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