-----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, OVbLm36WjTLqJikM805S68EA0dhVytrItfVvLdLKa3JSNm4dByMNwisCds1xAzuI eL+LH27cxYPXig7qYcIsFQ== 0000201801-98-000014.txt : 19981202 0000201801-98-000014.hdr.sgml : 19981202 ACCESSION NUMBER: 0000201801-98-000014 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02677 FILM NUMBER: 98761982 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122886520 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 [Graphic] Federated Municipal Securities Fund, Inc. 22ND SEMI-ANNUAL REPORT SEPTEMBER 30, 1998 ESTABLISHED 1976 PRESIDENT'S MESSAGE [Graphic] Dear Fellow Shareholder: Federated Municipal Securities Fund, Inc. was created in 1976, and I am pleased to present its 22nd Semi-Annual Report. The fund has provided tax-free income from a broad list of long-term municipal issues since 1976.* On September 30, 1998, the fund's $696.9 million portfolio was invested across 104 tax-free securities issued by municipalities across the U.S. The fund's weighted average effective maturity was 10.69 years. This report covers the first half of the fund's fiscal year which is the six-month period from April 1, 1998 through September 30, 1998. It begins with a discussion with J. Scott Albrecht, Vice President, who co- manages the fund with Mary Jo Ochson, Senior Vice President, both of Federated Advisers. Following their discussion are three additional items of shareholder interest. First is a series of graphs showing the fund's long-term investment performance. Second is a complete listing of the tax-free municipal securities that comprise the fund's holdings, and third is the publication of the fund's financial statements. During the six-month reporting period, municipal bonds continued to perform relatively well amid an environment of abundant supply. In the current market, municipal bonds generally have offered good yields relative to U.S. Treasuries. The fund's total return for the reporting period consisted of generous monthly income and modest price appreciation. Individual share class total return performance, including income dividends, follows.** TOTAL INCOME NET ASSET RETURN DISTRIBUTIONS VALUE INCREASE Class A Shares 4.44% $0.26 $10.91 to $11.13 = 2.02% Class B Shares 3.98% $0.21 $10.91 to $11.13 = 2.02% Class C Shares 3.98% $0.21 $10.91 to $11.13 = 2.02% * Income may be subject to the federal alternative minimum tax and state and local taxes. ** Performance quoted is based on net asset value, reflects past performance, and is not indicative of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period, based on offering price, for Class A, B, and C Shares were (0.23%), (1.61%), and 2.96%, respectively. Thank you for investing a portion of your wealth in Federated Municipal Securities Fund, Inc. The fund is a convenient way to invest in a broad list of municipal securities. You can receive income from the fund or increase your wealth by reinvesting your monthly dividends so they may compound tax-free.+ As always, we welcome your comments and suggestions. Sincerely yours, [Graphic] J. Christopher Donahue President November 15, 1998 + Systematic investing does not ensure a profit or protect against loss in declining markets. INVESTMENT REVIEW [Graphic] J. Scott Albrecht Vice President Federated Advisers [Graphic] Mary Jo Ochson Senior Vice President Federated Advisers [Graphic] THE FIRST HALF OF THE FUND'S FISCAL YEAR WAS A RELATIVELY GOOD PERIOD FOR MUNICIPAL BOND INVESTORS. WHAT IS YOUR REVIEW OF THE MARKETPLACE OVER THE SIX-MONTH REPORTING PERIOD ENDED SEPTEMBER 30, 1998? The municipal bond market generated solid returns over the period thanks to modest price appreciation and attractive coupon income. The Lehman Brothers Municipal Bond Index,* a good measure of the overall municipal market, provided a 4.64% total return over the six-month period, with 2.67% of this return generated from coupon income and the remainder from price appreciation. The increase in bond prices was primarily driven by a decline in interest rates over the reporting period. Municipal interest rates, as represented by the Bond Buyer 40 Index,* dropped from 5.27% to 5.04% over the reporting period. The yields of 30-year Treasury bonds declined as well, falling from 5.88% to 4.97%. [Graphic] WHY DO THE YIELDS FOR MUNICIPAL BONDS LOOK SO ATTRACTIVE RELATIVE TO OTHER FIXED-INCOME INVESTMENTS? In addition to the advantage of tax-free income**, here are two main reasons why investors find municipal bonds appealing today. First, there was a tremendous increase in the supply of municipal securities during the first eight months of 1998. Market strategists believe that municipal issuance for 1998 could exceed $300 billion, which would be an all-time record. Second, the turmoil in the international markets, particularly problems in the Asian, Russian, and Latin American economies, have contributed to a global "flight to quality" that has benefited Treasuries. Although municipal bonds are of very high credit quality, the flight to quality demand is from foreign buyers exempt from U.S. taxation. As of September 30, 1998, municipal bonds were trading at historically high values as compared to the Treasury market, with the long AAA-rated municipal bond at more than 97% of Treasury bond yields. * The Lehman Brothers Municipal Bond Index is a broad-based total return performance benchmark for the long-term, investment grade bond market. The Bond Buyer 40 Index is a standard against which municipal bonds are measured. These indexes are unmanaged, and investments cannot be made in an index. ** Income may be subject to the federal alternative minimum tax and state and local taxes. [Graphic] HOW HAS THE FEDERATED MUNICIPAL SECURITIES FUND, INC. PERFORMED WITH RESPECT TO TOTAL RETURN AND INCOME FOR THE SIX-MONTH REPORTING PERIOD ENDED SEPTEMBER 30, 1998? The fund performed very well over the reporting period. For the six-month period ended September 30, 1998, the fund's Class A Shares produced a total return of 4.44%, based on net asset value.** This return surpassed the Lipper General Municipal Fund Average+ total return of 4.28% and was competitive with the 4.64% return of the Lehman Brothers Municipal Bond Index. The income on this fund was also very competitive during the reporting period. The fund's current 30-day SEC yield on September 30, 1998 was 4.15% for Class A Shares, based on offering price.