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