[Graphic]
Federated Municipal Securities Fund, Inc.
20th Annual Report
March 31, 1997
Established 1976
PRESIDENT'S MESSAGE
[Graphic]
Dear Fellow Shareholder:
Federated Municipal Securities Fund, Inc. was established in 1976, and I am
pleased to present the 20th Annual Report for the fund covering the 12-month
period from April 1, 1996, to March 31, 1997.
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 Scott's
interview is a complete listing of the tax-free municipal securities
that comprise the fund's holdings and the financial statements.
Rising taxes? Taxes continue to eat away at investment income. The
most practical way to make sure your income remains just that -- your
income -- can be through municipal bonds.
Federated Municipal Securities Fund, Inc. is in its 21st year of
providing tax-free income* from a broadly diversified portfolio of
long-term municipal bonds. On March 31, 1997, the fund's $680 million
portfolio included 91 tax-free securities issued by municipalities
across our country. The fund's weighted average effective maturity was
13.16 years.
The fund's 30-day current net yield on March 31, 1997 was 4.46% for
Class A Shares, 3.56% for Class B Shares, and 3.57% for Class C
Shares.** The Class A Shares' yield of 4.46% is equivalent to taxable
yields of 7.05%, 6.65% and 6.17%, respectively, for investors in the
39.6%, 36%, and 31% federal tax brackets.
While total return was impacted by a decrease in net asset value, the
fund paid a healthy dividend stream. The performance of each share
class follows:+
TOTAL RETURN INCOME CAPITAL GAIN
Class A Shares 1.84% $0.60 $0.10
Class B Shares 0.94% $0.51 $0.10
Class C Shares 0.95% $0.51 $0.10
* Income may be subject to the federal alternative minimum tax, and
state and local taxes.
** The 30-day current net yield is calculated by dividing the net
investment income per share for the 30 days ended on the date
specified by the maximum offering price per share on that date.
Then, the figure is compounded and annualized.
+ Performance quoted is based on net asset value and represents 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 A, B, and C Share classes were -2.75%,
-4.62%, and -0.03%, respectively.
Thank you for selecting Federated Municipal Securities Fund, Inc. as a
convenient way to pursue income from a broad list of municipal
securities. Of course, you have the option of receiving income from
the fund or building your account by reinvesting your dividends and
enjoying the benefit of tax-free compounding.
Sincerely yours,
[Graphic]
J. Christopher Donahue
President
May 15, 1997
INVESTMENT REVIEW
[Graphic]
J. Scott Albrecht
Vice President
Federated Advisers
[Graphic]
Mary Jo Ochson
Senior Vice President
Federated Advisers
[Graphic]
PLEASE COMMENT ON THE MUNICIPAL MARKET, WHICH SEEMED TO BE
CHARACTERIZED BY A LACK OF DIRECTION DURING THE PERIOD.
The bond market's direction over the one-year period ended March 31,
1997, can best be characterized as moving sideways. A trading range
between 6.25% and 7.25% for the Treasury bond was established. We are
currently in the "Greenspan Market," as the Federal Reserve Board (the
"Fed") increased rates by a quarter of one percent with the
possibility of another rate increase this year.
The municipal market is driven to a large degree by specific market
technicals such as the supply of municipal bonds coming to market and
the demand for that supply by the various potential buyers, i.e.,
individuals, insurance companies and mutual funds. The favorable
technical position of the municipal market has allowed it to
outperform the Treasury market for most of the past several months.
The ratio of municipal bond yields to Treasury bond yields is a useful
measure of the relative performance of the municipal bond market.
Currently, this ratio is approximately 80%, which is close to the low
for the previous twelve months and reflects the municipal market's
strong relative performance versus Treasury bonds.
[Graphic]
WHY DID THE MUNICIPAL MARKET CONTINUE TO PERFORM STRONGLY RELATIVE TO
THE TREASURY MARKET?
The technical position that exists in the municipal bond market has
provided the circumstances for the relative outperformance versus the
Treasury bond market. The favorable technical position included a
limited number of new issues coming to market over the period. For
example, the supply of municipal bonds coming to market in the first
two months of 1997 was 14.5% less than during the same period in 1996.
The demand for tax-exempt assets -- especially from institutional
buyers such as insurance companies and corporations -- was relatively
stable. As a result, municipal bond prices were able to exhibit less
price volatility than Treasury bond prices over the period.
[Graphic]
IN THIS ENVIRONMENT, HOW DID FEDERATED MUNICIPAL SECURITIES FUND, INC.
PERFORM WITH RESPECT TO INVESTMENT RETURN OVER THE 12-MONTH REPORTING
PERIOD?
For the 12-month period that ended on March 31, 1997, investors in
Federated Municipal Securities Fund, Inc. A, B, and C Share classes
received total returns of 1.84%, 0.94%, and 0.95%, respectively, based
on net asset value.*
The fund's performance over the period was driven by its neutral
duration position relative to the market. Better diversification
across the yield curve also had a significant impact on the fund's
performance.
[Graphic]
HOW DID FEDERATED MUNICIPAL SECURITIES FUND, INC. PERFORM IN TERMS OF INCOME
AND YIELD?
Tax-free dividends were above-average, totaling $0.60 per share for
Class A Shares, $0.51 per share for Class B Shares and $0.51 per share
for Class C Shares. Each share class also received a capital gain
totaling $0.10 per share.
The 30-day current net yield on March 31, 1997 was 4.46% for Class A
Shares, 3.56% for Class B Shares, and 3.57% for Class C Shares.** The
fund's Class A Shares' yield of 4.46% has taxable yield equivalents of
7.05%, 6.65%, and 6.17%, respectively, for investors in the 39.6%,
36%, and 31% federal tax brackets.+
The fund's above-average income performance is directly related to its
positions in higher yielding sectors of the municipal market. These
higher yielding sectors include health care, housing, industrial
development and electric power. The security selection process is very
credit intensive and requires diligent surveillance on an ongoing
basis.
* Performance quoted represents 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 A, B, and
C Share classes were -2.75%, -4.62%, and -0.03%, respectively.
** The 30-day current net yield is calculated by dividing the net
investment income per share for the 30 days ended on the date
specified by the maximum offering price per share on that date.
Then, the figure is compounded and annualized.