++ [Graphic] WHAT ACCOUNTED FOR THE FUND'S PERFORMANCE? Several factors were responsible for the competitive performance of the fund. First, the position in low investment-grade bonds (BBB-rated) with attractive coupons provided a big part of the fund's total return performance. These securities provided both substantial income plus price appreciation. The fund's share price also benefited from its allocation to zero coupon securities. These securities generally outperform when interest rates decline because of their call protection and duration characteristics. ** Performance quoted is based on net asset value, represents past performance, and is not indicative of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period, based on net asset value, for Class B and C Shares were 3.98% and 3.98%, respectively. Total returns for the period, based on offering price, for Class A, B, and C Shares were (0.23%), (1.61%), and 2.96%, respectively. + The Lipper figure represents the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the category indicated. These figures do not reflect sales charges. ++ The 30-day current SEC yield is calculated by dividing the investment income per share for the prior 30 days by the net asset value per share on that date. The SEC yields are compounded and annualized. The 30-day SEC yields on September 30, 1998 for Class B and C Shares were 3.26% and 3.27%, based on offering price, respectively. [Graphic] WHAT WERE THE FUND'S TOP FIVE HOLDINGS AS OF SEPTEMBER 30, 1998? PERCENTAGE OF ISSUER NET ASSETS District of Columbia--Georgetown University, (Series B), 7.15%, 4/1/2021 3.40% Indianapolis, IN Airport Authority-- Federal Express, 7.10%, 1/15/2017 3.10% Wayne County, MI--Detroit, (Series A), 5.00%, 12/1/2028 2.80% Metropolitan Wayne County Airport Long Beach California Harbor (Insured), 5.375%, 5/15/2020 2.80% New York State Dormitory Authority--Department of Mental Hygiene, 5.375%, 2/15/2026 2.60% TOTAL 14.70% [Graphic] HOW WERE THE FUND'S ASSETS ALLOCATED IN TERMS OF CREDIT QUALITY AT THE END OF THE REPORTING PERIOD? As of September 30, 1998, the quality breakdown of the fund was: PERCENTAGE OF NET ASSETS AAA 25.7% AA 12.8% A 20.1% BBB 21.7% Non-Rated 19.1% [Graphic] WHAT KIND OF ENVIRONMENT DO YOU SEE AHEAD FOR MUNICIPAL BONDS? Our outlook for the balance of 1998 and into 1999 remains optimistic for municipal securities. We believe economic growth (Gross Domestic Product) will slow to a point nearer to the Federal Reserve Board's non-inflationary growth rate of 2.50% from a very strong real rate of 3.50% for the first half of 1998. Inflation should continue to remain in check and interest rates low due to a slower economy, overseas economic problems, and a federal budget surplus. We also believe that the combination of rising demand and expectations that new municipal issuance will begin to decrease later this year, should drive municipal yields back to a more normal alignment against Treasuries. If this happens against a backdrop of lower rates, municipal bonds may generate not only attractive tax-free yields but some price appreciation. SHAREHOLDER MEETING RESULTS A Special Meeting of fund shareholders was held on July 21, 1998. On May 13, 1998, the record date for shareholders voting at the meeting, there were 63,414,620 total outstanding shares. The following items were considered by shareholders and the results of their voting were as follows: AGENDA ITEM 1: To elect Directors.* SHARES SHARES VOTED FOR WITHHELD AUTHORITY Thomas G. Bigley 42,249,135 997,671 Nicholas P. Constantakis 42,251,986 994,820 John E. Murray, Jr., J.D., S.J.D. 42,251,986 994,820 AGENDA ITEM 2: To approve or disapprove amending and changing from a fundamental to an operating policy the Fund's ability to invest in restricted securities. The results of shareholders' voting were as follows: SHARES SHARES SHARES BROKER VOTED FOR VOTED AGAINST ABSTAIN NON-VOTE 32,614,485 3,253,866 2,327,531 5,050,924 AGENDA ITEM 3: To approve or disapprove amending and changing from a fundamental to an operating policy the Fund's ability to invest in the securities of other investment companies. The results of shareholders' voting were as follows: SHARES SHARES SHARES BROKER VOTED FOR VOTED AGAINST ABSTAIN NON-VOTE 32,763,412 3,069,447 2,363,024 5,050,923 * The following Directors of the Fund continued their terms as Directors of the Fund: John F. Donahue, John T. Conroy, Jr., William J. Copeland, J. Christopher Donahue, James E. Dowd, Esq., Lawrence D. Ellis, M.D., Edward L. Flaherty, Jr., Esq., Peter E. Madden, Wesley W. Posvar, and Marjorie P. Smuts. AGENDA ITEM 4: To approve or disapprove amending and changing from a fundamental to an operating policy the Fund's ability to invest in non-investment grade municipal bonds. The results of shareholders' voting were as follows: SHARES SHARES SHARES BROKER VOTED FOR VOTED AGAINST ABSTAIN NON-VOTE 29,694,806 5,858,522 2,642,555 5,050,923 AGENDA ITEM 5: To approve or disapprove removing the Fund's fundamental investment policy on investing in puts and calls. The results of shareholders' voting were as follows: SHARES SHARES SHARES BROKER VOTED FOR VOTED AGAINST ABSTAIN NON-VOTE 30,500,360 4,241,301 3,454,221 5,050,924 AGENDA ITEM 6: To approve or disapprove removing the Fund's fundamental investment policy on investing in issuers whose securities are owned by Officers and Directors. The results of shareholders' voting were as follows: SHARES SHARES SHARES BROKER VOTED FOR VOTED AGAINST ABSTAIN NON-VOTE 30,230,913 4,919,947 3,045,023 5,050,923 TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED MUNICIPAL SECURITIES FUND, INC. INITIAL INVESTMENT: IF YOU HAD MADE AN INITIAL INVESTMENT OF $22,000 IN THE CLASS A SHARES OF FEDERATED MUNICIPAL SECURITIES FUND, INC. ON 10/31/76, REINVESTED YOUR DIVIDENDS AND CAPITAL GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH $86,009 ON 9/30/98. YOU WOULD HAVE EARNED A 6.42%* AVERAGE ANNUAL TOTAL RETURN FOR THE INVESTMENT LIFE SPAN. One key to investing wisely is to reinvest all tax-free distributions in fund shares. This increases the number of shares on which you can earn future tax-free dividends, and you gain the benefit of compounding tax free. As of 9/30/98, the Class A Shares' average annual 1-year, 5-year, and 10-year total returns were 3.83%, 4.00%, and 6.90%, respectively. Class B Shares' average annual 1-year and since-inception (7/26/94) total returns were 2.10% and 4.99%, respectively. Class C Shares' average annual 1-year, 5-year, and since-inception (4/21/93) total returns were 6.75%, 4.03%, and 4.50%, respectively.