon a variety of factors, including market expectations as to future changes in interest rates and, in the case of floating and inverse floating rate bonds, the frequency with which the interest rate is adjusted and the multiple of the index rate used in making the adjustment. Most municipal bonds pay interest in arrears on a semiannual or more frequent basis. However, certain bonds, variously known as capital appreciation bonds or zero coupon bonds, do not provide for any interest payments prior to maturity. Such bonds are normally sold at a discount from their stated value, or provide for periodic increases in their stated value to reflect a compounded interest rate. The market value of these bonds is also more sensitive to changes in market interest rates than bonds that provide for current interest payments. The Fund does not intend to purchase securities if, as a result of such purchase, more than 25% of the value of its total assets would be invested in the securities of governmental subdivisions located in any one state, territory, or possession of the United States. The Fund will not invest 25% or more of its total assets in any one industry. Governmental issuers of municipal securities are not considered part of any "industry." However, municipal securities backed only by the assets and revenues of nongovernmental users may, for this purpose, be deemed to be related to the industry in which such nongovernmental users engage, and the 25% limitation would apply to such obligations. It is nonetheless possible that the Fund may invest more than 25% of its assets in a broader segment of the municipal securities market, such as revenue obligations of hospitals and other health care facilities, housing agency revenue obligations or airport revenue obligations. This would be the case only if the Fund determines that the yields available from obligations in a particular segment of the market justified the additional risks associated with a large investment in such segment. Although such obligations could be supported by the credit of governmental users or by the credit of nongovernmental users engaged in a number of industries, economic, business, political and other developments generally affecting the revenues of such users (for example, proposed legislation or pending court decisions affecting the financing of such projects and market factors affecting the demand for their services or products) may have a general adverse effect on all municipal securities in such a market segment. The Fund reserves the right to invest more than 25% of its assets in industrial development bonds or private activity bonds or in securities of issuers located in the same state, however, it has no present intention to do so. INVESTMENT RISKS The value of Shares will fluctuate. The amount of this fluctuation is dependent upon the quality and maturity of the municipal bonds in the Fund's portfolio as well as on market conditions. Yields on municipal bonds depend on a variety of factors, including: the general conditions of the money market and the taxable and municipal bond markets; the size of the particular offering; the maturity of the obligations; and the rating of the issue. The ability of the Fund to achieve its investment objective also depends on the continuing ability of the issuers of municipal bonds to meet their obligations for the payment of interest and principal when due. The prices of municipal bonds fluctuate inversely in relation to the direction of interest rates. The prices of longer term bonds fluctuate more widely in response to market interest rate changes. Generally speaking, the lower quality, long-term bonds in which the Fund invests have greater fluctuation in value than high quality, shorter-term bonds. Municipal bond prices are interest rate sensitive, which means that their value varies inversely with market interest rates. Thus, if market interest rates have increased from the time a bond was purchased, the bond, if sold, might be sold at a price less than its cost. Similarly, if market interest rates have declined from the time a bond was purchased, the bond, if sold, might be sold at a price greater than its cost. (In either instance, if the bond was held to maturity, no loss or gain normally would be realized as a result of interim market fluctuations.) Prices of lower grade bonds also fluctuate with changes in the perceived quality of the credit of their issuers. Consequently, Shares may not be suitable for persons who cannot assume the somewhat greater risks of capital depreciation associated with higher tax-exempt income yields. In addition, bonds rated "BBB" by S&P or "Baa" and below by Moody's have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to weakened capacity to make principal and interest payments than higher rated bonds. A large portion of the Fund's portfolio may be invested in bonds whose interest payments are from revenues of similar projects (such as housing or hospitals) or where issuers share the same geographic location. As a result, the Fund may be more susceptible to similar economic, political or regulatory developments than would a portfolio of bonds with a greater geographic and project variety. This susceptibility may result in greater fluctuations in share price. Many issuers of municipal bonds which have characteristics of rated bonds choose not to have their obligations rated. Unrated bonds may carry a greater risk and a higher yield than rated securities. Although unrated bonds are not necessarily of lower quality, the market for them may not be as broad as that for rated bonds since many investors rely solely on the major rating agencies for credit appraisal. Further, the lower rated or unrated municipal bonds which the Fund may purchase are frequently traded only in markets where the number of potential purchasers and sellers is limited. This consideration may have the effect of limiting the availability of such bonds for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell such bonds at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets. The Fund will not invest more than 15% of its total assets in securities which are not readily marketable. REDUCING RISKS OF LOWER-RATED SECURITIES The Fund's investment adviser believes that the risks of investing in lower rated securities can be reduced. The professional portfolio management techniques used by the Fund to attempt to reduce these risks include: CREDIT RESEARCH When purchasing bonds, rated or unrated, the Fund's investment adviser performs its own credit analysis in addition to using recognized rating agencies. This credit analysis considers the economic feasibility of revenue bond project financing and general purpose borrowings, the financial condition of the issuer or guarantor with respect to liquidity, cash flow and ability to meet anticipated debt service requirements, and political developments that may affect credit quality. DIVERSIFICATION The Fund invests in securities of many different issuers to reduce portfolio risks. ECONOMIC ANALYSIS The Fund's adviser also considers trends in the overall economy, in geographic areas, in various industries, and in the financial markets. INVESTMENT LIMITATIONS The Fund will not: * borrow money or pledge securities except, under certain circumstances, the Fund may borrow up to one-third of the value of its total assets and pledge up to 10% of the value of those assets to secure such borrowings; or * invest more than 5% of its total assets in securities of one issuer (except cash and cash items and U.S. government obligations). The above investment limitations cannot be changed without shareholder approval. The following limitation, however, can be changed by the Directors without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. The Fund will not invest more than 15% of its net assets in illiquid securities, including restricted securities which the adviser believes cannot be sold within seven days and repurchase agreements maturing in more than seven days. NET ASSET VALUE The Fund's net asset value ("NAV") per Share fluctuates and is based on the market value of all securities and other assets of the Fund. The NAV for each class of Shares may differ due to the variance in daily net income realized by each class. Such variance will reflect only accrued net income to which the shareholders of a particular class are entitled. All purchases, redemptions and exchanges are processed at the NAV next determined after the request in proper form is received by the Fund. The NAV is determined as of the close of trading on the New York Stock Exchange (normally 4:00 p.m., Eastern time) every day the New York Stock Exchange is open. INVESTING IN THE FUND This prospectus offers three classes of Shares each with the characteristics described below.
CLASS A CLASS B CLASS C Minimum and Subsequent Investment Amounts $1500/$100 $1500/$100 $1500/$100 Maximum Sales Charge 4.50%* None None Maximum Contingent Deferred Sales Charge** None 5.50+ 1.00%# Conversion Feature No Yes++ No
* Class A Shares are sold at NAV, plus a sales charge as follows:
SALES CHARGE DEALER AS A PERCENTAGE OF CONCESSION AS PUBLIC NET A PERCENTAGE OF OFFERING AMOUNT PUBLIC OFFERING AMOUNT OF TRANSACTION PRICE INVESTED PRICE Less than $100,000 4.50% 4.71% 4.00% $100,000 but less than $250,000 3.75% 3.90% 3.25% $250,000 but less than $500,000 2.50% 2.56% 2.25% $500,000 but less than $1 million 2.00% 2.04% 1.80% $1 million or greater 0.00% 0.00% 0.25%
** Computed on the lesser of the NAV of the redeemed Shares at the time of purchase or the NAV of the redeemed Shares at the time of redemption. + The following contingent deferred sales charge schedule applies to Class B Shares:
YEAR OF REDEMPTION CONTINGENT DEFERRED AFTER PURCHASE SALES CHARGE First 5.50% Second 4.75% Third 4.00% Fourth 3.00% Fifth 2.00% Sixth 1.00% Seventh and thereafter 0.00%
++ Class B Shares convert to Class A Shares (which pay lower ongoing expenses) approximately eight years after purchase. See "Conversion of Class B Shares." # The contingent deferred sales charge is assessed on Shares redeemed within one year of their purchase date. PURCHASING SHARES Shares of the Fund are sold on days on which the New York Stock Exchange is open. Shares of the Fund may be purchased as described below, either through a financial intermediary (such as a bank or broker/dealer) or by sending a wire or check directly to the Fund. Financial intermediaries may impose different minimum investment requirements on their customers. An account must be established with a financial intermediary or by completing, signing, and returning the new account form available from the Fund before Shares can be purchased. Shareholders in certain other funds advised and distributed by affiliates of Federated Investors, Inc. ("Federated Funds") may exchange their Shares for Shares of the corresponding class of the Fund. The Fund reserves the right to reject any purchase or exchange request. In connection with any sale, Federated Securities Corp. may, from time to time, offer certain items of nominal value to any shareholder or investor. PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY Orders placed through a financial intermediary are considered received when the Fund is notified of the purchase order or when payment is converted into federal funds. Purchase orders through a broker/dealer must be received by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be purchased at that day's price. Purchase orders through other financial intermediaries must be received by the financial intermediary and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares to be purchased at that day's price. It is the financial intermediary's responsibility to transmit orders promptly. Financial intermediaries may charge fees for their services. The financial intermediary which maintains investor accounts in Class B Shares or Class C Shares with the Fund must do so on a fully disclosed basis unless it accounts for share ownership periods used in calculating the contingent deferred sales charge (see "Contingent Deferred Sales Charge"). In addition, advance payments made to financial intermediaries may be subject to reclaim by the distributor for accounts transferred to financial intermediaries which do not maintain investor accounts on a fully disclosed basis and do not account for share ownership periods. PURCHASING SHARES BY WIRE Shares may be purchased by Federal Reserve wire by calling the Fund. All information needed will be taken over the telephone, and the order is considered received when State Street Bank receives payment by wire. Federal funds should be wired as follows: Federated Shareholder Services Company, c/o State Street Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number--this number can be found on the account statement or by contacting the Fund); Account Number; Trade Date and Order Number; Group Number or Dealer Number; Nominee or Institution Name; and ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire transfers are restricted. PURCHASING SHARES BY CHECK Shares may be purchased by mailing a check made payable to the name of the Fund (designate class of Shares and account number) to: Federated Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered received when payment by check is converted into federal funds (normally the business day after the check is received). SYSTEMATIC INVESTMENT PROGRAM Under this program, funds in a minimum amount of $50 may be automatically withdrawn periodically from the shareholder's checking account at an Automated Clearing House ("ACH") member and invested in the Fund. Shareholders should contact their financial intermediary or the Fund to participate in this program. CLASS A SHARES Class A Shares are sold at NAV, plus a sales charge. However: NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED: * through financial intermediaries that do not receive sales charge dealer concessions; * by Federated Life Members; or * through "wrap accounts" or similar programs under which clients pay a fee for services. IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY: * purchasing Class A Shares in quantity; * combining concurrent purchases of * Class A Shares by you, your spouse, and your children under age 21, or * Class A Shares of two or more Federated Funds (other than money market funds); * accumulating purchases (in calculating the sales charge on an additional purchase, you may count the current value of previous Class A Share purchases still invested in the Fund); * signing a letter of intent to purchase a specific dollar amount of Class A Shares within 13 months; or * using the reinvestment privilege within 120 days of redeeming Class A Shares of an equal or lesser amount. Consult a financial intermediary or Federated Securities Corp. for details on these programs. In order to eliminate the sales charge or receive sales charge reductions, Federated Securities Corp. must be notified by the shareholder in writing or by a financial intermediary at the time of purchase. DEALER CONCESSION For sales of Class A Shares, a dealer will normally receive up to 90% of the applicable sales charge. Any portion of the sales charge which is not paid to a dealer will be retained by the distributor. However, the distributor may offer to pay dealers up to 100% of the sales charge retained by it. Such payments may take the form of cash or promotional incentives, such as reimbursement of certain expenses of qualified employees and their spouses to attend informational meetings about the Fund or other special events at recreational-type facilities, or items of material value. In some instances, these incentives will be made available only to dealers whose employees have sold or may sell a significant amount of Shares. On purchases of $1 million or more, the investor pays no sales charge; however, the distributor will make twelve monthly payments to the dealer totaling 0.25% of the public offering price over the first year following the purchase. Such payments are based on the original purchase price of Shares outstanding at each month end. The sales charge for Shares sold other than through registered broker/dealers will be retained by Federated Securities Corp. Federated Securities Corp. may pay fees to banks out of the sales charge in exchange for sales and/or administrative services performed on behalf of the bank's customers in connection with the establishment of customer accounts and purchases of Shares. CLASS B SHARES Class B Shares are sold at NAV. Under certain circumstances, a contingent deferred sales charge will be assessed at the time of a redemption. Orders for $250,000 or more of Class B Shares will automatically be invested in Class A Shares. CONVERSION OF CLASS B SHARES Class B Shares will automatically convert into Class A Shares after eight full years from the purchase date. Such conversion will be on the basis of the relative NAVs per Share, without the imposition of any charges. Class B Shares acquired by exchange from Class B Shares of another Federated Fund will convert into Class A Shares based on the time of the initial purchase. CLASS C SHARES Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00% will be charged on assets redeemed within the first full 12 months following purchase. REDEEMING AND EXCHANGING SHARES Shares of the Fund may be redeemed for cash or exchanged for Shares of the same class of other Federated Funds on days on which the Fund computes its NAV. Shares are redeemed at NAV less any applicable contingent deferred sales charge. Exchanges are made at NAV. Shareholders who desire to automatically exchange Shares, of a like share class, in a pre-determined amount on a monthly, quarterly, or annual basis may take advantage of a systematic exchange privilege. Information on this privilege is available from the Fund or your financial intermediary. Depending upon the circumstances, a capital gain or loss may be realized when Shares are redeemed or exchanged. REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY Shares of the Fund may be redeemed or exchanged by contacting your financial intermediary before 4:00 p.m. (Eastern time). In order for these transactions to be processed at that day's NAV, financial intermediaries (other than broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern time), while broker/dealers must transmit the request to the Fund before 5:00 p.m. (Eastern time). The financial intermediary is responsible for promptly submitting transaction requests and providing proper written instructions. Customary fees and commissions may be charged by the financial intermediary for this service. Appropriate authorization forms for these transactions must be on file with the Fund. REDEEMING OR EXCHANGING SHARES BY TELEPHONE Shares acquired directly from the Fund may be redeemed in any amount, or exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these transactions must be on file with the Fund. Shares held in certificate form must first be returned to the Fund as described in the instructions under "Redeeming or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the form of a check to the shareholder's address of record or wire-transferred to the shareholder's account at a domestic commercial bank that is a member of the Federal Reserve System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed Shares purchased by check or through ACH will not be wired until that method of payment has cleared. Telephone instructions will be recorded. If reasonable procedures are not followed by the Fund, it may be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in redeeming by telephone. If this occurs, "Redeeming or Exchanging Shares by Mail" should be considered. The telephone transaction privilege may be modified or terminated at any time. Shareholders would be promptly notified. REDEEMING OR EXCHANGING SHARES BY MAIL Shares may be redeemed in any amount, or exchanged, by mailing a written request to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA 02266-8600. If share certificates have been issued, they must accompany the written request. It is recommended that certificates be sent unendorsed by registered or certified mail. All written requests should state: Fund Name and the Share Class name; the account name as registered with the Fund; the account number; and the number of Shares to be redeemed or the dollar amount of the transaction. An exchange request should also state the name of the Fund into which the exchange is to be made. All owners of the account must sign the request exactly as the Shares are registered. A check for redemption proceeds is normally mailed within one business day, but in no event more than seven days, after receipt of a proper written redemption request. Dividends are paid up to and including the day that a redemption or exchange request is processed. REQUIREMENTS FOR REDEMPTION Shareholders requesting a redemption of any amount to be sent to an address other than that on record with the Fund, or a redemption payable other than to the shareholder of record, must have their signatures guaranteed by a commercial or savings bank, trust company or savings association whose deposits are insured by an organization which is administered by the Federal Deposit Insurance Corporation; a member firm of a domestic stock exchange; or any other "eligible guarantor institution," as defined in the Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed by a notary public. REQUIREMENTS FOR EXCHANGE Shareholders must exchange Shares having an NAV equal to the minimum investment requirements of the fund into which the exchange is being made. Contact your financial intermediary directly or the Fund for free information on and prospectuses for the Federated Funds into which your Shares may be exchanged. Before the exchange, the shareholder must receive a prospectus of the fund for which the exchange is being made. Upon receipt of proper instructions and required supporting documents, Shares submitted for exchange are redeemed and proceeds invested in the same class of shares of the other fund. Signature guarantees will be required to exchange between fund accounts not having identical shareholder registrations. The exchange privilege may be modified or terminated at any time. Shareholders will be notified of the modification or termination of the exchange privilege. SYSTEMATIC WITHDRAWAL PROGRAM Under this program, Shares are redeemed to provide for periodic withdrawal payments in an amount directed by the shareholder of not less than $100. To be eligible to participate in this program, a shareholder must have an account value of at least $10,000. A shareholder may apply for participation in this program through his financial intermediary or by calling the Fund. Because participation in this program may reduce, and eventually deplete the shareholder's investment in the Fund, payments under this program should not be considered as yield or income. It is not advisable for shareholders to continue to purchase Class A Shares subject to a sales charge while participating in this program. A contingent deferred sales charge may be imposed on Class B Shares and Class C Shares. SYSTEMATIC WITHDRAWAL PROGRAM ("SWP") ON CLASS B SHARES A contingent deferred sales charge will not be charged on SWP redemptions of Class B Shares if: * shares redeemed are 12% or less of the account value in a single year; * the account is at least one year old; * all dividends and capital gains distributions are reinvested; and * the account has at least a $10,000 balance when the SWP is established; (multiple Class B Shares accounts cannot be aggregated to meet this minimum balance). A contingent deferred sales charge will be charged on redemption amounts that exceed the 12% annual limit. In measuring the redemption percentage, the account is valued when the SWP is established and then annually at calendar year-end. Redemptions can be made only at a rate of 1% monthly, 3% quarterly, or 6% semi-annually. CONTINGENT DEFERRED SALES CHARGE The contingent deferred sales charge will be deducted from the redemption proceeds otherwise payable to the shareholder and will be retained by the distributor. Redemptions will be processed in a manner intended to maximize the amount of redemption which will not be subject to a contingent deferred sales charge. The contingent deferred sales charge will not be imposed with respect to Shares acquired through the reinvestment of dividends or distributions of long-term capital gains. In determining the applicability of the contingent deferred sales charge, the required holding period for your new Shares received through an exchange will include the period for which your original Shares were held. ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE Upon written notification to Federated Securities Corp. or the transfer agent, no contingent deferred sales charge will be imposed on redemptions: * following the death or disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of the last surviving shareholder and any designated beneficiaries; * representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70 1U2; * which are involuntary redemptions of shareholder accounts that do not comply with the minimum balance requirements; * which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program; * which are reinvested in the Fund under the reinvest- ment privilege; * of Shares held by Directors, employees and sales representatives of the Fund, the distributor, or affiliates of the Fund or distributor, employees of any financial intermediary that sells Shares of the Fund pursuant to a sales agreement with the distributor, and their immediate family members to the extent that no payments were advanced for purchases made by these persons; and * of Shares originally purchased through a bank trust department, an investment adviser registered under the Investment Advisers Act of 1940 or retirement plans where the third party administrator has entered into certain arrangements with Federated Securities Corp. or its affiliates, or any other financial intermediary, to the extent that no payments were advanced for purchases made through such entities. For more information regarding the elimination of the contingent deferred sales charge through a Systematic Withdrawal Program, or any of the above provisions, contact your financial intermediary or the Fund. The Fund reserves the right to discontinue or modify these provisions. Shareholders will be notified of such action. ACCOUNT AND SHARE INFORMATION CONFIRMATIONS AND ACCOUNT STATEMENTS Shareholders will receive detailed confirmations of transactions (except for systematic program transactions). In addition, shareholders will receive periodic statements reporting all account activity, including dividends paid. The Fund will not issue share certificates. DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly to all shareholders invested in the Fund on the record date. Net long-term capital gains realized by the Fund, if any, will be distributed at least once every twelve months. Dividends and distributions are automatically reinvested in additional Shares of the Fund on payment dates at the ex-dividend date NAV without a sales charge, unless shareholders request cash payments on the new account form or by contacting the transfer agent. ACCOUNTS WITH LOW BALANCES Due to the high cost of maintaining accounts with low balances, the Fund may close an account by redeeming all Shares and paying the proceeds to the shareholder if the account balance falls below the applicable minimum investment amount. Accounts where the balance falls below the minimum due to NAV changes will not be closed in this manner. Before an account is closed, the shareholder will be notified and allowed 30 days to purchase additional Shares to meet the minimum. FUND INFORMATION MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Fund is managed by a Board of Directors. The Directors are responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. An Executive Committee of the Board of Directors handles the Board's responsibilities between meetings of the Board. INVESTMENT ADVISER Investment decisions for the Fund are made by Federated Advisers, the Fund's investment adviser, subject to direction by the Directors. The Adviser continually conducts investment research and supervision for the Fund and is responsible for the purchase or sale of portfolio instruments, for which it receives an annual fee from the Fund. ADVISORY FEES The Adviser receives an annual investment advisory fee equal to 0.30% of the Fund's average daily net assets, plus 4.5% of the Fund's gross income (excluding any capital gains or losses). The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses. The Adviser can terminate this voluntary waiver at any time at its sole discretion. ADVISER'S BACKGROUND Federated Advisers, a Delaware business trust organized on April 11, 1989, is a registered investment adviser under the Investment Advisers Act of 1940. It is a subsidiary of Federated Investors, Inc. All of the Class A (voting) Shares of Federated Investors, Inc. are owned by a trust, the trustees of which are John F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President and Director of Federated Investors, Inc. Federated Advisers and other subsidiaries of Federated Investors, Inc. serve as investment advisers to a number of investment companies and private accounts. Certain other subsidiaries also provide administrative services to a number of investment companies. With over $120 billion invested across more than 300 funds under management and/or administration by its subsidiaries, as of December 31, 1997, Federated Investors, Inc. is one of the largest mutual fund investment managers in the United States. With more than 2,000 employees, Federated continues to be led by the management who founded the company in 1955. Federated funds are presently at work in and through approximately 4,000 financial institutions nationwide. Mary Jo Ochson has been a portfolio manager of the Fund since 1996. Ms. Ochson joined Federated Investors, Inc. or its predecessor in 1982 and has been a Senior Vice President of the Fund's investment adviser since January 1996. From 1988 through 1995, Ms. Ochson served as a Vice President of the Fund's investment adviser. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance from the University of Pittsburgh. J. Scott Albrecht has been a portfolio manager of the Fund since 1996. Mr. Albrecht joined Federated Investors, Inc. or its predecessor in 1989 and has been a Vice President of the Fund's investment adviser since 1994. From 1992 to 1994, Mr. Albrecht served as an Assistant Vice President of the Fund's investment adviser. Mr. Albrecht is a Chartered Financial Analyst and received his M.S. in Public Management from Carnegie Mellon University. Both the Fund and the Adviser have adopted strict codes of ethics governing the conduct of all employees who manage the Fund and its portfolio securities. These codes recognize that such persons owe a fiduciary duty to the Fund's shareholders and must place the interests of shareholders ahead of the employees' own interests. Among other things, the codes: require preclearance and periodic reporting of personal securities transactions; prohibit personal transactions in securities being purchased or sold, or being considered for purchase or sale, by the Fund; prohibit purchasing securities in initial public offerings; and prohibit taking profits on securities held for less than sixty days. Violations of the codes are subject to review by the Directors, and could result in severe penalties. DISTRIBUTION OF SHARES Federated Securities Corp. is the principal distributor for Shares of the Fund. Federated Securities Corp. is located at Federated Investors, Inc. Tower, Pittsburgh, Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November 14, 1969, and is the principal distributor for a number of investment companies. Federated Securities Corp. is a subsidiary of Federated Investors, Inc. The distributor may offer to pay financial institutions an amount equal to 1% of the net asset value of Class C Shares purchased by their clients or customers at the time of purchase. These payments will be made directly by the distributor from its assets, and will not be made from assets of the Fund. Financial institutions may elect to waive the initial payment described above; such waiver will result in the waiver by the Fund of the otherwise applicable contingent deferred sales charge. The distributor will pay dealers an amount equal to 5.5% of the net asset value of Class B Shares purchased by their clients or customers. These payments will be made directly by the distributor from its assets, and will not be made from the assets of the Fund. Dealers may voluntarily waive receipt of all or any portion of these payments. The distributor may pay a portion of the distribution fee discussed below to financial institutions that waive all or any portion of the advance payments. DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER SERVICES Under a distribution plan adopted in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a fee to the distributor in an amount computed at an annual rate of 0.75% of the average