STATE FARM MUNICIPAL BOND FUND INC, 485BPOS, 1996-03-21

STATE FARM MUNICIPAL BOND FUND INC
485BPOS, 1996-03-21

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<PAGE>

Registration Nos.
Securities Act - 2-58161
Investment Company Act - 811-2727

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Post-Effective Amendment No. 24

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 22

State Farm Municipal Bond Fund, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

One State Farm Plaza, Bloomington, Illinois 61710
- --------------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (309) 766-2029

Janet Olsen
Bell, Boyd & Lloyd
Roger Joslin 3 First National Plaza
One State Farm Plaza Suite 3300, 70 West Madison
Bloomington, Illinois 61710 Chicago, Illinois 60602
- --------------------------------------------------------------------------------
(Names and addresses of agents for service)
__________

[X] It is proposed that this filing will become effective on
April 1, 1996 pursuant to Rule 485 (b)
__________

Amending the revised prospectus, Statement of Additional Information and Part
C and filing Exhibits.

Registrant has elected to register an indefinite number of securities pursuant
to Rule 24f-2. On January 25, 1996, Registrant filed its Rule 24f-2 Notice for
the year ended November 30, 1995.

Total Number of Pages ________
(including attachments and exhibits)

Exhibit Index is on Page _______
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------

CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C

Item Number Location or Caption*
- ----------- --------------------
Part A (Prospectus)
-------------------
1 . . . . . . . .Front Cover

2 (a) . . . . . .Fee Table

2 (b), (c). . . .Not Applicable

3 (a) . . . . . .Financial Highlights

3 (b), (c). . . .Not Applicable

3 (d) . . . . . .Financial Highlights

4 (a) . . . . . .The Fund;
Investment Objective and Policies;
Organization and Capital Stock

4 (b) . . . . . .Investment Objective and Policies;
Investment Restrictions

4 (c) . . . . . .Investment Risks

5 (a) . . . . . .Management of the Fund

5 (b), (c). . . .Management of the Fund; Fee Table

5 (d) . . . . . .Management of the Fund

5 (e), (f). . . .Management of the Fund; Fee Table;
Financial Highlights

5 (g) . . . . . .Not Applicable

5A . . . . . . .The information called for is contained in
registrant's annual report to shareowners

6 (a) . . . . . .Organization and Capital Stock

6 (b), (c), (d) .Not Applicable

6 (e) . . . . . .Cover Page

6 (f), (g). . . .Dividends, Distributions and Taxes

6 (h) . . . . . .Not Applicable

7 . . . . . . . .Purchase of Fund Shares; Retirement Plans

7 (a) . . . . . .Management of the Fund
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------

CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)

Item Number Location or Caption*
---- ------ -------- -- --------

7 (b) . . . . . .Determination of Net Asset Value;
Purchase of Fund Shares

7 (c) . . . . . .Not Applicable

7 (d) . . . . . .Purchase of Fund Shares

7 (e), (f). . . .Not Applicable

8 (a) . . . . . .Redemption of Fund Shares;
Signature Guarantee;
Systematic Withdrawal Program; Exchange of Fund
Shares

8 (b), (c). . . .Not Applicable

8 (d) . . . . . .Redemption of Fund Shares

9 . . . . . . . .Not Applicable

Part B (Statement of Additional Information)
--------------------------------------------

10 (a), (b). . . .Front Cover

11 . . . . . . . .Table of Contents

12 . . . . . . . .Not Applicable

13 (a) . . . . . .Investment Objective and Policies

13 (b), (c). . . .Investment Restrictions

13 (d) . . . . . .Not Applicable

14 (a), (b). . . .Directors and Officers

14 (c) . . . . . .Not Applicable

15 (a) . . . . . .Not Applicable

15 (b) . . . . . .General Information - Ownership of Shares

15 (c) . . . . . .Directors and Officers

<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------

CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)

Item Number Location or Caption*
- ----------- --------------------

16 (a)(i). . . . .Investment Advisory and Other Services;
Part A - Management of the Fund

16 (a)(ii) . . . .Directors and Officers

16 (a)(iii), (b) .Management Services Agreement; Part A - Management
of the Fund

16 (c) . . . . . .Not Applicable

16 (d), (e). . . .Management Services Agreement; Service Agreement

16 (f), (g). . . .Not Applicable

16 (h) . . . . . .General Information - Custody of Assets;
General Information - Independent Auditors

16 (i) . . . . . .Transfer Agent Agreement

17 (a) . . . . . .Portfolio Transactions

17 (b) . . . . . .Not Applicable

17 (c), (d). . . .Portfolio Transactions

17 (e) . . . . . .Not Applicable

18 (a), (b). . . .Not Applicable

19 (a) . . . . . .Purchase and Redemption of Fund Shares

19 (b) . . . . . .Determination of Net Asset Value

19 (c) . . . . . .Not Applicable

20 . . . . . . . .Additional Tax Considerations

21 (a) . . . . . .Underwriting Agreement

21 (b), (c). . . .Not Applicable

22 (a) . . . . . .Not Applicable

22 (b) . . . . . .Performance Information

23 . . . . . . . .Financial Information
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------

CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)

Item Number Location or Caption*
- ----------- --------------------
Part C (Other Information)
--------------------------

24 . . . . . . . .Financial Statements and Exhibits

25 . . . . . . . .Persons Controlled by or Under Common Control with
Registrant

26 . . . . . . . .Number of Security Holders

27 . . . . . . . .Indemnification

28 . . . . . . . .Business and Other Connections of Investment
Adviser

29 . . . . . . . .Principal Underwriters

30 . . . . . . . .Location of Accounts and Records

31 . . . . . . . .Management Services

32 . . . . . . . .Undertakings

* References are to the captions in the part of the registration statement
indicated unless noted otherwise.
<PAGE>

PROSPECTUS--APRIL 1, 1996

State Farm Municipal Bond Fund, Inc.

ONE STATE FARM PLAZA, BLOOMINGTON, ILLINOIS 61710

--------------------------------------------
| For Account Information and Shareowner |
| Services: (309) 766-2029 |
|------------------------------------------|
| For Price Information Only: |
| (800) 447-0740 |
--------------------------------------------

Offered to the Agents and Employees of
the State Farm Insurance Companies and their families

The investment objective of the Fund is to provide its
shareowners with as high a rate of income exempt from
federal income taxes as is consistent with prudent
investment management. The Fund seeks to achieve its
investment objective through investment primarily in a
diversified portfolio of long-term Municipal Bonds,
including industrial revenue bonds.

Shares of the Fund are offered at their net asset value.
There is no sales charge.

----------------------------------------------------

This prospectus contains information you should know before
investing in the Fund. Please read it and keep it
for future reference. A Statement of Additional Information
dated April 1, 1996 containing further information about the
Fund, which is incorporated herein by reference, has been
filed with the Securities and Exchange Commission. You can
obtain a copy without charge by writing to State Farm
Investment Management Corp., One State Farm Plaza,
Bloomington, Illinois 61710 or by calling the shareowner
services number stated above.

----------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>

FEE TABLE

The Fund is 100% no-load; you pay no fees to purchase, exchange or redeem
shares, nor any ongoing marketing ("12b-1") expenses. Lower expenses benefit
you by increasing the Fund's investment return.
Shown below are all expenses the Fund incurred during its 1995 fiscal year.
Expenses are expressed as a percentage of fiscal 1995 average net assets.
<TABLE>
<CAPTION>

<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND OPERATING EXPENSES
Sales load "charge" on purchases NONE Management fee 0.13%
Sales load "charge" on reinvested dividends NONE Distribution ("12b-1") fees NONE
Redemption fees NONE Other expenses 0.04%
Exchange fees NONE ----
TOTAL FUND EXPENSES 0.17%
</TABLE>

Example
You would pay the following expenses
on a $1,000 investment, assuming (1) 1 year 3 years 5 years 10 years
5% annual return and (2) redemption ------ ------- ------- --------
at the end of each time period....... $2 $5 $10 $22

The purpose of this table is to help you understand the various costs and
expenses that an investor in the Fund will bear directly or indirectly. (See
"Management of the Fund"). There is a charge (currently $7.50) for the payment
of redemption proceeds by wire transfer. (See "Redemption of Fund Shares")

THIS IS AN ILLUSTRATION ONLY. The figures in the example are not necessarily
representative of past or future expenses and actual expenses and performance
may be greater or less than that shown.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

PER SHARE INCOME AND CAPITAL CHANGES (for a share outstanding throughout the
period)

The following information has been audited by Ernst & Young LLP, independent
auditors, whose report thereon is unqualified. The audited financial statements
of the Fund, the auditor's report thereon and additional performance information
are contained in the Fund's annual report dated November 30, 1995 which may be
obtained from the Fund upon request at no cost.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 7.88 8.59 8.34 8.15 7.98 7.96

Income from Investment Operations
---------------------------------
Net investment income.................. .48 .48 .50 .53 .54 .58
Net gain or loss on securities (both
realized and unrealized)............. .62 (.69) .25 .19 .17 .02
----------------------------------------------------------------------------------
Total from investment operations........ 1.10 (.21) .75 .72 .71 .60

Less Distributions
- ------------------
Dividends (from net investment income) (.48) (.48) (.50) (.53) (.54) (.58)
Distributions (from capital gain) (b). -- (.02) -- -- -- --
----------------------------------------------------------------------------------
Total distributions..................... (.48) (.50) (.50) (.53) (.54) (.58)
Net asset value, end of period.......... $ 8.50 7.88 8.59 8.34 8.15 7.98
==================================================================================
Total Return............................ 14.25% (2.55%) 9.17% 9.05% 9.17% 7.78%

Ratios/Supplemental Data
- ------------------------
Net assets, end of period (millions).... $ 307.4 269.9 276.4 211.3 167.2 132.8
Ratio of expenses to average net assets. .17% .16% .18% .19% .21% .23%
Ratio of net investment income to
average net assets..................... 5.80% 5.80% 5.84% 6.36% 6.75% 7.30%
Portfolio turnover rate................. 7% 8% 5% 4% 2% 8%
Number of shares outstanding at end of
period (millions)...................... 36.2 34.3 32.2 25.3 20.5 16.6

SIX MONTHS
ENDED YEAR ENDED
NOVEMBER 30, MAY 31,
1989 1988 1987 1987 1986
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... 7.76 7.58 7.55 7.53 6.97
Income from Investment Operations
---------------------------------
Net investment income.................. .58 .57 .28 .57 .57
Net gain or loss on securities (both
realized and unrealized)............. .20 .18 .03 .02 .56
------------------------------------------------------------------------
Total from investment operations........ .78 .75 .31 .59 1.13
Less Distributions
- ------------------
Dividends (from net investment income) (.58) (.57) (.28) (.57) (.57)
Distributions (from capital gain) (b). -- -- -- -- --
------------------------------------------------------------------------
Total distributions..................... (.58) (.57) (.28) (.57) (.57)
Net asset value, end of period.......... 7.96 7.76 7.58 7.55 7.53
========================================================================
Total Return............................ 10.44% 10.14% 4.19% 7.72% 16.75%

Ratios/Supplemental Data
- ------------------------
Net assets, end of period (millions).... 110.0 85.2 70.7 66.4 49.1
Ratio of expenses to average net assets. .25% .29% .30%(a) .31 .37%
Ratio of net investment income to
average net assets..................... 7.42% 7.36% 7.49%(a) 7.30% 7.90%
Portfolio turnover rate................. 7% 2% 4%(a) 0% 5%
Number of shares outstanding at end of
period (millions)...................... 13.8 11.0 9.3 8.8 6.5
</TABLE>

Note: (a) Ratios and rate have been calculated on an annualized basis.
(b) Distributions representing less than $.01 were distributed in 1993
and 1992.

-2-
<PAGE>

THE FUND

The Fund is a no-load, open-end, diversified, management investment company
(mutual fund). The Fund is a no-load fund, which means that it imposes no
sales charges or commissions. The Fund is "open-end" because it continuously
offers its shares for sale and redeems its shares upon request of the
shareowners.

The Fund makes available to investors a diversified portfolio of long-term
Municipal Bonds under the continuous supervision of experienced investment
management. By combining individual shareowner investments into a pool of
assets, the Fund is able to invest in Municipal Bonds which are often offered
only in relatively large dollar denominations and, in some cases, are not
available to individual investors. Through ownership of shares of the Fund, as
contrasted with ownership of a number of individual securities, shareowners
are relieved of many details in the selection and management of their
investments and the safeguarding of securities, and their bookkeeping and
income tax records are greatly simplified. In addition, the Fund provides its
shareowners with liquidity, as shares can normally be redeemed at any time at
their net asset value. However, ownership of shares of the Fund does not
constitute a complete financial program. The Fund is intended to serve as the
longer term fixed-income portion of the investment programs of investors with
relatively high federal income tax brackets. Anyone considering investing in
the Fund should be confident that his federal income tax bracket is high
enough to make the lower tax-exempt yield more attractive than taxable yields
available from other forms of fixed-income investments.

INVESTMENT OBJECTIVE AND POLICIES

The Fund intends to invest primarily in a diversified selection of Municipal
Bonds (as defined below) with maturities of one to fifteen years, although
issues with longer maturities may be purchased from time to time. A majority
of the Fund's investments will usually be in issues with maturities longer
than five years. There can be no assurance that the current income will be
sufficient to offset decreases in the net asset value per share that will
result if prevailing interest rates rise in relation to the rates of interest
on Municipal Bonds in the Fund's portfolio. There can be no assurance that the
objective of the Fund will be achieved.

Assets not invested in Municipal Bonds will be held as cash or invested in
"Money Market Securities" and U.S. Treasury securities. Money Market
Securities include short-term obligations of the U.S. Government and its
agencies and instrumentalities and other money market instruments such as
domestic bank certificates of deposit, bankers' acceptances and corporate
commercial paper rated in the highest grade. From time to time more than 20%
of the Fund's assets may be invested in Money Market securities or held as
cash for defensive reasons in anticipation of a decline in the market values
of debt securities, or pending the investment of proceeds from the sale of
Fund shares or from the sale of portfolio securities, or in order to have
highly liquid securities available to meet possible redemptions.

Under ordinary circumstances at least 70% of the Fund's total assets will
consist of Municipal Bonds rated A or better by Moody's Investors Service, Inc.
("Moody's") or by Standard and Poor's Corporation ("S&P"), Money Market
Securities and cash (see "Appendix, Description of Moody's and S&P Municipal
Bond Ratings" in the Statement of Additional Information). Consequently, up to
30% of assets may consist of Municipal Bonds which are non-rated, or rated less
than A by Moody's or by S&P. See "Investment Risks." Subsequent to its purchase
by the Fund, an issue of Municipal Bonds or of Money Market Securities

-3-
<PAGE>

may no longer be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither occurrence will automatically require the
elimination of the security from the Fund's portfolio, but the Fund's investment
manager, State Farm Investment Management Corp. ("Manager") will consider the
reasons for the change in determining whether to retain the issue in the
portfolio.

Although changes will be made from time to time in securities owned by the
Fund as deemed necessary to accomplish the Fund's objective, the Manager does
not expect to engage in a significant amount of short-term trading. Most sales
of securities will occur when the proportion of securities owned with longer
term maturities is reduced in anticipation of a bond market decline (rise in
interest rates), or increased in anticipation of a bond market rise (decline
in interest rates).

The Fund may purchase Municipal Bonds on a "when-issued" basis. When-issued
means that the Fund has committed to purchase at a specified price certain
securities to be issued in the future. Such commitments are made in order to
secure what is considered, in the opinion of the Manager, to be an advantageous
price and yield to the Fund at the time of the commitment. Delivery and payment
for these securities may be a month or more after the purchase date, during
which time the value of such securities is subject to market fluctuation. It is
possible that the securities will never be issued and the commitment cancelled.

The Fund's investment objective and fundamental investment policy as set
forth in the first paragraph of "Investment Objective and Policies" may not be
changed without the approval of the shareowners. However, all other investment
policies followed in seeking that investment objective may be altered from time
to time without shareowners' approval.

MUNICIPAL BONDS--Municipal Bonds are debt obligations issued by or on behalf
of states, territories and possessions of the United States, the District of
Columbia and the Commonwealth of Puerto Rico and their political subdivisions,
agencies and instrumentalities, or by a multistate governmental agency or
authority, to obtain funds for various purposes. The interest on these
obligations is in general exempt from federal income taxes in the opinion of
bond counsel to the issuers. The two principal classifications of Municipal
Bonds are "general obligation" and "revenue" issues.

The basic security of general obligation bonds is the issuer's pledge of its
faith, credit and taxing power for the prompt payment of principal and
interest. The sole or principal security for a revenue bond is typically the
net revenues derived from operation of the facilities the bonds financed or,
in some cases, from the proceeds of a special excise or specific revenue
source, but not from the general taxing power.

Industrial development bonds, although issued by governmental entities or
public authorities, are usually not secured by the taxing power of the issuer,
but are secured by the revenues derived from payments by the user. Industrial
development bonds are issued to obtain funds for the construction, repair or
improvement of, or the equipment for, privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal and other industrial or commercial facilities. Such obligations are
included within the term Municipal Bonds if the interest paid thereon qualifies
as exempt from federal income taxes. The credit quality of an industrial
development bond is normally directly related to the credit standing of the
industrial user involved.

There are, in addition, a variety of hybrid and special types of Municipal
Bonds in which the Fund may invest, including variable rate securities and
municipal notes. Variable rate securities bear rates of interest that are
adjusted periodically according to formulae intended to minimize fluctuation
in values of the instruments. Municipal notes include tax, revenue, and bond
anticipation notes of short maturity, generally less than three years, which
are used to obtain temporary funds for various public purposes.

For further information see "Investment Objective and Policies" in the
Statement of Additional Information.

-4-
<PAGE>

INVESTMENT RISKS

Risks are inherent in all security investments, including mutual funds. The
net asset value per share of the Fund may decrease if prevailing interest
rates rise in relation to rates of interest on Municipal Bonds in the Fund's
portfolio. The Fund is intended for investors who can accept this fluctuation
and other risks associated with investments in long-term Municipal Bonds.
Although the Fund invests in a diversified selection of long-term Municipal
Bonds in an attempt to reduce its overall exposure to investment and market
risks, such diversification does not eliminate all risks. There can be no
assurance that the objective of the Fund will be achieved.
Inherent in the ownership of any Municipal Bond is the risk that the issuer
may lack the power or ability to make principal and interest payments when due.
Up to 30% of the Fund's total assets may be invested in Municipal Bonds which
are non-rated, or rated less than A by Moody's or by S&P. Investment in medium
or lower quality debt securities involves greater investment risk, including the
possibility of issuer default or bankruptcy. An economic downturn could severely
disrupt this market and adversely affect the value of outstanding bonds and the
ability of issuers to repay principal and interest. During a period of adverse
economic changes, including a period of rising interest rates, issuers of such
bonds may experience difficulty in servicing their principal and interest
obligations.
Medium and lower quality debt securities tend to be less marketable than
higher quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Fund may have greater difficulty selling any
medium and lower quality securities in its portfolio.
The Fund may invest 25% or more of its assets in Municipal Bonds that are
related in such a way that an economic, business or political development
affecting one such security could also affect the other securities. For
example, Municipal Bonds, the interest on which is paid from revenues of
similar projects, such as hospitals, utilities or housing, would be so
related. The Fund may invest 25% or more of its assets in industrial
development bonds (subject to the concentration restrictions described in this
prospectus under "Investment Restrictions" and in the Statement of Additional
Information).
Also, pollution control revenue bonds that are guaranteed by a corporate
entity have a risk of being deemed taxable by the Internal Revenue Service if
the corporation failed to meet, or failed to continue to meet, the established
Environmental Protection Agency standards, or otherwise failed to qualify for
tax-exempt status. However, the Fund, with two exceptions, has invested only in
pollution control revenue bonds that contain mandatory redemption provisions
which provide that should the corporation fail to qualify or continue to qualify
for exemption, the bonds would be redeemed at par value by the guarantor.
From time to time proposals have been introduced before Congress with the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. Similar proposals may be introduced in the
future. If such a proposal were enacted, the Fund would reevaluate its
investment objective and policies, submitting for shareowner approval any
significant changes that seem appropriate.

INVESTMENT RESTRICTIONS

The Fund will not:
(1) Invest more than 5% of the value of the Fund's total assets in
securities of any one issuer except securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, which may be purchased
without limitation;
(2) Purchase more than 10% of any class of securities of any one issuer
except U.S. Government obligations;
(3) Invest more than 5% of the market value of the Fund's total assets (at
the time of the investment) in securities of companies with records of less
than three years' continuous operation, including that of predecessors; or

-5-
<PAGE>

(4) Invest more than 25% of the value of the Fund's total assets in any one
industry (this restriction is not applicable to investments in Municipal Bonds
and securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
The policies described in the above paragraph, which cannot be changed
without the approval of a majority of the outstanding shares (as defined in
the Investment Company Act of 1940), are some of the important restrictions
upon investments of the Fund. All of the Fund's investment restrictions are
set forth in the Statement of Additional Information.

PURCHASE OF FUND SHARES

Shares of the Fund may be purchased by agents and employees of the State
Farm Insurance Companies and members of their families.
To open an account, eligible investors should complete and sign the
Application furnished with this prospectus and mail it to the Manager together
with a check (minimum: $1,000) made payable to State Farm Investment
Management Corp. Agents and employees may authorize a compensation deduction
(minimum: $100) through the State Farm Insurance Companies by completing the
Compensation Deduction Authorization section of the Application.
Subsequent investments (minimum: $500) may be made at any time by mailing to
the Manager a check accompanied by the detachable purchase form at the bottom
of the confirmation. Similarly, agents and employees may authorize, change or
cancel a compensation deduction by completing and signing the reverse side of
the detachable purchase form and mailing it to the Manager. The Fund will
accept investments and compensation deduction changes by letter from a
shareowner which provides clear instructions and indicates the account
registration and account number.
The Fund will invest the entire dollar amount of each purchase in full and
fractional shares of the Fund at the net asset value next determined after the
order to purchase is received and accepted by the Manager. Unless otherwise
instructed, all income dividends and capital gain distributions will be
reinvested in full and fractional shares. However, a shareowner may request
that income dividends and capital gain distributions be paid in cash. Stock
certificates will not be issued unless the shareowner requests a certificate
in writing. Certificates will be issued for full shares only.
A confirmation of each transaction, except purchases by compensation
deduction, will be mailed to the shareowner by the Manager. A confirmation of
purchase by compen-sation deduction will be mailed to each shareowner promptly
after the end of each calendar quarter.
The Fund reserves the right, in its sole discretion, to reject purchases
when, in the judgment of management, the purchase would not be in the best
interest of the Fund. No order to purchase shares is binding on the Fund until
it has been confirmed in writing and payment has been received by the Fund.

SYSTEMATIC WITHDRAWAL
PROGRAM

A shareowner owning $5,000 or more of the Fund's shares at the current net
asset value may provide for the payment of a specified dollar amount from the
shareowner's account to the shareowner or a designated payee monthly,
quarterly or annually.
A shareowner who has a systematic withdrawal program is not permitted to
participate in the compensation deduction plan. The Fund reserves the right to
amend the systematic withdrawal program on 30 days' notice. The program may be
terminated at any time by the shareowner or the Fund. Additional information
may be obtained by contacting State Farm Investment Management Corp., One
State Farm Plaza, Bloomington, Illinois 61710.