** Please see Appendix A.1. * Total return represents the change in the value of an investment in Class A Shares after reinvesting all income and capital gains, and takes into account the 4.50% sales charge applicable to an initial investment in Class A Shares. Data quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate, so an investor's shares, when redeemed, may be worth more or less than their original cost. ** The total returns take into account the 4.50% sales charge for Class A Shares, the 5.50% contingent deferred sales charge for Class B Shares, and the 1.00% contingent deferred sales charge for Class C Shares. FEDERATED MUNICIPAL SECURITIES FUND, INC. ONE STEP AT A TIME: $1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR 21 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $55,031. With this approach, the key is consistency. If you had started investing $1,000 annually in the Class A Shares of Federated Municipal Securities Fund, Inc. on 10/31/76, reinvested your dividends and capital gains and did not redeem any shares, you would have invested only $22,000 but your account would have reached a total value of $55,031* by 9/30/98. You would have earned an average annual total return of 6.42%. A practical investment plan helps you pursue a high level of income through tax-free municipal bonds. Through systematic investing, you buy shares on a regular basis and reinvest all tax-free earnings. An investment plan works for you when you invest only $1,000 annually. You can take it one step at a time. Put time, money, and compounding to work. Please see Appendix A.2. * This chart assumes that the subsequent annual investments are made on the last day of each anniversary month. No method of investing can guarantee a profit or protect against loss in down markets. However, by investing regularly over time and buying shares at various prices, investors can purchase more shares at lower prices. All accumulated shares have the ability to pay income to the investor. Because such a plan involves continuous investment, regardless of changing price levels, the investor should consider whether or not to continue purchases through periods of low price levels. FEDERATED MUNICIPAL SECURITIES FUND, INC. HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR TAX-FREE INCOME Larry and Barbara Bartlett are a fictional couple who, like all other tax-sensitive shareholders, want to keep more of what they earn. Larry owns a successful architectural firm and Barbara is a marketing executive. Their combined income puts them in the 39.6% federal tax bracket. On September 30, 1988, the Bartletts invested $25,000 in the Class A Shares of Federated Municipal Securities Fund, Inc. As this chart shows, in 10 years, their original $25,000 investment has grown to $48,700.* This represents a 6.90% average annual total return. As far as the Bartletts are concerned, this fund has made all the difference. Please see Appendix A.3. * Income may be subject to the federal alternative minimum tax and state and local taxes. This hypothetical scenario is provided for illustrative purposes only and does not represent the results obtained by any particular shareholder. Past performance does not guarantee future results. FEDERATED MUNICIPAL SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1998 (UNAUDITED)
PRINCIPAL AMOUNT CREDIT RATING* VALUE SHORT-TERM MUNICIPALS--0.4% CALIFORNIA--0.2% $ 1,500,000 Monterey Peninsula, CA Water Management District Weekly VRDNs (Wastewater Reclaimation)/(Sumitomo Bank Ltd., Osaka LOC) A-2 $ 1,500,000 IDAHO--0.2% 1,300,000 Boise, ID Industrial Development Corp., Multi-Mode Variable Rate Industrial Development Revenue Bonds (Series 1998) Weekly VRDNs (Multiquip Inc. Project)/(Bank of Tokyo- Mitsubishi Ltd. LOC) A-1 1,300,000 TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST) 2,800,000 LONG-TERM MUNICIPALS--99.0% ALABAMA--3.4% 10,000,000 Alabama State Docks Department, Docks Facilities Refunding Revenue Bonds, 5.50% (MBIA INS)/(Original Issue Yield: 5.75%), 10/1/2022 AAA 10,653,700 2,000,000 Courtland, AL IDB, Solid Waste Disposal Revenue Bonds (Series A), 6.50% (Champion International Corp.)/(Original Issue Yield: 6.654%), 9/1/2025 BBB 2,175,580 3,620,000 Jefferson County, AL, Sewer Revenue Refunding Warrants (Series 1997-A), 5.625% (FGIC INS)/(Original Issue Yield: 5.68%), 2/1/2018 AAA 3,910,795 6,260,000 Jefferson County, AL, Sewer Revenue Warrants (Series 1997D), 5.70% (FGIC INS)/(Original Issue Yield: 5.73%), 2/ 1/2018 AAA 6,813,321 Total 23,553,396 ALASKA--0.3% 2,000,000 Alaska Industrial Development and Export Authority, Refunding Revenue Bonds (Series A), 5.25% (MBIA INS)/ (Original Issue Yield: 5.39%), 4/1/2023 AAA 2,025,000 ARIZONA--0.1% 1,000,000 Show Low, AZ Industrial Development Authority, Hospital Revenue Bonds, Series 1998A, 5.50% (Navapache Regional Medical Center)/(American Capital Access INS)/(Original Issue Yield: 5.584%), 12/1/2017 A 1,033,230
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED CALIFORNIA--6.5% $ 9,400,000 California PCFA, Refunding Revenue Bonds (Series A), 5.90% (San Diego Gas & Electric)/(Original Issue Yield: 5.934%), 6/1/2014 A $ 10,736,116 14,600,000 California Statewide Communities Development Authority, Special Facilities Revenue Bonds, 5.625% (United Air Lines)/ (Original Issue Yield: 5.75%), 10/1/2034 BB+ 15,040,920 19,000,000 Long Beach California Harbor, Revenue Bonds, 5.375% (MBIA INS)/(Original Issue Yield: 5.75%), 5/15/2020 AAA 19,539,980 Total 45,317,016 COLORADO--0.4% 3,000,000 Highlands Ranch Metropolitan District No. 3, CO, UT GO Refunding Bonds, Series B, 5.25% (American Capital Access INS)/(Original Issue Yield: 5.375%), 12/1/2018 A 3,055,200 DISTRICT OF COLUMBIA--5.6% 8,275,000 District of Columbia Hospital Authority, Revenue Refunding Bonds (Series A), 7.125% (Medlantic Healthcare Group)/ (Original Issue Yield: 7.30%), 8/15/2019 BBB+ 9,380,375 2,000,000 District of Columbia Hospital Authority, Revenue Refunding Bonds (Series B), 7.00% (Medlantic Healthcare Group)/ (Original Issue Yield: 7.282%), 8/15/2015 BBB+ 2,258,620 22,250,000 District of Columbia, Revenue Bonds (Series B), 7.15% (Georgetown University)/(Original Issue Yield: 7.191%), 4/1/2021 A+ 23,068,132 4,000,000 District of Columbia, Revenue Bonds, 5.625% (American University)/(AMBAC INS)/(Original Issue Yield: 5.90%), 10/1/2026 AAA 4,295,520 Total 39,002,647 FLORIDA--2.7% 4,335,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue Yield: 9.173%), 6/1/2014 AA+ 6,341,195 665,000 Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(United States Treasury COL)/(Original Issue Yield: 9.173%), 6/1/2014 AAA 961,470
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED FLORIDA--CONTINUED $ 6,635,000 Florida State Department of Transportation, Right of Way Acquisition & Bridge Construction Bonds (Series 1997A), 5.00% (Original Issue Yield: 5.10%), 7/1/2014 AA+ $ 6,849,111 3,000,000 Florida State, UT GO Bonds, Broward County Expressway Authority, 10.00% (Original Issue Yield: 10.105%), 7/1/2014 AA+ 4,667,700 Total 18,819,476 GEORGIA--0.9% 6,000,000 Effingham County, GA Development Authority, Solid Waste Disposal Revenue Bonds, Series 1998, 5.625% (Fort James Corp.), 7/1/2018 BBB- 6,115,800 HAWAII--1.3% 5,000,000 Hawaii State Department of Budget & Finance, Residual Interest Tax-Exempt Securities (Series PA-343), 5.47151% (Hawaiian Electric Company, Inc.), 4/1/2012 NR 5,436,300 1,500,000 Hawaii State Department of Budget & Finance, Special Purpose Revenue Bonds, 5.35% (G.N. Wilcox Memorial Hospital)/ (Original Issue Yield: 5.45%), 7/1/2018 BBB+ 1,518,810 1,750,000 Hawaii State Department of Budget & Finance, Special Purpose Revenue Bonds, 5.50% (G.N. Wilcox Memorial Hospital), 7/1/2028 BBB+ 1,779,400 Total 8,734,510 IDAHO--0.1% 1,000,000 Idaho Health Facilities Authority, Hospital Revenue Bonds (Series 1998), 5.45% (Idaho Elks Rehabilitation Hospital)/ (Original Issue Yield: 5.53%), 7/15/2023 BBB 1,014,260 ILLINOIS--4.6% 8,295,000 Cook County, IL, Refunding GO Bonds (Series 1997A), 6.25% (MBIA INS), 11/15/2013 AAA 9,869,640 5,000,000 Illinois Development Finance Authority, Housing Revenue Bonds, 6.10% (Catholic Charities Housing Development Corp.), 1/1/2020 NR 5,168,500 11,240,000 Illinois Health Facilities Authority, Hospital Revenue Bonds (Series A), 9.25% (Edgewater Hospital & Medical Center, IL), 7/1/2024 NR 14,420,470