+ The taxable yield equivalents, based on offering price, for
investors in the 39.6%, 36%, and 31% federal tax brackets are 5.89%,
5.56%, and 5.15%, respectively, for Class B Shares; and 5.91%,
5.57%, and 5.17%, respectively, for Class C Shares.
[Graphic]
THE FUND'S 30-DAY YIELD, DIVIDEND, AND TOTAL RETURN DECLINED SUBSTANTIALLY
FROM 1996 TO 1997. WHAT EVENTS CAUSED THE DECLINES?
The fund's Class A Shares' 30-day yield fell from 5.19% on March 31,
1996, to 4.46% on March 31, 1997. As a consequence of the reduced
yield of its portfolio, the fund's Class A Shares' monthly dividend
was reduced from $0.052 per share on March 31, 1996, to $0.045 on
March 31, 1997. The Class A Shares' 12-month total return based on net
asset value also fell from 5.32% in 1996 to 1.84% in 1997. B and C
Share classes experienced similar declines.*
The reduction of the yield, dividend, and total return was
attributable primarily to two events. First, a restructuring of the
fund began in the third quarter of 1996. As a result, the proceeds
from the sale of several securities were reinvested in a lower
interest rate environment.
Second, during the period, two bonds backed by office
wastepaper-to-pulp recycling projects were deemed non-income producing
after the underlying recycling facilities were shut down. The loss of
income from these bonds, which represent 3.6% of the fund's net assets
at March 31, 1997, contributed to the reduction in the fund's yield
and dividends. In April 1997, the fund entered into a settlement
agreement regarding the Marion, West Virginia facility. The agreement
contemplates a restructuring and reduction in the principal amount of
the related bonds. The fund is currently discussing a restructuring of
the bonds with the owner and builder of the Fitchburg, Massachusetts
facility.
* For Class B Shares, as of fiscal year end (3/31), the 30-day yield
was 4.29% (1996) and 3.56% (1997); the monthly dividend was $0.044
(1996) and $0.038 (1997); and the total return was 4.40% (1996) and
0.94% (1997) based on net asset value. For Class C Shares, as of
fiscal year end (3/31), the 30-day yield was 4.30% (1996) and 3.57%
(1997); the monthly dividend was $0.044 (1996) and $0.038 (1997);
and the total return was 4.42% (1996) and 0.95% (1997) based on net
asset value.
[Graphic]
WHAT WERE THE FUND'S TOP HOLDINGS?
On March 31, 1997, the fund's top 10 holdings were:
PERCENTAGE
NAME RATING OF PORTFOLIO
Long Beach, CA Harbor AAA 3.94%
District of Columbia - Georgetown Univ. A+ 3.44%
Indianapolis, IN Airport Authority BBB 3.00%
San Antonio, TX Electric & Gas AA 2.96%
Valdez, AK Marine Terminal - BP Pipeline AA- 2.71%
New York City Municipal Water Authority A- 2.45%
Salt Lake City, UT Hospital Authority AAA 2.44%
Illinois State, UT GO Bonds AAA 2.37%
Pennsylvania Higher Education Facilities AAA 2.10%
Massachusetts IFA, Massachusetts Recycling NR 2.10%
Total Percentage of Portfolio 27.52%
[Graphic]
WITH MR. GREENSPAN'S ACTION IN PLACE, WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL
MARKET THROUGH 1997?
The outlook for municipal bonds is mixed. Rate increases affect all
bonds, and of course, their value. However, the Fed's action is
short-term "negative" and long-term "positive." Historically, higher
rates hurt businesses and slow the economy. Eventually, this can cause
a slowdown and lower interest rates, thereby improving bond prices. We
believe that bonds could end up performing quite well relative to
equities in 1997 on the basis of total return. The U.S. economy's real
growth rate is expected to slow in the second half of the year and
inflation should continue to remain submissive. Combine this situation
with a federal budget that is structured to potentially achieve
balance in the year 2002, and a powerful market environment could
exist for lower interest rates and, as a result, higher bond prices.
We believe that the municipal bond market should be among the better
performing fixed-income asset classes in 1997. The supply of municipal
bonds should continue to be somewhat constrained, creating a certain
measure of scarcity value. At the same time, the demand for municipal
bonds is expected to improve as investors reach their desired equity
exposure and begin to realize that taxes do matter.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN FEDERATED MUNICIPAL
SECURITIES FUND, INC.
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $21,000 IN THE CLASS A SHARES
OF FEDERATED MUNICIPAL SECURITIES FUND, INC. ON 10/4/76, REINVESTED
YOUR DIVIDENDS AND CAPITAL GAINS, AND DIDN'T REDEEM ANY SHARES, YOUR
ACCOUNT WOULD BE WORTH $71,593 ON 3/31/97. YOU WOULD HAVE EARNED A
6.17%* AVERAGE ANNUAL TOTAL RETURN FOR THE 21-YEAR INVESTMENT LIFE
SPAN.
One key to investing wisely is to reinvest all tax-free distributions
in fund shares. This increases the number of shares on which you can
earn future tax-free dividends, and you gain the benefit of tax-free
compounding.
As of 3/31/97, the Class A Shares' average annual 1-year, 5-year, and
10-year total returns were (2.75)%, 4.42%, and 5.89%, respectively.
The Class B Shares' average annual 1-year and since inception
(7/26/94) total returns were (4.62)% and 1.74%, respectively. The
Class C Shares' average annual 1-year and since inception (4/21/93)
total returns were (0.03)% and 2.64%, respectively.
GRAPHIC PRESENTATION "A1" OMITTED. SEE APPENDIX.
* Total return represents the change in the value of an investment in
Class A Shares after reinvesting all income and capital gains, and
takes into account the 4.50% sales charge applicable to an initial
investment in Class A Shares.
Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR 21 YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $47,077.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of
Federated Municipal Securities Fund, Inc. on 10/4/76, reinvested your
dividends and capital gains, and didn't redeem any shares, you would
have invested only $21,000, but your account would have reached a
total value of $47,077* by 3/31/97. You would have earned an average
annual total return of
7.12%.
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 even if you invest only $1,000 annually.
You can take it one step at a time. Put time, money, and compounding
to work!
GRAPHIC PRESENTATION "A2" OMITTED. SEE APPENDIX.