DETERMINATION OF NET ASSET VALUE

The net asset value per share of the Fund is determined as of 1:00 p.m.
Bloomington, Illinois time on Monday through Friday exclusive of the following
federal holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund need
not compute a net

-6-
<PAGE>

asset value on any day when no purchase or redemption order has been received by
the Manager or the Fund. The net asset value per share is computed by dividing
the value of the Fund's portfolio securities plus any cash and other assets of
the Fund, less all liabilities of the Fund, by the number of shares outstanding.
Interest earned on portfolio securities and expenses, including fees payable to
the Manager, are accrued daily.
In determining the net asset value per share of the Fund, long-term debt
securities and U.S. Treasury bills are valued at a fair market value by a
pricing service approved by the Board of Directors. Short-term debt
securities, other than U.S. Treasury bills, are valued on an amortized cost
basis. Securities for which the Board of Directors believes the value obtained
by the above procedures does not reflect a fair value, and all other assets,
are valued at a fair value determined in good faith by the Board of Directors.

REDEMPTION OF FUND SHARES

The Fund will redeem shares from a shareowner's account at the net asset
value next determined after receipt by the Fund of a proper request for
redemption.
Requests for redemption of shares in the Fund may be made in writing or by
telephone if the shareowner has so indicated on the application or previously
completed a Telephone Redemption Authorization Form. These redemption methods
are explained in detail below.
BY WRITTEN REQUEST -- Shareowners may redeem all or any portion of their
shares by sending a written request to: State Farm Investment Management
Corp., One State Farm Plaza, Bloomington, Illinois 61710. A redemption request
must clearly identify the exact name(s) in which the account is registered,
the account number and the number of shares or dollar amount to be redeemed.
Also, any stock certificates representing the shares to be redeemed must be
returned, in proper form for cancellation, along with the redemption request.
It is suggested that stock certificates returned for cancellation be sent by
certified mail, return receipt requested. The request must be properly signed
by each shareowner of record, including each joint holder of a joint account.
The Fund reserves the right to require further documentation in order to
verify the validity of the redemption request.
On a redemption of $50,000 or more, the signature of the reg-
istered shareowner must be guaranteed as described below in the section
entitled Signature Guarantee.
Proceeds of redemption by written request will normally be sent by check to
the registered shareowner's address of record. However, upon specific
instructions included in the redemption request, proceeds may be sent to
another payee or to an address other than the address of record.
BY TELEPHONE -- Shareowners can redeem by telephone at (309) 766-2029 up to
$50,000 of their uncertificated shares if proceeds are to be mailed to the
address of record, or they may redeem up to the entire value of their
uncertificated shares if the proceeds are to be wired to a pre-designated bank
account. Shareowners cannot redeem shares by telephone if stock certificates
are held for those shares. Shareowners may not utilize this method of
redemption unless they have so elected on the application or until a completed
Authorization Form for Telephone Redemption and Exchange Privileges
("Authorization Form") has been filed. When this election is made by
submitting an Authorization Form, the signature of the shareowner must be
guaranteed (see "Signature Guarantee"). Further documentation may be required
from corporations, partnerships, trusts and other entities. Telephone
redemption is not available for IRA accounts.
If elected by the shareowner, proceeds of telephone redemptions of $2,500 or
more will be wired to a bank as directed in the Telephone Redemption election.
The cost per wire transfer (currently $7.50) will be deducted from the
redemption proceeds. A similar charge may be assessed by the shareowner's
bank. In order to change the bank or account designated to receive proceeds, a
written request must be sent to State Farm Investment Management Corp., One
State Farm Plaza, Bloomington, Illinois 61710. Such requests must be signed by
each shareowner, with each signature guaranteed as described in the section
entitled Signature Guarantee.

-7-
<PAGE>

Telephone redemption proceeds of less than $2,500 and proceeds of up to
$50,000 of all telephone redemptions by shareowners not electing wire transfer
will be sent by check to the registered shareowner at the address of record.
During periods of volatile economic and market conditions, a shareowner may
have difficulty making a redemption request by telephone, in which case
redemption requests would have to be made in writing.
By electing the Telephone Redemption Privilege, the shareowner authorizes
the Manager to act upon an instruction by telephone to redeem shares from any
account for which such services have been elected. The Manager and the Fund
will employ reasonable procedures, including tape recording of telephone
instructions and providing written confirmation of each resulting transaction,
to confirm that telephone instructions are genuine. If the Manager and the
Fund fail to employ such procedures, they may be liable for any losses due to
unauthorized or fraudulent instructions. However, the Fund, its transfer agent
and their respective officers, directors, employees and agents will not be
liable for acting upon instructions given under the authorization when
reasonably believed to be genuine. In such case, the shareowner will bear the
risk of loss in the event of a fraudulent telephone redemption transaction. To
reduce that risk, proceeds of telephone redemptions will be sent only by check
payable to the shareowner of record to the shareowner's address of record or
wired to a pre-designated bank account.
Although the Authorization Form authorizes the Fund or its adviser to
tape-record all telephone instructions, the Fund may not honor telephone
instructions unless permission to record is confirmed by the caller.
Once the Telephone Redemption Privilege with a State Farm mutual fund has been
established by a shareowner, it may be established at the request of the
shareowner in any identically registered new account in any other State Farm
mutual fund offering the Telephone Redemption Privilege by the exchange of
shares of the first fund for those of the second fund by use of the Exchange
Privilege.
REDEMPTION GENERALLY --The Fund will generally redeem shares in cash (by
check or bank wire). Redemptions of more than $500,000 during any 90-day
period by one shareowner will normally be paid in cash, but may be paid wholly
or partly by a distribution in kind of securities. If a redemption is paid in
kind, the redeeming shareowner may incur brokerage fees in selling the
securities received.
Payment for shares redeemed will be mailed or wired within seven days after
the Fund receives a redemption request, either written or by telephone, in
proper form (including stock certificates, if any). However, if the Fund is
requested to redeem shares within several days after they have been purchased,
the Fund may delay mailing the redemption proceeds until it can verify that
payment of the purchase price for the shares has been, or will be, collected.
If the shareowner requests payment by wire, the cost of the wire transfer
(currently $7.50) will be deducted from the redemption proceeds.
A redemption is treated as a sale for federal income tax purposes. A
shareowner's redemption proceeds may be more or less than the shareowner's
cost depending upon the net asset value at the time of the redemption and, as
a result, the shareowner may realize a capital gain or loss. Gain or loss is
computed on the difference between the fair market value of the shares
redeemed and their cost basis. If shares of the Fund are purchased during the
30 days before or after a redemption, the Internal Revenue Code wash sale
rules might apply. Although it is not anticipated that the Fund will impose a
redemption fee, the Fund reserves the right to charge a redemption fee not to
exceed one percent of the redemption price.
The Fund may suspend the right of redemption or postpone a redemption payment
more than seven days during any period when (a) the New York Stock Exchange is
closed for other than customary weekend and holiday closing, (b) trading on that
exchange is restricted, (c) an emergency exists making disposal of securities
owned by the Fund or valuation of its assets not reasonably practicable, or (d)
the Securities and Exchange Commission has by order permitted such suspension
for the protection of shareowners of the
-8-
<PAGE>

Fund; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether any condition prescribed in (b)
through (d) exists.

SIGNATURE GUARANTEE

A signature guarantee is a written representation, signed by an officer or
authorized employee of the guarantor, that the signature of the shareowner is
genuine. The guarantor must be an institution authorized to guarantee
signatures by applicable state law. Such institutions include banks,
broker-dealers, savings and loan associations and credit unions.
The signature guarantee must appear, together with the signature of each
registered owner, either (1) on the written request for redemption, which
clearly identifies the exact name(s) in which the account is registered, the
account number and the number of shares or the dollar amount to be redeemed;
or (2) on a separate "stock power," an instrument of assignment which should
specify the total number of shares to be redeemed (this stock power may be
obtained from most banks and stockbrokers); or (3) on the back of each stock
certificate tendered for redemption; or (4) on the Authorization Form for
Telephone Redemption and Exchange Privileges.

EXCHANGE OF FUND SHARES

GENERAL -- A shareowner may redeem part or all of the shares in the
shareowner's account and purchase shares of another State Farm mutual fund
without charge by meeting the established redemption procedures and minimum
subscription requirements of that fund. A written exchange request must be
accompanied by a properly completed application for the fund being purchased if
an account in the new fund has not previously been established. A telephone
exchange request can be transacted as described under "Telephone Exchange
Privilege".
An exchange transaction is a sale and purchase of shares for federal tax
purposes, and may result in capital gain or loss. Before making an exchange, a
shareowner should obtain the prospectus for the fund to be purchased from the
Manager at One State Farm Plaza, Bloomington, Illinois 61710, and read it
carefully.

TELEPHONE EXCHANGE PRIVILEGE -- Shareowners who wish to use the Telephone
Exchange Privilege, which permits them to exchange by telephone shares of the
Fund for those of another fund managed by State Farm Investment Management
Corp., must so elect on the application or complete the Authorization Form,
have their signatures guaranteed and mail the form to the Fund.
Once the Telephone Exchange Privilege has been granted by the Fund, the
shareowner may telephone the Fund and request an exchange for any amount meeting
or exceeding the applicable minumum investment of the fund being purchased. The
shareowner must identify the existing account by designating the Fund's name,
registration of the account and account number, and must specify the dollar
amount or number of shares to be exchanged and the fund to which the exchange
should be made. The registration of the account to which an exchange is made
must be exactly the same as that of the Fund account from which an exchange is
made. If the shareowner has not established an account in the fund to which the
exchange is to be made, a new account will be opened automatically and will
carry the same registration as the Fund account from which the exchange is made;
accordingly, the Telephone Exchange Privilege will also apply to the fund being
purchased. The Fund's transfer agent's records of such instructions are binding.
The Manager and the Fund will employ reasonable procedures, including tape
recording of telephone instructions and providing written confirmation of each
resulting transaction, to confirm that telephone instructions are genuine. If
the Manager and the Fund fail to employ such procedures, they may be liable
for any losses due to unauthorized or fraudulent instructions. However, the
Fund, its transfer agent, and their respective officers, directors, employees
and agents will not be liable for acting upon instructions given by any person
under the Telephone Exchange Privilege when reasonably believed to be genuine.
In such case, the shareowner will bear the risk of loss

-9-
<PAGE>

in the event of a fraudulent telephone exchange transaction. To reduce the risk
of loss, the registration of the account into which the shares are exchanged
must be identical with the registration of the originating account.

The Telephone Exchange Privilege is not available for shares represented by
a certificate or if good payment for shares being redeemed has not been
received. (The other funds into which exchanges may be made have adopted
similar policies.)

During periods of volatile economic and market conditions, a shareowner may
have difficulty making an exchange request by telephone, in which case exchange
requests would have to be made in writing. The Fund reserves the right at any
time to suspend, limit, modify or terminate the telephone exchange privilege,
but will not do so without giving shareowners at least 30 days' prior written
notice.

MANAGEMENT OF THE FUND

The Board of Directors has overall management responsibility for the Fund.
However, the Fund has engaged State Farm Investment Management Corp., One
State Farm Plaza, Bloomington, Illinois 61710, as Manager to provide
professional investment management for the Fund.

The Fund's portfolio is managed by a team consisting of Kurt Moser and
Julian Bucher. Mr. Moser and Mr. Bucher have been members of the Fund's
portfolio management team since 1988.

Presently, Mr. Moser is a Director and a Vice President of the Manager. In
addition to his offices with the Manager, Mr. Moser has also held the
following positions during the past five years: Vice President of the Fund
since 1990; Director of State Farm Life Insurance Company and State Farm Fire
and Casualty Company since 1991; Vice President of State Farm Life Insurance
Company since 1989, and Vice President - Investments of State Farm Mutual
Automobile Insurance Company and State Farm Fire and Casualty Company since
1989.

Presently, Mr. Bucher is an Investment Officer of the Manager. In addition
to his office with the Manager, Mr. Bucher has also held the following
positions during the past five years: Investment Officer of State Farm Life
Insurance Company, State Farm Mutual Automobile Insurance Company and State
Farm Fire and Casualty Company since 1989.

Since its inception in 1967, the Manager's sole business has been to act as
investment adviser, principal underwriter, transfer agent and dividend
disbursing agent for the State Farm mutual funds.

The Manager is wholly-owned by State Farm Mutual Automobile Insurance
Company.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund declares a dividend each day from its net investment income,
distributable at the end of each calendar quarter. Shares begin to earn
dividends on the day following the date of purchase. Net realized capital
gains, if any, are distributed annually. All distributions are automatically
reinvested in shares of the Fund on the reinvestment date, except that any
shareowner may elect to receive dividends and distributions in cash, upon
signed written request received by the Manager. If the entire amount in a
shareowner's account is redeemed, dividends credited to that account through the
day of redemption are paid with the proceeds of redemption.

The Fund intends to continue to qualify as a "regulated investment company"
under the Internal Revenue Code so that it will not be liable for federal
income taxes on that portion of its net investment income and capital gains
distributed to shareowners. In addition, the Fund intends to invest
principally in tax-exempt obligations sufficient in amount to qualify the Fund
to designate and pay "exempt-interest dividends" under the Internal Revenue
Code.

Exempt-interest dividends paid to shareowners from interest earned by the
Fund from Municipal Bonds are not includable in the shareowner's gross income
for federal income tax purposes. Distributions from other interest and from
short-term capital gains, if any, are taxable to shareowners as ordinary
income, whether received in cash or additional shares. Because the taxable
portion of the Fund's dividends from investment income will be

-10-
<PAGE>

derived from interest, none of its dividends is expected to qualify for the
dividends received deduction available to corporations.

Shareowners are notified of such designations within 60 days following the
close of the Fund's November 30 fiscal year. The percentage of the
distribution which is tax-exempt varies from distribution to distribution.

The tax-exempt status of dividends derived from interest on Municipal Bonds
for federal income tax purposes does not necessarily result in exemption from
any state or local income taxes or other taxes.

In the case of a person receiving Social Security benefits, tax-exempt
interest, including exempt-interest dividends received from the Fund, will be
added to the person's adjusted gross income in determining whether such
benefits will be subject to federal income tax.

Shareowners must provide their social security or tax identification number
and furnish appropriate certification. Otherwise, IRS regulations require the
fund to withhold 31% from taxable distributions payable to accounts whose
owners have not complied.

Information concerning the tax status of dividends and distributions is
mailed to shareowners annually.

Because this section is not intended to be a full discussion, shareowners
may wish to consult their tax advisors regarding the tax consequences of
investments in the Fund.

ORGANIZATION AND CAPITAL STOCK

The Fund is a Maryland corporation organized on December 6, 1976 with
100,000,000 shares of authorized common stock, $1 par value.

Holders of shares are entitled to share pro rata in dividends and other
distributions on shares when and as declared by the Board of Directors, to one
vote per share in elections of directors and other matters presented to
shareowners, and to equal rights per share in the event of liquidation. The
shares are nonassessable, have no pre-emptive, subscription or conversion
rights, and have no sinking fund provisions. The shares are transferable and
are redeemable upon request of the holder. Shares redeemed by the Fund may be
reissued.

-11-
<PAGE>

PROSPECTUS

April 1, 1996

STATE
FARM
MUNICIPAL
BOND
FUND, INC.

ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
TELEPHONE (309) 766-2029

<PAGE>

State Farm Municipal Bond Fund, Inc.

ONE STATE FARM PLAZA, BLOOMINGTON, ILLINOIS 61710

Telephone: (309) 766-2029

STATEMENT OF ADDITIONAL INFORMATION -- APRIL 1, 1996

- --------------------------------------------------------------------------------

This Statement of Additional Information is not the Fund's prospectus but
contains information in addition to and more detailed than that set forth
in the prospectus. It should be read in conjunction with the prospectus.

The Fund's prospectus dated April 1, 1996, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge by contacting the Fund at the address or telephone number
shown above.

- --------------------------------------------------------------------------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PAGE
<S> <C>
Financial Information...................................................... 2
Investment Objective and Policies.......................................... 2
Investment Restrictions.................................................... 2
Purchase and Redemption of Fund Shares..................................... 3
Determination of Net Asset Value........................................... 3
Investment Advisory and Other Services..................................... 4
Management Services Agreement.............................................. 4
Service Agreement.......................................................... 5
Underwriting Agreement..................................................... 5
Transfer Agent Agreement................................................... 5
Performance Information.................................................... 5
Portfolio Transactions..................................................... 6
Additional Tax Considerations.............................................. 7
Directors and Officers..................................................... 7
General Information........................................................ 8
Appendix................................................................... 9
</TABLE>

<PAGE>

FINANCIAL INFORMATION

Please refer to the financial statements (including Financial Highlights),
notes thereto and Report of Independent Auditors (all of which are "Financial
Information") contained in the Fund's annual report for the fiscal year ended
November 30, 1995, a copy of which accompanies this Statement of Additional
Information. This Financial Information (but no other material from the annual
report) is incorporated by reference in this Statement of Additional
Information. Additional copies of the annual report may be obtained by writing
or telephoning the Fund, (309) 766-2029.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide its shareowners with as
high a rate of income exempt from federal income taxes as is consistent with
prudent investment management. It is a fundamental policy of the Fund that
during periods of normal market conditions, either (1) the Fund's assets will be
invested so that at least 80% of its net investment income will be exempt from
federal income tax, or (2) at least 80% of the Fund's net assets will be
invested in securities of which the income is exempt from federal income tax.
The Fund's investment objective and the fundamental investment policy described
in this paragraph may not be changed without the approval of the shareowners.
Other investment policies followed in seeking to achieve the Fund's investment
objective may be altered from time to time without shareowners' approval.

The Fund intends to invest primarily in a diversified selection of Municipal
Bonds (as defined in the prospectus) with maturities of one to fifteen years,
although issues with longer maturities may be purchased from time to time. A
majority of the Fund's investments will usually be in issues with maturities
longer than five years. There can be no assurance that current income will be
sufficient to offset decreases in the net asset value per share that will result
if prevailing interest rates rise in relation to the rates of interest on
Municipal Bonds in the Fund's portfolio. There can be no assurance that the
Fund's investment objective will be achieved.

Assets not invested in Municipal Bonds will be held in cash or invested in
"Money Market Securities" and U.S. Treasury securities. Money Market Securities
include short-term obligations of the U.S. Government and its agencies and
instrumentalities and other money market instruments such as domestic bank
certificates of deposit, bankers' acceptances and corporate commercial paper
rated in the highest grade. From time to time more than 20% of the Fund's assets
may be invested in Money Market securities or held as cash for defensive reasons
in anticipation of a decline in the market values of debt securities, or pending
the investment of proceeds from the sale of Fund shares or from the sale of
portfolio securities, or in order to have highly liquid securities available to
meet possible redemptions.

Although changes will be made from time to time in securities owned by the
Fund, as deemed necessary to accomplish the Fund's objective, the Manager does
not expect to engage in a significant amount of short-term trading. Most sales
of securities will occur when the proportion of securities owned with longer
term maturities is reduced in anticipation of a bond market decline (rise in
interest rates), or increased in anticipation of a bond market rise (decline in
interest rates). In periods of relatively stable interest rate levels, the Fund
does not expect the annual portfolio turnover rate to exceed 50% for issues with
maturities longer than one year at the time of purchase. In years of sharp
fluctuations in interest rates, however, the annual portfolio turnover rate may
exceed 50%. The rate of portfolio turnover will not be a limiting factor and,
accordingly, will always be incidental to transactions undertaken with the view
of achieving the Fund's investment objective. Historical portfolio turnover rate
information is set forth in the Fund's prospectus in the Financial Highlights
table which is incorporated herein by reference.

INVESTMENT RESTRICTIONS

The Fund is subject to certain restrictions upon its investments which provide
that the Fund may not:

(1) Invest more than 5% of the value of the Fund's total assets in
securities of any one issuer except securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, which may be purchased
without limitation;

(2) Borrow money, except from banks for temporary or emergency purposes and
not for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;

-2-
<PAGE>

(3) Pledge, mortgage or hypothecate the Fund's assets, except that, to secure
borrowings permitted by subparagraph (2) above, the Fund may pledge securities
having a market value not exceeding 10% of the Fund's net asset value;

(4) Underwrite any securities issued by other persons;

(5) Purchase or sell real estate, but the Fund may invest in Municipal Bonds
or Money Market Instruments secured by real estate or interests therein;

(6) Purchase or sell commodities or commodities contracts, or interests in
oil, gas or other mineral exploration or development programs;

(7) Make loans to others (except to the extent that the purchase of Municipal
Bonds, Money Market Instruments or U.S. Treasury securities may be deemed the
making of a loan);

(8) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions, or purchase or sell any put or call options or combinations
thereof;

(9) Purchase or retain for the portfolio of the Fund the securities of any
issuer, if, to the Fund's knowledge, those directors and officers of the Fund
who individually own more than 1/2 of 1% of the outstanding securities of such
issuer together own more than 5% of such outstanding securities;

(10) Purchase more than 10% of any class of securities of any one issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class)
except U.S. Government obligations;

(11) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933;

(12) Purchase securities of other investment companies or investment trusts,
except by purchases in the open market involving no commission or profit (other
than the customary broker's commission) to a sponsor or dealer, and then only in
an amount up to 5% of the value of the Fund's total assets, or except as a part
of a plan of merger or consolidation;

(13) Invest in the securities of a company for the purpose of exercising
management or control;

(14) Invest more than 5% of the market value of the Fund's total assets (at
the time of the investment) in securities of companies with records of less than
three years' continuous operation, including that of predecessors;

(15) Invest more than 25% of the value of the Fund's total assets in any one
industry (this restriction is not applicable to investments in Municipal Bonds
and securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).

For purposes of restrictions numbered 1, 9 and 10 above, the Fund will
classify the issuer or issuers of a security according to the entity or entities
which constitute the source of payment of interest and principal on the
security.

Other than for purposes of the restriction number 3 above, if a percentage
restriction is not violated at the time of investment or borrowing, a change in
the value of the Fund's net assets or in the outstanding securities of an issuer
will not result in a violation of the restriction.

These investment restrictions may not be changed without the consent of the
shareowners holding a majority of the shares. A majority of the shares, as used
in this Statement of Additional Information and in the Prospectus, means the
vote of (i) 67% or more of the shares present and entitled to vote at a meeting,
if the owners of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less.

PURCHASE AND REDEMPTION OF FUND SHARES

Purchases and redemptions of Fund shares are discussed in the Prospectus under
the headings "Purchase of Fund Shares", "Systematic Withdrawal Program",
"Redemption of Fund Shares" and "Exchange of Fund Shares" and that information
is incorporated herein by reference.

DETERMINATION OF NET ASSET VALUE

Determination of net asset value is set forth in the Prospectus under the
heading "Determination of Net Asset Value" and that information is
incorporated herein by reference.