daily net assets of each class of Shares to finance any activity which is principally intended to result in the sale of Shares subject to the Distribution Plan. For Class C Shares, the distributor may select financial institutions such as banks, fiduciaries, custodians for public funds, investment advisers, and broker/dealers to provide sales services or distribution-related support services as agents for their clients or customers. With respect to Class B Shares, because distribution fees to be paid by the Fund to the distributor may not exceed an annual rate of 0.75% of each class of Shares' average daily net assets, it will take the distributor a number of years to recoup the expenses it has incurred for its sales services and distribution and distribution-related support services pursuant to the Distribution Plan. The Distribution Plan is a compensation type plan. As such, the Fund makes no payments to the distributor except as described above. Therefore, the Fund does not pay for unreimbursed expenses of the distributor, including amounts expended by the distributor in excess of amounts received by it from the Fund, interest, carrying or other financing charges in connection with excess amounts expended, or the distributor's overhead expenses. However, the distributor may be able to recover such amounts or may earn a profit from future payments made by Shares under the Distribution Plan. In addition, the Fund has entered into a Shareholder Services Agreement with Federated Shareholder Services, a subsidiary of Federated Investors, Inc., under which the Fund may make payments up to 0.25% of the average daily net asset value of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal services for shareholders and for the maintenance of shareholder accounts. Under the Shareholder Services Agreement, Federated Shareholder Services will either perform shareholder services directly or will select financial institutions to perform shareholder services. Financial institutions will receive fees based upon Shares owned by their clients or customers. The schedules of such fees and the basis upon which such fees will be paid will be determined from time to time by the Fund and Federated Shareholder Services. SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS With respect to Class A Shares, Class B Shares, and Class C Shares, in addition to payments made pursuant to the Distribution Plan and Shareholder Services Agreement, Federated Securities Corp. and Federated Shareholder Services, from their own assets, may pay financial institutions supplemental fees for the performance of substantial sales services, distribution-related support services, or shareholder services. The support may include sponsoring sales, educational and training seminars for their employees, providing sales literature, and engineering computer software programs that emphasize the attributes of the Fund. Such assistance will be predicated upon the amount of Shares the financial institution sells or may sell, and/or upon the type and nature of sales or marketing support furnished by the financial institution. Any payments made by the distributor may be reimbursed by the Fund's investment adviser or its affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES Federated Services Company, a subsidiary of Federated Investors, Inc., provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. Federated Services Company provides these at an annual rate which relates to the average aggregate daily net assets of all funds advised by affiliates of Federated Investors, Inc. as specified below:
MAXIMUM AVERAGE AGGREGATE FEE DAILY NET ASSETS 0.150% on the first $250 million 0.125% on the next $250 million 0.100% on the next $250 million 0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least $125,000 per portfolio and $30,000 per each additional class of Shares. Federated Services Company may choose voluntarily to waive a portion of its fee. SHAREHOLDER INFORMATION Each Share of the Fund gives the shareholder one vote in Director elections and other matters submitted to shareholders for vote. All Shares of each portfolio or class in the Fund have equal voting rights, except that in matters affecting only a particular portfolio or class, only Shares of that portfolio or class are entitled to vote. Directors may be removed by the Directors or shareholders at a special meeting. A special meeting of shareholders shall be called by the Directors upon the written request of shareholders owning at least 10% of the Fund's outstanding Shares of all series entitled to vote. As of July 7, 1998, the following shareholder of record owned 25% or more of the outstanding Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (as record owner holding Class C Shares for its clients), Jacksonville, Florida, owned approximately 433,243 Shares (27.66%) and, therefore, may, for certain purposes, be deemed to control the Fund and be able to affect the outcome of certain matters presented for a vote of shareholders. TAX INFORMATION FEDERAL INCOME TAX The Fund will pay no federal income tax because it expects to meet requirements of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. Shareholders are not required to pay the federal regular income tax on any dividends received from the Fund that represent net interest on tax-exempt municipal bonds. However, under the Tax Reform Act of 1986, dividends representing net interest earned on some municipal bonds may be included in calculating the federal individual alternative minimum tax or the federal alternative minimum tax for corporations. The alternative minimum tax, up to 28% of alternative minimum taxable income for individuals and 20% for corporations, applies when it exceeds the regular tax for the taxable year. Alternative minimum taxable income is equal to the regular taxable income of the taxpayer increased by certain "tax-preference" items not included in regular taxable income and reduced by only a portion of the deductions allowed in the calculation of the regular tax. The Tax Reform Act of 1986 treats interest on certain "private activity" bonds issued after August 7, 1986, as a tax preference item for both individuals and corporations. Unlike traditional governmental purpose municipal bonds, which finance roads, schools, libraries, prisons, and other public facilities, private activity bonds provide benefits to private parties. The Fund may purchase all types of municipal bonds, including private activity bonds. Thus, should it purchase any such bonds, a portion of the Fund's dividends may be treated as a tax preference item. In addition, in the case of a corporate shareholder, dividends of the Fund which represent interest on municipal bonds may be subject to the 20% corporate alternative minimum tax because the dividends are included in a corporation's "adjusted current earnings." The corporate alternative minimum tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current earnings" over the taxpayer's alternative minimum taxable income as a tax preference item. "Adjusted current earnings" is based upon the concept of a corporation's "earnings and profits." Since "earnings and profits" generally includes the full amount of any Fund dividend, and alternative minimum taxable income does not include the portion of the Fund's dividend attributable to municipal bonds which are not private activity bonds, the difference will be included in the calculation of the corporation's alternative minimum tax. Dividends of the Fund representing net interest income earned on some temporary investments and any realized net short-term gains are taxed as ordinary income. These tax consequences apply whether dividends are received in cash or as additional shares. Information on the tax status of dividends and distributions is provided annually. STATE AND LOCAL TAXES Because interest received by the Fund may not be exempt from all state and local income taxes, shareholders may be required to pay state and local taxes on dividends received from the Fund. Shareholders are urged to consult their own tax advisers regarding the status of their accounts under state and local tax laws. PERFORMANCE INFORMATION From time to time the Fund advertises its total return, yield, and tax-equivalent yield for each class of Shares. Total return represents the change, over a specific period of time, in the value of an investment in each class of Shares after reinvesting all income and capital gains distributions. It is calculated by dividing that change by the initial investment and is expressed as a percentage. The yield of each class of Shares is calculated by dividing the net investment income per share (as defined by the Securities and Exchange Commission) earned by each class of Shares over a thirty-day period by the maximum offering price per share of each class on the last day of the period. This number is then annualized using semi-annual compounding. The tax-equivalent yield is calculated similarly to the yield, but is adjusted to reflect the taxable yield that a class of Shares would have had to earn to equal its actual yield, assuming a specific tax rate. The yield and tax-equivalent yield does not necessarily reflect income actually earned by each class of Shares and, therefore, may not correlate to the dividends or other distributions paid to shareholders. The performance information reflects the effect of non-recurring charges, such as the maximum sales charge or contingent deferred sales charges, which, if excluded, would increase the total return and yield. Total return and yield will be calculated separately for Class A Shares, Class B Shares, and Class C Shares. Expense differences between Class A Shares, Class B Shares, and Class C Shares may affect the performance of each class. From time to time, advertisements for Class A Shares, Class B Shares, and Class C Shares of the Fund may refer to ratings rankings, and other information in certain financial publications and/or compare the performance of Class A Shares, Class B Shares, and Class C Shares to certain indices. APPENDIX STANDARD AND POOR'S ("S&P") MUNICIPAL BOND RATING DEFINITIONS AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's Ratings Group. Capacity to pay interest and repay principal is extremely strong. AA--Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A--Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effect of changes in circumstances and economic conditions than debt in higher rated categories. BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB--Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The "BB" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BBB" rating. B--Debt rated "B" has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The "B" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BB" or "BB" rating. CCC--Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC--The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC debt rating. C--The rating C typically is applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS AAA--Bonds which are rated AAA are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA--Bonds which are rated AA are judged to be of high quality by all standards. Together with the AAA group, they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in AAA securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in AAA securities. A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA--Bonds which are rated BAA are considered as medium grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA--Bonds which are rated BA are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C--Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FEDERATED MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES CLASS B SHARES CLASS C SHARES Federated Investors Funds 5800 Corporate Drive Pittsburgh, PA 15237-7000 DISTRIBUTOR Federated Securities Corp. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 INVESTMENT ADVISER Federated Advisers Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 CUSTODIAN State Street Bank and Trust Company P.O. Box 8600 Boston, MA 02266-8600 TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Shareholder Services Company P.O. Box 8600 Boston, MA 02266-8600 INDEPENDENT AUDITORS Deloitte & Touche LLP 2500 One PPG Place Pittsburgh, PA 15222-5401 [Graphic] Federated Investors Federated Municipal Securities Fund, Inc. Class A Shares, Class B Shares, Class C Shares PROSPECTUS JULY 31, 1998 An Open-End, Diversified Management Investment Company [Graphic] Federated Securities Corp., Distributor 1-800-341-7400 www.federatedinvestors.com Cusip 313913105 Cusip 313913204 Cusip 313913303 G00322-01 (7/98) [Graphic] FEDERATED MUNICIPAL SECURITIES FUND, INC. CLASS A SHARES CLASS B SHARES CLASS C SHARES STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information should be read with the prospectus of Federated Municipal Securities Fund, Inc. (the "Fund") dated July 31, 1998. This Statement is not a prospectus. You may request a copy of a prospectus or a paper copy of this Statement, if you have received it electronically, free of charge by calling 1-800-341-7400. FEDERATED MUNICIPAL SECURITIES FUND, INC. FEDERATED INVESTORS FUNDS 5800 CORPORATE DRIVE PITTSBURGH, PENNSYLVANIA 15237-7000 Statement dated July 31, 1998 [Graphic] Cusip 313913105 Cusip 313913204 Cusip 313913303 8051601B (7/98) [Graphic] TABLE OF CONTENTS GENERAL INFORMATION ABOUT THE FUND 1 INVESTMENT OBJECTIVE AND POLICIES 1 Acceptable Investments 1 When-Issued and Delayed Delivery Transactions 1 Restricted and Illiquid Securities 1 Temporary Investments 1 Futures Transactions 2 Investing in Securities of Other Investment Companies 2 Portfolio Turnover 2 INVESTMENT LIMITATIONS 3 Selling Short and Buying on Margin 3 Borrowing Money 3 Pledging Assets 3 Investing in Commodities or Minerals 3 Investing in Real Estate 3 Underwriting 3 Making Loans 3 Diversification of Investments 3 Concentration of Investments 3 Investing in Restricted and Illiquid Securities 4 FEDERATED MUNICIPAL SECURITIES FUND, INC. MANAGEMENT 4 The Funds 7 Fund Ownership 7 Director Compensation 8 Director Liability 8 INVESTMENT ADVISORY SERVICES 8 Adviser to the Fund 8 Advisory Fees 9 BROKERAGE TRANSACTIONS 9 OTHER SERVICES 9 Fund Administration 9 Custodian And Portfolio Accountant 9 Transfer Agent 9 Independent Auditors 9 PURCHASING SHARES 10 Quantity Discounts and Accumulated Purchases 10 Concurrent Purchases 10 Letter of Intent 10 Reinvestment Privilege 10 Conversion of Class B Shares 11 Purchases by Sales Representatives, Fund Directors, and Employees 11 Conversion to Federal Funds 11 Distribution Plan (Class B Shares and Class C Shares Only) and Shareholder Services 11 DETERMINING NET ASSET VALUE 12 Valuing Municipal Bonds 12 REDEEMING SHARES 12 Redemption in Kind 12 Contingent Deferred Sales Charge 12 TAX STATUS 13 The Fund's Tax Status 13 TOTAL RETURN 13 YIELD 13 TAX-EQUIVALENT YIELD 14 Tax-Equivalency Table 14 PERFORMANCE COMPARISONS 15 Economic and Market Information 15 ABOUT FEDERATED INVESTORS, INC. 16 Mutual Fund Market 16 Institutional Clients 16 Bank Marketing 16 Broker/Dealers and Bank Broker/Dealer Subsidiaries 16 FINANCIAL STATEMENTS 16 GENERAL INFORMATION ABOUT THE FUND The Fund was incorporated under the laws of the State of Maryland on September 10, 1976. On December 23, 1992, the shareholders of the Fund voted to permit the Fund to offer separate series and classes of shares. On January 6, 1993, the Board of Directors ("Directors") approved changing the name of the Fund from Federated Tax-Free Income Fund, Inc. to Liberty Municipal Securities Fund, Inc. On February 26, 1996, the Directors approved an amendment to the Articles of Incorporation to change the name of Liberty Municipal Securities Fund, Inc. to Federated Municipal Securities Fund, Inc. Shares of the Fund are offered in three classes, known as Class A Shares, Class B Shares, and Class C Shares (individually and collectively referred to as "Shares" as the context may require). This Statement of Additional Information relates to all three classes of the above-mentioned Shares. INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. The objective cannot be changed without approval of shareholders. ACCEPTABLE INVESTMENTS The Fund invests primarily in municipal bonds. CHARACTERISTICS AND RISKS The municipal bonds in which the Fund invests have the characteristics and risks set forth in the prospectus. If a bond loses its rating or has its rating reduced after the Fund has purchased it, the Fund is not required to drop the bond from the portfolio, but may consider doing so. If ratings made by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's ("S&P") change because of changes in those organizations or in their rating systems, the Fund will try to use comparable ratings as standards in accordance with the investment policies described in the Fund's prospectus. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS These transactions are made to secure what is considered to be an advantageous price and yield for the Fund. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Fund sufficient to make payment for the securities to be purchased are segregated at the trade date. These assets are marked to market daily and are maintained until the transaction has been settled. The Fund does not intend to engage in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value of its assets. RESTRICTED AND ILLIQUID SECURITIES The ability of the Directors to determine the liquidity of certain restricted securities is permitted under a Securities and Exchange Commission staff position set forth in adopting release for Rule 144A under the Securities Act of 1933. The Directors consider the following criteria in determining the liquidity of certain restricted securities: * the frequency of trades and quotes for the security; * the number of dealers willing to purchase or sell the security and the number of other potential buyers; * dealer undertaking to make a market in the security; and * the nature of the security and the nature of the marketplace trades. TEMPORARY INVESTMENTS The Fund may also invest in temporary investments from time to time for defensive purposes. During the last fiscal year, the Fund did not invest in temporary investments and does not presently intend to do so in the current fiscal year. The Fund might invest in temporary investments: * as a reaction to market conditions; * while waiting to invest proceeds of sales of shares or portfolio securities, although generally proceeds from sales of shares will be invested in municipal bonds as quickly as possible; or * in anticipation of redemption requests. The Fund will not purchase temporary investments (other than securities of the U.S. government, its agencies, or instrumentalities) if, as a result of the purchase, 25% or more of the value of its total assets would be invested in any one industry. However, the Fund may, for temporary defensive purposes, invest more than 25% of the value of its assets in cash or cash items, U.S. Treasury bills, or securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or instruments secured by these money market instruments, such as repurchase agreements. FUTURES TRANSACTIONS A futures contract is a firm commitment by two parties: the seller who agrees to make delivery of the specific type of security called for in the contract ("going short") and the buyer who agrees to take delivery of the security ("going long") at a certain time in the future. In the fixed income securities market, price moves inversely to interest rates. A rise in rates means a drop in price. Conversely, a drop in rates means a rise in price. In order to hedge its holdings of fixed income securities against a rise in market interest rates, the Fund could enter into contracts to deliver securities at a predetermined price (i.e., "go short") to protect itself against the possibility that the prices of its fixed income securities may decline during the Fund's anticipated holding period. The Fund would agree to purchase securities in the future at a predetermined price (i.e., "go long") to hedge against a decline in market interest rates. "MARGIN" IN FUTURES TRANSACTIONS Unlike the purchase or sale of a security, the Fund does not pay or receive money upon the purchase or sale of a futures contract. Rather, the Fund is required to deposit an amount of "initial margin" in readily marketable securities with its custodian (or the broker, if legally permitted). The nature of initial margin in futures transactions is different from that of margin in securities transactions in that futures contract initial margin does not involve the borrowing of funds by the Fund to finance the transactions. Initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing its daily net asset value, the Fund will mark-to-market its open futures positions. REPURCHASE AGREEMENTS Repurchase agreements are arrangements in which banks, broker/dealers, and other recognized financial institutions sell U.S. government securities or certificates of deposit to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price. The Fund or its custodian will take possession of the securities subject to repurchase agreements and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Fund and allow retention or disposition of such securities. The Fund may only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are found by the Fund's adviser to be creditworthy pursuant to guidelines established by the Directors. From time to time, such as when suitable municipal bonds are not available, the Fund may invest a portion of its assets in cash. Any portion of the Fund's assets maintained in cash will reduce the amount of assets in municipal bonds and thereby reduce the Fund's yield. INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES In conjunction with the Fund's ability to invest in the securities of other investment companies, it may invest in the securities of affiliated money market funds as an efficient means of managing the Fund's uninvested cash. PORTFOLIO TURNOVER Portfolio trading will be undertaken principally to accomplish the Fund's objective in relation to anticipated movements in the general level of interest rates. The Fund is free to dispose of portfolio securities at any time when changes in circumstances or conditions make such a move desirable in light of the investment objective. The Fund will not attempt to achieve or be limited to a predetermined rate of portfolio turnover, such turnover always being incidental to transactions undertaken with a view to achieving the Fund's investment objective. During the fiscal years ended March 31, 1998, and 1997, the portfolio turnover rates were 64% and 33%, respectively. INVESTMENT LIMITATIONS SELLING SHORT AND BUYING ON MARGIN The Fund will not make short sales of securities or purchase any securities on margin, except for such credits as are necessary for the clearance of transactions. BORROWING MONEY The Fund will not borrow money except as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of the value of its total assets or in an amount up to one-third of the value of its total assets, including the amount borrowed, in order to meet redemption requests without immediately selling any portfolio securities. This borrowing provision is not for investment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests where the liquidation of portfolio securities is deemed to be inconvenient or disadvantageous. While any such borrowings are outstanding, no net purchases of investment securities will be made by the Fund. PLEDGING ASSETS The Fund will not pledge, mortgage or hypothecate its assets, except to secure permitted borrowings. In those cases, it may pledge securities having a market value at the time of pledge not exceeding 10% of the value of the Fund's total assets. INVESTING IN COMMODITIES OR MINERALS The Fund will not purchase or sell commodities, commodity contracts, oil, gas, or other mineral exploration or development programs. INVESTING IN REAL ESTATE The Fund will not purchase or sell real estate, but this shall not prevent the Fund from investing in Municipal Bonds secured by real estate or interest therein. UNDERWRITING The Fund will not underwrite any issue of securities except as it may be deemed to be an underwriter under the Securities Act of 1933, in connection with the sale of securities in accordance with its investment objective, policies and limitations. MAKING LOANS The Fund will not make loans except that the Fund may, in accordance with its investment objective, policies and limitations, acquire publicly or non-publicly issued Municipal Bonds or temporary investments or enter into repurchase agreements. DIVERSIFICATION OF INVESTMENTS The Fund will not purchase the securities of any one issuer, except in cash and cash instruments and securities issued by the United States government, its agencies, and instrumentalities, if as a result more than 5% of its total assets would be invested in the securities of such issuer. For purposes of this limitation, each governmental subdivision, i.e., state, territory, possession of the United States or any political subdivision of the foregoing including agencies, authorities, instrumentalities, or similar entities, or of the District of Columbia shall be considered a separate issuer if its assets and revenues are separate from those of the governmental body creating it and the security is backed by its own assets and revenues. In the case of an industrial development bond, if the security is backed only by the assets and revenues of a non-governmental user, then such non-governmental user will be deemed to be the sole issuer. If, however, in the case of an industrial development bond or governmental issued security, a governmental or some other entity guarantees the security, such guarantee would be considered a separate security issued by the guarantor as well as the other issuer (as above defined), subject to limited exclusions allowed by the Investment Company Act of 1940, as amended. For purposes of this limitation, cash instruments do not include securities issued by banks. CONCENTRATION OF INVESTMENTS The Fund will not purchase securities if, as a result of such purchase more than 25% of the value of its assets would be invested in the securities of governmental subdivisions located in any one state, territory, or possession of the United States. The Fund may invest more than 25% of the value of its assets in industrial development bonds. As to industrial development bonds, the Fund may purchase securities of an issuer resulting in the ownership of more than 25% of the Fund's assets in any one industry. The above investment limitations cannot be changed without shareholder approval. The following limitations, however, may be changed by the Directors without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective. INVESTING IN RESTRICTED AND ILLIQUID SECURITIES The Fund will not invest more than 15% of the value of its net assets in illiquid securities, including certain restricted securities not determined to be liquid under criteria established by the Directors and repurchase agreements providing for settlement in more than seven days after notice. FEDERATED MUNICIPAL SECURITIES FUND, INC. MANAGEMENT Officers and Directors are listed with their addresses, birthdates, present positions with Federated Municipal Securities Fund, Inc., and principal occupations. John F. Donahue@* Federated Investors Tower Pittsburgh, PA Birthdate: July 28, 1924 Chairman and Director Chief Executive Officer and Director or Trustee of the Funds; Chairman and Director, Federated Investors, Inc., Chairman and Trustee, Federated Advisers, Federated Management, and Federated Research; Chairman and Director, Federated Research Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President of the Company. Thomas G. Bigley 15 Old Timber Trail Pittsburgh, PA Birthdate: February 3, 1934 Director Director or Trustee of the Funds; Member of Executive Committee, Children's Hospital of Pittsburgh; formerly, Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of Executive Committee, University of Pittsburgh. John T. Conroy, Jr. Wood/IPC Commercial Department John R. Wood and Associates, Inc., Realtors 3255 Tamiami Trail North Naples, FL Birthdate: June 23, 1937 Director Director or Trustee of the Funds; President, Investment Properties Corporation; Senior Vice-President, John R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate ventures in Southwest Florida; formerly, President, Naples Property Management, Inc. and Northgate Village Development Corporation. Nicholas P. Constantakis 175 Woodshire Drive Pittsburgh, PA Birthdate: September 3, 1939 Director Director or Trustee of the Funds; Formerly, Partner, Anderson Worldwide SC. William J. Copeland One PNC Plaza--23rd Floor Pittsburgh, PA Birthdate: July 4, 1918 Director Director or Trustee of the Funds; Director and Member of the Executive Committee, Michael Baker, Inc.; formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan Homes, Inc.; Director, United Refinery; Chairman, Pittsburgh Foundation; Director, Forbes Fund; Chairman, Pittsburgh Civic Light Opera. J. Christopher Donahue* Federated Investors Tower Pittsburgh, PA Birthdate: April 11, 1949 Executive Vice President and Director President or Executive Vice President of the Funds; President and Director, Federated Investors, Inc.; President and Trustee, Federated Advisers, Federated Management, and Federated Research; President and Director, Federated Research Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company and Federated Shareholder Services; Director, Federated Services Company; Director or Trustee of some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director of the Company. James E. Dowd, Esq. 571 Hayward Mill Road Concord, MA Birthdate: May 18, 1922 Director Director or Trustee of the Funds; Attorney-at-law; Director, The Emerging Germany Fund, Inc.; formerly, President, Boston Stock Exchange, Inc.; Regional Administrator, United States Securities and Exchange Commission. Lawrence D. Ellis, M.D.* 3471 Fifth Avenue, Suite 1111 Pittsburgh, PA Birthdate: October 11, 1932 Director Director or Trustee of the Funds; Professor of Medicine, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center--Downtown; Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals; formerly, Member, National Board of Trustee, Leukemia Society of America. Edward L. Flaherty, Jr., Esq.@ Miller, Ament, Henny & Kochuba 205 Ross Street Pittsburgh, PA Birthdate: June 18, 1924 Director Director or Trustee of the Funds; Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region; Partner, Meyer and Flaherty. Peter E. Madden One Royal Palm Way 100 Royal Palm Way Palm Beach, FL Birthdate: March 16, 1942 Director Director or Trustee of the Funds; formerly, Representative, Commonwealth of Massachusetts General Court; President, State Street Bank and Trust Company and State Street Corporation; Director, VISA USA and VISA International; Chairman and Director, Massachusetts Banker Association; Director, Depository Trust Corporation. John E. Murray, Jr., J.D., S.J.D. President, Duquesne University Pittsburgh, PA Birthdate: December 20, 1932 Director Director or Trustee of the Funds; President, Law Professor, Duquesne University; Consulting Partner, Mollica & Murray; formerly, Dean and Professor of Law, University of Pittsburgh School of Law; Dean and Professor of Law, Villanova University School of Law. Wesley W. Posvar 1202 Cathedral of Learning University of Pittsburgh Pittsburgh, PA Birthdate: September 14, 1925 Director Director or Trustee of the Funds; President, World Society for Ekistics, Athens; Professor, International Politics; Management Consultant; Trustee, Carnegie Endowment for International Peace, RAND Corporation, Online Computer Library Center, Inc., National Defense University and U.S. Space Foundation; President Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council for Environmental Policy and Technology, Federal Emergency Management Advisory Board and Czech Management Center, Prague; formerly, Professor, United States Military Academy; Professor, United States Air Force Academy. Marjorie P. Smuts 4905 Bayard Street Pittsburgh, PA Birthdate: June 21, 1935 Director Director or Trustee of the Funds; Public Relations/Marketing/Conference Planning; formerly, National Spokesperson, Aluminum Company of America; Business owner. Edward C. Gonzales Federated Investors Tower Pittsburgh, PA Birthdate: October 22, 1930 Executive Vice President Director or Trustee of some of the Funds; President, Executive Vice President and Treasurer of some of the Funds; Vice Chairman, Federated Investors, Inc.; Vice President, Federated Advisers, Federated Management, Federated Research, Federated Research Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive Vice President and Director, Federated Securities Corp.; Trustee, Federated Shareholder Services Company. John W. McGonigle Federated Investors Tower Pittsburgh, PA Birthdate: October 26, 1938 Executive Vice President, Secretary and Treasurer Executive Vice President and Secretary of the Funds; Treasurer of some of the Funds; Executive Vice President, Secretary, and Director, Federated Investors, Inc.; Trustee, Federated Advisers, Federated Management, and Federated Research; Director, Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company; President and Trustee, Federated Shareholder Services; Director, Federated Securities Corp. Richard B. Fisher Federated Investors Tower Pittsburgh, PA Birthdate: May 17, 1923 Vice President President or Vice President of some of the Funds; Director or Trustee of some of the Funds; Executive Vice President, Federated Investors, Inc.; Chairman and Director, Federated Securities Corp. * This Director is deemed to be an "interested person" as defined in the Investment Company Act of 1940. @ Member of the Executive Committee. The Executive Committee of the Board of Directors handles the responsibilities of the Board between meetings of the Board. THE FUNDS As used in the table above, "The Funds" and "Funds" mean the following investment companies: 111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance Series; Federated Investment Portfolios; Federated Investment Trust; Federated Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; Fixed Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc.--1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; Regions Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Virtus Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; WesMark Funds; WCT Funds; and World Investment Series, Inc. FUND OWNERSHIP Officers and Directors own less than 1% of the Fund's outstanding Shares. As of July 7, 1998, no shareholders of record owned 5% or more of the Class A Shares and Class B Shares of the Fund. As of July 7, 1998, the following shareholder of record owned 5% or more of the Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith (a record owner holding Class C Shares for its clients), Jacksonville, Florida, owned approximately 433,243 shares (27.66%). DIRECTOR COMPENSATION AGGREGATE NAME, COMPENSATION POSITION WITH FROM TOTAL COMPENSATION PAID FUND FUND*# FROM FUND COMPLEX+ John F. Donahue, $0.00 $0 for the Fund and 56 investment companies Chairman and Director J. Christopher Donahue, $0.00 $0 for the Fund and 18 investment companies President and Director Thomas G. Bigley, $1,539.94 $111,222 for the Fund and 56 investment companies Director John T. Conroy, Jr., $1,694.18 $122,362 for the Fund and 56 investment companies Director Nicholas P. Constantakis,** $383.92 $0 for the Fund and 36 other investment companies Director William J. Copeland, $1,694.18 $122,362 for the Fund and 56 investment companies Director James E. Dowd, Esq., $1,694.18 $122,362 for the Fund and 56 investment companies Director Lawrence D. Ellis, M.D., $1,539.94 $111,222 for the Fund and 56 investment companies Director Edward L. Flaherty, Jr., Esq., $1,694.18 $122,362 for the Fund and 56 investment companies Director Peter E. Madden, $1,539.94 $111,222 for the Fund and 56 investment companies Director John E. Murray, Jr., J.D., S.J.D., $1,539.94 $111,222 for the Fund and 56 investment companies Director Wesley W. Posvar, $1,539.94 $111,222 for the Fund and 56 investment companies Director Marjorie P. Smuts, $1,539.94 $111,222 for the Fund and 56 investment companies Director
* Information is furnished for the fiscal year ended March 31, 1998. ** Mr. Constantakis became a member of the Board of Directors on July 21, 1998. He did not receive any fees as of the fiscal year end of the Fund. + The information is provided for the last calendar year. DIRECTOR LIABILITY The Articles of Incorporation provide that the Directors will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. INVESTMENT ADVISORY SERVICES ADVISER TO THE FUND The Fund's investment adviser is Federated Advisers (the "Adviser"). It is a subsidiary of Federated Investors, Inc. All the Class A (voting) shares of Federated Investors, Inc. are owned by a trust, the trustees of which are John F. Donahue, his wife, and his son, J. Christopher Donahue. The Adviser shall not be liable to the Fund or any shareholder for any losses that may be sustained in the purchase, holding, or sale of any security or for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties imposed upon it by its contract with the Fund. ADVISORY FEES For its advisory services, Federated Advisers receives an annual investment advisory fee as described in the prospectus. During the fiscal years ended March 31, 1998, 1997, and 1996, the Fund's Adviser earned $3,872,458, $4,379,885, and $4,644,716, respectively. BROKERAGE TRANSACTIONS When selecting brokers and dealers to handle the purchase and sale of portfolio instruments, the Adviser looks for prompt execution of the order at a favorable price. In working with dealers, the adviser will generally use those who are recognized dealers in specific portfolio instruments, except when a better price and execution of the order can be obtained elsewhere. The Adviser makes decisions on portfolio transactions and selects brokers and dealers subject to guidelines established by the Directors. The Adviser may select brokers and dealers who offer brokerage and research services. These services may be furnished directly to the Fund or to the Adviser and may include: advice as to the advisability of investing in securities; security analysis and reports; economic studies; industry studies; receipt of quotations for portfolio evaluations; and similar services. Research services provided by brokers and dealers may be used by the Adviser or its affiliates in advising the Fund and other accounts. To the extent that receipt of these services may supplant services for which the Adviser or its affiliates might otherwise have paid, it would tend to reduce their expenses. The Adviser and its affiliates exercise reasonable business judgment in selecting brokers who offer brokerage and research services to execute securities transactions. They determine in good faith that commissions charged by such persons are reasonable in relationship to the value of the brokerage and research services provided. During the fiscal years ended March 31, 1998, 1997, and 1996, no brokerage commissions were paid by the Fund. Although investment decisions for the Fund are made independently from those of the other accounts managed by the Adviser, investments of the type the Fund may make may also be made by those other accounts. When the Fund and one or more other accounts managed by the Adviser are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for sales will be allocated in a manner believed by the adviser to be equitable to each. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund. In other cases, however, it is believed that coordination and the ability to participate in volume transactions will be to the benefit of the Fund. OTHER SERVICES FUND ADMINISTRATION Federated Services Company, a subsidiary of Federated Investors, Inc., provides administrative personnel and services to the Fund for a fee as described in the prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative Services served as the Fund's Administrator. For purposes of this Statement of Additional Information, Federated Services Company and Federated Administrative Services may hereinafter collectively be referred to as the "Administrators." For the fiscal years ended March 31, 1998, 1997, and 1996, the Administrators earned $530,941, $547,583, and $573,123, respectively. CUSTODIAN AND PORTFOLIO ACCOUNTANT State Street Bank and Trust Company, Boston, MA, is custodian for the securities and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides certain accounting and recordkeeping services with respect to the Fund's portfolio investments. The fee paid for this service is based upon the level of the Fund's average net assets for the period plus out-of-pocket expenses. TRANSFER AGENT Federated Services Company, through its registered transfer agent, Federated Shareholder Services Company, maintains all necessary shareholder records. For its services, the transfer agent receives a fee based upon the size, type and number of accounts and transactions made by shareholders. INDEPENDENT AUDITORS The independent auditors for the Fund are Deloitte & Touche LLP. PURCHASING SHARES Except under certain circumstances described in the prospectus, Shares are sold at their net asset value (plus a sales charge on Class A Shares only) on days the New York Stock Exchange is open for business. The procedure for purchasing Shares is explained in the prospectus under "Investing in the Fund" and "Purchasing Shares." For further information on any of the programs listed below, please contact your financial intermediary or Federated Securities Corp. QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES As described in the prospectus, larger purchases of Class A Shares reduce or eliminate the sales charge paid. For example, the Fund will combine all Class A Share purchases made on the same day by the investor, the investor's spouse, and the investor's children under age 21 when it calculates the sales charge. In addition, the sales charge, if applicable, is reduced for purchases made at one time by a trustee or fiduciary for a single trust estate or a single fiduciary account. If an additional purchase of Class A Shares is made, the Fund will consider the previous purchases still invested in the Fund. For example, if a shareholder already owns Class A Shares having a current value at the public offering price of $90,000 and he purchases $10,000 more at the current public offering price, the sales charge on the additional purchase according to the schedule now in effect would be 3.75%, not 4.50%. To receive the sales charge reduction, Federated Securities Corp. must be notified by the shareholder in writing or by his financial intermediary at the time the purchase is made that Class A Shares are already owned or that purchases are being combined. The Fund will reduce or eliminate the sales charge after it confirms the purchases. CONCURRENT PURCHASES Shareholders have the privilege of combining concurrent purchases of Class A Shares of two or more funds in the Federated Complex in calculating the applicable sales charge. To receive a sales charge reduction or elimination, Federated Securities Corp. must be notified by the shareholder in writing or by his financial intermediary at the time the concurrent purchases are made. The Fund will reduce or eliminate the sales charge after it confirms the purchases. LETTER OF INTENT A shareholder can sign a letter of intent committing to purchase a certain amount of Class A Shares within a 13-month period in order to combine such purchases in calculating the applicable sales charge. The Fund's custodian will hold Shares in escrow equal to the maximum applicable sales charge. If the shareholder completes the commitment, the escrowed Shares will be released to their account. If the commitment is not completed within 13 months, the custodian will redeem an appropriate number of escrowed Shares to pay for the applicable sales charge. While this letter of intent will not obligate the shareholder to purchase Class A Shares, each purchase during the period will be at the sales charge applicable to the total amount intended to be purchased. At the time a letter of intent is established, current balances in accounts in any Class A Shares of any Federated Funds, excluding money market accounts, will be aggregated to provide a purchase credit towards fulfillment of the letter of intent. The letter may be dated as of a prior date to include any purchase made within the past 90 days. Prior trade prices will not be adjusted. REINVESTMENT PRIVILEGE The reinvestment privilege is available for all Shares of the Fund within the same Share class. Class A shareholders who redeem from the Fund may reinvest the redemption proceeds back into the same Share class at the next determined net asset value without any sales charge. The original Shares must have been subject to a sales charge and the reinvestment must be within 120 days. Similarly, Class C shareholders who redeem may reinvest their redemption proceeds in the same Share class within 120 days. Class B Shares also may be reinvested within 120 days of redemption, although such reinvestment will be made into Class A Shares. Shareholders would not be entitled to a reimbursement of the contingent deferred sales charge if paid at the time of redemption on any Share class. However, reinvested Shares would not be subject to a contingent deferred sales charge, if otherwise applicable, upon later redemption. In addition, if Shares were reinvested through a financial intermediary, the financial intermediary would not be entitled to an advanced payment from Federated Securities Corp. on the reinvested Shares, if otherwise applicable. Federated Securities Corp. must be notified by the shareholder in writing or by his financial intermediary of the reinvestment in order to eliminate a sales charge or a contingent deferred sales charge. If the shareholder redeems Shares in the Fund, there may be tax consequences. CONVERSION OF CLASS B SHARES Class B Shares will automatically convert into Class A Shares on or around the 15th of the month eight full years from the purchase date and will no longer be subject to a fee under the distribution plan. For purposes of conversion to Class A Shares, Shares purchased through the reinvestment of dividends and distributions paid on Class B Shares will be considered to be held in a separate sub-account. Each time any Class B Shares in the shareholder's account (other than those in the sub-account) convert to Class A Shares, an equal pro rata portion of the Class B Shares in the sub-account will also convert to Class A Shares. The conversion of Class B Shares to Class A Shares is subject to the continuing availability of a ruling from the Internal Revenue Service or an opinion of counsel that such conversions will not constitute taxable events for federal tax purposes. There can be no assurance that such ruling or opinion will be available, and the conversion of Class B Shares to Class A Shares will not occur if such a ruling or opinion is not available. In such event, Class B Shares would continue to be subject to higher expenses than Class A Shares for an indefinite period. PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES The following individuals and their immediate family members may buy Class A Shares at net asset value without a sales charge: * Directors, employees, and sales representatives of the Fund, Federated Advisers, and Federated Securities Corp. and its affiliates; * Federated Life Members (Class A Shares only); * any associated person of an investment dealer who has a sales agreement with Federated Securities Corp.; and * trusts, pensions, or profit-sharing plans for these individuals. These sales are made with the purchaser's written assurance that the purchase is for investment purposes and that the securities will not be resold except through redemption by the Fund. CONVERSION TO FEDERAL FUNDS It is the Fund's policy to be as fully invested as possible so that maximum interest may be earned. To this end, all payments from shareholders must be in federal funds or be converted into federal funds before shareholders begin to earn dividends. Federated Shareholder Services Company acts as the shareholder's agent in depositing checks and converting them to federal funds. DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER SERVICES These arrangements permit the payment of fees to financial institutions, the distributor, and Federated Shareholder Services, to stimulate distribution activities and to cause services to be provided to shareholders by a representative who has knowledge of the shareholder's particular circumstances and goals. These activities and services may include, but are not limited to: marketing efforts; providing office space, equipment, telephone facilities, and various clerical, supervisory, computer, and other personnel as necessary or beneficial to establish and maintain shareholder accounts and records; processing purchase and redemption transactions and automatic investments of client account cash balances; answering routine client inquiries; and assisting clients in changing dividend options, account designations, and addresses. By adopting the Distribution Plan (Class B Shares and Class C Shares only), the Directors expect that Class B Shares and Class C Shares of the Fund will be able to achieve a more predictable flow of cash for investment purposes and to meet redemptions. This will facilitate more efficient portfolio management and assist the Fund in pursuing its investment objectives. By identifying potential investors whose needs are served by the Fund's objectives, and