* No method of investing can guarantee a profit or protect against
loss in down markets. However, by investing regularly over time and
buying shares at various prices, investors can purchase more shares
at lower prices, and all accumulated shares have the ability to pay
income to the investor. Because such a plan involves continuous
investment, regardless of changing price levels, the investor should
consider whether or not to continue purchases through periods of low
price levels.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
HYPOTHETICAL INVESTORS 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 March 31, 1987, the Bartletts invested $26,000 in the
Class A Shares of Federated Municipal Securities Fund, Inc.
As this chart shows, in 10 years, their original $26,000 investment
has grown to $46,494 -- that's $22,036 in tax-free income.* This
represents a 5.89% average annual total return. As far as the
Bartletts are concerned, this fund has made all the difference.
GRAPHIC PRESENTATION "A3" OMITTED. SEE APPENDIX.
* Income may be subject to the federal alternative minimum tax, and
state and local taxes.
This hypothetical scenario is provided for illustrative purposes only and
does not represent the results obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS A SHARES)
GROWTH OF $10,000 INVESTED IN FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS A SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
the Federated Municipal Securities Fund, Inc. (Class A Shares) (the
"Fund") from March 31, 1987 to March 31, 1997, compared to the Lehman
Brothers Revenue Bond Index (LBRBI).+
GRAPHIC PRESENTATION "A4" OMITTED. SEE APPENDIX.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES
ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE
NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund after
deducting the maximum sales charge of 4.50% ($10,000 investment
minus $450 sales charge = $9,550). The Fund's performance assumes
the reinvestment of all dividends and distributions. The LBRBI has
been adjusted to reflect reinvestment of dividends on securities in
the index.
** Total return quoted reflects all applicable sales charges and
contingent deferred sales charges.
+ The LBRBI is not adjusted to reflect sales charges, expenses, or
other fees that the Securities and Exchange Commission requires to
be reflected in the Fund's performance. This index is unmanaged.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS B SHARES)
GROWTH OF $10,000 INVESTED IN FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS B SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
the Federated Municipal Securities Fund, Inc. (Class B Shares) (the
"Fund") from July 26, 1994 (start of performance) to March 31, 1997,
compared to the Lehman Brothers Revenue Bond Index (LBRBI).+
GRAPHIC PRESENTATION "A5" OMITTED. SEE APPENDIX.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES
ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE
NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The
ending value of the Fund reflects a 4.00% contingent deferred sales
charge on any redemption less than three years from the purchase
date. The maximum contingent deferred sales charge is 5.50% on any
redemption less than one year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and
distributions. The LBRBI has been adjusted to reflect reinvestment
of dividends on securities in the index.
** Total return quoted reflects all applicable sales charges and
contingent deferred sales charges.
+ The LBRBI is not adjusted to reflect sales charges, expenses, or
other fees that the Securities and Exchange Commission requires to
be reflected in the Fund's performance. This index is unmanaged.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS C SHARES)
GROWTH OF $10,000 INVESTED IN FEDERATED MUNICIPAL SECURITIES FUND, INC.
(CLASS C SHARES)
The graph below illustrates the hypothetical investment of $10,000 in
the Federated Municipal Securities Fund, Inc. (Class C Shares) (the
"Fund") from April 21, 1993 (start of performance) to March 31, 1997,
compared to the Lehman Brothers Revenue Bond Index (LBRBI).+
GRAPHIC PRESENTATION "A6" OMITTED. SEE APPENDIX.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES
ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE
NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund. The
ending value of the Fund reflects a 1.00% contingent deferred sales
charge on any redemption less than one year from the purchase date.
The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBRBI has been adjusted to reflect reinvestment
of dividends on securities in the index.
** Total return quoted reflects all applicable sales charges and
contingent deferred sales charges.
+ The LBRBI is not adjusted to reflect sales charges, expenses, or
other fees that the Securities and Exchange Commission requires to
be reflected in the Fund's performance. This index is unmanaged.
FEDERATED MUNICIPAL SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
SHORT-TERM MUNICIPALS -- 0.2%
TEXAS -- 0.2%
$ 1,600,000 Harris County, TX HFDC, (Series B) Daily VRDNs (St. Luke's
Episcopal Hospital)(AT AMORTIZED COST) AA $
1,600,000
LONG-TERM MUNICIPALS -- 97.9%
ALABAMA -- 1.7%
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
2,005,400
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
3,511,726
6,260,000 Jefferson County, AL, Sewer Revenue Warrants (Series
1997D), 5.70% (FGIC INS)/(Original Issue Yield: 5.73%),
2/1/2018 AAA
6,139,057
Total
11,656,183
ALASKA -- 2.7%
20,000,000 Valdez, AK Marine Terminal, Revenue Refunding Bonds
(Series B), 5.50% (BP Pipeline Inc.), 10/1/2028 AA-
18,446,800
ARIZONA -- 1.2%
8,000,000 Salt River Project, AZ Agricultural Improvement & Power
District, Electric System Revenue Bonds (Series A), 7.875%
(United States Treasury PRF)/(Original Issue Yield: 7.916%),