-3-
<PAGE>

INVESTMENT ADVISORY AND
OTHER SERVICES

The Fund has an Investment Advisory and Management Services Agreement, a
Transfer Agent Agreement and an Underwriting Agreement with State Farm
Investment Management Corp., One State Farm Plaza, Bloomington, Illinois 61710.
There is a separate Service Agreement among the Fund, the Manager and State Farm
Mutual Automobile Insurance Company ("Auto Company"). Each of these four
agreements may be continued beyond its current term only so long as such
continuance is specifically approved at least annually by the Board of Directors
of the Fund or by vote of a majority of the outstanding shares of the Fund and,
in either case, by vote of a majority of the directors who are not interested
persons of any party to such agreement, except in their capacity as directors of
the Fund, cast in person at a meeting called for the purpose of voting on such
approval. Each agreement may be terminated upon 60 days' written notice by any
of the parties to the agreement, or by a majority vote of the outstanding
shares, and will terminate automatically upon its assignment by any party.

The Manager is also the investment manager, transfer agent, dividend
disbursing agent and underwriter for State Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc. and State Farm Interim Fund, Inc. There are similar
agreements among each of those funds, the Manager and the Auto Company, except
that the Investment Advisory and Management Services Agreements with State Farm
Growth Fund, Inc. and State Farm Balanced Fund, Inc. provide for investment
advisory fees at annual rates different from those applicable to the Fund.

Since its inception in 1967, the Manager's sole business has been to act as
investment adviser, principal underwriter, transfer agent and dividend
disbursing agent for the State Farm mutual funds.

The Manager is wholly-owned by State Farm Mutual Automobile Insurance Company,
which is an Illinois mutual insurance company.

Messrs. Rust, Joslin, Grimes, Moser, Tipsord, Chevalier and Ms. Dysart are
directors and/or officers of the Fund, the Manager and the other State Farm
mutual funds (see "Directors and Officers").

MANAGEMENT SERVICES AGREEMENT

Pursuant to an Investment Advisory and Management Services Agreement, the
Manager: (1) acts as the Fund's investment adviser; (2) manages the Fund's
investments; (3) administers the Fund's business affairs; (4) provides clerical
personnel, suitable office space, necessary facilities and equipment and
administrative services; and (5) permits its officers and employees to serve as
directors, officers and agents of the Fund, without compensation from the Fund,
if duly elected or appointed.

The agreement requires the Fund to pay: (1) the fees and expenses of
independent auditors, legal counsel, the custodian, the transfer agent, the
registrar, the dividend disbursing agent and directors who are not affiliated
with the Manager; and (2) the cost of preparing and distributing stock
certificates, proxy materials, reports and notices to shareowners, brokerage
commissions, interest, taxes, federal securities registration fees and
membership dues in the Investment Company Institute or any similar organization.
The Manager is required to pay all other Fund expenses.

As compensation for the services and facilities furnished, the Fund pays a
management fee (computed on a daily basis and paid quarterly) at the annual rate
of .20% of the first $50 million of average net assets, .15% of the next $50
million of average net assets and .10% of the average net assets in excess of
$100 million. However, the management fee will be reduced, or the Manager will
reimburse the Fund, by any amount necessary to prevent the Fund's total expenses
(excluding taxes, interest, extraordinary litigation expenses, brokerage
commissions and other portfolio transaction costs) from exceeding .40% of the
average net assets of the Fund on an annual basis.

For the fiscal years ended November 30, 1995, 1994 and 1993, the Manager
earned $366,394, $355,000 and $321,752, respectively, for its services as
investment adviser to the Fund. Neither the Manager nor any affiliated company
receives any brokerage commissions from the Fund as such business is transacted
with non-affiliated broker-dealers.

Some affiliated companies of the Manager (including Auto Company) and the
other State Farm funds managed by the Manager carry on extensive investment
programs. Securities considered as investments for the Fund may also be
appropriate for the accounts of one or more of such companies. Although
investment decisions for the Fund are made independently from those for such
other companies, securities of the same issuer may be acquired, held or disposed
of by the Fund and one or more of such other companies at or about

-4-

<PAGE>

the same time, if consistent with the investment objectives and policies of the
respective parties. When both the Fund and one or more of such other companies
are concurrently engaged in the purchase or sale of the same securities, the
transactions are allocated as to amount and price in a manner considered
equitable to the Fund. In some cases this procedure may affect the price or
amount of the securities as far as each party is concerned. It is the opinion of
the Directors of the Fund, however, that the benefits available to the Fund
outweigh any possible disadvantages that may arise from such concurrent
transactions.

The obligation of performance under the Management Agreement between the
Manager and the Fund is solely that of the Manager, for which the Auto Company
assumes no responsibility.

SERVICE AGREEMENT

Under the Service Agreement, the Auto Company makes available to the Manager
the services, on a part-time basis, of employees of the Auto Company engaged in
its investment operations, and also certain other personnel, services and
facilities to enable the Manager to perform its obligations to the Fund. The
Manager reimburses the Auto Company for such costs, direct and indirect, as are
fairly attributable to the services performed and the facilities provided by the
Auto Company under the Service Agreement. Accordingly, the Fund makes no payment
to the Auto Company under the Service Agreement.

UNDERWRITING AGREEMENT

Pursuant to the Underwriting Agreement, the Manager: (1) is the underwriter of
the Fund's shares; (2) acts as agent of the Fund in the continuous sale of its
shares; (3) prepares and distributes literature relating to the Fund and its
investment performance; (4) distributes and pays for the printing of the Fund's
prospectus; (5) circulates advertising and public relations materials; and (6)
pays the cost of qualifying and maintaining the qualification of the Fund's
shares for sale under the securities laws of the various states.

The Manager receives no discount, commission or other compensation as
underwriter.

TRANSFER AGENT AGREEMENT

The Transfer Agent Agreement appoints the Manager as the Fund's transfer agent
and dividend disbursing agent. Under the terms of the agreement, the Manager:
(1) maintains all shareowner account records; (2) prepares and mails transaction
confirmations, annual records of investments and tax information statements; (3)
effects transfers of Fund shares; (4) arranges for the issuance and cancellation
of stock certificates; (5) prepares annual shareowner meeting lists; (6)
prepares, mails and tabulates proxies; (7) mails shareowner reports; and (8)
disburses dividend and capital gains distributions. These services are performed
by the Manager at no charge to the Fund.

PERFORMANCE INFORMATION

The Fund provides information on its "Average Annual Total Return" in its
annual reports to shareowners. "Average Annual Total Return" is the average
annual compounded rate of change in value represented by the percentage change
in value during a period of an investment in shares of the Fund, including the
value of shares acquired through reinvestment of all dividends and capital gains
distributions for the period.

Average Annual Total Return is computed as follows:

ERV = P(1 + T)n

Where: P = the amount of an assumed initial investment in shares of the Fund
T = average annual total return
n = number of years from initial investment to the end of the period
ERV = ending redeemable value of shares held at the end of the period

-5-

<PAGE>

For example, as of November 30, 1995 the Average Annual Total Return on a
$1,000 investment in the Fund for the following period was:

Average Annual
Total Return
------------
1 year......................................... 14.25%
5 years........................................ 7.66
10 years........................................ 8.75

The Fund imposes no sales charges and pays no distribution expenses. Income
taxes are not taken into account. Performance figures quoted by the Fund are not
necessarily indicative of future results. The Fund's performance is a function
of conditions in the securities markets, portfolio management and operating
expenses. Although information about past performance is useful in reviewing the
Fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.

In its annual report, the Fund's performance may be compared with movements of
market indexes, including the Lehman Brothers Municipal Bond Index.

PORTFOLIO TRANSACTIONS

To date, all purchases and sales of portfolio securities for the Fund have
been made on a net basis without brokerage commissions, in transactions with
securities dealers who buy and sell those securities as market makers. Market
makers earn the spread between the bid and asked prices at which they buy and
sell. New issues of securities offered by underwriters are purchased at prices
which are marked up from the discounted prices at which the underwriters
purchase for resale. For the three most recent fiscal years, the Fund paid no
brokerage commissions.

Since the Fund will frequently wish to purchase newly issued securities, the
Manager appraises, as to each of its dealers, the past record and future
prospects in the allocation of new issues of securities by such dealer for
purchase by the Fund, and gives weight to such appraisals in selecting dealers
to execute market transactions for the Fund, and in designating dealers to be
credited with the dealer compensation for purchases by the Fund of newly issued
securities.

The Manager's primary consideration in selecting dealers or brokers to execute
transactions, and in designating dealers to be compensated for Fund purchases in
underwritings, is the best net price consistent with competent execution. Among
the factors considered in evaluating quality of execution are: (1) skill,
knowledge and effort required in executing particular transactions; (2) trading
and operational capability; (3) financial condition and stability; (4)
confidentiality; and (5) reliability and integrity.

Informational services of a wide variety, which vary in value according to
their usefulness to the Manager in making investment decisions for the Fund, are
also provided by many dealers. The Fund may pay for useful informational
services provided by a dealer by placing brokerage transactions through that
dealer in an aggregate amount which, in the opinion of the Manager, is
commensurate with the value of the execution services plus the value of any
informational services provided by the dealer over a period of time.

The Manager and the Auto Company perform extensive investment research, which
is used in making investment decisions for the Fund, for the other State Farm
funds and for the State Farm Companies. The availability of additional
information from a diversity of sources, some of which have in-depth knowledge
of specialized subjects, and have proven insight and acumen in economic,
financial, political and investment matters, may tend to reduce the Manager's
costs by some indeterminable amount, but more importantly is believed to provide
a quantity and range of information greater than could be generated solely
within a single advisory organization, even for a larger advisory fee. Although
the other State Farm funds and other State Farm Companies benefit from
information obtained for the Fund with the Fund's transactions, the Fund also
benefits from information obtained for the other State Farm funds and other
State Farm Companies and with their transactions.

-6-

<PAGE>

ADDITIONAL TAX CONSIDERATIONS

The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. A 4% excise tax is imposed on
the excess of the required distribution for a calendar year over the distributed
amount for such calendar year. Generally, the required distribution is the sum
of 98% of the Fund's net investment income for the calendar year plus 98% of its
capital gain net income for the one year period ending November 30. The Fund
intends to declare or distribute dividends during the calendar year in an amount
sufficient to prevent imposition of the 4% excise tax.

Because capital gain distributions reduce net asset value, if you purchase
shares shortly before a record date for such a distribution you will, in effect,
receive a return of a portion of your investment although the distribution will
be taxable to you. This is true even if the net asset value of your shares was
reduced below your cost. However, for federal income tax purposes your original
cost would continue as your tax basis. Any loss recognized on the disposition of
Fund shares acquired which have been held by the shareowner for six months or
less will be treated as long-term capital loss to the extent the shareowner
received a long-term capital gain distribution with respect to those Fund
shares.

Any loss realized by a shareholder on the disposition of Fund shares held for
six months or less is disallowed to the extent of any exempt-interest dividends
received by the shareholder with respect to such shares.

Distributions of long-term capital gains are taxable to shareowners as long-
term capital gains, whether received in cash or additional shares and regardless
of the period of time the shares have been held. Dividends subject to federal
income tax and capital gains are taxed to shareholders at the same rates.
However, the distinction between ordinary income or loss and capital gain or
loss remains important for certain tax purposes, such as a taxpayer's ability to
offset losses against income.

Under the provisions of the Internal Revenue Code, interest on indebtedness
incurred or continued to purchase or carry shares of the Fund is not deductible
for federal income tax purposes. Even though borrowed funds are not directly
traceable to the purchase of shares, the Internal Revenue Service may determine,
depending on circumstances, that the indebtedness is incurred for such a
purpose. Furthermore, persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds should consult
their tax advisers before purchasing Fund shares. Because of tax implications,
investment in the Fund may be unsuitable for such persons.

Pursuant to the Tax Reform Act of 1986, interest on certain municipal
obligations issued by "nonessential governmental issuers" are subject to
federal income taxation for those investors subject to the alternative minimum
tax. The Fund does not currently intend to purchase municipal obligations whose
interest is a tax preference item for purposes of the alternative minimum tax.

DIRECTORS AND OFFICERS

The directors and officers of the Fund, their principal occupations for the
last five years and their affiliations, if any, with State Farm Investment
Management Corp., the Fund's investment adviser and principal underwriter, are
listed below. Unless otherwise noted, the address of each is One State Farm
Plaza, Bloomington, Illinois 61710.

Edward B. Rust, Jr., President and Director*

President and Chairman of the Board, State Farm Mutual Automobile Insurance
Company and Director of certain wholly owned insurance subsidiaries and
affiliates. President and Director, State Farm Investment Management Corp.

Albert H. Hoopes, Director

Attorney at Law. Address: 102 S. East Street, Suite 350, Bloomington,
Illinois 61701.

Roger S. Joslin, Vice President, Treasurer and Director*

Senior Vice President and Treasurer, State Farm Mutual Automobile Insurance
Company and certain wholly owned insurance subsidiaries and affiliates.
Chairman of the Board, State Farm Fire and Casualty Company. Vice President,
Treasurer and Director, State Farm Investment Management Corp.

Davis U. Merwin, Director

Investor. Address: P.O. Box 8, Bloomington, Illinois 61702.

James A. Shirk, Director

Director and President, Beer Nuts Inc., Address: 103 N. Robinson, Bloomington,
Illinois 61701.

-7-

<PAGE>

David R. Grimes, Assistant Vice President and Secretary

Assistant Vice President of Accounting, State Farm Mutual Automobile Insurance
Company. Secretary, State Farm Investment Management Corp.; since 1994,
Assistant Vice President and Secretary, State Farm Investment Management Corp.

Kurt G. Moser, Vice President

Director of State Farm Life Insurance Company and State Farm Fire and Casualty
Company since 1991; Vice President of State Farm Life Insurance Company and
Vice President-Investments of State Farm Mutual Automobile Insurance Company
and State Farm Fire and Casualty Company since 1989. Director since 1991 and
Vice President since 1990, State Farm Investment Management Corp.

Julian R. Bucher, Vice President

Investment Officer, State Farm Life Insurance Company, State Farm Mutual
Automobile Insurance Company and State Farm Fire and Casualty Company. Since
1994, Investment Officer, State Farm Investment Management Corp.

Michael L. Tipsord, Assistant Secretary

Director of Accounting, State Farm Mutual Automobile Insurance Company.
Assistant Secretary, State Farm Investment Management Corp.

Jerel S. Chevalier, Assistant Secretary-Treasurer

Director-Mutual Funds, State Farm Mutual Automobile Insurance Company. Since
1992, Assistant Treasurer, State Farm Investment Management Corp.; since 1994,
Assistant Secretary-Treasurer, State Farm Investment Management Corp.

Patricia L. Dysart, Assistant Secretary

Assistant Tax Counsel, State Farm Mutual Automobile Insurance Company since
1991. Since 1995, Assistant Secretary, State Farm Investment Management Corp.

*Director who is an "interested person" of the Fund or the Manager, as defined
in the Investment Company Act of 1940.

The directors and officers as a group owned 1.3% of the Fund's outstanding
shares on January 31, 1996.

The directors and officers of the Fund, excluding Julian R. Bucher, hold
identical positions with State Farm Growth Fund, Inc., State Farm Balanced Fund,
Inc. and State Farm Interim Fund, Inc. Messrs. Rust and Joslin are members of
the Executive Committee which has authority during intervals between meetings of
the board of directors to exercise the powers of the board with certain
exceptions.

GENERAL INFORMATION

OWNERSHIP OF SHARES

As of February 29, 1996, no shareowner owned more than five percent of the
Fund's outstanding shares.

CUSTODY OF ASSETS

The securities and cash of the Fund are held by Morgan Guaranty Trust Company
of New York ("Morgan"), 60 Wall Street, New York, NY 10260, as custodian. Morgan
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments and performs other
duties, all as directed by persons duly authorized by the Board of Directors.
Cash of the Fund is also held by Commerce Bank ("Commerce"), 120 S. Center
Street, Bloomington, Illinois 61701, as custodian. Commerce receives payments
from the Manager for sale of the Fund's shares and performs other duties, as
directed by persons duly authorized by the Board of Directors.

INDEPENDENT AUDITORS

The Fund's independent auditors are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606. The firm audits the Fund's annual financial statements,
reviews certain regulatory reports and the Fund's income tax returns, and
performs other professional accounting, auditing, tax and advisory services when
engaged to do so by the Fund.

-8-

<PAGE>

CODE OF ETHICS

The Manager intends that: all of its activities function exclusively for the
benefit of the owners or beneficiaries of the assets it manages; assets under
management or knowledge as to current or prospective transactions in managed
assets are not utilized for personal advantage or for the advantage of anyone
other than the owners or beneficiaries of those assets; persons associated with
the Manager and the Fund avoid situations involving actual or potential
conflicts of interest with the owners or beneficiaries of managed assets; and,
situations appearing to involve actual or potential conflicts of interest or
impairment of objectivity are avoided whenever doing so does not run counter to
the interests of the owners or beneficiaries of the managed assets. The Board of
Directors of the Fund has adopted a Code of Ethics which imposes certain
prohibitions, restrictions, preclearance requirements and reporting rules on the
personal securities transactions of subscribers to the Code, who include the
Fund's officers and directors and employees of the Manager. The Board of
Directors believes that the provisions of the Code are reasonably designed to
prevent subscribers from engaging in conduct that violates these principles.

APPENDIX -- RATINGS OF MUNICIPAL SECURITIES

RATINGS IN GENERAL

A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Manager believes that the quality of Municipal
Securities should be continuously reviewed and that individual analysts give
different weightings to the various factors involved in credit analysis. A
rating is not a recommendation to purchase, sell or hold a security, because it
does not take into account market value or suitability for a particular
investor. When a security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons. The Manager, through independent analysis, attempts to
discern variations in credit ratings of the published services, and to
anticipate changes in credit ratings. The following is a description of the
characteristics of certain ratings used by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").

RATINGS BY MOODY'S

MUNICIPAL BONDS:

Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.

Aa. Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risks appear somewhat greater than in Aaa bonds.

A. Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa. Bonds rated Baa are considered medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.

-9-

<PAGE>

Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B. Bonds which are rated B generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or elements of danger may be present with respect to principal or
interest.

Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C. Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Conditional Ratings. The designation "Con." followed by a rating indicates
bonds for which the security depends upon the completion of some
act or the fulfillment of some condition. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.

Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1, and B 1.

MUNICIPAL NOTES:

MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

MIG 3. This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.

COMMERCIAL PAPER:

Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:

Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality

If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.

-10-
<PAGE>

RATINGS BY S&P

MUNICIPAL BONDS:

AAA. Bonds rated AAA have the highest rating. Capacity to pay interest and
repay principal is extremely strong.

AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only to a small degree.

A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher-rated
categories.

BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Although they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in higher-rated categories.

BB. B. CCC. CC. Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

C. The rating C is reserved for income bonds on which no interest is being
paid.

In order to provide more detailed indications of credit quality, S&P's bond
letter ratings described above (except for the AAA category) may be modified
by the addition of a plus or a minus sign to show relative standing within the
rating category.

Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, although addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.

MUNICIPAL NOTES:

SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.

SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.

Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:

- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).

- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be rated as a note).

-11-
<PAGE>

COMMERCIAL PAPER:

A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree to safety.

A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designed A-1+.

-12-
<PAGE>

ANNUAL REPORT

State Farm Municipal Bond Fund, Inc.

ONE STATE FARM PLAZA . BLOOMINGTON, ILLINOIS 61710

For Account Information and Shareowner
Services: (309) 766-2029

For Price Information ONLY:
1-800/447-0740

November 30, 1995

This report is not to be distributed unless
preceded or accompanied by a prospectus.
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.

Dear Shareowner:

The past fiscal year has been a good one for bond markets and investors in the
Municipal Bond Fund. Yields on the municipal bonds held by your Fund have
dropped about 150 basis points (a basis point is .01%) during the year causing
the values of the securities to increase significantly. Correspondingly, the net
asset value of the Fund rose to $8.50 from $7.88, a 7.9% improvement. The total
return, which is derived by adding dividends declared by the Fund to the change
in net asset value, for the past year was 14.25%.

The following graph compares a $10,000 investment in the Municipal Bond Fund
over the past ten years to a theoretical investment of the same amount in the
Lehman Brothers Municipal Bond Index:

COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT FOR THE YEARS
ENDED NOVEMBER 30

[PERFORMANCE GRAPH APPEARS HERE]

Lehman
X-Axis Municipal Muni Bond
Year Bond Fund Index
------ --------- ---------
1985 10,000 10,000
1986 12,082 12,070
1987 12,207 11,804
1988 13,438 13,059
1989 14,838 14,497
1990 15,993 15,613
1991 17,473 17,215
1992 19,045 18,942
1993 20,813 21,043
1994 20,251 19,938
1995 23,134 23,706

Many crosscurrents have affected the municipal bond market over the past
fiscal year. The dominating force has been the downward move of general
interest rates. The fall in interest rates has been fueled by evidence that
growth in the U.S. economy is slowing and inflationary pressures are slight.
Furthermore, capital markets have been helped to some degree by prospects
for a program, which will hopefully be agreed upon by the President

-2-

<PAGE>

and Congress, to eliminate the federal budget deficit over seven years.
Offsetting the positive impact of the general reduction in interest rates are
the following factors which have tended to be detrimental to the prices of
municipal securities: consideration of tax reform and more specifically a "flat
tax"; some loss of liquidity in the market as several dealers either withdrew
from or scaled back activity in the municipal market; and effects of the Orange
County bankruptcy filing.

The municipal market has functioned reasonably well in the rather complex
environment of the past twelve months. For the time being, investors seem to
have decided that present yields on long-term municipal bonds, which are in the
range of 85-90% of those available on U.S. Government bonds with comparable
maturities, are attractive and compensate them adequately for the uncertainties
which exist under present circumstances. Investor demand has been sufficient to
readily absorb new issue volume in 1995 which is now just 12% below the 1994
pace.

The prevailing mood in the bond markets is quite optimistic at the moment.
Many investors seem to be convinced that the Federal Reserve Board has done its
job well and the twin perils of inflation and recession will be avoided for a
long time leaving room for further drops in interest rates. Such a view is
comforting and may well prove to be correct, but we caution you, as investors,
against believing the future is predictable. Markets are always vulnerable to
unanticipated surprises and changes in investors' perceptions, and vulnerability
along these lines tends to be greatest when optimism is rampant.

The general composition of your Fund's investments has not changed much since
last November. Bonds purchased over the course of the year have maturities
ranging from 12 to 17 years. Good quality bonds dominate the Fund's portfolio.
About 83% of long-term assets are rated Aa or better and 99% fall in the top
three rating categories. The average maturity stands at approximately 7.6 years
with maturities spread out over the next 17 years.

The good quality investments held by the Fund continue to deliver a dependable
flow of dividend income. As you know, the Fund declares a dividend each day from
its net investment income which is payable on the last day of the calendar
quarter. All dividends are automatically invested in shares of the Fund unless
you have advised State Farm Investment Management Corp. otherwise in writing.