properly servicing these accounts, it may be possible to curb sharp fluctuations in rates of redemptions and sales. Other benefits, which may be realized under either arrangement, may include: (1) providing personal services to shareholders; (2) investing shareholder assets with a minimum of delay and administrative detail; and (3) enhancing shareholder recordkeeping systems; and (4) responding promptly to shareholders' requests and inquiries concerning their accounts. For the fiscal year ended March 31, 1998, payments in the amounts of $638,542 (Class B Shares) and $139,644 (Class C Shares) were made pursuant to the Distribution Plan, all of which was paid to financial institutions. In addition, for the fiscal year ended March 31, 1998, payments in the amounts of $1,499,514 (Class A Shares), $212,847 (Class B Shares), and $46,548 (Class C Shares) were made pursuant to the Shareholder Services Agreement, of which $839,728 (Class A Shares), $0 (Class B Shares), and $1,862 (Class C Shares) were voluntarily waived. DETERMINING NET ASSET VALUE The Fund's net asset value per Share fluctuates and is based on the market value of all securities and other assets of the Fund. The net asset value for each class of Shares may differ due to the variance in daily net income realized by each class. Net asset value is not determined on (i) days on which there are not sufficient changes in the value of the Fund's portfolio securities that its net asset value might be materially affected; (ii) days during which no Shares are tendered for redemption and no orders to purchase Shares are received; or (iii) the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. VALUING MUNICIPAL BONDS The Directors use an independent pricing service to value municipal bonds. The independent pricing service takes into consideration yield, stability, risk, quality, coupon rate, maturity, type of issue, trading characteristics, special circumstances of a security or trading market, and any other factors or market data it considers relevant in determining valuations for normal institutional size trading units of debt securities, and does not rely exclusively on quoted prices. REDEEMING SHARES The Fund redeems Shares at the next computed net asset value after the Fund receives the redemption request. Shareholder redemptions may be subject to a contingent deferred sales charge. Redemption procedures are explained in the prospectus under "Redeeming and Exchanging Shares." Although the transfer agent does not charge for telephone redemptions, it reserves the right to charge a fee for the cost of wire-transferred redemptions of less than $5,000. REDEMPTION IN KIND The Fund is obligated to redeem shares solely in cash up to $250,000 or 1% of the Fund's net asset value, whichever is less, for any on shareholder within a 90-day period. Any redemption beyond this amount will also be in cash unless the Directors determine that further payments should be in kind. In such cases, the Fund will pay all or a portion of the remainder of the redemption in portfolio instruments valued in the same way as the Fund determines net asset value. The portfolio instruments will be selected in a manner that the Directors deem fair and equitable. Redemption in kind is not as liquid as a cash redemption. If redemption is made in kind, shareholders who sell these securities receive less than the redemption value and could incur certain transaction costs. CONTINGENT DEFERRED SALES CHARGE In computing the amount of the applicable Contingent Deferred Sales Charge, redemptions are deemed to have occurred in the following order: (1) Shares acquired through the reinvestment of dividends and long-term capital gains; (2) Shares held for more than six full years from the date of purchase with respect to Class B Shares and one full year from the date of purchase with respect to Class C Shares; (3) Shares held for fewer than six years with respect to Class B Shares and for less than one full year from the date of purchase with respect to Class C Shares on a first-in, first-out basis. TAX STATUS THE FUND'S TAX STATUS The Fund will pay no federal income tax because it expects to meet requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to receive the special tax treatment afforded to such companies. To qualify for this treatment, the Fund must, among other requirements: * derive at least 90% of its gross income from dividends, interest, and gains from the sale of securities; * invest in securities within certain statutory limits; and * distribute to its shareholders at least 90% of its net income earned during the year. TOTAL RETURN The Fund's average annual total returns based on offering price for the following periods ended March 31, 1998, were: SHARE CLASS INCEPTION DATE ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION Class A 10/4/76 6.23% .26% 7.05% 6.36% Class B 7/26/94 4.55% N/A N/A 4.27% Class C 4/21/93 9.30% N/A N/A 4.15%
The average annual total return for all classes of Shares of the Fund is the average compounded rate of return for a given period that would equate a $1,000 initial investment to the ending redeemable value of that investment. The ending redeemable value is computed by multiplying the number of Shares owned at the end of the period by the offering price per Share at the end of the period. The number of Shares owned at the end of the period is based on the number of Shares purchased at the beginning of the period with $1,000, less any applicable sales charge, adjusted over the period by any additional Shares, assuming a reinvestment of all dividends and distributions. Any applicable contingent deferred sales charge is deducted from the ending value of the investments based on the lesser of the original purchase price or the offering price of Shares redeemed. YIELD The Fund's yields for the thirty-day period ended March 31, 1998, were: SHARE CLASS YIELD Class A 4.11% Class B 3.41% Class C 3.42% The yield for all classes of Shares of the Fund is determined by dividing the net investment income per Share (as defined by the SEC) earned by any class of Shares over a thirty-day period by the maximum offering price per Share of any class of Shares on the last day of the period. This value is then annualized using semi-annual compounding. This means that the amount of income generated during the thirty-day period is assumed to be generated each month over a twelve-month period and is reinvested every six months. The yield does not necessarily reflect income actually earned by any class of Shares because of certain adjustments required by the SEC and, therefore, may not correlate to the dividends or other distributions paid to shareholders. To the extent that financial institutions and broker/dealers charge fees in connection with services provided in conjunction with an investment in any class of Shares, the performance will be reduced for those shareholders paying those fees. TAX-EQUIVALENT YIELD The Fund's tax-equivalent yields for the thirty-day period ended March 31, 1998, for Class A Shares, Class B Shares, and Class C Shares were: SHARE CLASS YIELD Class A 5.71% Class B 4.74% Class C 4.75% The tax-equivalent yield of the Fund is calculated similarly to the yield, but is adjusted to reflect the taxable yield that the Fund would have had to earn to equal its actual yield, assuming a 28% tax rate (the maximum effective federal rate for individuals) and assuming that income is 100% tax-exempt. TAX-EQUIVALENCY TABLE A tax-equivalency table may be used in advertising and sales literature. The interest earned by the municipal securities in the Fund's portfolio generally remains free from federal regular income tax*, and is often free from state and local taxes as well. As the table on the next page indicates, a "tax-free" investment can be an attractive choice for investors, particularly in times of narrow spreads between tax-free and taxable yields. TAXABLE YIELD EQUIVALENT FOR 1998 MULTISTATE MUNICIPAL FUND FEDERAL INCOME TAX BRACKET: 15.00% 28.00% 31.00% 36.00% 39.60% JOINT $1- $42,351- $102,301- $155,951- OVER RETURN 42,350 102,300 155,950 278,450 $278,450 SINGLE $1- $25,351- $61,401- $128,101- OVER RETURN 25,350 61,400 128,100 278,450 $278,450 TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT 1.00% 1.18% 1.39% 1.45% 1.56% 1.66% 1.50% 1.76% 2.08% 2.17% 2.34% 2.48% 2.00% 2.35% 2.78% 2.90% 3.13% 3.31% 2.50% 2.94% 3.47% 3.62% 3.91% 4.14% 3.00% 3.53% 4.17% 4.35% 4.69% 4.97% 3.50% 4.12% 4.86% 5.07% 5.47% 5.79% 4.00% 4.71% 5.56% 5.80% 6.25% 6.62% 4.50% 5.29% 6.25% 6.52% 7.03% 7.45% 5.00% 5.88% 6.94% 7.25% 7.81% 8.28% 5.50% 6.47% 7.64% 7.97% 8.59% 9.11% 6.00% 7.06% 8.33% 8.70% 9.38% 9.93% 6.50% 7.65% 9.03% 9.42% 10.16% 10.76% 7.00% 8.24% 9.72% 10.14% 10.94% 11.59% 7.50% 8.82% 10.42% 10.87% 11.72% 12.42% 8.00% 9.41% 11.11% 11.59% 12.50% 13.25% Note: The maximum marginal tax rate for each bracket was used in calculating the taxable yield equivalent. The chart above is for illustrative purposes only. It is not an indicator of past or future performance of Fund shares. * Some portion of the Fund's income may be subject to the federal alternative minimum tax and state and local income taxes. PERFORMANCE COMPARISONS The performance of each of the classes of Shares depends upon such variables as: * portfolio quality; * average portfolio maturity; * type of instruments in which the portfolio is invested; * changes in interest rates and market value of portfolio securities; * changes in the Fund's or any class of Shares' expenses; and * various other factors. The Fund's performance fluctuates on a daily basis largely because net earnings and offering price per share fluctuate daily. Both net earnings and offering price per share are factors in the computation of yield and total return. Investors may use financial publications and/or indices to obtain a more complete view of the Fund's performance. When comparing performance, investors should consider all relevant factors such as the composition of any index used, prevailing market conditions, portfolio compositions of other funds, and methods used to value portfolio securities and compute offering price. The financial publications and/or indices which the Fund uses in advertising may include: * Lipper Analytical Services, Inc., ranks funds in various fund categories by making comparative calculations using total return. Total return assumes the reinvestment of all capital gains distributions and income dividends and takes into account any change in net asset value over a specific period of time. From time to time, the Fund will quote its Lipper ranking in the general municipal bond funds category in advertising and sales literature. * Lehman Brothers Revenue Bond Index is a total return performance benchmark for the long-term, investment grade, revenue bond market. Returns and attribute for the index are calculated semi-monthly. * Lehman Seven Year State General Obligations Index is an index of general obligation bonds rated A or better with 6-8 years to maturity. * Morningstar, Inc., an independent rating service, is the publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-listed mutual funds of all types, according to their risk-adjusted returns. The maximum rating is five stars, and ratings are effective for two weeks. Advertisements and other sales literature for any class of Shares may quote total returns which are calculated on non-standardized base periods. These total returns represent the historic change in the value of an investment in any of the classes of Shares based on monthly reinvestment of dividends over a specified period of time. From time to time as it deems appropriate, the Fund may advertise the performance of any of the classes of Shares using charts, graphs, and descriptions, compared to federally insured bank products including certificates of deposit and time deposits and to money market funds using the Lipper Analytical Services money market instruments average. Advertisements may quote performance which does not reflect the effect of the sales charge for Class A Shares. Advertising and other promotional literature may include charts, graphs and other illustrations using the Fund's returns, or returns in general, that demonstrate basic investment concepts such as tax-deferred compounding, dollar-cost averaging and systematic investment. In addition, the Fund can compare its performance, or performance for the types of securities in which in invests, to a variety of other investments, such as bank savings accounts, certificates of deposit, and Treasury bills. ECONOMIC AND MARKET INFORMATION Advertising and sales literature for the Fund may include discussions of economic, financial and political developments and their effect of the securities market. Such discussions may take the form of commentary on these developments by Fund portfolio managers and their views and analysis on how such developments could affect the Funds. In addition, advertising and sales literature may quote statistics and give general information about the mutual fund industry, including the growth of the industry, from sources such as the Investment Company Institute ("ICI"). For example, according to the ICI, thirty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $4.4 trillion to the more than 6,700 funds available. ABOUT FEDERATED INVESTORS, INC. Federated Investors, Inc. is dedicated to meeting investor needs which is reflected in its investment decision making structured, straightforward, and consistent. This has resulted in a history of competitive performance with a range of competitive investment products that have gained the confidence of thousands of clients and their customers. The company's disciplined security selection process is firmly rooted in sound methodologies backed by fundamental and technical research. Investment decisions are made and executed by teams of portfolio managers, analysts, and traders dedicated to specific market sectors. These traders handle trillions of dollars in annual trading volume. In the municipal sector, as of December 31, 1997, Federated Investors, Inc. managed 11 bond funds with approximately $2.1 billion in assets and 22 money market funds with approximately $10.9 billion in total assets. In 1976, Federated introduced one of the first municipal bond mutual funds in the industry and is now one of the largest institutional buyers of municipal securities. The Funds may quote statistics from organizations including The Tax Foundation and the National Taxpayers Union regarding the tax obligations of Americans. The Chief Investment Officers responsible for oversight of the various investment sectors within Federated Investors, Inc. are: U.S. equity and high yield - J. Thomas Madden; U.S. fixed income - William D. Dawson, III; and International - Henry A. Frantzen. The Chief Investment Officers are Executive Vice Presidents of the Federated advisory companies. MUTUAL FUND MARKET Thirty-seven percent of American households are pursuing their financial goals through mutual funds. These investors, as well as businesses and institutions, have entrusted over $4.4 trillion to the more than 6,700 funds available.