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED ILLINOIS--CONTINUED $ 2,500,000 Illinois Health Facilities Authority, Revenue Bonds (Series 1998), 5.25% (Centegra Health System)/(Original Issue Yield: 5.512%), 9/1/2024 A- $ 2,512,000 Total 31,970,610 INDIANA--4.4% 6,200,000 Indiana Health Facility Financing Authority, Hospital Revenue Bonds, 6.625% (Floyd Memorial Hospital, IN)/ (Original Issue Yield: 6.902%), 2/15/2022 A 6,857,696 2,000,000 Indiana Health Facility Financing Authority, Hospital Revenue Refunding Bonds, 5.25% (Floyd Memorial Hospital, IN)/(Original Issue Yield: 5.50%), 2/15/2022 A 2,022,940 19,000,000 Indianapolis, IN Airport Authority, Special Facilities Revenue Bonds, 7.10% (FDX Corp.)/(Original Issue Yield: 7.178%), 1/15/2017 BBB 21,561,580 Total 30,442,216 IOWA--1.7% 2,000,000 Des Moines, IA, Aviation System Revenue Bonds (1998B), 5.125% (FSA INS)/(Original Issue Yield: 5.40%), 7/1/2018 AAA 2,008,980 9,500,000 Iowa Finance Authority, Hospital Facilities Revenue Bonds (Series 1998A), 5.125% (Iowa Health System)/(MBIA INS)/ (Original Issue Yield: 5.36%), 7/1/2020 AAA 9,532,585 Total 11,541,565 KANSAS--0.1% 1,000,000 Newton, KS, Hospital Revenue Refunding Bonds, Series 1998, 5.75% (Newton Healthcare Corp.)/(Original Issue Yield: 5.787%), 11/15/2024 BBB- 1,033,020 LOUISIANA--3.1% 6,000,000 De Soto Parish, LA Environmental Improvement Authority, Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018 BBB+ 7,035,000 3,550,000 St. Charles Parish, LA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (Louisiana Power & Light Co.)/(Original Issue Yield: 7.04%), 12/1/2022 BBB 3,887,605
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED LOUISIANA--CONTINUED $ 10,000,000 St. James Parish, LA, Solid Waste Disposal Revenue Bonds, 7.70% (Freeport McMoRan, Inc.)/(Original Issue Yield: 7.75%), 10/1/2022 NR $ 10,904,800 Total 21,827,405 MARYLAND--1.9% 12,220,000 Maryland State Community Development Administration, SFM Revenue Bonds (5th Series), 6.75%, 4/1/2026 AA 13,221,185 MASSACHUSETTS--5.8% 10,000,000 Commonwealth of Massachusetts, UT GO Bonds (Series 1997C), 5.00% (Original Issue Yield: 5.30%), 8/1/2017 AA- 10,145,700 33,800,000(a) Massachusetts IFA, Solid Waste Disposal Sr. Lien Revenue Bonds (Series A), 9.00% (Massachusetts Recycling Association), 8/1/2016 NR 12,675,000 2,200,000 Massachusetts State HFA, Rental Housing Mortgage Revenue Bonds, 1995 Series E, 5.90% (AMBAC INS), 7/1/2025 AAA 2,313,432 15,000,000 Massachusetts Turnpike Authority, Metropolitan Highway System Revenue Bonds (Series A), 5.00% (MBIA INS)/(Original Issue Yield: 5.55%), 1/1/2037 AAA 14,960,700 Total 40,094,832 MICHIGAN--4.3% 1,250,000 Flint, MI Hospital Building Authority, Rental Revenue Bonds (Series 1998B), 5.375% (Hurley Medical Center)/(Original Issue Yield: 5.53%), 7/1/2028 BBB 1,259,650 1,000,000 Flint, MI Hospital Building Authority, Revenue Rental Bonds (Series 1998B), 5.375% (Hurley Medical Center)/(Original Issue Yield: 5.48%), 7/1/2018 BBB 1,006,850 1,500,000 Michigan State Hospital Finance Authority, Revenue Bonds (Series 1998A), 5.25% (Detroit Medical Center Obligated Group)/(Original Issue Yield: 5.40%), 8/15/2028 A- 1,498,785
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED MICHIGAN--CONTINUED $ 6,500,000 Michigan Strategic Fund, Limited Obligation Revenue Refunding Bonds (Series A), 5.55% (Detroit Edison Co.)/(MBIA INS), 9/1/2029 AAA $ 6,636,175 20,000,000 Wayne County, MI, Revenue Bonds (Series A), 5.00% (Detroit Metropolitan Wayne County Airport)/(MBIA INS), 12/1/2028 AAA 19,829,200 Total 30,230,660 MINNESOTA--3.5% 8,000,000 St. Paul, MN Housing & Redevelopment Authority, Hospital Revenue Refunding Bonds ( Series A), 6.625% (Healtheast, MN)/ (Original Issue Yield: 6.687%), 11/1/2017 BBB 8,673,280 1,000,000 St. Paul, MN Housing & Redevelopment Authority, Revenue Bonds (Series 1997A), 5.70% (Healtheast, MN)/(Original Issue Yield: 5.756%), 11/1/2015 BBB 1,034,520 12,000,000 VRDC/IVRC Trust, GO Inverse Variable Rate Certificates, 7.423% (Regents of University of Minnesota), 5/18/2012 AA 14,985,000 Total 24,692,800 MISSOURI--1.5% 8,010,000 Kansas City, MO, UT GO Bonds, Series B, 5.125% (Original Issue Yield: 5.25%), 2/1/2017 AA 8,255,907 1,980,000 Missouri State Housing Development Commission, Single Family Mortgage Revenue Bonds (Series 1997C-1), 6.55% (GNMA Collateralized Home Mortgage Program COL), 9/1/2028 AAA 2,220,055 Total 10,475,962 NEW HAMPSHIRE--0.4% 2,500,000 New Hampshire Higher Educational & Health Facilities Authority, Revenue Bonds (Series 1998), 5.30% (Franklin Pierce College)/(American Capital Access INS)/(Original Issue Yield: 5.48%), 10/1/2028 A 2,509,625 NEW JERSEY--0.3% 2,100,000 New Jersey EDA, Kapkowski Road Landfill Revenue Bonds, 6.50% (New Jersey Metromall Urban Renewal, Inc.)/(Original Issue Yield: 6.55%), 4/1/2018 NR 2,110,290
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED NEW MEXICO--0.8% $ 5,000,000 Farmington, NM, PCR Refunding Bonds (Series A), 7.20% (Southern California Edison Co.)/(Original Issue Yield: 7.30%), 4/1/2021 A+ $ 5,429,850 NEW YORK--12.6% 6,500,000 Long Island Power Authority, Electric System Revenue Bonds (Series 1998A), 5.25% (Original Issue Yield: 5.47%), 12/1/2026 A- 6,656,325 17,000,000 New York City Municipal Water Finance Authority, Water & Sewer System Revenue Bonds (Series B), 5.25% (Original Issue Yield: 5.53%), 6/15/2029 A- 17,302,770 4,600,000 New York City, NY IDA, Industrial Development Revenue Bonds (Series 1997), 5.75% (Brooklyn Navy Yard Cogeneration Partners, L.P. Project)/(Original Issue Yield: 5.81%), 10/1/2036 BBB- 4,759,344 7,500,000 New York City, NY, Residual Interest Tax-Exempt Securities (Series PA-147), 6.60847%, 8/1/2007 NR 8,956,950 5,000,000 New York City, NY, UT GO Bonds (Series 1998G), 5.00% (Original Issue Yield: 5.25%), 8/1/2018 A- 5,023,300 17,800,000 New York State Dormitory Authority, Revenue Bonds (Series B), 5.375% (New York State Department of Mental Hygiene)/ (Original Issue Yield: 5.97%), 2/15/2026 A- 18,367,642 10,000,000 New York State Dormitory Authority, Revenue Bonds, 5.125% (State University of New York)/(Original Issue Yield: 5.54%), 5/15/2021 A- 10,105,600 5,050,000 New York State Local Government Assistance Corp., Residual Interest Tax-Exempt Securities (Series PA-207), 7.70959% (AMBAC INS), 4/1/2008 NR 6,537,377 6,025,000 New York State Local Government Assistance Corp., Residual Interest Tax-Exempt Securities (Series PA-207A), 7.70959% (AMBAC INS), 4/1/2007 NR 7,689,406 2,000,000 New York State Mortgage Agency, Mortgage Revenue Bonds ( Series 30-B), 6.65% (FHA GTD), 10/1/2025 Aaa 2,146,600 Total 87,545,314 NORTH CAROLINA--1.4% 9,000,000 Martin County, NC IFA, (Series 1995) Solid Waste Disposal Revenue Bonds, 6.00% (Weyerhaeuser Co.), 11/1/2025 A 9,616,410