1/1/2028 (@102) AAA
8,394,720
CALIFORNIA -- 7.6%
1,000,000 Anaheim, CA Public Financing Authority, Lease Revenue
Bonds (Series 1997C), 6.00% (Anaheim Public Improvements
Project)/(FSA INS), 9/1/2010 AAA
1,059,150
1,000,000 Anaheim, CA Public Financing Authority, Lease Revenue
Bonds (Series 1997C), 6.00% (Anaheim Public Improvements
Project)/(FSA INS), 9/1/2011 AAA
1,054,890
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
CALIFORNIA -- CONTINUED
$ 1,600,000 Anaheim, CA Public Financing Authority, Lease Revenue
Bonds (Series 1997C), 6.00% (Anaheim Public Improvements
Project)/(FSA INS), 9/1/2016 AAA $
1,649,168
9,400,000 California PCFA, Refunding Revenue Bonds (Series A), 5.90%
(San Diego Gas & Electric)/(Original Issue Yield: 5.934%),
6/1/2014 A2
9,650,040
11,290,000 California PCFA, Solid Waste Disposal Revenue Bonds,
6.875% (Browning-Ferris Industries, Inc.)/(Original Issue
Yield: 6.95%), 11/1/2027 A
12,101,751
29,000,000 Long Beach California Harbor, Revenue Bonds, 5.375%
(MBIA INS)/(Original Issue Yield: 5.75%), 5/15/2020 AAA
26,832,250
Total
52,347,249
DISTRICT OF COLUMBIA -- 6.3%
14,775,000 District of Columbia Hospital Authority, Revenue Refunding
Bonds (Series A and B), 7.00% - 7.125% (Medlantic Healthcare
Group)/(Original Issue Yield: 7.282% - 7.30%), 8/15/2015 -
8/15/2019 BBB+
15,472,164
22,250,000 District of Columbia, Revenue Bonds (Series B), 7.15%
(Georgetown University)/(Original Issue Yield: 7.191%),
4/1/2021 A+
23,428,805
4,765,000 Georgetown University, 8.25%, 4/1/2018 AA-
5,032,126
Total
43,933,095
FLORIDA -- 1.6%
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
5,984,988
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
918,478
3,000,000 Florida State, UT GO Bonds, Broward County Expressway
Authority, 10.00% (Original Issue Yield: 10.105%), 7/1/2014 AA
4,427,970
Total
11,331,436
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
GEORGIA -- 4.1%
$ 3,000,000 Dalton, GA, Combined Utility Revenue Bonds (Series 1997),
6.00% (MBIA INS), 1/1/2008 AAA $
3,194,190
5,000,000 Georgia Municipal Electric Authority, Power Revenue Bonds
(Series O), 8.125%, 1/1/2017 A+
5,235,050
2,500,000 Georgia Municipal Electric Authority, Revenue Refunding
Bonds (Series Q), 8.375% (Original Issue Yield: 8.397%),
1/1/2016 AA-
2,626,875
5,000,000 Georgia State, UT GO Bonds (Series F), 6.50%, 12/1/2007 AA+
5,585,250
6,000,000 Georgia State, UT GO, 6.00%, 9/1/2007 AA+
6,449,460
5,000,000 Metropolitan Atlanta Rapid Transit Authority, Sales Tax
Revenue Bonds (Series J), 8.00% (United States Treasury
PRF)/(Original Issue Yield: 8.043%), 7/1/2018 (@102) AAA
5,337,750
Total
28,428,575
ILLINOIS -- 5.4%
2,080,000 Chicago, IL, GO Library Bonds (Series 1997), 5.25% (FGIC
INS)/(Original Issue Yield: 5.55%), 1/1/2012 AAA
1,987,274
2,200,000 Chicago, IL, Motor Fuel Tax Refunding Revenue Bonds,
6.125% (AMBAC INS), 1/1/2009 AAA
2,352,042
5,000,000 Illinois Development Finance Authority, Housing Revenue
Bonds, 6.10% (Catholic Charities Housing Development
Corp.), 1/1/2020 NR
4,735,150
11,430,000 Illinois Health Facilities Authority, Hospital Revenue Bonds
(Series A), 9.25% (Edgewater Hospital & Medical Center, IL),
7/1/2024 NR
12,490,018
16,000,000 Illinois State, UT GO Bonds, 5.125% (FGIC INS), 12/1/2004 AAA
16,130,080
Total
37,694,564
INDIANA -- 5.9%
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
6,357,232
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
INDIANA -- CONTINUED
$ 19,000,000 Indianapolis, IN Airport Authority, Special Facilities
Revenue
Bonds, 7.10% (Federal Express Corp.)/(Original Issue Yield:
7.178%), 1/15/2017 BBB $
20,375,790
10,000,000 Kokomo, IN Hospital Authority, Revenue Refunding Bonds,
6.35% (St. Joseph Hospital, IN)/(Original Issue Yield:
6.40%),
8/15/2013 BBB
10,060,300
4,500,000 LaPorte County, IN Hospital Authority, Hospital Facility
Revenue Refunding Bonds, 6.25% (LaPorte Hospital, Inc.,
IN)/(Original Issue Yield: 6.35%), 3/1/2012 BBB
4,401,675
Total
41,194,997
LOUISIANA -- 3.0%
6,000,000 De Soto Parish, LA Environmental Improvement Authority,
Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018 A-
6,800,520
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+
3,687,917
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
10,244,700
Total
20,733,137
MARYLAND -- 1.8%
12,220,000 Maryland State Community Development Administration,
SFM Revenue Bonds (5th Series), 6.75%, 4/1/2026 Aa
12,678,250
MASSACHUSETTS -- 2.4%
33,800,000 (a)Massachusetts IFA, Solid Waste Disposal Sr. Lien Revenue
Bonds (Series A), 9.00% (Massachusetts Recycling
Association), 8/1/2016 NR
14,280,838
2,200,000 Massachusetts State HFA, Rental Housing
Mortgage Revenue Bonds, 1995 Series E, 5.90%
(AMBAC INS), 7/1/2025 AAA
2,158,266
Total
16,439,104
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
MICHIGAN -- 2.8%
$ 15,455,000 Michigan State Hospital Finance Authority, Revenue Bonds,
5.25% (St. John Hospital, MI)/(AMBAC INS)/(Original Issue
Yield: 5.65%), 5/15/2026 AAA $
13,994,966
500,000 Michigan State Hospital Finance Authority, Revenue Bonds,
Providence Hospital, 7.00% (Daughters of Charity)/(Original
Issue Yield: 7.04%), 11/1/2021 Aa
538,105
5,000,000 Royal Oak, MI Hospital Finance Authority, Refunding
Revenue Bonds, 5.25% (William Beaumont Hospital, MI)/
(Original Issue Yield: 5.943%), 1/1/2020 AA
4,551,800
Total
19,084,871
MINNESOTA -- 2.9%
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
8,156,560
12,000,000 VRDC/IVRC Trust, GO Inverse Variable Rate Certificates,
7.573% (Regents of University of Minnesota), 5/18/2012 NR
12,075,000
Total
20,231,560
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+
5,422,000
NEW YORK -- 9.8%
3,000,000 Municipal Assistance Corp. of New York, Revenue Bonds
(Series 67), 7.625% (Original Issue Yield: 7.698%), 7/1/2008 AA-
3,246,060
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-