Sincerely,

[SIGNATURE OF KURT G. MOSER] [SIGNATURE OF JULIAN R. BUCHER]
Kurt G. Moser Julian R. Bucher
Vice President Vice President

December 19, 1995

-3-
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareowners
State Farm Municipal Bond Fund, Inc.

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of State Farm Municipal Bond Fund, Inc. as of
November 30, 1995, the related statements of operations and changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the fiscal periods since 1986. 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 investments owned as of
November 30, 1995, by correspondence with the custodian and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Farm Municipal Bond Fund, Inc. at November 30, 1995, the results of its
operations and changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the fiscal periods since
1986, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois
December 15, 1995

-4-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS (97.8%):

SECURED BY U.S. TREASURY OBLIGATIONS (19.0%):

$ 130,000 Grand River Dam Authority, Oklahoma Rev., Ser. 1978, 7.20%,
6-1-1998 (Prerefunded to 6-1-1997 @ 100) Aaa $ 136,495
500,000 Orlando Utilities Commission, Florida Water and Electric Rev.,
Ser. 1983, 9.60%, 10-1-1999 (Escrowed to maturity) Aaa 595,710
2,000,000 State of Washington Motor Vehicle Fuel Tax General
Obligation Bonds (State Route 90), Ser. CC-8, 7.10%,
3-1-2000 (Prerefunded to 3-1-1999 @ 100) AAA 2,180,800
1,000,000 State of Texas Public Finance Authority General Obligation
Bonds, Ser. 1990A, 7.00%, 10-1-2000
(Prerefunded to 10-1-1999 @ 100) AA 1,098,180
1,000,000 Rutherford County, Tennessee General Obligation School Bonds,
Series 1986, 7.00%, 4-1-2001 (Prerefunded to 4-1-1996 @ 102) Aa 1,031,090
2,840,000 Washington Suburban Sanitary District of Maryland, General
Obligation Bonds, 7.00%, 12-1-2001 (Prerefunded to 12-1-1998
@ 102) Aaa 3,124,994
2,000,000 Jefferson County, Colorado School Dist. No. R-1, General
Obligation Bonds, Ser. 1985C, 8.70%, 12-15-2001 (Prerefunded
to 12-15-1995 @ 100) AAA 2,004,220
250,000 Georgia Municipal Electric Authority Power Rev., Ser. H.,
12.50%,1-1-2002 (Prerefunded to 1-1-1997 @ 100) AAA 273,103
1,500,000 Gwinnett County, Georgia General Obligation Bonds, 7.25%,
1-1-2002 (Prerefunded to 1-1-1997 @ 102) AA 1,586,580
300,000 North Carolina Eastern Municipal Power Agency Power System
Revenue Bonds, Ser. 1982A, 13.25%, 1-1-2002 (Prerefunded to
1-1-1997 @ 100) AAA 330,282
2,250,000 Pima County, Arizona Unified School District No. 1, Tucson
School Improvement General Obligation Bonds, Ser. 1990B, 6.90%,
7-1-2002 (Prerefunded to 7-1-2000 @ 101%) A 2,504,587
3,000,000 Tempe, Union High School District No. 213, Maricopa County, Arizona
School Improvement General Obligation Bonds, Project of 1989,
Ser. 1992B, 5.875%, 7-1-2002 (Prerefunded to 7-1-2001 @ 101) A1 3,240,450
550,000 Johnson County Water District No. 1, Kansas Water Rev., Ser.
1982A, 10.25%,8-1-2002 (Escrowed to maturity) Aaa 716,353
900,000 Metropolitan Government of Nashville and Davidson County,
Tennessee Water and Sewer Rev., Ser. 1982, 10.50%, 12-1-2002
(Prerefunded to 12-1-1997 @ 100) Aaa 1,011,708
2,000,000 City and County of Honolulu, Hawaii General Obligation Bonds,
1987 Ser. A, 8.10%, 10-1-2003 (Prerefunded to 10-1-1996 @ 101.5) AA 2,102,960
3,000,000 City of Lakeland, Florida Electric and Water Rev., Ser. 1989,
6.90%, 10-1-2003 (Prerefunded to 10-1-1999 @ 102) AA 3,340,830
2,000,000 City of Grand Rapids, Michigan Water Supply System Improvement
Rev. Bonds, Ser. 1988, 7.70%, 1-1-2004 (Prerefunded to 1-1-1998
@ 102) AAA 2,183,420
2,500,000 Columbus, Ohio General Obligation Refunding Bonds, No. 1-86,
Ser. B, 7.60%,5-1-2004 (Prerefunded to 5-1-1996 @ 102) Aaa 2,590,900
2,000,000 Jackson, Mississippi General Obligation Bonds, Ser. 1988,
7.50%, 5-1-2004 (Prerefunded to 5-1-1998 @ 100) A1 2,155,020
3,500,000 City of Los Angeles, California Wastewater System Rev. Bonds, Ser.
1990B, 6.90%, 6-1-2004 (Prerefunded to 6-1-2000 @ 102) Aaa 3,945,165
2,000,000 City of Scottsdale, Arizona General Obligation Bonds, Project of
1986 (ULT), 6.80%, 7-1-2004 (Prerefunded to 7-1-1996 @ 102) Aa1 2,077,080
3,000,000 Omaha Public Power District of Nebraska, Electric Systems
Rev., Ser. A, 6.70%, 2-1-2005 (Prerefunded to 2-1-2000 @ 101.5) AA 3,309,600
2,000,000 State of Wisconsin General Obligation Bonds, 1988 Series B, 7.40%,
5-1-2005 (Prerefunded to 5-1-1997 @ 101) Aa 2,118,880
1,000,000 Shawnee County, Kansas General Obligation Refunding and
Improvement, Ser. 1985-C, 9.125%, 9-1-2005 (Prerefunded to
9-1-1996 @ 100) AAA 1,041,240

</TABLE>
-5-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>

SECURED BY U.S. TREASURY OBLIGATIONS (Continued)

$2,500,000 King County, Washington, Unlimited Tax General Obligation
Bonds, Ser. 1988B, 7.30%, 12-1-2005 (Prerefunded to 12-1-1998
@ 100) Aaa $ 2,723,875
1,250,000 State of Washington General Obligation Refunding Bonds, Ser.
R-86D, 8.00%, 9-1-2005 (Prerefunded to 9-1-1996 @ 100) A1 1,291,300
1,900,000 Fort Worth Independent School District, Texas School Building
Unlimited Tax General Obligation Bonds, Ser. 1989, 6.75%,
2-15-2006 (Prerefunded to 2-15-1999 @ 100) AAA 2,049,777
2,000,000 Baltimore County, Maryland General Obligation Bonds, 1988
Ser., 7.50%, 7-1-2006 (Prerefunded to 1-1-96 @ 102) Aaa 2,046,560
1,500,000 Intermountain Power Agency, Utah Power Supply Rev. Refunding Bonds,
1986 Ser. F, 7.20%, 7-1-2006 (Prerefunded to 7-1-1996 @ 102) Aaa 1,561,245
2,000,000 State of Texas Public Financial Authority General Obligation Bonds,
Ser. 1988A, 6.50%, 10-1-2007 (Prerefunded to 10-1-1998 @ 100) AA 2,127,140
1,500,000 Washington Public Power Supply System Nuclear Project No. 2,
Rev. Refunding Bonds, Ser. A, 7.625%, 7-1-2008 (Prerefunded to
7-1-2000 @ 102) Aaa 1,733,595
------------
58,233,139

GENERAL OBLIGATIONS (56.1%):

1,455,000 State of Louisiana General Obligation Bonds, Ser. 1986A,
7.375%, 5-1-1997 Baa1 1,504,048
3,000,000 North Slope Borough, Alaska General Obligation School
Construction Bonds, Ser. Y, 7.10%, 7-1-1997 AAA 3,143,670
300,000 Maryland State & Local Facility Loan of 1982 General Obligation
Bonds, 1st Ser., 11.20%, 7-1-1997 AAA 333,591
1,100,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1998 AAA 1,150,864
3,000,000 Scottsdale Unified School District No. 48 of Maricopa County,
Arizona Refunding Bonds, Ser. 1991, 6.75%, 7-1-1998 AA 3,204,450
1,350,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1999 AAA 1,433,295
400,000 State of California, Variable Purpose General Obligation Bonds,
9.00%, 4-1-1999 AA 459,552
150,000 Oregon Veterans' Welfare General Obligation Bonds, Ser. LXIV,
9.00%, 4-1-1999 AA 172,837
2,500,000 Austin Independent School District, Texas Unlimited Tax
Refunding District Obligation Bonds, Ser. 1991, 6.20%,
8-1-1999 Aaa 2,668,225
1,000,000 State of Texas Public Finance Authority General Obligation
Bonds, Ser. 1990A, 7.00%, 10-1-1999 AA 1,100,040
3,000,000 Washington Suburban Sanitary District, Maryland Water Supply
Refunding Bonds of 1991, 6.00%, 11-1-1999 Aa1 3,204,330
200,000 City of Charleston, Illinois Water Works Improvement General
Obligation Bonds, 8.00%, 1-1-2000 A 225,532
3,000,000 State of California Various Purpose General Obligation Bonds,
5.90%, 2-1-2000 AA 3,193,020
2,500,000 Dupage Water Commission, Illinois General Obligation Water
Refunding Bonds, Ser. 1992, 5.85%, 3-1-2000 AAA 2,645,975
10,000 Alaska Housing Finance Corp. State Guaranteed Bonds, 1983 Ser. 1
(Veterans Mortgage Program), 9.00%, 12-1-2000 (called for
redemption 12-1-1995) AA 10,001
1,000,000 State of Texas Veterans Land Board General Obligation Bonds,
Ser. 1984, 9.00%, 12-1-2000 Aaa 1,169,140
1,885,000 Anoka County, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.20%, 2-1-2001 A1 1,952,163
1,200,000 Shelby County, Tennessee General Obligation Refunding Bonds,
1992 Ser. B, 5.20%, 3-1-2001 Aa 1,249,644
400,000 State of California General Obligation Veterans Bonds, Ser.
AL, 9.60%, 4-1-2001 Aaa 496,912
2,200,000 City and County of Honolulu, Hawaii General Obligation
Refunding Bonds, 1992 Ser. 1, 5.60%, 6-1-2001 AA 2,329,976
2,000,000 School District of Leon County, Florida General Obligation
Refunding Bonds, Ser. 1991, 5.85%, 7-1-2001 A1 2,147,280
2,000,000 Howard County, Maryland Consolidated Public Improvement
Refunding General Obligation Bonds, Ser. 1991B, 5.80%,
8-15-2001 Aa 2,147,140
</TABLE>
-6-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>

GENERAL OBLIGATIONS (Continued)

$2,110,000 State of Nevada General Obligation (Limited Tax) Hoover
Uprating Refunding Bonds, Ser. 1992, 6.00%, 10-1-2001 AA $ 2,284,223
900,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds,
Series 1993, 4.90%, 1-1-2002 A1 909,396
1,535,000 City of Columbus, Ohio Sewer Improvement No. 27 Refunding
Bonds, Unlimited Tax General Obligation Bonds, Ser.
1991, 5.90%, 2-15-2002 Aaa 1,660,517
1,000,000 Williamson County, Tennessee Public Works Refunding Bonds,
Ser. 1992, 5.65%, 3-1-2002 Aa 1,064,800
1,500,000 City of Tulsa, Oklahoma General Obligation Refunding Bonds of
1993, 5.05%,6-1-2002 Aa 1,550,340
2,100,000 Jackson Public School District, Jackson, Mississippi General
Obligation School Bonds, Ser. 1992, 5.80%, 7-1-2002 A1 2,241,687
925,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds,
Series 1993, 4.90%, 7-1-2002 A1 935,341
1,000,000 Pima County Arizona General Obligation Refunding Bonds, Ser.
1992, 6.30%,7-1-2002 Aa 1,101,570
3,500,000 Milwaukee, Wisconsin Metropolitan Sewerage District General
Obligation Capital Purpose Bonds, Ser. 1990A, 6.70%, 10-1-2002 AA 3,944,150
1,885,000 Federal Way School District No. 210, King County, Washington
Unlimited Tax General Obligation Refunding Bonds, 1987, 6.75%,
12-1-2002 A 1,922,417
1,500,000 County of Ramsey, Minnesota General Obligation Capital
Improvement Refunding Bonds, Ser. 1992C, 5.40%, 12-1-2002 Aaa 1,586,775
1,505,000 Anchorage, Alaska General Obligation General Purpose Refunding
Bonds, 4.60%, 2-1-2003 Aaa 1,495,835
2,000,000 Lake County, Illinois Forest Preserve District General
Obligation Refunding Bonds, Ser. 1992B, 5.70%, 2-1-2003 Aa 2,132,920
2,000,000 Oregon General Obligation Veterans' Welfare Bonds, Ser. 74A,
7.75%, 3-1-2003 A1 2,126,080
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993,
5.15%,5-1-2003 Aa 1,087,915
2,000,000 Nashville and Davidson County, Tennessee General Obligation
Refunding Bonds of 1993, 5.00%, 5-15-2003 Aa 2,056,340
2,000,000 State of Illinois General Obligation Refunding Bonds, Series
of June 1993, 5.00%, 6-1-2003 Aa 2,035,040
1,500,000 Municipality of Anchorage, Alaska 1993 General Obligation
Refunding School Bonds, Series B, 4.90%, 9-1-2003 Aaa 1,527,000
1,750,000 State of Louisiana General Obligation Bonds, Series 1987A,
7.00%, 8-1-2003 Baa1 1,841,210
2,000,000 Texas Public Finance Authority, State of Texas General
Obligation Refunding Bonds, Ser. 1992A, 5.70%, 10-1-2003 Aa 2,150,040
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993,
Series 1, 5.30%, 11-1-2003 Aa 2,096,020
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993,
Series 3, 4.75%, 11-1-2003 Aa 2,023,620
2,520,000 Federal Way School District No. 210, King County, Washington
Unlimited Tax General Obligation and Refunding Bonds, 1993,
5.25%, 12-1-2003 Aaa 2,625,210
2,620,000 Cherry Creek School District No. 5, Arapahoe County, Colorado
General Obligation Improvement Bonds, Ser. 1990, 7.00%, 12-15-2003 AA 2,933,378
2,000,000 Jefferson County Colorado School District No. R-1 General
Obligation Bonds, Ser. 1992, 5.75%, 12-15-2003 Aaa 2,157,740
2,025,000 County of DuPage, Illinois General Obligation Refunding Bonds
(Alternate Rev. Source - Stormwater Project), 5.10%, 1-1-2004 Aaa 2,072,041
2,000,000 Indianapolis, Indiana Local Public Improvement Bond Bank,
Limited Obligation Bonds, Series 1993A Bonds, 5.25%,1-10-2004 Aaa 2,066,560
2,100,000 Cherokee County School Systems Georgia, General Obligation
School Series 1993, 4.90%, 2-1-2004 A1 2,125,242
2,300,000 Osseo Area Schools, Minnesota, General Obligation Refunding
Bonds, Series 1993, 4.60%, 2-1-2004 A1 2,290,570
</TABLE>
-7-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>

GENERAL OBLIGATIONS (Continued)

$2,300,000 Indianapolis, Indiana Local Public Improvement Bond Bank
Refunding Bonds, Limited Obligation Bonds, Ser. 1993B,
4.70%, 2-15-2004 Aaa $ 2,279,783
1,600,000 County of Buncombe, North Carolina Refunding General
Obligation Bonds, Series 1993, 5.10%, 3-1-2004 Aa 1,655,424
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993,
5.25%,5-1-2004 Aa 1,087,779
2,000,000 Davis County School District, Davis County, Utah, General
Obligation Refunding Bonds, Series 1993A, 4.50%, 6-1-2004 Aaa 1,962,620
2,000,000 Alachua County School District, Alachua County, Florida
General Obligation Refunding Bonds, Ser. 1994, 4.50%,
7-1-2004 Aaa 1,978,880
2,000,000 Deer Valley Unified School District No. 97 of Maricopa County,
Arizona School Improvement General Obligation Bonds, Project of
1992, Series A (1993), 5.125%, 7-1-2004 Aaa 2,066,540
1,205,000 DeKalb County School District, Georgia General Obligation
Refunding Bonds, Series 1993, 5.10%, 7-1-2004 Aa 1,242,982
1,000,000 Maricopa County, Arizona Unified School District No. 69,
Paradise Valley School Improvement General Obligation Bonds,
Ser. 1990A, 7.10%, 7-1-2004 A1 1,160,240
1,540,000 Joint School District No. 2, Ada and Canyon Counties, Idaho,
General Obligation School Bonds, Ser. 1994, 5.0%, 7-30-2004 Aa 1,577,992
3,215,000 State of Minnesota General Obligation State Refunding Bonds,
5.125%, 8-1-2004 Aa 3,327,043
2,000,000 Harris County, Texas Road and Refunding Bonds, Ser. 1993,
4.70%, 10-1-2004 Aa 1,999,880
2,000,000 City of Seattle, Washington Unlimited Tax General Obligation
Refunding Bonds, 1993, 4.80%, 12-1-2004 Aa1 2,017,760
1,000,000 Bismarck, North Dakota Public School District #1, Burleigh
County General Obligation Building Bonds of 1986, 7.00%, 4-1-2005 A1 1,039,240
1,800,000 Nashville and Davidson County, Tennessee General Obligation
Refunding Bonds of 1993, 5.00%, 5-15-2005 Aa 1,833,930
1,625,000 Charleston County, South Carolina General Obligation Refunding
Bonds of 1994 (ULT), 5.40%, 6-1-2005 Aa 1,705,031
1,100,000 Municipality of Anchorage, Alaska 1994 General Obligation
School Bonds, 5.40%, 7-1-2005 Aaa 1,141,624
2,000,000 Oklahoma City, Oklahoma General Obligation Refunding Bonds,
Series 1993, 5.30%, 8-1-2005 Aa 2,093,840
2,500,000 State of Illinois General Obligation Refunding Bonds,
Ser. 1987, 6.80%, 4-1-2006 Aa 2,642,800
1,600,000 Natrona County, Wyoming School District No. 1 General
Obligation Bonds, Ser. 1994, 5.45%, 7-1-2006 Aaa 1,659,872
2,340,000 City of Phoenix, Arizona General Obligation Refunding Bonds,
Ser. 1993A, 5.30%, 7-1-2006 Aa1 2,440,058
2,000,000 State of California Various Purpose General Obligation Bonds,
6.00%, 10-1-2006 A1 2,170,660
3,215,000 Forsyth County School District, Georgia, General Obligation
Bonds, Series 1995, 5.05%, 7-1-2007 Aaa 3,215,000
2,000,000 (c) Arapahoe County School District #6, Colorado, Littleton
Public Schools General Obligation Improvement Bonds,
Series 1995A 5.00%, 12-1-2007 Aa 2,007,160
2,780,000 (c) Salt Lake County, Utah General Obligation Jail Bonds, Series
1995, 5.00%, 12-15-2007 Aaa 2,782,113
2,000,000 State of Wisconsin General Obligation Bonds of 1995, Series A,
6.00%, 5-1-2008 Aa 2,147,140
2,000,000 State of Florida, State Board of Education, Public Education
Capital Outlay Refunding Bonds, 1995 Series C, 5.125%,
6-1-2008 Aa 2,010,480
1,000,000 Maricopa County, Arizona Unified School District No. 69,
Paradise Valley School Improvement Bonds, Ser. 1994A, 7.10%,
7-1-2008 A1 1,187,940
1,700,000 State of South Carolina General Obligation State Highway
Bonds, Series 1995, 5.10%, 8-1-2008 Aaa 1,723,783
</TABLE>
-8-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>

GENERAL OBLIGATIONS (Continued)

$1,200,000 Maricopa County, Arizona Unified School District No. 69,
Paradise Valley School Improvement Bonds, Ser. 1994A, 7.00%,
7-1-2009 A1 $ 1,413,660
1,700,000 State of South Carolina General Obligation State Highway
Bonds, Series 1995, 5.25%, 8-1-2009 Aaa 1,731,076
2,500,000 Maricopa County, Arizona Unified School District No. 69,
Paradise Valley School Improvement Bonds, Ser. 1994A, 7.00%,
7-1-2010 A1 2,953,125
2,500,000 State of Wisconsin General Obligation Refunding Bonds of 1993,
Ser. 2, 5.125%, 11-1-2010 Aa 2,478,025
3,000,000 State of Hawaii, General Obligation Refunding Bonds of 1992,
Series BW, 6.375%, 3-1-2011 Aa 3,371,160
2,000,000 Washington and Clackamas Counties School District #23J
(Tigard-Tualatin), Oregon, General Obligation Bonds, Series 1995,
5.55%, 6-1-2011 A1 2,035,040
2,000,000 State of Georgia, General Obligation Bonds, Series 1995C,
5.70%, 7-1-2011 Aaa 2,124,320
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B,
6.00%, 12-1-2011 Aa1 1,193,197
3,000,000 State of Georgia, General Obligation Bonds, Series 1995B,
5.75%, 3-1-2012 Aaa 3,192,870
4,500,000 State of Washington General Obligation Bonds, Series 1993A,
5.75%, 10-1-2012 Aa 4,743,945
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B,
6.00%, 12-1-2012 Aa1 1,189,046
------------
172,568,720

MUNICIPAL REVENUE (18.0%):

2,000,000 City of St. Petersburg, Florida Public Utility Refunding
Rev. Bonds, Ser. 1991, 6.10%, 10-1-1998 Aa 2,110,880
3,000,000 City of Colorado Springs, Colorado Utilities System Refunding
Rev., Ser. 1991A, 6.10%, 11-15-1998 AA 3,172,350
1,490,000 City of San Antonio, Texas Water System Revenue Refunding
Special Obligation Bonds, Ser. 1992, 5.80%, 5-15-1999 AAA 1,565,960
1,250,000 Washington Public Power Supply System Nuclear Project No. 3,
Refunding Rev. Bonds, Ser. 1991A, 6.25%, 7-1-2000 Aa 1,336,475
1,250,000 State of New York Power Authority General Purpose Bonds, Ser.
Z, 6.00%,1-1-2001 Aa 1,339,025
1,400,000 San Diego County Water Authority Water Rev. Certificates of
Participation, Ser. 1991A, 6.00%, 5-1-2001 AA 1,493,016
1,500,000 Intermountain Power Agency, Utah Power Supply Rev. Refunding
Bonds, 1986 Ser. F, 7.00%, 7-1-2001 AA 1,555,950
1,250,000 Municipal Subdistrict, Northern Colorado Water Conservancy
District Water Rev., Ser. D, 7.60%, 12-1-2001 A1 1,317,188
2,000,000 Nashville and Davidson County, Tennessee Electric System
Rev. Bonds, 1992 Series B, 5.50%, 5-15-2002 Aa 2,116,720
1,000,000 Washington Public Power Supply System Nuclear Project No. 1,
Rev. Refunding Bonds, Ser. 1990C, 7.70%, 7-1-2002 AA 1,159,350
1,080,000 Charleston, South Carolina Waterworks and Sewer Systems
Rev. Refunding Bonds, Ser. 1986A, 6.90%, 1-1-2003 A1 1,101,600
2,000,000 City of Des Moines, Iowa Sewer Rev. Bonds, Ser. 1992D,
6.00%, 6-1-2003 Aaa 2,153,500
2,500,000 City of Albuquerque, New Mexico Joint Water and Sewer
Refunding Rev. Bonds, Ser. 1990B, 7.00%, 7-1-2003 A1 2,784,900
2,000,000 Washington Public Power Supply System, Nuclear Project No. 3
Refunding Revenue Bonds, Series 1993C, 4.80%, 7-1-2003 Aa 1,978,640
2,000,000 City of Lincoln, Nebraska, Water Revenue and Refunding Bonds,
Series 1993, 4.90%, 8-15-2003 Aa 2,044,960
2,850,000 City of Lincoln, Nebraska, Electric System Revenue Refunding
Bonds, 1993 Series A, 4.70%, 9-1-2003 Aa 2,875,622
2,000,000 Fargo, North Dakota, Water Revenue of 1993, 5.00%, 1-1-2004 Aaa 2,039,900
1,500,000 Municipal Electric Authority of Georgia General Power Rev.
Bonds, 1993A Series, 5.00%, 1-1-2004 A1 1,499,940
1,500,000 Nashville and Davidson County, Tennessee, Water and Sewer
Revenue Refunding Bonds, Series 1993, 4.90%, 1-1-2004 Aaa 1,524,975
</TABLE>
-9-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1995
<TABLE>
<CAPTION>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
<S> <C> <C> <C>