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED OHIO--0.6% $ 1,000,000 Cuyahoga County, OH, Health Care Facilities Refunding Revenue Bonds, 5.50% (Benjamin Rose Institute)/(Original Issue Yield: 5.75%), 12/1/2028 NR $ 1,001,990 3,000,000 Franklin County, OH Health Care Facilities, Revenue Refunding Bonds, 5.50% (Ohio Presbyterian Retirement Services)/(Original Issue Yield: 5.64%), 7/1/2017 NR 3,033,660 Total 4,035,650 OKLAHOMA--1.2% 7,500,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.60% (American Airlines)/(Original Issue Yield: 7.931%), 12/1/2030 BBB- 8,183,400 PENNSYLVANIA--7.5% 2,310,000 Allegheny County, PA HDA, Refunding Revenue Bonds (Series 1998A), 5.125% (South Hills Health System)/(Original Issue Yield: 5.34%), 5/1/2023 A2 2,315,105 2,000,000 Allegheny County, PA HDA, Refunding Revenue Bonds (Series 1998A), 5.125% (South Hills Health System)/(Original Issue Yield: 5.40%), 5/1/2029 A2 1,996,840 2,210,000 Elizabeth Forward, PA School District, GO UT Bonds, 6.75% accrual (MBIA INS)/(Original Issue Yield: 6.75%), 9/1/2018 AAA 844,220 1,300,000 Latrobe, PA Industrial Development Authority, College Revenue Bonds, 6.75% (St. Vincent College, PA)/(Original Issue Yield: 7.00%), 5/1/2024 AAA 1,502,059 4,250,000 Pennsylvania EDFA, Revenue Bonds, 7.60% (MacMillan Bloedel LTD Partnership)/(Original Issue Yield: 7.65%), 12/1/2020 BBB- 4,915,125 8,000,000 Pennsylvania Housing Finance Authority, SFM Revenue Bonds (Series 39B), 6.875%, 10/1/2024 AA+ 8,454,480 12,865,000 Pennsylvania State Higher Education Facilities Authority, Revenue Bonds (Series A), 7.375% (Medical College of Pennsylvania)/(United States Treasury PRF)/(Original Issue Yield: 7.45%), 3/1/2021 AAA 14,199,744 15,000,000 Philadelphia, PA School District, UT GO (Series B), 5.50% (AMBAC INS)/(Original Issue Yield: 5.95%), 9/1/2025 AAA 15,778,200
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED PENNSYLVANIA--CONTINUED $ 2,000,000 Sayre, PA, Health Care Facilities Authority, Revenue Bonds (Series A), 7.10% (Guthrie Healthcare System, PA)/(AMBAC INS)/(Original Issue Yield: 7.175%), 3/1/2017 AAA $ 2,172,980 Total 52,178,753 PUERTO RICO--0.7% 2,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest Tax-Exempt Securites (Series PA 331A), 6.85753% (AMBAC INS), 7/1/2013 NR 2,475,840 2,000,000 Puerto Rico Highway and Transportation Authority, Residual Interest Tax-Exempt Securities (Series PA 331B), 6.85753% (AMBAC INS), 7/1/2014 NR 2,459,680 Total 4,935,520 TENNESSEE--2.4% 13,000,000 Springfield, TN Health & Educational Facilities Board, Hospital Revenue Bonds, 8.50% (NorthCrest Medical Center)/ (Original Issue Yield: 8.875%), 4/1/2024 AAA 16,962,660 TEXAS--11.4% 4,000,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A), 7.875% (Texas Utilities Electric Co.), 3/1/2021 BBB+ 4,377,160 12,750,000 Dallas-Fort Worth, TX International Airport Facilities, Revenue Bonds, 7.25% (American Airlines)/(Original Issue Yield: 7.428%), 11/1/2030 BBB- 14,181,315 10,000,000 Fort Worth, TX Higher Education Finance Corp., Revenue Bonds, 5.00% (Texas Christian University)/(Original Issue Yield: 5.287%), 3/15/2027 AA- 9,977,200 3,000,000 Georgetown, TX Health Facilities Development Corporation, Revenue Bonds, 5.375% (Wesleyan Homes, Inc.)/(American Capital Access INS)/(Original Issue Yield: 5.55%), 8/15/2028 A 3,064,350 2,000,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds (Series A), 6.875% (Champion International Corp.)/(Original Issue Yield: 7.15%), 12/1/2028 BBB 2,188,280 4,490,000 Gulf Coast, TX Waste Disposal Authority, Revenue Bonds, 5.60% (Valero Energy Corp.), 4/1/2032 BBB- 4,533,239
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED TEXAS--CONTINUED $ 2,200,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series 1997A, 6.00% (Memorial Hospital System)/(MBIA LOC), 6/1/2011 AAA $ 2,530,836 4,000,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series 1997A, 6.00% (Memorial Hospital System)/(MBIA LOC), 6/1/2012 AAA 4,609,560 2,000,000 Lufkin, TX HFDC, Health System Revenue Bonds (Series 1998), 5.70% (Memorial Health System of East Texas)/ (Original Issue Yield: 5.75%), 2/15/2028 BBB 2,050,020 3,700,000 Red River Authority, TX, PCR Bonds, 6.875% (Hoechst Celanese Corp.)/(Original Issue Yield: 6.939%), 4/1/2017 A+ 4,064,783 6,610,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.50% (Richardson Medical Center, TX)/ (Original Issue Yield: 6.72%), 12/1/2012 BBB- 7,144,485 1,000,000 Richardson, TX Hospital Authority, Hospital Refunding & Improvement Bonds, 6.75% (Richardson Medical Center, TX)/ (Original Issue Yield: 6.82%), 12/1/2023 BBB- 1,091,630 12,450,000 San Antonio, TX Electric & Gas, Revenue Refunding Bonds, 5.00% (Original Issue Yield: 6.10%), 2/1/2017 AA 12,490,088 5,000,000 Tarrant County, TX Health Facilities Development Corp., System Revenue Bonds (Series 1997A), 5.75% (Texas Health Resources System)/(MBIA INS), 2/15/2015 AAA 5,603,850 1,500,000 Texas State, UT GO Veterans Housing Assistance, 7.00%, 12/1/2025 AA 1,636,035 Total 79,542,831 UTAH--3.4% 13,500,000 Salt Lake City, UT Hospital Authority, Hospital Revenue Refunding Bonds (Series A), 8.125% (IHC Hospitals Inc., UT)/ (United States Treasury COL)/(Original Issue Yield: 8.17%), 5/15/2015 AAA 17,911,530 6,000,000 Tooele County, UT, Hazardous Waste Treatment Revenue Bonds (Series 1998A), 5.70% (Union Pacific Corp.), 11/1/2026 BBB- 6,077,280 Total 23,988,810
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PRINCIPAL AMOUNT CREDIT RATING* VALUE LONG-TERM MUNICIPALS--CONTINUED WASHINGTON--0.7% $ 5,000,000 Washington State Public Power Supply System, (Nuclear Project No. 2) Refunding Revenue Bonds (Series 1998A), 5.00% (Original Issue Yield: 5.18%), 7/1/2012 AA- $ 5,122,550 WEST VIRGINIA--1.5% 1,368,351 Marion County, WV County Commission, Refunding Revenue Bonds, 10.00% (Adirondack Recycling), 12/1/2025 NR 1,245,199 9,790,831 Marion County, WV County Commission, Refunding Revenue Bonds, 8.00% (Adirondack Recycling), 12/1/2025 NR 8,909,656 Total 10,154,855 WISCONSIN--0.6% 4,000,000 Wisconsin Health and Educational Facilities Authority, Revenue Bonds (Series 1998A), 5.375% (The Richland Hospital, Inc.)/(American Capital Access INS)/(Original Issue Yield: 5.46%), 6/1/2028 A 4,026,680 WYOMING--1.3% 8,460,000 Sweetwater County, WY IDA, Solid Waste Disposal Revenue Bonds (Series A), 7.00% (FMC Corp.), 6/1/2024 BBB- 9,382,394 TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $652,449,705) 689,926,382 TOTAL INVESTMENTS (IDENTIFIED COST $655,249,705)(B) $692,726,382