16,677,180
13,600,000 New York City, NY IDA, Special Facility Revenue Bonds,
6.00% (Terminal One Group Association)/(Original Issue
Yield: 6.45%), 1/1/2019 A
13,157,864
10,000,000 New York City, NY, UT GO Bonds (Series B), 6.00% (Original
Issue Yield: 6.25%), 8/15/2026 BBB+
9,567,800
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
NEW YORK -- CONTINUED
$ 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 $
4,896,250
2,000,000 New York State Mortgage Agency, Mortgage Revenue Bonds
(Series 30-B), 6.65% (FHA GTD), 10/1/2025 Aa
2,069,400
13,000,000 New York State Power Authority, Revenue Bonds (Series V),
8.00% (United States Treasury PRF), 1/1/2017 (@102) AA
13,652,080
4,300,000 Triborough Bridge & Tunnel Authority, NY, Revenue
Refunding Bonds (Series L), 8.125% (Original Issue Yield:
8.22%), 1/1/2012 A+
4,507,389
Total
67,774,023
NORTH CAROLINA -- 2.0%
9,000,000 Martin County, NC IFA, (Series 1995) Solid Waste Disposal
Revenue Bonds, 6.00% (Weyerhaeuser Co.), 11/1/2025 A
8,948,250
4,500,000 North Carolina Municipal Power Agency No. 1, Catawba
Electric Revenue Refunding Bonds, 7.875% (United States
Treasury PRF), 1/1/2019 (@102) AAA
4,722,390
Total
13,670,640
OHIO -- 0.2%
1,000,000 Franklin County, OH Hospital Facility Authority, Hospital
Revenue Refunding & Improvement Bonds, 7.25% (Riverside
United Methodist Hospital)/(MBIA INS)/(Original Issue
Yield: 7.29%), 5/15/2020 AAA
1,092,770
OKLAHOMA -- 1.7%
3,780,000 Enid, OK Municipal Authority, Sales Tax & Utility Refunding
Revenue Bonds, 5.50% (AMBAC INS), 2/1/2004 AAA
3,882,476
7,500,000 Tulsa, OK Municipal Airport, Revenue Bonds, 7.60%
(American Airlines)/(Original Issue Yield: 7.931%),
12/1/2030 Baa2
8,073,150
Total
11,955,626
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
PENNSYLVANIA -- 10.1%
$ 10,815,000 Commonwealth of Pennsylvania, UT GO Bonds (First Series
of 1997), 5.125% (AMBAC INS)/(Original Issue Yield: 5.35%),
3/15/2011 AAA $
10,338,924
7,520,000 Commonwealth of Pennsylvania, UT GO Bonds (First Series
of 1997), 5.125% (AMBAC INS)/(Original Issue Yield: 5.40%),
3/15/2012 AAA
7,137,082
1,300,000 Latrobe, PA Industrial Development Authority, College
Revenue Bonds, 6.75% (St. Vincent College, PA)/(Original
Issue Yield: 7.00%), 5/1/2024 Baa1
1,352,208
7,250,000 Pennsylvania EDFA, Revenue Bonds, 7.60% (Macmillan
Bloedel LTD Partnership)/(Original Issue Yield: 7.65%),
12/1/2020 BBB-
8,034,015
8,000,000 Pennsylvania Housing Finance Authority, SFM Revenue
Bonds (Series 39B), 6.875%, 10/1/2024 AA
8,390,720
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-
4,290,680
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
14,284,653
15,000,000 Philadelphia, PA School District, UT GO (Series B), 5.50%
(AMBAC INS)/(Original Issue Yield: 5.95%), 9/1/2025 AAA
14,127,900
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
2,174,980
Total
70,131,162
TENNESSEE -- 3.5%
13,000,000 Springfield, TN Health & Educational Facilities Board,
Hospital Revenue Bonds, 8.50% (NorthCrest Medical
Center)/(Original Issue Yield: 8.875%), 4/1/2024 NR
13,937,040
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
TENNESSEE -- CONTINUED
$ 10,000,000 Tennessee State, Refunding UT GO Bonds (Series B), 5.50%,
5/1/2003 AA+ $
10,389,100
Total
24,326,140
TEXAS -- 13.2%
4,000,000 Brazos River Authority, TX, PCR Revenue Bonds (Series A),
7.875% (Texas Utilities Electric Co.), 3/1/2021 BBB
4,361,040
12,750,000 Dallas-Fort Worth, TX International Airport Facilities,
Revenue Bonds, 7.25% (American Airlines)/(Original Issue
Yield: 7.428%), 11/1/2030 Baa2
13,652,062
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
2,079,720
2,200,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series
1997A, 6.00% (Memorial Hospital System)/(MBIA LOC),
6/1/2011 AAA
2,297,152
4,000,000 Harris County, TX HFDC, Hospital Revenue Bonds, Series
1997A, 6.00% (Memorial Hospital System)/(MBIA LOC),
6/1/2012 AAA
4,163,800
5,200,000 Harris County, TX, UT GO Subordiate Lien Toll Road
Revenue Bond, 7.00%, 8/15/2010 AA
5,971,264
3,360,000 Houston, TX Hotel Occupancy Tax, Sr. Lien Refunding
Revenue Bonds, 6.00% (FSA INS), 7/1/2004 AAA
3,543,120
3,000,000 Houston, TX Water & Sewer System, Junior Lien Refunding
Revenue Bonds (Series A), 5.25% (FGIC INS)/(Original Issue
Yield: 5.60%), 12/1/2025 AAA
2,741,280
3,700,000 Red River Authority, TX, PCR Bonds, 6.875% (Hoechst
Celanese Corp.)/(Original Issue Yield: 6.939%), 4/1/2017 AA-
3,946,050
6,925,000 Richardson, TX Hospital Authority, Hospital Refunding &
Improvement Bonds, 6.50% (Richardson Medical Center,
TX)/(Original Issue Yield: 6.72%), 12/1/2012 BBB-
7,017,933
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
TEXAS -- CONTINUED
$ 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- $
1,027,240
22,450,000 San Antonio, TX Electric & Gas, Revenue Refunding Bonds,
5.00% (Original Issue Yield: 6.10%), 2/1/2017 AA
20,116,547
6,555,000 Texas A & M University Permanent University Fund,
Revenue Bonds, 5.40%, 7/1/2003 AAA
6,752,174
1,500,000 Texas State, UT GO Veterans Housing Assistance, 7.00%,
12/1/2025 AA
1,573,875
14,000,000 Texas State, Veterans Land UT GO Bonds (Series 1996), 5.25%
(Original Issue Yield: 5.50%), 12/1/2026 AA
12,525,100
Total
91,768,357
UTAH -- 2.8%
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
16,626,465
2,500,000 Salt Lake City, UT Hospital Authority, Hospital Revenue
Refunding Bonds (Series B), 8.125% (IHC Hospitals Inc., UT)/
(Original Issue Yield: 8.17%), 5/15/2015 AA
2,648,100
Total
19,274,565
WASHINGTON -- 1.6%
5,000,000 Pilchuck Development Public Corp., WA, Special Facilities
Airport Revenue Bonds ( Series 1993), Tramco, Inc. Project,
6.00% (Goodrich (B.F.) Co.), 8/1/2023 BBB+
4,820,300
5,900,000 Washington State, Refunding UT GO Bonds (Series R-96C),
6.00%, 7/1/2004 AA
6,267,452
Total
11,087,752
</TABLE>
FEDERATED MUNICIPAL SECURITIES FUND, INC.