MUNICIPAL REVENUE (Continued)

$1,710,000 Southern Minnesota Municipal Power Agency, Power Supply System
Revenue Bonds, Series 1993 B, 4.60%, 1-1-2004 A1 $ 1,692,883
2,000,000 City of Dallas, Texas Waterworks and Sewer System Rev.
Refunding Bonds, Series 1993, 4.90%, 4-1-2004 Aa 2,024,460
2,045,000 City of Iowa City, Johnson County, Iowa Sewer Rev. Bonds,
5.875%, 7-1-2004 Aaa 2,177,271
2,000,000 City of Jackson, Mississippi Water and Sewer System Rev.
Refunding Bonds, Series 1993-A, 4.85%, 9-1-2004 Aaa 2,021,180
1,685,000 Hampton Roads Sanitation District, Virginia, Wastewater
Refunding and Capital Improvement Revenue Bonds, Series 1993, 4.70%,
10-1-2004 Aa 1,689,735
3,000,000 City of Los Angeles Department of Water and Power, Electric
Plant Refunding Revenue Bonds, Second Issue of 1993, 4.80%,
11-15-2004 Aa 3,010,770
1,500,000 Omaha, Nebraska Public Power District Electric System Rev.
Bonds, 1993, Series B, 5.10%, 2-1-2005 Aa 1,535,205
1,325,000 Winston-Salem, North Carolina Water & Sewer System Revenue
Bonds, Series 1995B, 5.00%, 6-1-2007 Aa 1,331,917
2,600,000 Washington Public Power Supply System Nuclear Project No. 1, Rev.
Refunding Bonds, Ser. 1989A, 7.50%, 7-1-2007 AA 2,863,406
1,665,000 Winston-Salem, North Carolina Water & Sewer System Revenue
Bonds, Series 1995B, 5.10%, 6-1-2008 Aa 1,673,641
------------
55,191,419

INDUSTRIAL REVENUE - UTILITIES (4.7%):

300,000 Red River Authority of Texas Collateralized Pollution Control
Rev. Bonds,Ser. 1981, 13.50%, 10-1-2001 (Southwestern Public
Service Co. Project) Aa2 322,149
2,200,000 The Water Works and Sewer Board, Birmingham, Alabama Water and
Sewer Revenue Bonds, Ser. 1994, 4.75%, 1-1-2005 Aa 2,188,692
200,000 City of Joliet, Illinois Pollution Control Rev. Bonds, Ser. 1976,
6.80%,7-1-2006 (Commonwealth Edison Company Project) Baa1 200,326
3,000,000 Becker, Minnesota Pollution Control Rev. Refunding Bonds, Ser.
1989A, 6.80%,4-1-2007, (No. States Power Co. - Serberne Cnty.
Gen. Sta. Units 1 & 2 Proj.) Aa3 3,224,250
6,000,000 Omaha, Nebraska Public Power District Electric System Revenue
Bonds, Ser. 1992B, 6.15%, 2-1-2012 Aa 6,589,980
1,840,000 Dallas, Texas Water Works and Sewer System Revenue Bonds, Ser.
1994A, 6.375%, 10-1-2012 Aa 1,960,262
------------
14,485,659

Total long-term municipal bonds (cost: $282,109,088) 300,478,937

SHORT-TERM INVESTMENTS (3.3%):
6,000,000 U.S. Treasury bills, 5.245% to 5.385% effective yield,
due 12-1995 to 2-1996 5,959,142
3,820,000 General Motors Acceptance Corp., 5.78%, 12-5-1995 3,821,842
480,000 General Motors Acceptance Corp., 5.79%, 12-5-1995 480,077
------------
Total short-term investments (cost: $10,261,061) 10,261,061
------------
TOTAL INVESTMENTS (101.1%) (cost: $292,370,149) 310,739,998
LIABILITIES, LESS CASH AND OTHER ASSETS (-1.1%) (3,323,681)
------------
NET ASSETS (100.0%) $307,416,317
============
</TABLE>

Notes: (a) At November 30, 1995, net unrealized appreciation of $18,369,849
consisted of gross unrealized appreciation of $18,457,331 and gross
unrealized depreciation of $87,482 based on cost of $292,370,149 for
federal income tax purposes.

(b) Ratings not covered by the report of independent auditors.
NR denotes no rating available.

-10-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995

<S> <C> <C>
ASSETS

Investments, at value (cost $292,370,149)............................. $310,739,998
Cash.................................................................. 557,748
Receivable for:
Interest............................................................ $5,465,971
Sundry.............................................................. 5,316 5,471,287
----------
Prepaid expenses...................................................... 9,533
------------
Total assets...................................................... 316,778,566

LIABILITIES AND NET ASSETS

Payable for:
Securities purchased................................................ 6,028,938
Dividends to shareowners............................................ 2,894,747
Shares of the Fund redeemed......................................... 329,098
Other accounts payable (including $94,392 to Manager)............... 109,466
----------
Total liabilities................................................. 9,362,249
------------
Net assets applicable to 36,172,771 shares outstanding of
$1 par value common stock (100,000,000 shares authorized)........... $307,416,317
============

Net asset value, offering price and redemption price per
share............................................................... $ 8.50
============
ANALYSIS OF NET ASSETS

Excess of amounts received from sales of shares over
amounts paid on redemptions of shares on account of
capital............................................................. $288,831,542
Accumulated net realized gain on
sales of investments................................................ 214,926
Net unrealized appreciation of investments............................ 18,369,849
------------
Net assets applicable to shares outstanding........................... $307,416,317
============

</TABLE>

See accompanying notes to financial statements.

-11-

<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS

Year ended November 30,
1995 1994
<S> <C> <C>
Investment income:
Tax-exempt interest................................................. $16,931,069 16,472,830
Taxable interest.................................................... 446,122 225,158
---------------------------
Total investment income........................................... 17,377,191 16,697,988

Expenses:
Investment advisory and management fees............................. 366,394 355,000
Audit fees.......................................................... 21,113 20,823
Legal fees.......................................................... 4,264 5,283
Fidelity bond expense............................................... 5,077 5,289
Directors' fees..................................................... 2,200 2,200
Reports to shareowners.............................................. 9,024 3,892
Securities evaluation fees.......................................... 19,822 20,190
Franchise taxes..................................................... 16,598 15,299
Custodian fees...................................................... 29,930 --
Other............................................................... 21,799 32,962
---------------------------
Total expenses.................................................... 496,221 460,938
---------------------------
Less: Custodian fees paid indirectly.............................. 25,465 --
---------------------------
Net expenses...................................................... 470,756 460,938
---------------------------
Net investment income................................................. 16,906,435 16,237,050

Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on sales of investments.................... 264,519 (49,593)
Change in net unrealized appreciation............................... 21,451,782 (23,629,677)
---------------------------
Net realized and unrealized gain (loss) on investments................ 21,716,301 (23,679,270)
---------------------------
Net change in net assets resulting from operations.................... $38,622,736 (7,442,220)
===========================

</TABLE>

See accompanying notes to financial statements.

-12-

<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS

Year ended November 30,
1995 1994
<S> <C> <C>
From operations:
Net investment income............................ $ 16,906,435 16,237,050
Net realized gain (loss) on sales of investments. 264,519 (49,593)
Change in net unrealized appreciation............ 21,451,782 (23,629,677)
--------------------------
Net change in net assets resulting
from operations................................ 38,622,736 (7,442,220)

Dividends to shareowners from:
Net investment income (per share $.48 in 1995
and $.48 in 1994)............................ (16,906,435) (16,237,050)
Net realized gain (per share $.017 in 1994)...... -- (551,997)
--------------------------
Total distributions to shareowners................. (16,906,435) (16,789,047)

From Fund share transactions:
Proceeds from shares sold........................ 25,292,645 37,360,622
Reinvestment of ordinary income dividends
and capital gain distributions................. 12,894,959 13,048,768
--------------------------
38,187,604 50,409,390
Less payments for shares redeemed................ 22,392,823 32,624,914
--------------------------
Net increase in net assets from Fund share
transactions................................... 15,794,781 17,784,476
--------------------------
Total increase (decrease) in net assets............ 37,511,082 (6,446,791)

Net assets:
Beginning of year................................ 269,905,235 276,352,026
--------------------------
End of year...................................... $307,416,317 269,905,235
==========================
</TABLE>

See accompanying notes to financial statements.

-13-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

Securities valuation --

Municipal bonds and notes and other debt securities are valued using
quotations provided by independent pricing services. Short-term debt securities
having a maturity of 60 days or less from the valuation date are valued on an
amortized cost basis. Any securities not valued as described above are valued at
fair value as determined in good faith by the Board of Directors or its
delegate.

Security transactions and interest income --

Security transactions are accounted for on the trade date (date the order
to buy or sell is executed). Interest income is recorded on the accrual basis;
premiums and original issue discounts on tax-exempt securities are amortized.
Realized gains and losses from security transactions are reported on an
identified cost basis.

Securities purchased on a `when-issued' basis --

The Fund may purchase municipal bonds on a `when-issued' basis. Delivery
and payment for these securities may be a month or more after the purchase date,
during which time such securities are subject to market fluctuations. It is
possible that the securities will never be issued and the commitment cancelled.
At November 30, 1995, there were commitments of $6,028,938 for such securities.

Fund share valuation, dividends and distributions to shareowners --

Fund shares are sold and redeemed on a continuous basis at net asset value.
Net asset value per share is determined as of 1:00 p.m. Bloomington, Illinois
time on each business day other than customary weekend and holiday closings,
except that the Fund need not compute a net asset value on any day when no
purchase or redemption order has been received by the Fund. The net asset value
per share is computed by dividing the value of the Fund's investments and other
assets, less liabilities, by the number of Fund shares outstanding. The Fund
declares a daily dividend equal to its net investment income, and distributions
of such amounts are made at the end of each calendar quarter. Net realized gain
on sales of investments, if any, are distributed annually after the close of the
Fund's fiscal year.

Dividends and distributions payable to its shareowners are recorded by the
Fund on the ex-dividend date.

Federal income taxes --

It is the Fund's policy to comply with the special provisions of the
Internal Revenue Code available to investment companies and, in the manner
provided therein, to distribute all of its income, as well as any net realized
gain on sales of investments reportable for federal income tax purposes. The
Fund has complied with this policy and, accordingly, no provision for federal
income taxes is required.

Custodian fees --

Custodian fees are reduced based on the Fund's cash balances maintained
with the custodian. Beginning in 1995, in accordance with changes in the
requirements of the Securities and Exchange Commission, both gross custodian
fees and the amount by which such fees are reduced, are disclosed separately in
the statement of operations. This presentation does not affect the determination
of net investment income.

-14-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS

2. Transactions with affiliates

The Fund has an investment advisory and management services agreement with
State Farm Investment Management Corp. (Manager) pursuant to which the Fund pays
the Manager an annual fee (computed on a daily basis and paid quarterly) of .20%
of the first $50 million of average net assets, .15% of the next $50 million of
average net assets and .10% of average net assets in excess of $100 million. The
Manager guarantees that all operating expenses of the Fund, including
compensation of the Manager but excluding franchise taxes, interest,
extraordinary litigation expenses, brokerage commissions and other portfolio
transaction costs, shall not exceed .40% of average net assets annually.

Under the terms of this agreement, the Fund incurred fees of $366,394 for
1995 and $355,000 for 1994. The Fund pays no fees for transfer agent services
provided by the Manager. The Fund does not pay any discount, commission or other
compensation for underwriting services provided by the Manager.

Certain officers and/or directors of the Fund are also officers and/or
directors of the Manager. The Fund made no payments to its officers or directors
during the two years ended November 30, 1995 except for directors' fees of
$2,200 for 1995 and 1994, respectively, paid to the Fund's independent
directors.

3. Investment transactions

Investment transactions (exclusive of short-term instruments) for each of
the two years ended November 30 are as follows:

<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Purchases.................................. $34,619,287 36,396,943
Proceeds from sales........................ 18,616,250 21,105,695
===========================
</TABLE>

4. Fund share transactions

Proceeds and payments on Fund shares as shown in the statement of changes
in net assets are in respect of the following number of shares:

<TABLE>
<CAPTION>
Year ended November 30,
1995 1994
<S> <C> <C>
Shares sold................................ 3,052,147 4,463,884
Shares issued in reinvestment of ordinary
income dividends and capital gain
distributions............................ 1,565,349 1,567,732
---------------------------
4,617,496 6,031,616
Less shares redeemed....................... 2,709,601 3,949,631
---------------------------
Net increase in shares outstanding......... 1,907,895 2,081,985
===========================
</TABLE>

-15-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.

FINANCIAL HIGHLIGHTS

Per Share Income and Capital Changes (For a share outstanding throughout each
period)

<TABLE>
<CAPTION>
Six months
ended Year ended
Year ended November 30, November 30, May 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.. $ 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55 7.53 6.97%

Income from Investment
- ----------------------
Operations
----------
Net investment
income............... .48 .48 .50 .53 .54 .58 .58 .57 .28 .57 .57
Net gain or loss
on securities (both
realized and
unrealized).......... .62 (.69) .25 .19 .17 .02 .20 .18 .03 .02 .56
------------------------------------------------------------------------------------------------------------
Total from
investment
operations........... 1.10 (.21) .75 .72 .71 .60 .78 .75 .31 .59 1.13

Less Distributions
- ------------------
Dividends (from
net investment
income)............ (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57) (.57)
Distributions (from
capital gain) (b) -- (.02) -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------
Total distributions... (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57) (.57)

Net asset value, end
of period............ $ 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55 7.53
============================================================================================================
Total Return.......... 14.25% (2.55%) 9.17% 9.05% 9.17% 7.78% 10.44% 10.14% 4.19% 7.72% 16.75%
- ------------

Ratios/Supplemental
- -------------------
Data
----
Net assets, end of
period (millions).... $ 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2 70.7 66.4 49.1
Ratio of expenses to
average net assets... .17%(c) .16% .18% .19% .21% .23% .25% .29% .30%(a) .31% .37%
Ratio of net
investment income
to average net
assets............... 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36% 7.49%(a) 7.30% 7.90%
Portfolio turnover
rate................. 7% 8% 5% 4% 2% 8% 7% 2% 4%(a) 0% 5%
Number of shares
outstanding at end
of period
(millions)............ 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0 9.3 8.8 6.5
</TABLE>

Notes: (a) Ratios and rates have been calculated on an annualized basis.
(b) Distributions representing less than $.01 were made in 1993 and 1992.
(c) The ratio based on net custodian expenses would have been .16%.

-16-
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.
TAX INFORMATION

The Fund paid ordinary income dividends in March, June, September and
December 1995. Of those dividends, 98% in March, 98% in June, 97% in September
and 97% in December are designated as exempt-interest dividends. The taxable
portion of the dividends paid to you will be included on the Form 1099-DIV to be
sent in January 1996.

Since the Fund's investment income was derived from interest, none of the
taxable portion of the Fund's distributions are eligible for the dividend
received deduction for corporations.

In December, 1995, the Fund made a capital gain distribution of $.006 per
share, 100% of which was paid from long-term capital gain and is designated as a
capital gain dividend.

NOTE: The taxable portion of the dividends and the capital gain distribution
must be included in your federal income tax return and must be reported
by the Fund to the Internal Revenue Service in accordance with provisions
of the Internal Revenue Code. The tax-exempt status of dividends derived
from interest on municipal bonds for federal income tax purposes does not
necessarily result in exemption from any state or local income taxes or
other taxes.

-17-
<PAGE>

(This page intentionally left blank.)

-18-
<PAGE>

(This page intentionally left blank.)

-19-
<PAGE>

ANNUAL
REPORT

November 30, 1995

STATE
FARM
MUNICIPAL BOND
FUND, INC.

ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
TELEPHONE (309) 766-2029

<PAGE>

SIGNATURES
----------

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Bloomington, and State of Illinois on
the 15th day of March, 1996.

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Edward B. Rust, Jr.
---------------------------------
Edward B. Rust, Jr., President

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.

/s/ Edward B. Rust, Jr. Director and President
- -------------------------------------(Principal Executive Officer)
Edward B. Rust, Jr.

/s/ Roger Joslin Director, Vice President,
- -------------------------------------and Treasurer
Roger Joslin (Principal financial and
accounting officer)

/s/ Albert H. Hoopes Director March 15, 1996
- -------------------------------------
Albert H. Hoopes

/s/ Davis U. Merwin Director
- -------------------------------------
Davis U. Merwin

/s/ James A. Shirk Director
- -------------------------------------
James A. Shirk

<PAGE>

INDEX FOR EXHIBITS
FILED WITH THIS AMENDMENT
-------------------------

EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------

1 Amended and restated articles of
incorporation

2 By-laws of registrant

4(a) Form of stock certificate

5(a) Investment advisory and management
services agreement

5(b) Service agreement

6 Underwriting agreement

8(a) Custodian agreement between registrant
and Morgan Guaranty Trust Company of
New York

8(b) Custodian agreement between registrant
and The Peoples Bank

9 Transfer agent agreement

10 Opinion of Bell, Boyd & Lloyd

11 Consent of Independent Auditors
dated March 15, 1996

14(a)(1) State Farm Funds Individual Retirement
Account Plan

14(a)(2) State Farm Funds Individual Retirement
Account Plan Disclosure Statement

14(a)(3) State Farm Funds Individual Retirement
Account Plan Custodial Account Agreement

16 Schedule for computation of performance
quotations

17 Financial Data Schedule

<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.

ARTICLES OF AMENDMENT AND RESTATEMENT

STATE FARM MUNICIPAL BOND FUND, INC., a Maryland corporation, having its
principal office in Baltimore City, Maryland (which is hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:

FIRST: The Charter of the Corporation is hereby amended and restated in its
entirety to read as follows:

STATE FARM MUNICIPAL BOND FUND, INC.

AMENDED AND RESTATED ARTICLES OF INCORPORATION

FIRST: THE UNDERSIGNED, Donald F. Storm, whose address is One State Farm
Plaza, Bloomington, Illinois, 61701, being at least eighteen years of age,
acting as incorporator, does hereby form a corporation under the General Laws of
the State of Maryland.

SECOND: (a) The name of the corporation (which is hereinafter called the
"Corporation") is:

State Farm Municipal Bond Fund, Inc.

(b) The Corporation acknowledges that it has adopted its corporate name
through permission of State Farm Mutual Automobile Insurance Company, an
Illinois mutual insurance company (hereinafter referred to as "State Farm
Mutual") and acknowledges that State Farm Mutual has the sole and exclusive
right to use or license the use of the name "State Farm" in commerce. The
Corporation agrees that at the request of State Farm Mutual the Corporation
shall take all requisite action to amend its Charter to eliminate the name
"State Farm" from the Corporation's corporate name and from the designations of
its shares of capital stock. The Corporation further acknowledges that State
Farm Mutual reserves the right to grant the non-exclusive right to use the name
"State Farm" to any other corporation, including other investment companies,
whether now in existence or hereafter created.

THIRD: (a) The purposes for which the Corporation is formed and the
business and objects to be carried on and promoted by it are:
<PAGE>

(1) To engage generally in the business of investing, reinvesting, owning,
holding or trading in securities, as defined in the Investment Company Act of
1940, as from time to time amended (hereinafter referred to as the "Investment
Company Act"), as an investment company classified under the Investment Company
Act as an open-end, management company.

(2) To engage in any one or more businesses or transactions, or to acquire
all or any portion of any entity engaged in any one or more businesses or
transactions, which the Board of Directors may from time to time authorize or
approve, whether or not related to the business described elsewhere in this
Article or to any other business at the time or theretofore engaged in by the
Corporation.

(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the Charter of the Corporation, and each
shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.

FOURTH: The present address of the principal office of the Corporation in
this State is 11 East Chase Street, Baltimore, Maryland 21202.

FIFTH: The name and address of the resident agent of the Corporation in
this State are Prentice-Hall Corporation Systems Maryland, Inc., 11 East Chase
Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.

SIXTH: (a) The total number of shares of captital stock which the
Corporation initially has authority to issue is 100,000,000 shares of capital
stock (par value $1.00 per share), amounting in aggregate par value to
$100,000,000. All of such shares are classified as "Common Stock".

(b) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end company under the Investment Company Act, the Board of
Directors shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the number of shares
of capital stock that the Corporation has authority to issue.
<PAGE>

(c) The following is a description of the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock:

(1) Dividends and Distributions. Dividends and capital gains
distributions on shares of Common Stock may be paid with such frequency, in such
form and in such amount as the Board of Directors may determine by resolution
adopted from time to time, or pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Board of Directors may
determine, after providing for actual and accrued liabilities. All dividends
and distributions on shares of Common Stock shall be distributed pro rata to the
holders of Common Stock in proportion to the number of shares of Common Stock
held by such holders at the date and time of record established for the payment
of such dividends or distributions.

Dividends and distributions may be paid in cash, property or additional
shares of Common Stock, or a combination thereof, as determined by the Board of
Directors or pursuant to any program that the Board of Directors may have in
effect at the time for the election by stockholders of the form in which
dividends or distributions are to be paid. Any such dividend or distribution
paid in shares shall be paid at the current net asset value thereof.

(2) Voting. On each matter submitted to a vote of the stockholders, each
holder of shares of Common Stock shall be entitled to one vote for each share
standing in his name on the books of the Corporation.

(3) Redemption by Stockholders. Each holder of shares of Common Stock
shall have the right at such times as may be permitted by the Corporation to
require the Corporation to redeem all or any part of his shares of Common Stock,
at a redemption price per share equal to the net asset value per share of Common
Stock next determined after the shares are properly tendered for redemption,
less such redemption fee (not to exceed l% of the net asset value of the shares
redeemed), if any, as may be established by the Board of Directors in its sole
discretion. Payment of the redemption price shall be in cash; provided,
however, that the Corporation may, to the extent and in the manner permitted by
the Investment Company Act, make payment wholly or partly in securities or other
assets of the Corporation, at the value of such securities or assets used in
such determination of net asset value.