Securities that are subject to Alternative Minimum Tax represent 33.6% of the portfolio as calculated based upon total portfolio market value. (a) Non-income producing security. (b) The cost of investments for federal tax purposes amounts to $655,249,705. The net unrealized appreciation of investments on a federal tax basis amounts to $37,476,677 which is comprised of $58,085,003 appreciation and $20,608,326 depreciation at September 30, 1998. * Please refer to the Appendix of the Statement of Additional Information for an explanation of the credit ratings. Current credit ratings are unaudited. Note: The categories of investments are shown as a percentage of net assets ($696,968,416) at September 30, 1998. The following acronyms are used throughout this portfolio: AMBAC--American Municipal Bond Assurance Corporation COL --Collateralized EDA --Economic Development Authority EDFA --Economic Development Financing Authority FGIC - --Financial Guaranty Insurance Company FHA --Federal Housing Administration FSA - --Financial Security Assurance GNMA --Government National Mortgage Association GO --General Obligation GTD --Guaranty HDA --Hospital Development Authority HFA - --Housing Finance Authority HFDC --Health Facility Development Corporation IDA - --Industrial Development Authority IDB --Industrial Development Bond IFA - --Industrial Finance Authority INS --Insured LOC --Letter of Credit MBIA - --Municipal Bond Investors Assurance PCR --Pollution Control Revenue PCFA - --Pollution Control Finance Authority PRF --Prerefunded SFM --Single Family Mortgage UT --Unlimited Tax VRDNs--Variable Rate Demand Notes MASSACHUSETTS IFA, SOLID WASTE DISPOSAL SR. LIEN REVENUE BONDS (SERIES A), 9.00% (MASSACHUSETTS RECYCLING ASSOCIATION) There are $173 million face amount of these Senior Lien Revenue Bonds currently outstanding. On August 12, 1997, the obligor filed a petition for relief under Chapter 11 of the Federal Bankruptcy Code. Pursuant to a settlement approved by the Bankruptcy Court, a new owner acquired the facility subject to a portion of the Senior Lien Revenue Bonds. The new owner entered into a fifteen-year lease guaranteed by the company that built the facility and pledged the lease and the guarantee as additional collateral for the Senior Lien Revenue Bonds. The Senior Lien Revenue Bonds are expected to be replaced with refunding bonds in the face amount of $56.3 million by December 31, 1998. The Senior Lien Revenue Bonds will not produce any income until exchanged for such refunding bonds. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1998 (UNAUDITED) ASSETS: Total investments in securities, at value (identified and tax cost $655,249,705) $692,726,382 Income receivable 12,554,202 Receivable for shares sold 1,035,415 Total assets 706,315,999 LIABILITIES: Payable for investments purchased $6,500,000 Payable for shares redeemed 51,026 Income distribution payable 2,623,135 Payable to Bank 869 Accrued expenses 172,553 Total liabilities 9,347,583 NET ASSETS for 62,635,869 shares outstanding $696,968,416 NET ASSETS CONSIST OF: Paid in capital $658,869,364 Net unrealized appreciation of investments 37,476,677 Accumulated net realized gain on investments 4,126,291 Distributions in excess of net investment income (3,503,916) Total net assets $696,968,416 NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE: CLASS A SHARES: Net Asset Value Per Share ($591,584,431 / 53,165,145 shares outstanding) $11.13 Offering Price Per Share (100/95.50 of $11.13)* $11.65 Redemption Proceeds Per Share $11.13 CLASS B SHARES: Net Asset Value Per Share ($88,308,176 / 7,936,159 shares outstanding) $11.13 Offering Price Per Share $11.13 Redemption Proceeds Per Share (94.50/100 of $11.13)** $10.52 CLASS C SHARES: Net Asset Value Per Share ($17,075,809 / 1,534,565 shares outstanding) $11.13 Offering Price Per Share $11.13 Redemption Proceeds Per Share (99.00/100 of $11.13)** $11.02
* See "Investing in the Fund" in the Prospectus. ** See "Contingent Deferred Sales Charge" in the Prospectus. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
INVESTMENT INCOME: Interest $19,681,421 EXPENSES: Investment advisory fee $1,925,232 Administrative personnel and services fee 261,438 Custodian fees 22,245 Transfer and dividend disbursing agent fees and expenses 250,013 Directors'/Trustees' fees 8,688 Auditing fees 9,651 Legal fees 5,211 Portfolio accounting fees 69,474 Distribution services fee--Class B Shares 325,340 Distribution services fee--Class C Shares 64,043 Shareholder services fee--Class A Shares 737,041 Shareholder services fee--Class B Shares 108,447 Shareholder services fee--Class C Shares 21,348 Share registration costs 22,884 Printing and postage 32,205 Insurance premiums 2,745 Taxes 13,146 Miscellaneous 5,211 Total expenses 3,884,362 Waivers-- Waiver of shareholder services fee--Class A Shares $(412,743) Waiver of shareholder services fee--Class C Shares (854) Total waivers (413,597) Net expenses 3,470,765 Net investment income 16,210,656 REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments 6,451,807 Net change in unrealized appreciation of investments 7,071,654 Net realized and unrealized gain on investments 13,523,461 Change in net assets resulting from operations $29,734,117
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED 1998 MARCH 31, (UNAUDITED) 1998 INCREASE (DECREASE) IN NET ASSETS: OPERATIONS-- Net investment income $ 16,210,656 $ 32,145,972 Net realized gain (loss) on investments ($6,451,807 and $3,273,099 net gain, respectively, as computed for federal tax purposes) 6,451,807 (664,845) Net change in unrealized appreciation 7,071,654 42,415,663 Change in net assets resulting from operations 29,734,117 73,896,790 DISTRIBUTIONS TO SHAREHOLDERS-- Distributions from net investment income Class A Shares (13,879,680) (28,187,919) Class B Shares (1,656,754) (3,245,800) Class C Shares (326,774) (712,253) Distributions in excess of net investment income Class A Shares -- (446,648) Class B Shares -- (66,543) Class C Shares -- (12,628) Distributions from net realized gains Class A Shares -- (1,381,790) Class B Shares -- (204,140) Class C Shares -- (39,946) Change in net assets resulting from distributions to shareholders (15,863,208) (34,297,667) SHARE TRANSACTIONS-- Proceeds from sale of shares 77,084,913 129,961,665 Net asset value of shares issued to shareholders in payment of distributions declared 8,360,610 21,687,238 Cost of shares redeemed (98,578,092) (188,612,798) Change in net assets resulting from share transactions (13,132,569) (36,963,895) Change in net assets 738,340 2,635,228 NET ASSETS: Beginning of period 696,230,076 693,594,848 End of period $ 696,968,416 $ 696,230,076