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING*
VALUE
<C> <S> <S> <C>
LONG-TERM MUNICIPALS -- CONTINUED
WEST VIRGINIA -- 1.5%
$ 3,800,000 (a)Marion County, WV County Commission, Solid Waste
Disposal Facility Revenue Bonds (Series 1994), 8.25%
(American Power Paper Recycling), 12/1/2011 NR $
1,691,038
20,000,000 (a)Marion County, WV County Commission, Solid Waste
Facility Revenue Bonds (Series 1993), 7.75% (American Power
Paper Recycling), 12/1/2011 NR
8,900,000
Total
10,591,038
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
8,989,511
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $691,309,932)
678,678,125
TOTAL INVESTMENTS (IDENTIFIED COST $692,288,766)(B)
$680,278,125
</TABLE>
Securities that are subject to Alternative Minimum Tax represent 33.4%
of the portfolio as calculated based upon total portfolio market
value.
* Please refer to the Appendix of the Statement of Additional
Information for an explanation of the credit ratings. Current credit
ratings are unaudited.
(a) Non-income producing security.
Massachusetts IFA, Solid Waste Disposal Sr. Lien Revenue Bonds (Series A),
9.00% (Massachusetts Recycling Association)
Currently, the obligor has defaulted on the Series A revenue bonds.
The obligor and contractor are currently in negotiations with the
bondholders. The investment adviser is unable to predict the outcome
of the negotiations.
Marion County, WV County Commission, Solid Waste Facility Revenue Bonds
(Series 1993/1994), 7.75 - 8.25% (American Power Paper Recycling)
Currently, the obligor is in bankruptcy. The fund has entered into a
settlement agreement with the partners of the obligor, this
agreement contemplates a restructuring and reduction in the
principal amount of the bonds.
(b) The cost of investments for federal tax purposes amounts to
$695,362,682. The net unrealized depreciation of investments on a
federal tax basis amounts to $15,084,557 which is comprised of
$23,290,548 appreciation and $38,375,105 depreciation at March 31,
1997.
Note: The categories of investments are shown as a percentage of net assets
($693,594,848) at March 31, 1997.
The following acronyms are used throughout this portfolio:
AMBAC -- American Municipal Bond Assurance Corporation COL --
Collateralized EDFA -- Economic Development Financing Authority FGIC
- -- Financial Guaranty Insurance Company FHA -- Federal Housing
Administration FSA -- Financial Security Assurance GO -- General
Obligation GTD -- Guaranty HFA -- Housing Finance Authority HFDC --
Health Facility Development Corporation IDA -- Industrial Development
Authority IDB -- Industrial Development Bond IFA -- Industrial Finance
Authority INS -- Insured IVRC -- Inverse Variable Rate Certificate LOC
- -- Letter of Credit LTD -- Limited 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.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified
cost $692,288,766 and tax cost $680,278,125
$695,362,682)
Cash 241,903
Income receivable 13,279,785
Receivable for investments sold 1,843,420
Receivable for shares sold 1,562,966
Total assets 697,206,199
LIABILITIES:
Payable for shares redeemed $ 1,870,711
Income distribution payable 1,450,497
Accrued expenses 290,143
Total liabilities 3,611,351
NET ASSETS for 67,287,797 shares outstanding $693,594,848
NET ASSETS CONSIST OF:
Paid in capital $708,965,828
Net unrealized depreciation of investments (12,010,640)
Accumulated net realized loss on investments (34,795)
Distributions in excess of net investment income (3,325,545)
Total Net Assets $693,594,848
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($595,515,100 / 57,773,220 $10.31
shares outstanding)
Offering Price Per Share (100/95.50 of $10.31)* $10.80
Redemption Proceeds Per Share $10.31
CLASS B SHARES:
Net Asset Value Per Share ($77,535,846 / 7,521,540 $10.31
shares outstanding)
Offering Price Per Share $10.31
Redemption Proceeds Per Share (94.50/100 of $9.74
$10.31)**
CLASS C SHARES:
Net Asset Value Per Share ($20,543,902 / 1,993,037 $10.31
shares outstanding)
Offering Price Per Share $10.31
Redemption Proceeds Per Share (99.00/100 of $10.21
$10.31)**
</TABLE>
* See "How to Purchase Shares" in the Prospectus.