* Federated Investors, Inc., through its subsidiaries, distributes mutual funds for a variety of investment applications. Specific markets include: INSTITUTIONAL CLIENTS Federated Investors, Inc. meets the needs of approximately 900 institutional clients nationwide by managing and servicing separate accounts and mutual funds for a variety of applications, including defined benefit and defined contribution programs, cash management, and asset/liability management. Institutional clients include corporations, pension funds, tax-exempt entities, foundations/endowments, insurance companies, and investment and financial advisors. The marketing effort to these institutional clients is headed by John B. Fisher, President, Institutional Sales Division. BANK MARKETING Other institutional clients include close relationships with more than 1,600 banks and trust organizations. Virtually all of the trust divisions of the top 100 bank holding companies use Federated funds in their clients' portfolios. The marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank Marketing & Sales. BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES Federated funds are available to consumers through major brokerage firms nationwide--we now have over 2,200 broker/dealer and bank broker/dealer relationships across the country--supported by more wholesalers than any other mutual fund distributor. Federated's service to financial professionals and institutions has earned it high ratings in several surveys performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for service quality measurement. The marketing effort to these firms is headed by James F. Getz, President, Federated Securities Corp. FINANCIAL STATEMENTS The Financial Statements for the fiscal year ended March 31, 1998, are incorporated herein by reference to the Annual Report of the Fund dated March 31, 1998 (File Nos. 2-57181 and 811-2677). A copy of this report may be obtained without charge by contacting the Fund. * Source: Investment Company Institute. PART C. OTHER INFORMATION. Item 24. Financial Statements and Exhibits: (a) Financial Statements. (Incorporated by reference to the Registrant's Annual Report dated March 3l, l998 pursuant to Rule 411 under the Securities Act of 1933.) (File Nos. 2-57181 and 811-2677); (b) Exhibits: (1) (i) Conformed copy of Articles of Incorporation of the Registrant; (14) (ii) Copy of amendment to Articles of Incorporation of the Registrant; (14) (2) (i) Copy of Amended and Restated By-Laws of the Registrant; (14) (ii) Copy of Amendment to By-Laws effective August 26, l987; (8) (iii) Copy of Amendment to By-Laws effective September 30, 1976; (14) (iv) Copy of Amendment to By-Laws effective February 17, 1984; (14) (v) Copy of Amendment to By-Laws effective February 21, 1985; (14) (vi) Copy of Amendment to By-Laws effective August 27, 1986; (14) (vii) Copy of Amendment to By-Laws effective February 2, 1987; (14) (viii) Copy of Amendment to By-Laws effective February 23, 1998; + (ix) Copy of Amendment to By-Laws effective February 27, 1998; + (x) Copy of Amendment By-Laws effective May 12, 1998; + (3) Not applicable; (4) Conformed copies of Specimen Certificates for Shares of Capital Stock of the Registrant's Class A Shares, Class B Shares, and Class C Shares; (16) (5) Conformed copy of Investment Advisory Contract of the Registrant; (9) - ------ + All exhibits have been filed electronically. 8. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 35 on Form N-1A filed July 27, 1989. (File Nos. 2-57181 and 811-2677) 9. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 36 on Form N-1A filed July 17, 1990. (File Nos. 2-57181 and 811-2677) 12. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 42 on Form N-1A filed May 25, 1994. (File Nos. 2-57181 and 811-2677) 14. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 46 on Form N-1A filed April 26, 1996. (File Nos. 2-57181 and 811-2677) 16. Response is incorporated by reference to Registrant's Post Effective Amendment No. 50 on Form N-1A filed May 29, 1997. (File Nos. 2-57181 and 811-2677) (6) (i) Conformed copy of Distributor's Contract of the Registrant; (12) (ii) Conformed copy of Exhibit D to the Distributor's Contract; (13) (iii) Conformed copy of Distributor's Contract (Class B Shares) including Exhibit 1 and Schedule A; (17) (iv) The Registrant hereby incorporates the conformed copy of the specimen Mutual Funds Sales and Service Agreement; Mutual Funds Service Agreement; and Plan Trustee/Mutual Funds Service Agreement from Item 24(b)(6) of the Cash Trust Series II Registration Statement on Form N-1A, filed with the Commission on July 24, 1995 (File Numbers 33-38550 and 811-6269); (7) Not applicable; (8) (i) Conformed copy of Custodian Contract of the Registrant; (13) (ii) Conformed copy of Custody Fee Schedule; (17) (9) (i) Conformed copy of Agreement for Fund Accounting Services, Administrative Services, Transfer Agency Services and Custody Services Procurement; (15) (ii) The responses described in Item 24(b)(6)(iii) are hereby incorporated by reference. (iii) The Registrant hereby incorporates by reference the conformed copy of the Shareholder Services Sub-Contract between Fidelity and Federated Shareholder Services from Item 24(b)(9)(iii) of the Federated GNMA Trust Registration Statement on Form N-1A, filed with the Commission on March 25, 1996. (File Nos. 2-75670 and 811-3375); (iv) Conformed copy of Principal Shareholder Servicer's Agreement (Class B Shares) including Exhibit 1 and Schedule A; (17) . (v) Conformed copy of Shareholders Services Agreement (Class B Shares) including Exhibit 1 and Schedule A; (17) (vi) Conformed copy of Amended and Restated Shareholder Services Agreement; + - ---------------------- + All exhibits have been filed electronically. 12. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 42 on Form N-1A filed May 25, 1994. (File Nos. 2-57181 and 811-2667) 13. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 45 on Form N-1A filed May 25, 1995. (File Nos. 2-57181 and 811-2677) 14. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 46 on Form N-1A filed April 26, 1996. (File Nos. 2-57181 and 811-2677) 15. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 48 on Form N-1A filed May 28, 1996. (File Nos. 2-57181 and 811-2677) 17. Response is incorporated by reference to Registrant's Post Effective Amendment No. 51 on Form N-1A filed May 29, 1998. (File Nos. 2-57181 and 811-2677) (10) Not applicable; (11) Conformed copy of Independent Auditors' Consent; (+) (12) Not applicable; (13) Not applicable; (14) Not applicable; (15) (i) Conformed copy of the 12b-1 Distribution Plan of the Registrant; (12) (ii) Conformed copy of Exhibit C of the 12b-1 Distribution Plan of the Registrant; (13) (iii) The responses described in Item 24(b)(6)(iii) are hereby incorporated by reference. (iv) Conformed copy of Exhibit 1 and Schedule A to the 12b-1 Distribution Plan (Class B Shares) of the Registrant; (17) (16) Copy of Schedule for Computation of Fund Performance Data;(14) (17) Copy of Financial Data Schedules; (16) (18) The Registrant hereby incorporates the conformed copy of the specimen Multiple Class Plan from Item 24(b)(18) of the World Investment Series, Inc. Registration Statement on Form N-1A, filed with the Commission on January 26, 1996. (File Nos. 33-52149 and 811-07141); (19) Conformed copy of Power of Attorney. (16) - ---------------------- + All exhibits have been filed electronically. 12. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 42 on Form N-1A filed May 25, 1994. (File Nos. 2-57181 and 811-2667) 13. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 45 on Form N-1A filed May 25, 1995. (File Nos. 2-57181 and 811-2677) 14. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 46 on Form N-1A filed April 26, 1996. (File Nos. 2-57181 and 811-2677) 16. Response is incorporated by reference to Registrant's Post Effective Amendment No. 50 on Form N-1A filed May 29, 1997. (File Nos. 2-57181 and 811-2677) 17. Response is incorporated by reference to Registrant's Post Effective Amendment No. 51 on Form N-1A filed May 29, 1998. (File Nos. 2-57181 and 811-2677) Item 25. Persons Controlled by or Under Common Control with Registrant: None. Item 26. Number of Holders of Securities: Number of Record Holders Title of Class as of July 7, 1998 -------------- ------------------ Shares of capital stock ($0.0l per share par value) Class A Shares 21,503 Class B Shares 2,608 Class C Shares 521 Item 27. Indemnification:(11) Item 28. Business and Other Connections of Investment Adviser: (a) For a description of the other business of the investment adviser, see the section entitled "Fund Information-Management of the Fund"in Part A. The affiliations with the Registrant of four of the Trustees and one of the Officers of the investment adviser are included in Part B of this Registration Statement under "Federated Municipal Securities Fund, Inc. Management." The remaining Trustee of the investment adviser, his position with the investment adviser, and, in parentheses, his principal occupation is: Mark D. Olson (Partner, Wilson, Halbrook & Bayard), 107 W. Market Street, Georgetown, Delaware 19947. The remaining Officers of the investment adviser are: Executive Vice Presidents: William D. Dawson, III Henry A. Frantzen J. Thomas Madden Senior Vice Presidents: Joseph M. Balestrino Drew J. Collins Jonathan C. Conley Deborah A. Cunningham Mark E. Durbiano Sandra L. McInerney J. Alan Minteer Susan M. Nason Mary Jo Ochson Robert J. Ostrowski Vice Presidents: Todd A. Abraham J. Scott Albrecht Randall S. Bauer David A. Briggs Micheal W. Casey Kenneth J. Cody Alexandre de Bethmann Michael P. Donnelly Linda A. Duessel Donald T. Ellenberger - -------------------- 11. Response is incorporated by reference to Registrant's Post-Effective Amendment No. 38 on Form N-1A filed July 22, 1992. (File Nos. 2-57181 and 811-2677) (Vice Presidents cont.) Kathleen M. Foody-Malus Thomas M. Franks Edward C. Gonzales James E. Grefenstette Susan R. Hill Stephen A. Keen Robert K. Kinsey Robert M. Kowit Jeff A. Kozemchak Richard J. Lazarchic Steven Lehman Marian R. Marinack Charles A. Ritter Scott B. Schermerhorn Frank Semack Aash M. Shah Christopher Smith Tracy P. Stouffer Edward J. Tiedge Paige M. Wilhelm Jolanta M. Wysocka Assistant Vice Presidents: Arthur J. Barry Robert E. Cauley Lee R. Cunningham, II B. Anthony Delserone, Jr. Paul S. Drotch Salvatore A. Esposito Donna M. Fabiano John T. Gentry William R. Jamison Constantine Kartsonsas Natalie F. Metz Joseph M. Natoli Keith J. Sabol John Sheehy Michael W. Sirianni Gregg S. Tenser Leonardo A. Vila Lori A. Wolff Secretary: Stephen A. Keen Treasurer: Thomas R. Donahue Assistant Secretaries: Thomas R. Donahue Richard B. Fisher Christine I. McGonigle Assistant Treasurer: Richard B. Fisher The business address of each of the Officers of the investment adviser is Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779. These individuals are also officers of a majority of the investment advisers to the Funds listed in Part B of this Registration Statement. Item 29. Principal Underwriters: (a) Federated Securities Corp. the Distributor for shares of the Registrant, acts as principal underwriter for the following open-end investment companies, including the Registrant: 111 Corcoran Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Core Trust; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust; Federated Income Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance Series; Federated Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; Fixed Income Securities, Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; Regions Funds; RIGGS Funds; SouthTrust Funds; Star Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Virtus Funds; The Wachovia Funds; The Wachovia Municipal Funds; Tower Mutual Funds; Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; and World Investment Series, Inc. Federated Securities Corp. also acts as principal underwriter for the following closed-end investment company: Liberty Term Trust, Inc.- 1999. (b) (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Richard B. Fisher Director, Chairman, Chief Vice President Federated Investors Tower Executive Officer, Chief Pittsburgh, PA 15222-3779 Operating Officer, Asst. Secretary and Asst. Treasurer, Federated Securities Corp. Edward C. Gonzales Director, Executive Vice Executive VIce Federated Investors Tower President, Federated, President Pittsburgh, PA 15222-3779 Securities Corp. Thomas R. Donahue Director, Assistant Secretary -- Federated Investors Tower and Assistant Treasurer Pittsburgh, PA 15222-3779 Federated Securities Corp James F. Getz President-Broker/Dealer, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John B. Fisher President-Institutional Sales, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David M. Taylor Executive Vice President -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark W. Bloss Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard W. Boyd Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Laura M. Deger Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Theodore Fadool, Jr. Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Bryant R. Fisher Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Christopher T. Fives Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James S. Hamilton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James M. Heaton Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Keith Nixon Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Solon A. Person, IV Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Timothy C. Pillion Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas E. Territ Senior Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Ernest G. Anderson Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Teresa M. Antoszyk Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John B. Bohnet Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Byron F. Bowman Vice President, Secretary, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jane E. Broeren-Lambesis Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David J. Callahan Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mary J. Combs Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 R. Edmond Connell, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 R. Leonard Corton, Jr. Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Kevin J. Crenny Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Daniel T. Culbertson Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant G. Michael Cullen Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Marc C. Danile Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William C. Doyle Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jill Ehrenfeld Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark D. Fisher Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Joseph D. Gibbons Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John K. Goettlicher Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Craig S. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard C. Gonzales Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Raymond Hanley Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Bruce E. Hastings Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Beth A. Hetzel Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 James E. Hickey Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Charlene H. Jennings Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Brian G. Kelly Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant H. Joseph Kennedy Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael W. Koenig Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael R. Manning Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Mark J. Miehl Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard C. Mihm Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 J. Michael Miller Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Alec H. Neilly Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas A. Peters III Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Robert F. Phillips Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard A. Recker Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Eugene B. Reed Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Paul V. Riordan Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John Rogers Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Brian S. Ronayne Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Thomas S. Schinabeck Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant Edward L. Smith Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 David W. Spears Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John A. Staley Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Colin B. Starks Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Jeffrey A. Stewart Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 William C. Tustin Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Paul A. Uhlman Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Miles J. Wallace Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 John F. Wallin Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Richard B. Watts Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Edward J. Wojnarowski Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Michael P. Wolff Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Edward R. Bozek Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Terri E. Bush Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Beth C. Dell Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (1) (2) (3) Name and Principal Positions and Offices Positions and Offices Business Address With Distributor With Registrant David L. Immonen Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Renee L. Martin Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Robert M. Rossi Assistant Vice President, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Denis McAuley Treasurer, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 Leslie K. Platt Assistant Secretary, -- Federated Investors Tower Federated Securities Corp. Pittsburgh, PA 15222-3779 (c) Not applicable. Item 30. Location of Accounts and Records: All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one of the following locations: Registrant Federated Investors Tower Pittsburgh, PA 15222-3779 Federated Shareholder Services Company P.O. Box 8600 ("Transfer Agent and Dividend Boston, MA 02266-8600 Disbursing Agent") Federated Services Company Federated Investors Tower ("Administrator") Pittsburgh, PA 15222-3779 Federated Advisers Federated Investors Tower ("Adviser") Pittsburgh, PA 15222-3779 State Street Bank and Trust Company P.O. Box 8600 ("Custodian") Boston, MA 02266-8600 Item 31. Management Services: Not applicable. Item 32. Undertakings: Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. Registrant hereby undertakes to comply with the provisions of Section 16 (c) of the 1940 Act with respect to the removal of Directors and the calling of special shareholder meetings by shareholders. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, FEDERATED MUNICIPAL SECURITIES FUND, INC., certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Ruel 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the 28th day of July, 1998. FEDERATED MUNICIPAL SECURITIES FUND, INC. BY: /s/ Nicholas J. Seitanakis Nicholas J. Seitanakis, Assistant Secretary Attorney in Fact for John F. Donahue July 28, 1998 Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated: NAME TITLE DATE By: /s/ Nicholas J. Seitanakis Attorney In Fact July 28, 1998 Nicholas J. Seitanakis For the Persons ASSISTANT SECRETARY Listed Below John F. Donahue* Chairman and Director (Chief Executive Officer) J. Christopher Donahue* President and Director John W. McGonigle* Treasurer, Executive Vice President and Secretary (Principal Financial and Accounting Officer) Thomas G. Bigley* Director John T. Conroy, Jr.* Director Nicholas P. Constantakis* Director William J. Copeland* Director James E. Dowd* Director Lawrence D. Ellis, M.D.* Director Edward L. Flaherty, Jr.* Director Peter E. Madden* Director John E. Murray, Jr.* Director Wesley W. Posvar* Director Marjorie P. Smuts* Director * By Power of Attorney EX-99.BYLAWAMEND 2 Exhibit 2 under Form N-1A Exhibit 3(ii) under Item 601/Reg. SK FEDERATED MUNICIPAL SECURITIES FUND, INC. (formerly: Liberty Municipal Securities Fund, Inc.) Amendment #11 to the By-Laws (effective February 23, 1998) Delete Sections 1, 2, 3, 4 & 5 from Article IV, OFFICERS, and replace with the following: Section 1. GENERAL PROVISIONS. The Officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer, and a Secretary. The Board of Directors, in its discretion, may elect or appoint a Chairman of the Board of Directors and other Officers or agents, including one or more Assistant Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. A Vice President, the Secretary or the Treasurer may appoint an Assistant Vice President, an Assistant Secretary or an Assistant Treasurer, respectively, to serve until the next election of Officers. Two or more offices may be held by a single person except the offices of President and Vice President may not be held by the same person concurrently. It shall not be necessary for any Director or any Officer to be a holder of shares in any Series or Class of the Corporation. Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Officers shall be elected annually by the Board of Directors at its Annual Meeting. Each Officer shall hold office for one year and until the election and qualification of his successor, or until earlier resignation or removal. The Chairman of the Board of Directors, if there is one, shall be elected annually by and from the Directors, and serve until a successor is so elected and qualified, or until earlier resignation or removal. Section 3. REMOVAL. Any Officer elected by the Board of Directors or whose appointment has been ratified by the Board of Directors may be removed with or without cause at any time by a majority vote of all of the Directors. Any other employee of the Corporation may be removed or dismissed at any time by the President. Section 4. RESIGNATIONS. Any Officer may resign at any time by giving written notice to the Board of Directors. Any such resignation shall take effect at the time specified therein or, if no time is specified, at the time of receipt. Unless otherwise specified , the acceptance of such resignation shall not be necessary to make it effective. Section 5. VACANCIES. Any vacancy in any of the offices, whether by resignation, removal or otherwise, may be filled for the unexpired portion of the term by the President. A vacancy in the office of Assistant Vice President may be filled by a Vice President; in the office of by the Secretary; or in the office of Assistant Treasurer by the Treasurer. Any appointment to fill any vacancy shall serve subject to ratification by the Board of Directors at its next Regular Meeting. EX-99.BYLAWAMEND 3 Exhibit 2 under Form N-1A Exhibit 3(ii) under Item 601/Reg. SK Federated Municipal Securities Fund, Inc. Amendment #12 to the By-Laws (effective February 27, 1998) Delete Section 7 Proxies of Article I, Meetings of Shareholders, and replace with the following: Section 7. PROXIES. Any Shareholder entitled to vote at any meeting of Shareholders may vote either in person or by proxy, but no proxy which is dated more than eleven months before the meeting named therein shall be accepted unless otherwise provided in the proxy. Every proxy shall be in writing and signed by the Shareholder or his duly authorized agent or be in such other form as may be permitted by the Maryland General Corporation Law, including electronic transmissions from the shareholder or his authorized agent. Authorization may be given orally, in writing, by telephone, or by other means of communication. A copy, facsimile transmission or other reproduction of the writing or transmission may be substituted for the original writing or transmission for any purpose for which the original transmission could be used. Every proxy shall be dated, but need not be sealed, witnessed or acknowledged. Where Shares are held of record by more than one person, any co-owner or co-fiduciary may appoint a proxy holder, unless the Secretary of the Corporation is notified in writing by any co-owner or co-fiduciary that the joinder of more than one is to be required. All proxies shall be filed with and verified by the Secretary or an Assistant Secretary of the Corporation, or the person acting as Secretary of the Meeting. Unless otherwise specifically limited by their term, all proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. EX-99.BYLAWAMEND 4 Exhibit 2 under Form N-1A Exhibit 3(ii) under Item 601/Reg. SK Federated Municipal Securities Fund, Inc. Amendment #13 to the By-Laws (effective May 12, 1998) Strike Section 3 - Place of Meetings from Article I - Meeting of Shareholder and replace it with the following: Section 3. PLACE OF MEETINGS. All meetings of the Shareholders of the Corporation or a particular Series or Class, shall be held at such place within or without the State of Maryland as may be fixed by the Board of Directors. EX-99.SHSERVAGREE 5 Exhibit 9 under Form N-1A Exhibit 10 under Item 601/Reg. SK Amended and Restated SHAREHOLDER SERVICES AGREEMENT THIS AGREEMENT, amended and restated as of the first day of September, 1995, (originally made and enterered into as of the first day of March, 1994), by and between those investment companies listed on Exhibit 1, as may be amended from time to time, having their principal office and place of business at Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have approved this form of Agreement (individually referred to herein as a "Fund" and collectively as "Funds") and Federated Shareholder Services, a Delaware business trust, having its principal office and place of business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779 ("FSS"). 1. The Funds hereby appoint FSS to render or cause to be rendered personal services to shareholders of the Funds and/or the maintenance of accounts of shareholders of the Funds ("Services"). In addition to providing Services directly to shareholders of the Funds, FSS is hereby appointed the Funds' agent to select, negotiate and subcontract for the performance of Services. FSS hereby accepts such appointments. FSS agrees to provide or cause to be provided Services which, in its best judgment (subject to supervision and control of the Funds' Boards of Trustees or Directors, as applicable), are necessary or desirable for shareholders of the Funds. FSS further agrees to provide the Funds, upon request, a written description of the Services which FSS is providing hereunder. 2. During the term of this Agreement, each Fund will pay FSS and FSS agrees to accept as full compensation for its services rendered hereunder a fee at an annual rate, calculated daily and payable monthly, up to 0.25% of 1% of average net assets of each Fund. For the payment period in which this Agreement becomes effective or terminates with respect to any Fund, there shall be an appropriate proration of the monthly fee on the basis of the number of days that this Agreement is in effect with respect to such Fund during the month. 3. This Agreement shall continue in effect for one year from the date of its execution, and thereafter for successive periods of one year only if the form of this Agreement is approved at least annually by the Board of each Fund, including a majority of the members of the Board of the Fund who are not interested persons of the Fund ("Independent Board Members") cast in person at a meeting called for that purpose. 4. Notwithstanding paragraph 3, this Agreement may be terminated as follows: (a) at any time, without the payment of any penalty, by the vote of a majority of the Independent Board Members of any Fund or by a vote of a majority of the outstanding voting securities of any Fund as defined in the Investment Company Act of 1940 on sixty (60) days' written notice to the parties to this Agreement; (b) automatically in the event of the Agreement's assignment as defined in the Investment Company Act of 1940; and (c) by any party to the Agreement without cause by giving the other party at least sixty (60) days' written notice of its intention to terminate. 5. FSS agrees to obtain any taxpayer identification number certification from each shareholder of the Funds to which it provides Services that is required under Section 3406 of the Internal Revenue Code, and any applicable Treasury regulations, and to provide each Fund or its designee with timely written notice of any failure to obtain such taxpayer identification number certification in order to enable the implementation of any required backup withholding. 6. FSS shall not be liable for any error of judgment or mistake of law or for any loss suffered by any Fund in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. FSS shall be entitled to rely on and may act upon advice of counsel (who may be counsel for such Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Any person, even though also an officer, trustee, partner, employee or agent of FSS, who may be or become a member of such Fund's Board, officer, employee or agent of any Fund, shall be deemed, when rendering services to such Fund or acting on any business of such Fund (other than services or business in connection with the duties of FSS hereunder) to be rendering such services to or acting solely for such Fund and not as an officer, trustee, partner, employee or agent or one under the control or direction of FSS even though paid by FSS. This Section 6 shall survive termination of this Agreement. 7. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought. 8. FSS is expressly put on notice of the limitation of liability as set forth in the Declaration of Trust of each Fund that is a Massachusetts business trust and agrees that the obligations assumed by each such Fund pursuant to this Agreement shall be limited in any case to such Fund and its assets and that FSS shall not seek satisfaction of any such obligations from the shareholders of such Fund, the Trustees, Officers, Employees or Agents of such Fund, or any of them. 9. The execution and delivery of this Agreement have been authorized by the Trustees of FSS and signed by an authorized officer of FSS, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, and the obligations of this Agreement are not binding upon any of the Trustees or shareholders of FSS, but bind only the trust property of FSS as provided in the Declaration of Trust of FSS. 10. Notices of any kind to be given hereunder shall be in writing (including facsimile communication) and shall be duly given if delivered to any Fund and to such Fund at the following address: Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention: President and if delivered to FSS at Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention: President. 11. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject hereof whether oral or written. If any provision of this Agreement shall be held or made invalid by a court or regulatory agency decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. Subject to the provisions of Sections 3 and 4, hereof, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and shall be governed by Pennsylvania law; provided, however, that nothing herein shall be construed in a manner inconsistent with the Investment Company Act of 1940 or any rule or regulation promulgated by the Securities and Exchange Commission thereunder. 12. This Agreement may be executed by different parties on separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. 13. This Agreement shall not be assigned by any party without the prior written consent of FSS in the case of assignment by any Fund, or of the Funds in the case of assignment by FSS, except that any party may assign to a successor all of or a substantial portion of its business to a party controlling, controlled by, or under common control with such party. Nothing in this Section 14 shall prevent FSS from delegating its responsibilities to another entity to the extent provided herein. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. Attest: Investment Companies (listed on Exhibit 1) /s/ John W. McGonigle By:/s/ John F. Donahue John W. McGonigle John F. Donahue Secretary Chairman Attest: Federated Shareholder Services /s/ Joseph M. Huber By: /s/ John W. McGonigle Joseph M. Huber John W. McGonigle Secretary President EX-99.AUDITCONSENT 6 Exhibit 11 under Form N-1A Exhibit 23 under Item 601/Reg. SK INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Shareholders of Federated Municipal Securities Fund, Inc.,: We consent to the incorporation by reference in Post-Effective Amendment No. 52 to the Registration Statement (No. 2-57191) of Federated Municipal Securities Fund, Inc. of our report dated May 8, 1998, appearing in the Annual Report, which is incorporated by reference in such Registration Statement, and to the reference to us under the heading "Financial Highlights" in such Prospectus. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania July 27, 1998 EX-27.FDS 7
6 001 Federated Municipal Securities Fund, Inc. Class A Shares 12-Mos Mar-31-1998 Mar-31-1998 694,344,458 724,749,481 13,226,554 0 0 737,976,035 39,478,519 0 2,267,440 41,745,959 0 672,001,933 54,217,940 57,773,220 0 (3,851,364) (2,325,516) 0 30,405,023 591,310,325 0 39,150,357 0 7,004,385 32,145,972 (664,845) 42,415,663 73,896,790 0 28,187,919 1,381,790 446,648 9,670,305 15,033,250 1,807,665 2,635,228 0 (34,795) (3,325,545) 0 3,872,458 0 7,845,975 702,466,607 10.310 0.460 0.640 0.460 0.030 0.010 10.910 0.86 0 0.000
EX-27.FDS 8
6 002 Federated Municipal Securities Fund, Inc. B Shares 12-Mos Mar-31-1998 Mar-31-1998 694,344,458 724,749,481 13,226,554 0 0 737,976,035 39,478,519 0 2,267,440 41,745,959 0 672,001,933 8,005,162 7,521,540 0 (3,851,364) (2,325,516) 0 30,405,023 87,304,060 0 39,150,357 0 7,004,385 32,145,972 (664,845) 42,415,663 73,896,790 0 3,245,800 204,140 66,543 2,304,892 1,983,725 162,455 2,635,228 0 (34,795) (3,325,545) 0 3,872,458 0 7,845,975 702,466,607 10.310 0.380 0.640 0.380 0.030 0.010 10.910 1.75 0 0.000
EX-27.FDS 9
6 003 Federated Municipal Securities Fund, Inc. C Shares 12-Mos Mar-31-1998 Mar-31-1998 694,344,458 724,749,481 13,226,554 0 0 737,976,035 39,478,519 0 2,267,440 41,745,959 0 672,001,933 1,615,215 1,993,037 0 (3,851,364) (2,325,516) 0 30,405,023 17,615,691 0 39,150,357 0 7,004,385 32,145,972 (664,845) 42,415,663 73,896,790 0 712,253 39,946 12,628 176,581 598,603 44,200 2,635,228 0 (34,795) (3,325,545) 0 3,872,458 0 7,845,975 702,466,607 10.310 0.370 0.650 0.370 0.030 0.020 10.910 1.74 0 0.000
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