(See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. FINANCIAL HIGHLIGHTS--CLASS A SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, (UNAUDITED) 1998 1997 1996 1995 1994 NET ASSET VALUE, BEGINNING OF PERIOD $10.91 $10.31 $10.82 $10.92 $11.20 $11.62 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.27 0.46 0.55 0.66 0.67 0.66 Net realized and unrealized gain (loss) on investments 0.21 0.64 (0.36 ) (0.09 ) (0.05 ) (0.40 ) Total from investment operations 0.48 1.10 0.19 0.57 0.62 0.26 LESS DISTRIBUTIONS Distributions from net investment income (0.26) (0.46 ) (0.55 ) (0.66 ) (0.67 ) (0.66 ) Distributions in excess of net investment income(a) -- (0.01 ) (0.05 ) -- -- -- Total distributions from net investment income (0.26) (0.47 ) (0.60 ) (0.66 ) (0.67 ) (0.66 ) Distributions from net realized gain on investments -- (0.03 ) (0.10 ) (0.01 ) (0.23 ) (0.02 ) Total distributions (0.26) (0.50 ) (0.70 ) (0.67 ) (0.90 ) (0.68 ) NET ASSET VALUE, END OF PERIOD $11.13 $10.91 $10.31 $10.82 $10.92 $11.20 TOTAL RETURN(B) 4.44% 11.28% 1.84% 5.32% 5.90% 2.10% RATIOS TO AVERAGE NET ASSETS Expenses 0.87%* 0.86% 0.93% 0.98% 0.92% 0.84% Net investment income 4.81%* 4.70% 5.37% 5.97% 6.17% 5.59% Expense waiver/reimbursement(c) 0.14%* 0.14% 0.14% 0.13% -- -- SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $591,584 $591,310 $595,515 $663,538 $708,712 $714,384 Portfolio turnover 15% 64% 33% 29% 41% 27%
* Computed on an annualized basis. (a) Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal tax purposes. (b) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (c) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. FINANCIAL HIGHLIGHTS--CLASS B SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, (UNAUDITED) 1998 1997 1996 1995(A) NET ASSET VALUE, BEGINNING OF PERIOD $10.91 $10.31 $10.82 $10.92 $11.06 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.22 0.38 0.47 0.56 0.40 Net realized and unrealized gain (loss) on investments 0.21 0.64 (0.37 ) (0.09 ) (0.03 ) Total from investment operations 0.43 1.02 0.10 0.47 0.37 LESS DISTRIBUTIONS Distributions from net investment income (0.21) (0.38 ) (0.47 ) (0.56 ) (0.40 ) Distributions in excess of net investment income(b) -- (0.01 ) (0.04 ) -- -- Total distributions from net investment income (0.21) (0.39 ) (0.51 ) (0.56 ) (0.40 ) Distributions from net realized gain on investments -- (0.03 ) (0.10 ) (0.01 ) (0.11 ) Total distributions (0.21) (0.42 ) (0.61 ) (0.57 ) (0.51 ) NET ASSET VALUE, END OF PERIOD $11.13 $10.91 $10.31 $10.82 $10.92 TOTAL RETURN(C) 3.98% 10.30% 0.94% 4.40 % 3.49 % RATIOS TO AVERAGE NET ASSETS Expenses 1.77%* 1.75% 1.82% 1.86% 1.84%* Net investment income 3.94%* 3.81% 4.50% 5.23% 5.94%* SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $88,308 $87,304 $77,536 $58,296 $18,201 Portfolio turnover 15% 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 tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. FINANCIAL HIGHLIGHTS--CLASS C SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED MARCH 31, (UNAUDITED) 1998 1997 1996 1995 1994(a) NET ASSET VALUE, BEGINNING OF PERIOD $10.91 $10.31 $10.82 $10.92 $11.20 $11.70 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.22 0.37 0.46 0.56 0.58 0.52 Net realized and unrealized gain (loss) on investments 0.21 0.65 (0.36 ) (0.09 ) (0.05 ) (0.48 ) Total from investment operations 0.43 1.02 0.10 0.47 0.53 0.04 LESS DISTRIBUTIONS Distributions from net investment income (0.21) (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 (0.21) (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 (0.21) (0.42 ) (0.61 ) (0.57 ) (0.81 ) (0.54 ) NET ASSET VALUE, END OF PERIOD $11.13 $10.91 $10.31 $10.82 $10.92 $11.20 TOTAL RETURN(C) 3.98% 10.31% 0.95% 4.42% 4.96% 0.17 % RATIOS TO AVERAGE NET ASSETS Expenses 1.71%* 1.74% 1.81% 1.82% 1.81% 1.80%* Net investment income 3.84%* 3.83% 4.51% 5.16% 5.28% 4.70%* Expense waiver/reimbursement(d) 0.01%* 0.01% 0.01% 0.04% -- -- SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $17,076 $17,616 $20,544 $25,914 $22,389 $22,066 Portfolio turnover 15% 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 tax purposes. (c) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if applicable. (d) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above. (See Notes which are an integral part of the Financial Statements) FEDERATED MUNICIPAL SECURITIES FUND, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. ORGANIZATION Federated Municipal Securities Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund offers three classes of shares: Class A Shares, Class B Shares, and Class C Shares. The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing service, taking into consideration yield, liquidity, risk, credit quality, coupon, maturity, type of issue, and any other factors or market data the pricing service deems relevant. Short-term securities are valued at the prices provided by an independent pricing service. However, short-term securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS--Interest income and expenses are accrued daily. Bond premium and discount, if applicable, are amortized as required by the Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These distributions do not represent a return of capital for federal income tax purposes. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its income. Accordingly, no provisions for federal tax are necessary. Additionally, net capital losses of $5,489,729 attributable to security transactions incurred after October 31, 1997, are treated as arising on April 1, 1998, the first day of the Fund's next taxable year. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in when-issued or delayed delivery transactions. The Fund records when- issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated. OTHER--Investment transactions are accounted for on the trade date. 3. CAPITAL STOCK At September 30, 1998, par value shares ($0.01 per share) authorized were as follows: PERCENTAGE OF PAR VALUE SHARE CLASS NAME CAPITAL STOCK AUTHORIZED Class A Shares 375,000,000 Class B Shares 250,000,000 Class C Shares 375,000,000 TOTAL 1,000,000,000 Transactions in capital stock were as follows:
SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED (UNAUDITED) MARCH 31, 1998 CLASS A SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 6,238,583 $ 68,206,145 9,670,305 $ 103,414,194 Shares issued to shareholders in payment of distributions declared 689,440 7,529,395 1,807,665 19,419,915 Shares redeemed (7,980,818) (87,245,490) (15,033,250) (160,904,159) Net change resulting from Class A Share transactions (1,052,795) $ (11,509,950) (3,555,280) $ (38,070,050) SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED (UNAUDITED) MARCH 31, 1998 CLASS B SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 651,099 $ 7,121,903 2,304,892 $ 24,638,393 Shares issued to shareholders in payment of distributions declared 58,827 642,403 162,455 1,793,068 Shares redeemed (778,929) (8,511,702) (1,983,725) (21,309,970) Net change resulting from Class B Share transactions (69,003) $ (747,396) 483,622 $ 5,121,491 SIX MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED (UNAUDITED) MARCH 31, 1998 CLASS C SHARES SHARES AMOUNT SHARES AMOUNT Shares sold 159,301 $ 1,756,865 176,581 $ 1,909,078 Shares issued to shareholders in payment of distributions declared 17,294 188,812 44,200 474,255 Shares redeemed (257,245) (2,820,900) (598,603) (6,398,669) Net change resulting from Class C Share transactions (80,650) $ (875,223) (377,822) $ (4,015,336) Net change resulting from share transactions (1,202,448) $ (13,132,569) (3,449,480) $ (36,963,895)