** See "How to Redeem Shares" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED MUNICIPAL SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 45,675,471
EXPENSES:
Investment advisory fee $ 4,379,885
Administrative personnel and services fee 547,583
Custodian fees 106,679
Transfer and dividend disbursing agent fees and 447,189
expenses
Directors'/Trustees' fees 19,628
Auditing fees 18,116
Legal fees 10,216
Portfolio accounting fees 148,700
Distribution services fee -- Class B Shares 527,131
Distribution services fee -- Class C Shares 177,337
Shareholder services fee -- Class A Shares 1,576,818
Shareholder services fee -- Class B Shares 175,710
Shareholder services fee -- Class C Shares 59,112
Share registration costs 49,174
Printing and postage 124,622
Insurance premiums 10,967
Taxes 101,367
Miscellaneous 9,723
Total expenses 8,489,957
Waivers --
Waiver of shareholder services fee -- Class A $(883,019)
Shares
Waiver of shareholder services fee -- Class C (2,364)
Shares
Total waivers (885,383)
Net expenses 7,604,574
Net investment income 38,070,897
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (30,587)
Net change in unrealized appreciation (depreciation) (25,442,823)
of investments
Net realized and unrealized loss on investments (25,473,410)
Change in net assets resulting from $ 12,597,487
operations
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED MUNICIPAL SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 38,070,897 $ 44,749,297
Net realized gain (loss) on investments ($(439,197) net loss
and $6,671,235 net
gain, respectively, as computed for federal tax purposes) (30,587) 7,079,845
Net change in unrealized appreciation (depreciation) (25,442,823) (13,521,713)
Change in net assets resulting from operations 12,597,487 38,307,429
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Class A Shares (33,864,603) (41,611,908)
Class B Shares (3,157,991) (1,898,925)
Class C Shares (1,067,075) (1,219,692)
Distributions in excess of net investment income
Class A Shares (2,893,224) --
Class B Shares (332,555) --
Class C Shares (99,766) --
Distributions from net realized gains
Class A Shares (5,887,308) (894,502)
Class B Shares (554,488) (44,667)
Class C Shares (229,139) (30,361)
Change in net assets resulting from distributions to (48,086,149) (45,700,055)
shareholders
SHARE TRANSACTIONS --
Proceeds from sale of shares 161,534,404 314,593,464
Net asset value of shares issued to shareholders
in payment of distributions declared 30,227,698 27,833,467
Cost of shares redeemed (210,426,834) (336,588,031)
Change in net assets resulting from share transactions (18,664,732) 5,838,900
Change in net assets (54,153,394) (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) $ 693,594,848 $ 747,748,242
</TABLE>
(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)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 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 0.55 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 (0.36) (0.09) (0.05) (0.40) 0.64 0.37 0.14
0.21 0.23 (0.77)
Total from
investment 0.19 0.57 0.62 0.26 1.30 1.04 0.85
0.93 0.95 (0.04)
operations
LESS DISTRIBUTIONS
Distributions
from net
investment (0.55) (0.66) (0.67) (0.66) (0.66) (0.67) (0.71)
(0.72) (0.72) (0.73)
income
Distributions in
excess of net
investment
income(a) (0.05) -- -- -- -- -- --
- -- -- --
Total distributions
from net investment (0.60) (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) -- -- --
- -- -- --
Total (0.70) (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 $10.31 $10.82 $10.92 $11.20 $11.62 $10.98 $10.61
$10.47 $10.26 $10.03
TOTAL RETURN (B) 1.84% 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 5.37% 5.97% 6.17% 5.59% 5.81% 6.17% 6.77%
6.80% 7.07% 7.28%
income
Expense waiver/
reimbursement(c) 0.14% 0.13% -- -- -- -- --
- -- -- --
SUPPLEMENTAL DATA
Net assets, end
of period
(000 omitted) $595,515 $663,538 $708,712 $714,384 $706,126 $590,118 $511,611
$474,797 $440,445 $388,916
Portfolio turnover 33% 29% 41% 27% 13% 8% 45%
25% 58% 55%
</TABLE>
(a) Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These distributions do not represent a return of
capital for federal income tax purposes.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(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)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 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 0.47 0.56 0.40
Net realized and unrealized gain (loss) on investments (0.37) (0.09) (0.03)
Total from investment operations 0.10 0.47 0.37
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.56) (0.40)
Distributions in excess of net investment income(b) (0.04) -- --
Total distributions from net investment income (0.51) (0.56) (0.40)
Distributions from net realized gain on investments (0.10) (0.01) (0.11)
Total distributions (0.61) (0.57) (0.51)
NET ASSET VALUE, END OF PERIOD $10.31 $10.82 $10.92
TOTAL RETURN(C) 0.94% 4.40% 3.49%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.82% 1.86% 1.84%*
Net investment income 4.50% 5.23% 5.94%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $77,536 $58,296 $18,201
Portfolio turnover 33% 29% 41%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 26, 1994 (date of
initial public offering) to March 31, 1995.
(b) Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These distributions do not represent a return of
capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(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)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 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 0.46 0.56 0.58 0.52
Net realized and unrealized gain (loss) on (0.36) (0.09) (0.05) (0.48)
investments
Total from investment operations 0.10 0.47 0.53 0.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.46) (0.56) (0.58) (0.52)
Distributions in excess of net investment (0.05) -- -- --
income(b)
Total distributions from net investment income (0.51) (0.56) (0.58) (0.52)
Distributions from net realized gain on (0.10) (0.01) (0.23) (0.02)
investments
Total distributions (0.61) (0.57) (0.81) (0.54)
NET ASSET VALUE, END OF PERIOD $10.31 $10.82 $10.92 $11.20
TOTAL RETURN(C) 0.95% 4.42% 4.96% 0.17%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.81% 1.82% 1.81% 1.80%*
Net investment income 4.51% 5.16% 5.28% 4.70%*
Expense waiver/reimbursement(d) 0.01% 0.04% -- --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $20,544 $25,914 $22,389 $22,066
Portfolio turnover 33% 29% 41% 27%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 21, 1993 (date of
initial public offering) to March 31, 1994.
(b) Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These distributions do not represent a return of
capital for federal income tax purposes.
(c) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED MUNICIPAL SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
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.
Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income
tax purposes.
FEDERAL TAXES -- It is the Fund's policy to comply with the provisions
of the Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its income.
Accordingly, no provisions for federal tax are necessary.
At March 31, 1997, the Fund for federal tax purposes, had a capital
loss carryforward of $30,587, which will reduce the Fund's taxable
income arising from future net realized gain on investments, if any,
to the extent permitted by the Code, and thus will reduce the amount
of the distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax.
Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2005 $30,587
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage
in when-issued or delayed delivery transactions. The Fund records
when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and
begin earning interest on the settlement date.