Notwithstanding the foregoing, the Corporation may postpone payment of the
redemption price and may suspend the right of the holders of shares of Common
Stock to require the Corporation to redeem shares of Common Stock during any
period or at any time when and to the extent permissible under the Investment
Company Act.
<PAGE>

(4) Net Asset Value Per Share. The net asset value per share of Common
Stock shall be the quotient obtained by dividing the value of the net assets of
the Corporation (being the value of the assets of the Corporation less the
liabilities of the Corporation) by the total number of shares of Common Stock
outstanding, all as determined by or under the direction of the Board of
Directors in accordance with generally accepted accounting principles and the
Investment Company Act. Subject to the applicable provisions of the Investment
Company Act, the Board of Directors, in its sole discretion, may prescribe and
set forth in the By-Laws of the Corporation or in a duly adopted resolution of
the Board of Directors such bases and times for determining the value of the
assets belonging to the Corporation and the net asset value per share of
outstanding shares of Common Stock, or the net income attributable to such
shares, as the Board of Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not inconsistent with the
Maryland General Corporation Law and the Investment Company Act, to determine
which items shall be treated as income and which items as capital and whether
any item of expense shall be charged to income or capital. Each such
determination and allocation shall be conclusive.

(d) The Corporation may issue and sell fractions of shares of Common Stock
having pro rata all the rights of full shares, including, without limitation,
the right to vote and to receive dividends, and wherever the words "share" or
"shares" are used in the Charter or By-Laws of the Corporation as amended from
time to time, they shall be deemed to include fractions of shares where the
context does not clearly indicate that only full shares are intended.

(e) The Corporation shall not be obligated to issue certificates
representing shares of Common Stock. At the time of issue or transfer of shares
without certificates, the Corporation shall provide the stockholder with such
information as may be required under the Maryland General Corporation Law.

SEVENTH: The number of directors of the Corporation shall be five, which
number may be increased or decreased pursuant to the By-Laws of the Corporation
as amended from time to time, but shall never be less than the minimum number
permitted by the General Laws of the State of Maryland now or hereafter in
force. The names of the directors who are serving until the next annual meeting
and until their successors are elected and qualify are as follows:

Edward B. Rust, Jr.
Albert H. Hoopes
Roger S. Joslin
Davis U. Merwin
James A. Shirk

EIGHTH: (a) The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
<PAGE>

(1) The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of its capital stock, whether now or hereafter
authorized, for such consideration as may be deemed advisable by the Board of
Directors and without any action by the stockholders.

(2) No holder of any stock or any other securities of the Corporation,
whether now or hereafter authorized, shall have any preemptive right to
subscribe for or purchase any stock or any other securities of the Corporation
other than such, if any, as the Board of Directors, in its sole discretion, may
determine and at such price or prices and upon such other terms as the Board of
Directors, in its sole discretion, may fix.

(3) Notwithstanding any provision of law requiring the authorization of any
action by a greater proportion than a majority of the total number of shares of
all classes of capital stock or of the total number of shares of any class of
capital stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes outstanding and entitled to vote thereon, except as otherwise
provided in the Charter.

(4) To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, and the Investment Company Act, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that nothing herein shall be
construed to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office. No
amendment of the Charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the limitation of liability provided to directors and
officers hereunder with respect to any act or omission occurring prior to such
amendment or repeal.

(5) The Corporation reserves the right from time to time to make any
amendments of its Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its Charter, of any of its outstanding stock by classification,
reclassification or otherwise.

(b) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
<PAGE>

NINTH: The duration of the Corporation shall be perpetual.

IN WITNESS WHEREOF, I have signed these Articles of Incorporation, acknowledging
the same to be my act, on December 2, 1976.

Witness:

/s/ Donald F. Storm
- ---------------------------------

************

SECOND: The amendment and restatement does not increase the authorized
stock of the Corporation.

THIRD: The foregoing amendment and restatement to the Charter of the
Corporation has been advised by the Board of Directors and approved by the
stockholders of the Corporation.

IN WITNESS WHEREOF, STATE FARM MUNICIPAL BOND FUND, INC. has caused these
presents to be signed in its name and on its behalf by its Vice President and
witnessed by its Secretary on April 17, 1995.

WITNESS: STATE FARM MUNICIPAL BOND FUND, INC.

/s/ David R. Grimes /s/ Kurt G. Moser
- --------------------------------- ---------------------------------
Secretary Vice President

THE UNDERSIGNED, Vice President of STATE FARM MUNICIPAL BOND FUND, INC., who
executed on behalf of the Corporation the foregoing Articles of Amendment and
Restatement of which this certificate is made a part, hereby acknowledges in the
name and on behalf of said Corporation the foregoing Articles of Amendment and
Restatement to be the corporate act of said Corporation and hereby certifies
that to the best of his knowledge, information, and belief the matters and facts
set forth therein with respect to the authorization and approval thereof are
true in all material respects under the penalties of perjury.

/s/ Kurt G. Moser
---------------------------------
Vice President

<PAGE>

BYLAWS
------

STATE FARM MUNICIPAL BOND FUND, INC.
(as amended and restated March 12, 1993)

ARTICLE I

OFFICES

Section 1.01. Principal office. The principal office of the corporation
in the State of Maryland shall be located in the City of Baltimore.

Section 1.02. Other offices. The corporation may also have offices at
such other places both within and without the State of Maryland as the board of
directors may from time to time determine or the business of the corporation may
require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 2.01. Place of meetings. All meetings of the stockholders shall
be held in the City of Bloomington, State of Illinois, or at such other place in
the United States as shall be designated from time to time by the board of
directors, at such time and place, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.

Section 2.02. Annual meeting. As long as the corporation is registered
as an investment company under the Investment Company Act of 1940, the
corporation shall not be required to hold an annual meeting of stockholders
during any year in which none of the following is required to be acted on by
stockholders under that Act: (1) an election of directors; (2) approval of an
investment advisory agreement; (3) ratification of a selection of independent
public accountants; and (4) approval of a distribution agreement. If there is
to be an annual meeting, it shall be held on the first Friday after the second
Monday of March if not a legal holiday, and if a legal holiday, then on the next
secular day following, at 10:00 a.m., or at such other date and time within the
month of March as shall be designated from time to time by the board of
directors and stated in the notice of the meeting, at which they shall elect a
board of directors and transact such other business as may properly be brought
before the meeting.
<PAGE>

Section 2.03. Special meetings. Special meetings of stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
articles of incorporation, may be called at any time by the president or the
board of directors. Special meetings of stockholders shall be called by the
secretary upon the written request of stockholders entitled to cast at least 25
percent of all the votes entitled to be cast at such meeting, provided that (a)
such request shall state the purpose or purposes of the meeting and the matters
proposed to be acted on at it; and (b) the stockholders requesting the meeting
shall have paid to the corporation the reasonably estimated cost of preparing
and mailing the notice thereof, which the secretary shall determine and specify
to such stockholders. Upon payment of these costs to the corporation, the
secretary shall notify each stockholder entitled to notice of the meeting.
Unless requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at any
special meeting of stockholders held during the preceding twelve months.

Section 2.04. Stockholders entitled to vote; number of votes. If a
record date has been fixed for the determination of stockholders entitled to
notice of or to vote at any meeting of stockholders, each stockholder of the
corporation shall be entitled to vote, in person or by proxy, each share of
stock (or fraction thereof) registered in his name on the books of the
corporation outstanding at the close of business on such record date, with one
vote (or fraction of a vote) for each share (or fraction thereof) so
outstanding.

Section 2.05. Notice of meetings. Written notice of each meeting of
stockholders stating the place, date and hour of the meeting and, in the case of
a special meeting or if otherwise required by law, the purpose or purposes for
which the meeting is called, shall be given, not less than 10 nor more than 90
days before the date of the meeting, to each stockholder entitled to vote at
such meeting.

Section 2.06. Quorum; adjournment. The holders of a majority of the
stock entitled to vote at a meeting of stockholders, present in person or
represented by proxy, shall constitute a quorum at the meeting for the
transaction of business except as otherwise provided by statute or by the
articles of incorporation. If, however, such quorum shall not be present or
represented at any meeting of stockholders, the stockholders entitled to vote
thereat present in person or represented by proxy shall have the power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At any adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than 120 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.

Section 2.07. Voting. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy and voting on the question shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of any statute or the charter or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
<PAGE>

Section 2.08. Proxies. No proxy shall be valid more than eleven months
after its date, unless it provides for a longer period.

Section 2.09. Action without meeting. Any action required or permitted
to be taken at a meeting of stockholders may be taken without a meeting if a
unanimous written consent which sets forth the action is signed by each
stockholder entitled to vote on the matter is filed with the record of
stockholders' meetings.

Section 2.10. Stock ledger. The secretary of the corporation shall
cause an original or duplicate stock ledger to be maintained at the office of
the corporation's transfer agent. The stock ledger shall contain the name and
address of each stockholder and the number of shares of stock which the
stockholder holds.

ARTICLE III

DIRECTORS AND COMMITTEES

Section 3.01. Function and powers. The business and affairs of the
corporation shall be managed under the direction of its board of directors. All
powers of the corporation may be exercised by or under the authority of the
board of directors except as conferred on or reserved to the stockholders by
statute or the charter or these bylaws.

Section 3.02. Number. The number of directors which shall constitute the
entire board of directors shall be not less than three nor more than fifteen.
Within such limits the number of directors may be changed by resolution, or by
amendment to these bylaws, adopted by a majority of the entire board of
directors, but no such action shall affect the tenure of office of any director.

Section 3.03. Election and term of office. The directors shall be
elected at the annual meeting of the stockholders (if any such meeting is held),
except as provided in Section 3.04 of this article, and each director elected
shall hold office until his successor is elected and qualifies or until his
earlier resignation or removal. Directors need not be stockholders of the
corporation.

Section 3.04. Vacancies. Any vacancy occurring in the board of
directors for any cause other than by reason of an increase in the number of
directors may be filled by a majority of the remaining members of the board of
directors, although such majority is less than a quorum; provided, however, that
no vacancy shall be so filled unless immediately thereafter at least two-thirds
of the directors then holding office shall have been elected to such office by
the stockholders, and provided further that if at any time
<PAGE>

less than a majority of the directors holding office at that time were elected
by the stockholders, a meeting of the stockholders shall be held promptly and in
any event within 60 days for the purpose of electing directors to fill any
existing vacancy in the board of directors, unless the Securities and Exchange
Commission shall by order extend such period under the authority granted by
section 16(a) of the Investment Company Act of 1940. A director elected to fill
a vacancy shall be elected to hold office until the next annual meeting of
stockholders or until his successor is elected and qualifies.

Section 3.05. Regular meetings. The board of directors from time to
time may provide for the holding of regular meetings of the board and fix their
time and place.

Section 3.06. Special meetings. Special meetings of the board may be
called by the president on 24 hours notice to each director, either personally,
by mail, by telegram or by facsimile transmission. Special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of a majority of the directors or a majority of the members of
the executive committee.

Section 3.07. Quorum and voting. At all meetings of the board a
majority of the directors in office shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or the
articles of incorporation or these bylaws. If a quorum shall not be present at
any meeting of the board of directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.

Section 3.08. Telephone meetings. Members of the board of directors or
any committee thereof may participate in a meeting of such board or committee by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at the
meeting.

Section 3.09. Action without meeting. Unless otherwise restricted by
statute or the articles of incorporation or these bylaws, any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if a unanimous written consent
which sets forth the action is signed by each member of the board or committee,
as the case may be, and filed with the minutes of proceedings of the board or
committee.
<PAGE>

Section 3.10. Committees. The board of directors may, by resolution
passed by a majority of the entire board, designate an executive committee and
other committees, each committee to consist of two or more directors of the
corporation. In the absence of a member of a committee, the members thereof
present at any meeting, whether or not they constitute a quorum, may appoint
another member of the board of directors to act at the meeting in the place of
any such absent member.

Section 3.11. Executive committee. Unless otherwise provided by
resolution of the board of directors, the executive committee shall have and may
exercise all powers of the board of directors in the management of the business
and affairs of the corporation that may lawfully be exercised by an executive
committee, except the power to: (i) declare dividends or distributions on stock;
(ii) issue stock; (iii) recommend to the stockholders any action which requires
stockholder approval; (iv) amend the bylaws; or (v) approve any merger or share
exchange which does not require stockholder approval.

Section 3.12. Other committees. To the extent provided by resolution of
the board of directors, other committees of the board shall have and may
exercise any of the powers that may lawfully be granted to the executive
committee.

Section 3.13. Minutes of committee meetings. Each committee shall keep
regular minutes of its meetings and report the same to the board of directors
when required.

Section 3.14. Expenses and compensation of directors. Directors shall
not receive any stated salary for their services as directors, but, by
resolution of the board of directors, a fixed sum, and expenses of attendance,
if any, may be allowed to directors for attendance at each regular or special
meeting of the board of directors, or of any committee thereof, but nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.

ARTICLE IV

NOTICES

Section 4.01. Type of notice. Whenever, under the provisions of any
statute or the articles of incorporation or these bylaws, notice is required to
be given to any director or stockholder, such notice may be given in writing, by
personal delivery, or by mail, addressed to such director or stockholder, at his
or her address as it appears on the records of the corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Notice to directors may
also be given by telegram or by facsimile transmission.
<PAGE>

Section 4.02. Waiver of notice. Whenever the provisions of any statute
or the articles of incorporation or these bylaws require notice of the time,
place or purpose of a meeting of the board of directors or a committee of the
board, or of stockholders, each person who is entitled to the notice waives
notice if: (a) before or after the meeting he or she signs a waiver of notice
which is filed with the records of the meeting; or (b) he or she is present at
the meeting or, in the case of a stockholders' meeting, is represented by proxy.

ARTICLE V

OFFICERS

Section 5.01. Offices. The officers of the corporation shall be elected
by the board of directors and shall be a president, one or more vice presidents,
a secretary and a treasurer. The board of directors may also appoint a
chairperson of the board, assistant secretaries and assistant treasurers. Any
number of offices may be held by the same person, unless the articles of
incorporation or these bylaws otherwise provide, except that no one may serve
concurrently as both president and vice president. A person who holds more than
one office may not act in more than one capacity to execute, acknowledge or
verify an instrument required by law to be executed, acknowledged or verified by
more than one officer.

Section 5.02. Annual election. The board of directors annually shall
elect a president one or more vice presidents, a secretary and a treasurer. The
board of directors may elect one of its members to serve as chairperson of the
board.

Section 5.03. Other officers and agents. The board of directors may
appoint such other officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board.

Section 5.04. Term of office; removal; vacancies. The officers of the
corporation shall hold office until their respective successors are chosen and
qualify. Any officer elected or appointed by the board of directors may be
removed at any time by the affirmative vote of a majority of the board of
directors, when the board in its judgment finds that the best interests of the
corporation will be served by such action. The removal of an officer or agent
does not prejudice his contract rights, if any. Any vacancy occurring in any
office of the corporation shall be filled by the board of directors.
<PAGE>

Section 5.05. The chairperson of the board of directors. The
chairperson of the board of directors, if one shall be elected, shall preside at
all meetings of the directors and stockholders, and shall perform such other
duties as the board of directors may prescribe.

Section 5.06. The president. The president shall be the chief executive
officer of the corporation and shall have general management of the business of
the corporation, and shall see that all orders and resolutions of the board of
directors are carried into effect. In the absence of a chairperson of the board
of directors, or if a chairperson is not elected, the president shall preside at
all meetings of the directors and stockholders. The president may execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent of
the corporation.

Section 5.07. The vice presidents. In the absence of the president or
in the event of the president's inability or refusal to act, the vice president
(or in the event there be more than one vice president, the vice presidents in
the order designated, or in the absence of any designation, then in the order of
their election) shall perform the duties of the president, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president. The vice presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.

Section 5.08. The secretary. The secretary shall record all votes and
proceedings of meetings of directors and stockholders in the corporation
records. The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and meetings of the board of directors when notice thereof
is required. The secretary shall have custody of the seal of the corporation
and may affix the same to any instrument requiring the corporate seal and attest
to the same with his or her signature. The secretary shall perform such other
duties as the board of directors may prescribe.

Section 5.09. The assistant secretary. The assistant secretary, or if
there be more than one, the assistant secretaries in the order determined by the
board of directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the secretary or in the event of the
secretary's inability or refusal to act, perform the duties and exercise the
powers of the secretary and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.

Section 5.10. The treasurer. The treasurer: (a) shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation; (b) shall deposit with the corporation's custodian all moneys and
other valuable effects in the name and to the credit of the corporation; (c)
shall direct the custodian to make such disbursements of the funds of the
corporation as may be ordered by the board of directors, taking proper vouchers
for such disbursements; and (d) shall render to the president and
<PAGE>

the board of directors, at its regular meetings, or when the board of directors
so requires, an account of all his or her transactions as treasurer and
financial statements of the corporation.

Section 5.11. The assistant treasurer. The assistant treasurer, or if
there shall be more than one, the assistant treasurers in the order determined
by the board of directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the treasurer or in the event
of the treasurer's inability or refusal to act, perform the duties and exercise
the powers of the treasurer and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.

ARTICLE VI

CAPITAL STOCK

Section 6.01. Certificates of stock. Every holder of stock in the
corporation shall be entitled, upon request, to have a certificate or
certificates, signed by, or in the name of the corporation by, the president or
a vice president and countersigned by the treasurer, an assistant treasurer, the
secretary or an assistant secretary of the corporation, certifying the number of
full shares owned by him in the corporation. No certificates shall be issued
for fractional shares. Where a certificate is countersigned by a transfer agent
other than the corporation or its employee, any other signature on the
certificate may be facsimile. In case any officer or transfer agent who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer or transfer agent before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer or transfer agent at the date of issue.

Section 6.02. Lost certificates. The board of directors may direct a
new certificate or certificates be issued in place of any certificate or
certificates previously issued by the corporation which are alleged to be lost,
mutilated or destroyed, upon such terms and upon such conditions as the board of
directors may prescribe.

Section 6.03. Transfers of stock. The shares of stock of the
corporation shall be transferable on the books of the corporation at the request
of the record holder thereof in person or by a duly authorized attorney, upon
presentation to the corporation or its transfer agent of a duly executed
assignment or authority to transfer, or proper evidence of succession, and, if
the shares are represented by a certificate, a duly endorsed certificate or
certificates of stock surrendered for cancellation, and with such proof of the
authenticity of the signatures as the corporation or its transfer agent may
reasonably require. The transfer shall be recorded on the books of the
corporation, the old certificates, if any, shall be cancelled, and the new
record holder, upon request, shall be entitled to a new certificate or
certificates.
<PAGE>

Section 6.04. Fixing of record date. The board of directors may fix in
advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
provided that such record date shall not be a date more than 90 days, and in the
case of a meeting of stockholders not less than 10 days, prior to the date on
which the particular action requiring such determination of stockholders is to
be taken. In such case only such stockholders as shall be stockholders of
record on the record date so fixed shall be entitled to such notice of, and to
vote at, such meeting or adjournment, or to give such consent, or to receive
payment of such dividend or other distribution, or to receive such allotment of
rights, or to exercise such rights, or to take such other action, as the case
may be, notwithstanding any transfer of any shares on the books of the
corporation after any such record date.

Section 6.05. Registered stockholders. The corporation shall be
entitled to treat the holder of record of shares as the holder in fact thereof
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
statute.

ARTICLE VII

CUSTODIAN

Section 7.01. Qualifications. The corporation shall at all times
employ, pursuant to a written contract, one or more banks or trust companies,
each having an aggregate capital, surplus and undivided profits (as shown in its
last published report) of at least $2,000,000, as custodian to hold the funds
and securities of the corporation.

Section 7.02. Contract. Such contract shall be upon such terms and
conditions and may provide for such compensation as the board of directors deems
necessary or appropriate, provided such contract shall further provide that the
custodian shall deliver securities owned by the corporation only upon sale of
such securities for the account of the corporation and receipt of payment
therefor by the custodian or when such securities may be called, redeemed,
retired or otherwise become payable. Such limitation shall not, however,
prevent:

(a) the delivery of securities for examination to the broker selling the
same in accord with the "street delivery" custom whereby such securities are
delivered to such broker in exchange for a
<PAGE>

delivery receipt exchanged on the same day for an uncertified check of such
broker to be presented on the same day for certification;

(b) the delivery of securities of an issuer in exchange for or conversion
into other securities alone or cash and other securities pursuant to any plan of
merger, consolidation, reorganization, recapitalization or readjustment of the
securities of such issuer;

(c) the conversion by the custodian of securities owned by the
corporation pursuant to the provisions of such securities into other securities;

(d) the surrender by the custodian of warrants, rights or similar
securities owned by the corporation in the exercise of such warrants, rights or
similar securities, or the surrender of Municipal Bond receipts or temporary
securities for definitive securities;

(e) the delivery of securities owned by the corporation as a redemption
in kind of securities issued by the corporation.

The custodian shall deliver funds of the corporation only upon the purchase of
securities for the portfolio of the corporation and the delivery of such
securities to the custodian, but such limitation shall not prevent the release
of funds by the custodian for redemption of shares issued by the corporation,
for payment of interest, dividend disbursements, taxes and management fees, for
payments in connection with the conversion, exchange or surrender of securities
owned by the corporation as set forth in sub-paragraphs (b), (c) and (d) above,
for operating expenses of the corporation and for any other purpose authorized
by the board of directors.

Section 7.03. Termination of contract. The contract of employment of
the custodian shall be terminable by either party on 60 days' written notice to
the other party. Upon any termination, the board of directors shall use its
best efforts to obtain a successor custodian, but lacking success in the
appointment of a successor custodian, the question of whether the corporation
shall be liquidated or shall function without a custodian shall be submitted to
the stockholders before delivery of any funds or securities of the corporation
to any person other than a successor custodian, including a temporary successor
selected by the retiring custodian. If a successor custodian is found, the
retiring custodian shall deliver funds and securities owned by the corporation
directly to the successor custodian.
<PAGE>

Section 7.04. Agents of custodian. The provisions of any other section
of these bylaws to the contrary notwithstanding, any contract of employment of a
custodian to hold the funds and securities of the corporation may authorize the
custodian, upon approval of the board of directors, to appoint other banks or
trust companies meeting the requirements of this article, domestic and foreign
(including domestic and foreign branches), to perform all or a part of the
duties of the custodian under its contract with the corporation.

Section 7.05. Negotiable instruments. All checks and drafts for the
payment of money shall be signed in the name of the corporation by such officer
or officers or such other person or persons as the board of directors may
designate, and all requisitions or orders for the payment of money by the
custodian or for the issue of checks and drafts therefor, all promissory notes,
all assignments of shares or securities standing in the name of the corporation,
and all requisitions or orders for the assignment of shares or securities
standing in the name of the custodian or its nominee, or for the execution of
powers to transfer the same, shall be signed in the name of the corporation by
not less than two of its officers. Promissory notes, checks or drafts payable
to the corporation may be endorsed only to the order of the custodian or its
agent.