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISORY FEE--Federated Advisers, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment advisory fee equal to (a) a maximum of 0.30% of the average daily net assets of the Fund, and (b) 4.50% of the gross income of the Fund, excluding capital gains or losses. ADMINISTRATIVE FEE--Federated Services Company ("FServ"), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FServ is based on the level of average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc. for the period. The administrative fee received during the period of the Administrative Services Agreement shall be at least $125,000 per portfolio and $30,000 per each additional class of shares. DISTRIBUTION SERVICES FEE--The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. ("FSC"), the principal distributor, from the net assets of the Fund to finance activities intended to result in the sale of the Fund's Class B and Class C Shares. The Plan provides that the Fund may incur distribution expenses according to the following schedule annually, to compensate FSC. PERCENTAGE OF AVERAGE SHARE CLASS NAME DAILY NET ASSETS Class B Shares 0.75% Class C Shares 0.75% FSC may voluntarily choose to waive any portion of its fee. FSC can modify or terminate this voluntary waiver at any time at its sole discretion. SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25% of average daily net assets of the of each class of shares for the period. The fee paid to FSS is used to finance certain services for shareholders and to maintain shareholder accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can modify or terminate this voluntary waiver at any time at its sole discretion. TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--FServ, through its subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the size, type, and number of accounts and transactions made by shareholders. PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for which it receives a fee. The fee is based on the level of the Fund's average daily net assets for the period, plus out-of-pocket expenses. INTERFUND TRANSACTIONS--During the period ended September 30, 1998, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions were made at current market value pursuant to Rule 17a-7 under the Act amounting to $77,500,000 and $91,300,000, respectively. GENERAL--Certain of the Officers and Directors of the Fund are Officers and Directors or Trustees of the above companies. 5. INVESTMENT TRANSACTIONS Purchases and sales of investments, excluding short-term securities, for the period ended September 30, 1998, were as follows: PURCHASES $104,501,709 SALES $148,266,090 6. CONCENTRATION OF CREDIT RISK Since the Fund invests a substantial portion of its assets in issuers located in one state, it will be more susceptible to factors adversely affecting issuers of that state than would be a comparable tax-exempt mutual fund that invests nationally. In order to reduce the credit risk associated with such factors, at September 30, 1998, 21.6% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The value of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 10.5% of total investments. 7. YEAR 2000 Similar to other financial organizations, the Fund could be adversely affected if the computer systems used by the Fund's service providers do not properly process and calculate date-related information and data from and after January 1, 2000. The Fund's Adviser and Administrator are taking measures that they believe are reasonably designed to address the Year 2000 issue with respect to computer systems that they use and to obtain reasonable assurances that comparable steps are being taken by each of the Fund's other service providers. At this time, however, there can be no assurance that these steps will be sufficient to avoid any adverse impact to the Fund. DIRECTORS John F. Donahue Thomas G. Bigley John T. Conroy, Jr. Nicholas P. Constantakis William J. Copeland J. Christopher Donahue James E. Dowd, Esq. Lawrence D. Ellis, M.D. Edward L. Flaherty, Jr., Esq. Peter E. Madden John E. Murray, Jr., J.D., S.J.D. Wesley W. Posvar Marjorie P. Smuts OFFICERS John F. Donahue Chairman J. Christopher Donahue President Edward C. Gonzales Executive Vice President John W. McGonigle Executive Vice President, Treasurer, and Secretary Richard B. Fisher Vice President Nicholas J. Seitanakis Assistant Secretary Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including possible loss of principal. This report is authorized for distribution to prospective investors only when preceded or accompanied by the fund's prospectus which contains facts concerning its objective and policies, management fees, expenses, and other information. [Graphic] Federated Investors Federated Securities Corp., Distributor Federated Investors, Inc. Federated Investors Tower 1001 Liberty Avenue Pittsburgh, PA 15222-3779 1-800-341-7400 www.federatedinvestors.com Cusip 313913105 Cusip 313913204 Cusip 313913303 8110104 (11/98) [Graphic] APPENDIX A1. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color coded mountain chart is a visual representation of the narrative text above it. The "x" axis reflects computation periods from 10/31/76 to 9/30/98. The "y" axis is measured in increments of $20,000 ranging from $0 to $100,000 and indicates that the ending value of hypothetical initial investment of $22,000 (1,681 Shares) in the fund's Class A Shares, assuming the reinvestment of capital gains and dividends, would have grown to $86,009 (7,728 Shares) on 9/30/98. A2. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color coded mountain chart is a visual representation of the narrative text above it. The "x" axis reflects computation periods from 10/31/76 to 9/30/98. The "y" axis is measured in increments of $10,000 ranging from $0 to $60,000 and indicates that the ending value of hypothetical yearly investments of $1,000 over 21 years in the fund's Class A Shares, assuming the reinvestment of capital gains and dividends, would have grown to $55,031 (4,944 Shares) on 9/30/98. A3. The graphic presentation here displayed consists of a boxed legend in the upper left quadrant indicating the components of the corresponding mountain chart. The color-coded mountain chart is a visual representation of the narrative text beneath it. The "x" axis reflects computation periods from 9/30/88 to 9/30/98. The "y" axis is measured in increments of $10,000 ranging from $0 to $60,000 and indicates that the ending value of a hypothetical investment of $25,000 (2,330 Shares) in the fund's Class A Shares, assuming the reinvestment of capital gains and dividends, would have grown to $48,700 (4,376 Shares) on 9/30/98. -----END PRIVACY-ENHANCED MESSAGE-----