INVESTMENT RISK -- Although the Fund has a diversified portfolio, the
Fund has 19% 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. The Fund held defaulted
securities with a value aggregating $24,871,876, representing 3% of
the Fund's net assets at March 31, 1997.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those
estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At March 31, 1997, par value shares ($ 0.01 per share) authorized were
as follows:
NUMBER OF PAR VALUE
CLASS NAME CAPITAL STOCK AUTHORIZED
Class A Shares 375,000,000
Class B Shares 250,000,000
Class C Shares 375,000,000
Total shares authorized 1,000,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS A SHARES SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Shares sold 11,574,693 $ 121,849,621 23,530,576 $
259,873,935
Shares issued to shareholders in
payment of distributions declared 2,586,707 27,181,535 2,377,750
26,169,718
Shares redeemed (17,732,936) (185,898,913) (29,468,002)
(325,138,363)
Net change resulting from
Class A Share transactions (3,571,536) $ (36,867,757) (3,559,676) $
(39,094,710)
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS B SHARES SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,354,939 $ 35,239,171 4,157,827 $
45,890,492
Shares issued to shareholders in
payment of distributions declared 203,345 2,136,903 91,690
1,011,056
Shares redeemed (1,426,287) (14,965,753) (526,969)
(5,813,110)
Net change resulting from
Class B Share transactions 2,131,997 $ 22,410,321 3,722,548 $
41,088,438
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
CLASS C SHARES SHARES AMOUNT SHARES
AMOUNT
<S> <C> <C> <C> <C>
Shares sold 423,472 $ 4,445,612 797,328 $
8,829,037
Shares issued to shareholders in
payment of distributions declared 86,450 909,260
59,235 652,693
Shares redeemed (912,686) (9,562,168) (511,334)
(5,636,558)
Net change resulting from
Class C Share transactions (402,764) (4,207,296) 345,229 $
3,845,172
Net change resulting from
share transactions (1,842,303) $ (18,664,732) 508,101 $
5,838,900
</TABLE>
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 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. ("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 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 March 31, 1997, 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 $236,950,000 and $229,118,698 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 fiscal year ended March 31, 1997, were as follows:
PURCHASES $236,079,898
SALES $258,708,997
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of FEDERATED MUNICIPAL
SECURITIES FUND, INC.:
We have audited the accompanying statement of assets and liabilities
of Federated Municipal Securities Fund, Inc. as of March 31, 1997, the
related statement of operations for the year then ended, the
statements of changes in net assets for the years ended March 31, 1997
and 1996, and the financial highlights for the periods presented.
These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of the securities owned as of March 31, 1997, by
correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Federated Municipal Securities Fund, Inc. as of March 31, 1997, the
results of its operations, the changes in its net assets, and its
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
May 2, 1997
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
Richard B. Fisher
Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
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 the possible loss of principal.
This report is authorized for distribution to prospective investors
only when preceded or accompanied by the fund's prospectus which
contains facts concerning its objective and policies, management fees,
expenses, and other information.
[Graphic]
Cusip 313913105
Cusip 313913204
Cusip 313913303
8042830 (5/97)
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 10/4/76 to 3/31/97. The "y" axis is
measured in increments of $10,000 ranging from $0 to $80,000 and
indicates that the ending value of a hypothetical initial investment
of $21,000 in the fund's Class A Shares, assuming the reinvestment of
capital gains and dividends, would have grown to $71,593 on 3/31/97.
A2. The graphic presentation here displayed consists of a boxed
legend in the upper left quadrant indicating the components of the
corresponding mountain chart. The color-coded mountain chart is a
visual representation of the narrative text above it. The "x" axis
reflects computation periods from 10/4/76 to 3/31/97. The "y" axis is
measured in increments of $10,000 ranging from $0 to $50,000 and
indicates that the ending value of hypothetical yearly investments of
$1,000 in the fund's Class A Shares, assuming the reinvestment of
capital gains and dividends, would have grown to $47,077 on 3/31/97.
A3. The graphic presentation here displayed consists of a boxed
legend in the upper left quadrant indicating the components of the
corresponding mountain chart. The color-coded mountain chart is a
visual representation of the narrative text above it. The "x" axis
reflects computation periods from 3/31/87 to 3/31/97. The "y" axis is
measured in increments of $10,000 ranging from $0 to $50,000 and
indicates that the ending value of a hypothetical initial investment
of $26,000 in the fund's Class A Shares would have grown to $46,494 on
3/31/97.
A4. The graphic presentation here displayed consists of a line
graph. The corresponding components of the line graph are listed
underneath. The Class A Shares of Federated Municipal Securities Fund,
Inc., based on a 4.50% sales charge, are represented by a solid line.
The Lehman Brothers Revenue Bond Index (the "LBRBI") is represented by
a dotted line. The line graph is a visual representation of a
comparison of change in value of a $10,000 hypothetical investment in
the Class A Shares of the fund and the LBRBI. The "x" axis reflects
computation periods from 3/31/87 to 3/31/97. The "y" axis reflects the
cost of the investment. The right margin reflects the ending value of
the hypothetical investment in the fund's Class A Shares, based on a
4.50% sales charge, as compared to the LBRBI. The ending values were
$17,730 and $22,133, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the fund's Class A Shares
Average Annual Total Returns for the one-year, five-year and 10-year
periods ended 3/31/97 and from the fund's start of performance
(10/4/76) to 3/31/97. The total returns were (2.75%), 4.42%, 5.89% and
6.12%, respectively.
A5. The graphic presentation here displayed consists of a line
graph. The corresponding components of the line graph are listed
underneath. The Class B Shares of Federated Municipal Securities Fund,
Inc. are represented by a solid line. The LBRBI is represented by a
dotted line. The line graph is a visual representation of a comparison
of change in value of a $10,000 hypothetical investment in the Class B
Shares of the fund and the LBRBI. The "x" axis reflects computation
periods from 7/26/94 to 3/31/97. The "y" axis reflects the cost of the
investment. The right margin reflects the ending value of the
hypothetical investment in the fund's Class B Shares as compared to
the LBRBI. The ending values were $10,434 and $12,398, respectively.
The legend in the bottom quadrant of the graphic presentation
indicates the fund's Class B Shares Average Annual Total Returns for
the one-year period ended 3/31/97 and from the start of performance of
Class B Shares (7/26/94) to 3/31/97. The total returns were (4.62%)
and 1.74%, respectively.
A6. The graphic presentation here displayed consists of a line
graph. The corresponding components of the line graph are listed
underneath. The Class C Shares of Federated Municipal Securities Fund,
Inc. are represented by a solid line. The LBRBI is represented by a
dotted line. The line graph is a visual representation of a comparison
of change in value of a $10,000 hypothetical investment in the Class C
Shares of the fund and the LBRBI. The "x" axis reflects computation
periods from 4/21/93 to 3/31/97. The "y" axis reflects the cost of the
investment. The right margin reflects the ending value of the
hypothetical investment in the fund's Class C Shares as compared to
the LBRBI. The ending values were $11,082 and $12,663, respectively.
The legend in the bottom quadrant of the graphic presentation
indicates the fund's Class C Shares Average Annual Total Returns for
the one-year period ended 3/31/97 and from the start of performance of
Class C Shares (4/21/93) to 3/31/97. The total returns were (0.03%)
and 2.64%, respectively.