ARTICLE VIII

TRANSACTIONS WITH OFFICERS AND DIRECTORS

Section 8.01. Purchase and sale of securities. The corporation shall
not purchase any securities (other than shares issued by the corporation) from,
or sell any securities (other than shares issued by the corporation and
securities paid in satisfaction of shares deposited for redemption during a
period during which the corporation is redeeming its shares principally in kind)
to, any director or officer of the corporation, or any director, officer or
partner of any firm which acts as investment adviser or principal underwriter
for the corporation acting as principal, except to the extent permitted to do so
under the Investment Company Act of 1940 or the rules or regulations thereunder
or by appropriate order or written advice of the Securities and Exchange
Commission.

Section 8.02. Concentration in any one issuer. The corporation shall
not purchase or retain securities of a company if all of the directors and
officers of the corporation and of its investment adviser who individually own
beneficially more than 1/2% of the securities of the company collectively own
more than 5% of such securities.

Section 8.03. Transactions in shares of the corporation. No director or
officer of the corporation or of its investment adviser shall take a long or
short position in the capital stock of the corporation, except that officers or
directors may purchase shares of the corporation for investment purposes at the
same price as that available to the public at the time of purchase.
<PAGE>

ARTICLE IX

INDEMNIFICATION

Section 9.01. Indemnification. Each person who is or was a director or
officer of the corporation, and each person who serves or served at the request
of the corporation as a director or officer of another corporation (and their
respective heirs, executors and administrators), shall be indemnified by the
corporation in accordance with, and to the fullest extent authorized by, the
General Corporation Law of the State of Maryland as it may be in effect from
time to time, provided that (unless otherwise permitted by the Investment
Company Act of 1940, the rules and regulations thereunder or the Securities and
Exchange Commission):

(a) this provision shall not protect any person against any liability to
the corporation or to its stockholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office;

(b) if there is neither a final court determination on the merits that
the person seeking indemnification is not liable nor a court determination that
he was not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, no
indemnification shall be permitted unless a determination that the person was
not guilty of any such misconduct has been made by (i) the vote of a majority of
a quorum of directors who are neither "interested persons" of the corporation as
defined in section 2(a)(19) of the Investment Company Act of 1940 nor parties to
the proceedings ("disinterested, non-party directors") or (ii) an independent
legal counsel (not including a counsel who does work for either the corporation,
its investment adviser or principal underwriter, or any person affiliated with
any of these persons); and

(c) before the final disposition of a proceeding, the corporation may pay
the expenses, including attorneys' fees, incurred by any such person in
defending a civil or criminal action, suit or proceeding, only if:

(i) authorized in the specific case, by a majority of the
disinterested, non-party directors, or if there are no disinterested, non-party
directors, by the board of directors;
<PAGE>

(ii) any advances are limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including costs
connected with preparation of a settlement);

(iii) any advances are accompanied by a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount which it is ultimately determined that the recipient is entitled to
receive from the corporation by reason of indemnification;

(iv) such promise is secured by (1) a surety bond or other security
provided by the recipient of the advance or (2) other suitable insurance, unless
a majority of a quorum of the disinterested, non-party directors, or an
independent legal counsel in a written opinion, has determined, based on a
review of readily available facts, that there is reason to believe that the
recipient of the advance ultimately will be found entitled to indemnification.

ARTICLE X

GENERAL PROVISIONS

Section 10.01. Dividends.
-------------- ---------

(a) The board of directors, from time to time as they may deem advisable,
may declare and pay dividends in cash or other property of the corporation, out
of any source available for dividends, to the stockholders according to their
respective rights and interests and in accordance with the applicable provisions
of the charter.

(b) The board of directors may prescribe from time to time that dividends
declared are payable at the election of any of the stockholders, either in cash
or in shares of the corporation.

(c) The board of directors shall cause any dividend payment to be
accompanied by a written statement if paid wholly or partly from any source
other than:

(i) the corporation's accumulated undistributed net income (determined
in accordance with generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission then in effect) and not
including profits or losses realized upon the sale of securities or other
properties; or
<PAGE>

(ii) the corporation's net income so determined for the current or
preceding fiscal year.

Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Securities and
Exchange Commission may prescribe.

Section 10.02. Fiscal year. The fiscal year of the corporation shall
-------------- -----------
end on November 30.

Section 10.03. Seal. The corporate seal shall have inscribed thereon
the name of the corporation and shall be in such form and contain such other
words and figures as the directors shall determine or the law require. The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or by placing the word "seal" adjacent to the signature of the
authorized officer of the corporation. Any officer or director of the
corporation shall have authority to affix the corporate seal of the corporation
to any document requiring the same.

ARTICLE XI

AMENDMENTS

Section 11.01. General. Except as provided in section 11.02, these
bylaws may be altered, amended or repealed, and new bylaws may be adopted solely
by the board of directors, at any meeting of the board of directors.

Section 11.02. Amendment by stockholders only. Sections 2.06 and 2.07
of article II, section 3.04 of article III, article VIII, and article XI of
these bylaws may be altered, amended or repealed only with the approval of the
holders of a "majority of the outstanding voting securities" of the corporation,
as that term is defined in section 2(a)(42) of the Investment Company Act of
1940.

<PAGE>

NUMBER SHARES
- -------------- ------------

STATE FARM MUNICIPAL BOND FUND, INC.

INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND

CUSIP 856851 10 0

This is to Certify that is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES
OF THE COMMON STOCK OF

STATE FARM MUNICIPAL BOND FUND, INC.,

of the par value of One Dollar ($1.00) per share, transferable on the books of
the Company by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to the provisions of the
Articles of Incorporation and of the By-Laws of the Company, and of all
amendments from time to time made thereto. Copies are on file with the Transfer
Agent.

This Certificate is not valid until countersigned by the Transfer Agent.

WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.

Dated

[SIGNATURE OF PAUL ANDERSON, JR.] [SIGNATURE OF EDWARD B. RUST]

Secretary President

[CORPORATE SEAL OF STATE FARM MUNICIPAL BOND FUND, INC.]

Countersigned:

STATE FARM INVESTMENT MANAGEMENT CORP.
(Delaware) Transfer Agent

By
Authorized Signature

<PAGE>

INVESTMENT ADVISORY AND MANAGEMENT
SERVICES AGREEMENT

AGREEMENT dated October 1, 1978, by and between STATE FARM MUNICIPAL
BOND FUND, INC., a Maryland corporation registered under the Investment Company
Act of 1940 as an open-end diversified management investment company
(hereinafter called the "Fund"), and STATE FARM INVESTMENT MANAGEMENT CORP., a
Delaware corporation registered under the Investment Advisers Act of 1940 as an
investment adviser (hereinafter called the "Adviser"):

WITNESSETH:

In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:

1. Engagement of Adviser. The Fund hereby employs the Adviser to act
as investment adviser for and to manage the investment and reinvestment of the
assets of the Fund, and to administer its affairs to the extent requested by and
subject to the supervision and control of the Board of Directors of the Fund for
the period and upon the terms herein set forth. The Adviser shall give due
consideration to the investment policies and restrictions and the other
statements concerning the Fund in the Fund's articles of incorporation, by-laws,
and registration statements under the Investment Company Act of 1940 (the "Act")
and the Securities Act of 1933 (the "Securities Act"), and to the provisions of
the Internal Revenue Code applicable to the Fund as a regulated investment
company.

The Adviser is authorized to make the decisions to buy and sell
securities of the Fund, to place the Fund's portfolio transactions with
securities broker-dealers, and to negotiate brokerage commissions and other
terms of such transactions on behalf of the Fund. The Adviser is authorized to
exercise discretion within the Fund's policy concerning allocation of its
portfolio brokerage as permitted by law, including but not limited to section
28(e) of the Securities Exchange Act of 1934, and in so doing shall not be
required to make any reduction in its investment advisory fees.

The Adviser shall for all purposes herein provided be deemed to be an
independent contractor, and unless otherwise expressly provided or authorized
shall have no authority to act for or represent the Fund in any way or otherwise
be deemed an agent of the Fund.

2. Expenses. The Adviser shall at its own expense furnish to the Fund
suitable office space in its own offices or in such other place as may be agreed
upon from time to time between the parties, hereto, and in addition shall
furnish all necessary office facilities, equipment, administrative services and
<PAGE>

clerical personnel for managing the affairs and investments of the Fund. The
Adviser shall arrange, if desired by the Fund, for officers or employees of the
adviser to serve without salary from the Fund as directors, officers or agents
of the Fund if duly elected or appointed to such positions by the shareholders
of the Fund or by the Board of Directors thereof and subject to their individual
consent and to any limitations imposed by law. The Adviser assumes and shall
pay all of the expenses of the Fund, other than those expressly to be paid by
the Fund as specified herein and expenses payable by any distributor of the
Fund's shares pursuant to a separate agreement between the Fund and such
distributor.

The Fund assumes and shall pay the following expenses related to the
Fund: (i) all fees of the Adviser hereunder; (ii) all charges of independent
auditors, of legal counsel, of depositaries, custodians and other agencies for
the safekeeping and servicing of its cash, securities and other property, and
for keeping the Fund's books of account and calculating the Fund's net asset
value if such books are kept and such calculations are made by a custodian, and
of its transfer agents, registrars and dividend disbursing and redemption
agents, if any; (iii) all compensation of directors other than those affiliated
with the Adviser; (iv) interest, if any, on obligations incurred by the Fund;
(v) the cost of preparing, printing and distributing stock certificates,
corporate reports, notices, proxy solicitation material and reports to its
shareholders; (vi) all taxes and corporate fees payable to federal, state and
other governmental agencies, domestic or foreign; (vii) all registration and
filing fees payable under federal securities laws; and (viii) the cost of the
Fund's membership in any association of investment companies. The Fund shall
also assume and pay the following expenses related to the Fund except to the
extent that they shall be assumed and paid by a distributor of the Fund's shares
pursuant to a separate agreement between the Fund and such distributor: (i) all
expenses of printing and distributing any prospectus of the Fund and of
preparing, printing, distributing and disseminating any other literature,
advertising and selling aids in connection with the offering of the shares for
sale (except the cost of preparing, printing and distributing reports and other
communications to shareholders in their capacity as such); (ii) all expenses of
advertising in connection with such offering; and (iii) all fees payable to
states in connection with the qualification of Fund shares for sale, or the
qualification of the Fund as a dealer or broker, under the laws of such states
as may be designated by the Underwriter. In addition to the payment of
expenses, the Fund shall also assume and pay all brokers' commissions and other
charges incurred in connection with the purchase and sale of portfolio
securities. The Fund shall not pay or incur any obligation for any management
or administrative expenses for which the Fund intends to seek reimbursement from
the Adviser as herein provided without first obtaining the written approval of
the Adviser. The Fund shall be free to retain at its expense other persons to
furnish it with any services whatsoever, including, without limitation,
statistical, factual or technical information or advice.

3. Compensation of Adviser; limitation of Fund's expenses. For the
services to be rendered, the facilities to be furnished and the expenses to be
assumed by the Adviser, as provided in this Agreement, the Fund shall pay to the
Adviser for each of the Fund's fiscal quarters a fee equal to one quarter of the
annual percentage of the average net assets of the fund during each such fiscal
quarter in accordance with the following schedule:
<PAGE>

Annual Rate of Advisory Fee Based on Average Net Assets
-------------------------------------------------------

.20% of the first $50 million
.15% of the next $50 million
.10% in excess of $100 million

Such payment to the Advisor shall be made within 20 days after the last day of
each of the Fund's fiscal quarters with a final adjustment as of the end of each
fiscal year so that the annual fee will equal appropriate annual percentages of
the average net assets of the Fund during the fiscal year.

The Adviser shall reimburse the Fund to such extent as the total
expenses of the Fund for any fiscal year during the term of this agreement
chargeable to income on the accrual basis of accounting, including fees to the
Adviser but excluding all (i) taxes, (ii) interest and (iii) extraordinary
litigation expenses, shall exceed .4% of the average net assets to the Fund
during such year. Brokers' commissions and other charges incurred in connection
with the purchase and sale of portfolio securities shall not be regarded as
expenses for this purpose. Such reimbursement shall be made quarterly on an
Municipal Bond basis, with a final adjustment as of the end of each year.

For the quarter and year in which this agreement becomes effective or
terminates there shall be an appropriate proration of the fee and of the
reimbursement (if any) on the basis of the number of days that the agreement is
in effect during such quarter and year.

For purposes of this section the average net asset value during a period
shall be determined on the basis of the net asset value of the Fund as of the
close of each business day during the period in accordance with the articles of
incorporation of the Fund. If pursuant to the articles of incorporation of the
Fund the net asset value is not required to be determined on any particular
business day, then for the purpose of the foregoing computations the net asset
value last determined shall be deemed to be the net asset value as of the close
of business on that day.

4. Interested parties; services other than as Adviser. It is
understood that the officers, directors, agents and shareholders of the Fund are
or may be interested in the Adviser as officers, directors, agents, shareholders
or otherwise, and that the officers, directors, shareholders and agents of the
Adviser may be interested in the Fund otherwise than as a shareholder. It is
further understood that the Adviser, by virtue of separate agreements, may also
act as transfer agent, dividend disbursing agent and underwriter for the Fund
and that State Farm Mutual Automobile Insurance Company, by virtue of a separate
agreement, may furnish services to the Adviser to assist the Adviser in
fulfilling its obligations to the Fund pursuant to this agreement. The services
of the Adviser herein provided are not to be deemed exclusive and the Adviser
shall be free to render similar services or other services to others so long as
its services hereunder shall not be impaired thereby.
<PAGE>

5. Limitation of liability of Adviser. The Adviser shall not be liable
for any error of judgment or import of law, or for any loss suffered by the Fund
or its shareholders from or as a consequence of any act or omission of the
Adviser, or of any of the directors, officers, employees or agents of the
Adviser, in connection with the matters to which this agreement relates, except
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Adviser in the performance of its obligations and duties or by
reason of its reckless disregard of its obligations and duties under this
agreement.

6. Term and termination. This agreement shall become effective on the
date hereof and, unless sooner terminated as hereinafter provided, shall
continue in effect until December 1, 1979, and from year to year thereafter, but
only so long as such continuance is specifically approved at least annually in
the manner required by the Act.

This agreement may be terminated at any time without the payment of any
penalty by the Board of Directors of the Fund, or by vote of the holders of a
majority of the outstanding shares of the Fund, or by the Adviser, on sixty (60)
days' written notice to the other party.

This agreement may be terminated at any time without the payment of any
penalty by vote of the Board of Directors of the Fund in the event that it shall
have been established by a court of competent jurisdiction that the Adviser or
any officer or director of the Adviser has taken any action which results in a
breach of the covenants of the Adviser set forth herein.

This agreement shall automatically terminate in the event of its
assignment (as defined in the Act).

7. Notices. Any notice under this agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.

8. "State Farm" name. The Fund agrees that upon the termination of
this agreement at any time or for any reason it shall, when so requested by the
Adviser, eliminate all reference to the name "State Farm" from its corporate
name and thereafter refrain from using the name "State Farm" in connection with
its business or activities in any form or combination whatsoever except as may
be necessary to identify its prior name.
<PAGE>

9. Amendment. This agreement may be amended only with the affirmative
vote (i) of a majority of those directors who are not "interested persons" (as
defined in the Act) of the Fund or the Advisor, voting in person at a meeting
called for the purpose of voting on such approval, and (ii) of the holders of a
majority of the outstanding shares of the Fund.

IN WITNESS WHEREOF, the Fund and the Adviser have caused this agreement
to be executed in their names and on their behalf by and through their duly
authorized officers all on the day and year first above written.

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Edward B. Rust
-----------------------------------
President

ATTEST:

/s/ Donald F. Storm
- -------------------------
Assistant Secretary

STATE FARM INVESTMENT MANAGEMENT CORP.

By: /s/ Roger Joslin
-----------------------------------
Vice President

ATTEST:

/s/ Paul R. Dotson
- -------------------------
Assistant Secretary

<PAGE>

SERVICE AGREEMENT
(As amended September 9, 1977)

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, an Illinois corporation
(Auto Company), STATE FARM INVESTMENT MANAGEMENT CORP., a Delaware corporation
and a wholly-owned second-tier subsidiary of Auto Company (Manager), and STATE
FARM MUNICIPAL BOND FUND, INC., a Maryland corporation and an open-end
diversified management investment company registered under the Investment
Company Act of 1940 (Fund) to which Manager is investment adviser under an
Investment Advisory and Management Services Agreement dated December 21, 1976
and amended September 9, 1977 agree that:

1. Manager shall have the right to use, and Auto Company shall make
available for the use of Manager, (i) such part-time services of employees of
Auto Company engaged in its investment operations, and such services of
administrative and other employees of Auto Company, for periods to be agreed
upon by Manager and Auto Company, and (ii) such administrative, clerical,
stenographic and other support services and office supplies and equipment, as
may in each case be reasonably required by Manager in the performance of its
obligations as investment adviser to the Fund under their Investment Advisory
and Management Services Agreement and any agreements amending or superseding
such agreement.

2. Manager shall have the right to use, and Auto Company shall furnish
for the use of Manager such office space as is reasonably needed by Manager in
the performance of its obligations as investment adviser to the Fund.

3. In performing services for Manager under this agreement, the
employees of Auto Company may, to the full extent that they deem appropriate,
have access to and utilize statistical and economic data, investment research
and reports and other information prepared for or contained in the files of the
Auto Company which are relevant to making investment decisions within the
investment objectives of the Fund, and may make such information available to
Manager; provided, that any such information prepared or obtained in connection
with a private placement or other nonpublic transaction need not be made
available to Manager if Auto Company deems such information confidential.

4. Employees of Auto Company performing services for Manager pursuant
hereto shall report and be responsible solely to the officers and directors of
Manager or persons designated by them. Auto Company shall have no
responsibility for investment recommendations and decisions of Manager based
upon information or advice given or obtained by or through such Auto Company
employees; provided, however, that the foregoing shall not be construed to
relieve Auto Company of any liability to the Fund or its security holders to
which the Auto Company would otherwise be subject by reason of its willful
misfeasance, bad faith or gross negligence, in the performance of its duties
hereunder, or by reason of its reckless disregard of its obligations and duties
hereunder.
<PAGE>

5. The obligation of performance of the Investment Advisory and
Management Services Agreement of Manager with the Fund is solely that of
Manager, for which Auto Company assumes no responsibility except as otherwise
expressly provided herein.

6. In consideration of the services to be rendered and the facilities
to be provided to Manager by Auto Company and its employees pursuant to this
agreement, Manager agrees to reimburse Auto Company for such costs, direct and
indirect, as may be fairly attributable to the services performed and the
facilities provided for Manager. Such costs shall include, but shall not be
limited to, an appropriate portion of salaries, employee benefits, general
overhead expense, and supplies and equipment, and a charge in the nature of rent
for the cost of space in the Auto Company offices fairly allocable to activities
of Manager under its Investment Advisory and Management Services Agreement with
the Fund. In the event of disagreement between Manager and Auto Company, as to
a fair basis for allocating or apportioning costs, such basis shall be fixed by
the independent public accountants for the Fund.

7. This agreement shall become effective on the date hereof and shall
continue in effect until December 1, 1978, and thereafter shall continue in
effect from year to year if its continuance is specifically approved by (i) the
vote of a majority of the outstanding voting securities of the Fund (as defined
in section 2(a)(42) of the Investment Company Act of 1940 ("Act")), or (ii) the
vote of a majority of the Board of Directors of the Fund, and in either case by
a majority of the Directors of the Fund who are not parties to the agreement or
interested persons (as defined in section 2(a)(19) of the Act) of the Fund, Auto
Company or Manager, voting in person at a meeting called for such purpose;
provided, however, that this agreement (a) may be terminated at any time,
without the payment of any penalty, either by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities of the Fund, on
sixty days' written notice to Manager and to Auto Company, (b) shall terminate
automatically in the event of its assignment (as defined in section 2(a)(4) of
the Act), and (c) may be terminated by Manager or by Auto Company on sixty days'
written notice to each other and to the Fund.

8. This agreement may be amended at any time by mutual consent of the
parties, provided that such amendment shall not become effective until it has
been approved by vote of a majority of the outstanding voting securities of the
Fund.

9. Any notice under this agreement shall be in writing, addressed and
delivered or mailed postage prepaid to the other parties, at such addresses as
such other parties may designate for the receipt of such notices. Until further
notice to the other parties, it is agreed that the address of Auto Company, that
of Manager and that of the Fund for this purpose shall be One State Farm Plaza,
Bloomington, Illinois 61701.
<PAGE>

Dated: December 21, 1976

Amended September 9, 1977

STATE FARM INVESTMENT MANAGEMENT CORP.

By: /s/ Roger Joslin
------------------------------------
Vice President

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

By: /s/ Robert O. Noel
------------------------------------
Vice President - Operations

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Edward B. Rust
------------------------------------
President

<PAGE>

UNDERWRITING AGREEMENT
(As amended September 9, 1977)

AGREEMENT made this 21st day of December, 1976 and amended September 9,
1977, between STATE FARM MUNICIPAL BOND FUND, INC., a Maryland Corporation
(hereinafter called the "Fund"), and STATE FARM INVESTMENT MANAGEMENT CORP., a
Delaware corporation (hereinafter called the "Underwriter"):

WITNESSETH:

In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:

1. Appointment of Underwriter. The Underwriter is hereby appointed the
Fund's agent for the distribution of shares of common stock of the Fund.

2. Undertaking of Underwriter. The Underwriter agrees to use its best
efforts to sell shares of the Fund at prices and on terms as hereinafter
provided, all subject to applicable federal and state laws and regulations and
to the Articles of Incorporation of the Fund, and subject also to such
limitations on the class of investors to whom shares may be offered as may be
described from time to time in the Fund's prospectus currently effective
("Prospectus") under the Securities Act of 1933 ("Securities Act"). The
Underwriter may in its discretion refuse to sell shares to any particular
applicant, and the Fund may similarly refuse to sell shares to any person. The
Underwriter or its agent shall be entitled to rely upon the certification of any
purchaser that he is a member of that class of investors to whom shares may be
offered as may be described from time to time in the Prospectus.

3. Appointment of dealers. The Underwriter, as agent of the Fund,
shall sell shares of the Fund directly or to or through qualified dealers or
others in such manner (not inconsistent with the provisions hereof and the then
effective registration statement of the Fund under the Securities Act
("Registration Statement")) as the Underwriter may determine from time to time,
provided that no dealer or other person shall be appointed or authorized to act
as agent of the Fund without the prior written consent of the Fund and that the
form of each agreement between the Underwriter and any such dealer or other
person shall have been approved by the Fund.

4. Sales price of shares. All shares of the Fund offered for sale or
sold by the Underwriter shall be so offered or sold at a price per share
determined in accordance with the Prospectus except as departure from such
prices may be permitted by the rules and regulations of the Securities and
Exchange
<PAGE>

Commission; provided however, that any public offering price for shares of the
Fund shall be the net asset value per share (computed in accordance with the
Articles of Incorporation of the Fund) next determined after the order for such
shares is placed with the Underwriter, to which there may be added a
distribution charge of not more than 9% of the public offering price.

5. Commissions and concessions. The price the Fund shall receive for
all shares purchased from the Fund shall be the net asset value used in
determining the public offering price applicable to the sale of such shares.
The excess, if any, of the sales price over the net asset value of the shares
sold by the Underwriter as agent shall be retained by the Underwriter as a
commission for its services hereunder. Out of such commission the Underwriter
may allow commissions or concessions to dealers and may allow them to others in
its discretion in such amounts as the Underwriter shall determine from time to
time. Except as may be otherwise determined by the Underwriter and the Fund
from time to time, such commissions or concessions shall be uniform to all
dealers.

6. Confirmations. The Underwriter shall issue and deliver on behalf of
the Fund such confirmations of sales made by it pursuant to this agreement as
may be required. At or prior to the time of delivery by the Fund to or on the
order of the Underwriter of certificates for any shares of common stock of the
Fund, the Underwriter will pay or cause to be paid to the Fund the amount due
the Fund for the sale of such shares. Certificates shall be issued or shares
registered on the transfer books of the Fund in such names and denominations as
the Underwriter may specify.

7. Blue sky qualification; dealer registration. The Fund will execute
any and all documents and furnish any and all information which may be
reasonably necessary in connection with the qualification of its shares for sale
(including the qualification of the Fund as a dealer where necessary or
advisable) in such states as the Underwriter may reasonably request (it being
understood that the Fund shall not be required without its consent to qualify to
do business in any jurisdiction or to comply with any requirement which in its
opinion is unduly burdensome).

8. Sales material. All sales material used or distributed by the
Underwriter or its dealers or others will conform to applicable laws and
regulations, and the Underwriter will furnish the Fund with copies of all such
material.

9. Repurchase of shares. The Underwriter, as agent of and for the
account of the Fund, may repurchase shares of common stock of the Fund at such
prices and upon such terms and conditions as shall be specified in the
Prospectus.
<PAGE>

10. Indemnification. The Underwriter will indemnify and save harmless
the Fund from any damage or expense on account of any wrongful act by the
Underwriter or any employee, representative or agent of the Underwriter.

11. Conformity to Registration Statement. The Underwriter will require
each dealer to conform to the provisions hereof and of the Registration
Statement and Prospectus and neither the Underwriter nor any such dealer shall
withhold the placing of purchase orders so as to make a profit thereby.

12. Expenses. The Fund will pay or cause to be paid (i) all expenses
(including the fees and disbursements of its legal counsel and independent
auditors, but not including printing expenses) related to the registration of
shares of its common stock under the Securities Act and (ii) all expenses
incident to the issuance of such shares (such as the cost of stock certificates,
issue taxes and fees of the transfer agent). The Underwriter will pay all
expenses (other than expenses which one or more dealers may bear pursuant to any
agreement with the Underwriter) incident to the offering, sale and distribution
of the shares offered hereunder, including, without limiting the generality of
the foregoing, (i) all expenses of printing and distributing any prospectus of
the Fund and of preparing, printing, distributing and disseminating any other
literature, advertising and selling aids in connection with the offering of the
shares for sale (except the cost of preparing, printing and distributing reports
and other communications to shareowners in their capacity as such), (ii) all
expenses of advertising in connection with such offering, (iii) all fees payable
to states in connection with the qualification of Fund shares for sale and (iv)
all fees payable under state and federal laws in connection with the
qualification of the Fund or the Underwriter as a dealer, broker or agent.

13. Term and termination. This agreement shall become effective on the
date hereof, and, unless sooner terminated as hereinafter provided shall
continue in effect until December 1, 1978 and from year to year thereafter, but
only so long as such continuance is specifically approved at least annually in
the manner required by the Investment Company Act of 1940. Either party hereto
may terminate this agreement at any time by giving the other party at least
sixty days' prior written notice of such termination specifying the date fixed
therefor. This agreement shall automatically terminate in the event of its
assignment (as defined in the Investment Company Act of 1940).

14. Notices. Any notice under this agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.

IN WITNESS WHEREOF, the Fund and the Underwriter have caused this
agreement to be executed in their names and on their behalf by and through their
duly authorized officers all on the day and year first above written.
<PAGE>

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Edward B. Rust
-----------------------------------
President

ATTEST:

/s/ Donald F. Storm
- ------------------------
Assistant Secretary

STATE FARM INVESTMENT MANAGEMENT CORP.

By: /s/ Roger Joslin
-----------------------------------
Vice President

ATTEST:

/s/ Paul R. Dotson
- ------------------------
Assistant Secretary

<PAGE>

JPMORGAN

DOMESTIC CORPORATE CUSTODY AGREEMENT
------------------------------------

AGREEMENT dated as of Nov 1, 1990 between MORGAN GUARANTY TRUST COMPANY of
New York, a New York banking corporation (the "Bank"), and STATE FARM MUNICIPAL
BOND FUND, INC. (the "Client").

WHEREAS, the Client, which is a Maryland Corporation and an investment
company registered as such under the Investment Company Act of 1940, desires to
arrange for the custody of certain of its assets by the Bank and by certain
depositories located in the United States;

WHEREAS, the Client specifically approves the designation by the Bank of its
New York Office as the office through which the Bank will perform many of the
services and fulfill many of its obligations under this Agreement;

NOW THEREFORE, in consideration of the mutual agreement made herein, the Bank
and the Client agree as follows:

1. The Bank agrees to establish and maintain (a) one or more separate
custody accounts (singly a "Custody Account" and collectively the "Custody
Accounts") for any and all stocks, bonds and other securities (the "Securities")
from time to time received for the account of the Client by the Bank or a
Domestic Subcustodian and (b) one or more separate deposit accounts (singly a
"Deposit Account" and collectively the "Deposit Accounts") for any and all cash
(the "Cash") received for the account of the Client by the Bank. The term
"Domestic Subcustodian" means a depository located in the United States
including, but not limited to, the Depository Trust Company, the Federal Reserve
Bank of New York and the Participants Trust Company, the use of which has been
expressly authorized by the Client.

2. Securities and Cash are permitted to be held by

a) the Bank; and

b) Domestic Subcustodians.
<PAGE>

JP MORGAN

3. (a) The records maintained by the Bank of the Custody Accounts and the
Deposit Accounts will reflect all Securities and Cash maintained in accordance
with Section 1 hereof.

(b) The Bank will require each Domestic Subcustodian holding Securities to
identify Securities held by it as being held for the account of the Bank for its
clients.

(c) The Bank shall physically segregate any Securities which are physically
held by it; in all other respects the Securities may be commingled with other
securities no matter by whom owned, except for securities owned by the Bank as
principal, subject to the record-keeping requirements of subsection (b) above.
Securities may be held in certificated and uncertificated form.

(d) Any Securities or Cash held by a Domestic Subcustodian will be subject
only to the instructions of the Bank acting in its capacity as agent of the
Client.

(e) The Bank will authorize or permit the holding of Securities and Cash by
a Domestic Subcustodian only as long as (i) the Securities are not subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Domestic Subcustodian or its creditors, including a receiver or trustee in
bankruptcy, except for a claim of payment for the safe custody or administration
of the Securities and (ii) beneficial ownership of the Securities is freely
transferable without the payment of money or value other than for safe custody
or administration of the Securities.

(f) The Bank will allow independent public accountants of the Client
reasonable access to the records of the Bank relating to the Securities and Cash
as is required by those accountants in connection with their examination of the
books and records pertaining to the affairs of the Client. Upon request, the
Bank will provide the Client with any reports obtained by the Bank on a Domestic
Subcustodian's accounting system, internal accounting controls and procedures
for safekeeping securities.

4. The Bank shall make payments of Cash only:

(a) upon the purchase of Securities for the Client and against the delivery
of Securities to the Bank, or the crediting of such Securities to the account of
the Bank or its Domestic Subcustodian for the account of the Client; provided,
however that such payment is made in the amount specified by Authorized
Instructions;

(b) for any payments to be made in connection with the sale, conversion,
exchange or surrender of any Securities,

(d) for payment of interest, dividends, taxes, management or supervisory
fees, and operating expenses;
<PAGE>

JP MORGAN

(e) for other purposes of the Client, but only upon receipt of, in addition
to Authorized Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Client signed by an officer of
the Client and certified by its Secretary or an Assistant Secretary, specifying
the amount of such payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made; and

(f) upon termination of this Agreement as set forth in section 16 of this
Agreement.

5. Securities will be transferred, exchanged, or delivered by the Bank only:

(a) upon the sale of Securities and against receipt by the Bank of payment
therefor in accordance with Authorized Instructions; provided that the Bank may
accept payment in such form as shall be satisfactory to it, and may deliver such
Securities and arrange for payment subsequent to delivery therefor in accordance
with customary established securities trading practices or securities processing
practices and procedures in the jurisdiction or market in which the transaction
occurs (it being agreed that the Client bears the risk that the recipient of
such Securities may fail to make payment, to return such Securities, or to hold
such Securities or the proceeds of their sale in trust for the Bank;

(b) in exchange for or upon conversion into other Securities or Cash
pursuant to a plan of merger, consolidation, reorganization, recapitalization or
readjustment;

(d) upon the exercise of subscription, purchase or other similar rights
represented by Securities;

(e) for the purpose of redeeming in kind shares of the Client in accordance
with Authorized Instructions;

(f) for other purposes of the Client, but only upon receipt of, in addition
to Authorized Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Client signed by an officer of
the Client and certified by its Secretary or an Assistant Secretary, specifying
the Securities to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such delivery is to be made; and

(g) upon termination of this Agreement as set forth in Section 16 of this
Agreement.

6. Until the Bank receives Authorized Instructions to the contrary, the Bank
will:

(a) deposit all Cash received by the Bank in a Deposit Account and all
Securities received by the Bank in a Custody Account;
<PAGE>

JP MORGAN

(b) collect dividends, interest and other income payments made and stock
dividends, rights and similar Securities paid or issued with respect to
Securities and collect and hold all such payments in a Deposit Account and all
such stock dividends, rights and similar Securities in a Custody Account;

(c) take such steps as may reasonably be necessary to secure or otherwise
prevent the loss of rights relating to any Securities;

(d) promptly notify the Client upon receiving notices or reports of
corporate actions affecting any Securities;

(e) present for payment maturing obligations and those called for redemption
to the extent that the Bank receives notice of such opportunities for payment
and hold monies received upon presentation of such maturing obligations for
credit to a Deposit Account;

(f) execute in the name of the Client such ownership and other certificates
as may be required to obtain payment in respect of any Securities;

(g) accept, open and act appropriately with respect to all mail directed to
the Client in care of the Bank;

(h) disclose the Client's name, address and Securities position to the
issuers of Securities when requested to do so by them and approved by the
Client; and

(i) dispose of fractional interests received by the Bank as a result of
stock dividends by selling any fractional interest received.

7. (a) The Bank shall have responsibility as a bailee for hire under the
law of the State of New York with respect to any Securities or Cash held by it.
Without limiting the generality of the foregoing, the Bank will hold the Client
harmless from and indemnify it against any loss that occurs as a result of the
negligence or willful misconduct of the Bank.

(b) The Bank's responsibility with respect to any Securities or Cash held by
a Domestic Subcustodian is limited to the failure on the part of the Bank to
exercise reasonable care in the selection or retention of such Domestic
Subcustodian and the Bank will hold the Client harmless from and indemnify it
against any loss that occurs as a result of the Bank's failure to exercise such
reasonable care.

8. The Bank will, at its sole discretion, accept orders from the Client for
the purchase or sale of Securities and either execute such orders itself or by
means of an affiliate of the Bank or a broker or other financial organization of
its choice, subject to the fees and commissions in effect from time to time. The
Bank will not be responsible for any act or omission, or for the solvency, of
any affiliate, broker or other financial organization selected by the Bank to
effect any transaction for the account of the Client.
<PAGE>

JP MORGAN

When instructed to buy or sell Securities for which the Bank acts as a dealer,
the Bank will buy or sell such Securities from or to either itself, as
principal, or such affiliate.

9. The Client agrees that, when the Bank is instructed to receive any
Securities against payment, it will have sufficient Cash in the Deposit Accounts
or will make sufficient funds available to the Bank for such purpose. Any
dividends or interest automatically credited to the Deposit Accounts which are
not subsequently received by the Bank from the corporation making such payment
will be reimbursed to the Bank and the Bank may debit the Deposit Accounts for
this purpose.

10. Securities may be registered in the name of the Bank's nominee or, as
to any Securities in the possession of an entity other than the Bank, in the
name of such entity's nominee. The Client agrees to hold such nominees harmless
from any liability as a holder of record of such Securities and will have the
same responsibility as if the Securities were registered in the name of the
Client.

11. The Bank shall be responsible for the performance of only those duties
as are set forth herein or contained in Authorized Instructions given to the
Bank that are not contrary to the provisions of this Agreement. The Bank is not
under any duty to provide the Client with investment advice or to supervise its
investments.

12. Notwithstanding the provisions of Section 7 of this Agreement:

(a) all collections of funds or other property paid or distributed with
respect to any Securities shall be made at the risk of the Client;

(b) the Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank of any payment, redemption, proceeding
or other transaction regarding, or of any rights exercisable by the Client in
connection with, any Securities with respect to which the Bank has agreed to
take action as provided in Section 6 of this Agreement;

(c) the Bank shall not be liable for any action taken in good faith and in
the exercise of reasonable care upon Authorized Instructions or upon any
certified copy of any vote of the Board of Directors or Trustees of the Client
and may rely on any such documents that it in good faith believes to be validly
executed.
<PAGE>

JP MORGAN

13. The Bank shall forward to the Client communications relating to any
Securities which call for voting or the exercise of rights or other specific
action (including materials relating to legal proceedings intended to be
transmitted to holders of such Securities) to the extent such communications are
received by the Bank in time for forwarding to each client of the Bank. The
Bank will cause its nominee to execute and deliver to the Client proxies
relating to Securities registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted. Proxies relating
to bearer Securities will be delivered in accordance with Authorized
Instructions.

14. The Client agrees to pay the Bank as compensation for its services a
fee computed at rates determined by the Bank from time to time and communicated
to it in advance, as well as all taxes, assessments, charges and expenses
including, without limitation, legal expenses and attorney's fees incurred by
the Bank in connection with the maintenance of the Custody Accounts and Deposit
Accounts and the transfer of Securities and Cash pursuant to the terms of this
Agreement. The Bank is authorized to charge the Deposit Accounts for such items
and such amounts, as well as any other obligation or liability of any kind which
the Client may have to the Bank in connection with this Agreement, and the Bank
may exercise such right of set-off against the Deposit Accounts as may be
accorded it under applicable law. The Client agrees that it is the duty of the
Client to reconcile statements and advices sent to it by mail or electronic
media and that all such statements and advices will be considered final sixty
days from the date of dispatch.

15. The term "Authorized Instructions" means a communication given in
writing by two Authorized Persons and received by the Bank by facsimile
transmission, telegram, teletype, cablegram or other teleprocess or electronic
instruction system which the Bank believes in good faith to have been given by
the Client or which are transmitted with proper testing or authentication
pursuant to terms and conditions specified in writing by the Bank. The Client
agrees to assume all risks which may result from any action taken by the Bank in
reliance in good faith on Authorized Instructions. The term "Authorized
Persons" means those officers of the Client who have been designated by or
pursuant to a vote of the Board of Directors or Trustees, a certified copy of
which has been filed with the Bank, to act on behalf of the Client in the
performance of any acts that Authorized Persons may do under this Agreement
pursuant to such vote. Such persons shall continue to be Authorized Persons
until such time as there has been filed with the Bank a properly certified copy
of a vote of the Board of Directors or Trustees revoking the authority of such
persons. The Client shall safeguard any testkeys, identification codes or other
security devices with which the Bank provides it.

16. This Agreement may be terminated by the Bank or the Client on 60 days'
written notice to the other party, sent by registered mail. If notice of
termination is given by the Bank, Authorized Persons shall, within 60 days
following the giving of such notice, specify in writing the names of the persons
to whom all Securities and Cash shall be delivered or paid. In such case, the
Bank, subject to the satisfaction of amounts owed to it pursuant to Section 14
hereof, will deliver such Securities and pay such Cash to the persons so
specified. If within 60 days following the giving of a notice of termination by
the Bank, the
<PAGE>

JP MORGAN

Bank does not receive from the Client the names of the persons to whom such
Securities shall be delivered and such Cash shall be paid, the Bank at its
election may deliver such Securities and pay such Cash to a bank or trust
company doing business in the State of New York to be held and disposed of
pursuant to the provisions of this Agreement or the Authorized Instructions of
any Authorized Persons or may continue to hold such Securities and Cash until
the names of such persons are delivered to the Bank. If notice of termination is
given by the Client, the Bank, subject to the satisfaction of amounts owed to it
pursuant to Section 14 hereof, will deliver such Securities and pay such Cash to
the persons specified in Authorized Instructions.

17. Any notice or other communication to the Bank is to be addressed to
Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York
10015, Attention: Safekeeping Administration. Any notice or other communication
to the Client is to be mailed postage prepaid and addressed to it in care of B.
R. Vanderpool.

18. This Agreement shall bind the successors and assigns of the Bank and the
Client and shall be governed by and construed in accordance with the law of the
State of New York.

MORGAN GUARANTY TRUST COMPANY
OF NEW YORK

By: /s/ Stella Milano
------------------------------------
Vice President

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Rex J. Bates
------------------------------------
President

<PAGE>

CUSTODIAN AGREEMENT FOR

STATE FARM MUNICIPAL BOND FUND, INC.

THIS AGREEMENT, is made this first day of October, 1991, by and between the
State Farm Municipal Bond Fund, Inc., a corporation existing under the laws of
the State of Maryland, having its principal place of business at Bloomington,
Illinois (hereinafter referred to as the "Fund"), and the Peoples Bank of
Bloomington, a commercial banking institution organized under the laws of
Illinois, having its principal place of business at Bloomington, Illinois
(hereinafter referred to as the "Custodian").

WITNESSETH

WHEREAS, the Fund has entered into a separate custody agreement with Morgan
Guaranty Trust Company of New York, a New York banking corporation, (hereinafter
referred to as "Morgan") which establishes a custodial arrangement for certain
of the Fund's securities and cash assets; and

WHEREAS, the Fund has a need for the Custodian to maintain custody of
certain of the Fund's moneys and other cash assets not held by Morgan;

WHEREAS, the Fund also has a need to establish a checking account, in
addition to a custodial account, with the Custodian;

NOW, THEREFORE, for and in consideration of the mutual promises contained
in this Agreement, the Fund and the Custodian agree as follows.

1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints the Custodian as
the custodian of certain of the Fund's moneys and other cash assets delivered to
the Custodian by the Fund. The Custodian hereby accepts this appointment.

2. DUTIES OF THE CUSTODIAN.

A. DEPOSIT ACCOUNT. The Custodian shall establish and maintain one
or more separate deposit accounts and shall hold in the account(s), subject to
the terms of this Agreement, all moneys and other cash assets received by it
from or for the account of the Fund. The Custodian shall keep
<PAGE>

all moneys and other cash assets received by it on deposit either in its
banking, savings or trust department as depository.

B. SAFEKEEPING OF ASSETS. The Custodian will receive and keep safely
the assets of the Fund delivered to it. The Custodian will not deliver any of
the assets received from the Fund to any person except as permitted by the terms
of this Agreement.

C. PAYMENT AND TRANSFER OF FUND MONEYS AND OTHER CASH ASSETS. Upon
receipt of Authorized Instructions (which may be an instruction that continues
until changed, when deemed appropriate by the Fund and the Custodian), the
Custodian shall transfer or pay out moneys and other cash assets of the Fund in
only the following cases:

(1) For the transfer, including wire transfer via the Federal Reserve
system, of moneys and other cash assets from the Fund's account(s)
with the Custodian to the Fund's account with Morgan as custodian for
the Fund.

(2) For the transfer of moneys and other cash assets to the Fund's
checking account maintained and established by the Custodian for the
Fund;

(3) For the purchase or redemption of shares issued by the Fund in
accordance with Article 3 of this Agreement;

(4) For the payment of any dividends or distributions on shares of the
Fund in accordance with Article 4 of this Agreement;

(5) For the payment of interest, taxes, management or supervisory fees,
and operating expenses (including, without limitation, fees for legal,
auditing and accounting services);

(6) For the payment upon termination of the Agreement pursuant to Article
10 of this Agreement; and
<PAGE>

(7) For any other proper purpose of the Fund, but only upon receipt of a
certified copy of a resolution of the Fund's Board of Directors or of
the Fund's Executive Committee signed by an officer of the Fund and
certified by its Secretary or Assistant Secretary specifying the
amount of the payment, setting forth the purpose of the payment,
declaring the purpose to be a proper purpose and naming the person(s)
to whom such payment is to be made.

E. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian
will allow independent public accountants of the Fund reasonable access to the
records of the Custodian relating to the Fund's moneys and other cash assets
held by the Custodian pursuant to this Agreement as is required by those
accountants in connection with their examination of the books and records
pertaining to the affairs of the Fund. Upon request, the Custodian shall
provide the Fund with reports obtained by the Custodian on the Custodian's
accounting system and its internal accounting controls and procedures.

F. ENDORSEMENT. The Custodian is authorized to endorse for the
credit of the Fund when received, all checks, drafts or other orders for the
payment of money drawn to or for the order of the Fund or to or for the order of
the Custodian for the account of the Fund. Except as provided below with
respect to the Fund's checking account with the Custodian, such amounts shall be
placed in the Fund's deposit account with the Custodian.

3. PAYMENTS FOR REDEMPTIONS AND SALES OF FUND SHARES. The Fund may
utilize its moneys and other cash assets held by the Custodian for the purpose
of redeeming its shares. The Fund may draw upon its checking account with the
Custodian for this purpose, or the Fund may elect to utilize the services of the
State Farm Investment Management Corporation to disburse the proceeds of
redemption. Upon receipt of Authorized Instructions from the Fund, the
Custodian shall withdraw from the Fund's deposit account the amount stated in
the Authorized Instructions and (i) deposit such amount in the Fund's checking
account, (ii) deposit such amount in an account of State Farm Investment
Management Corporation maintained for the purpose of disbursing the proceeds of
redemption of Fund shares, or (iii) otherwise deliver such amount, all as
provided in the Authorized Instructions.

The Custodian shall receive from the Fund or the State Farm Investment
Management Corporation and deposit into the Fund's deposit account such payments
as are received for the sale of the Fund's shares.

4. DIVIDENDS OR DISTRIBUTIONS ON FUND SHARES. The Fund may utilize its
moneys and other cash assets held by the Custodian for the purpose of paying
dividends or distributions on its shares. The Fund may draw upon its checking
account with the Custodian for this purpose, or may elect to utilize the
services of the State Farm Investment Management Corporation to disburse such
dividend or distribution payments. Upon receipt of Authorized Instructions from
the Fund, the Custodian shall withdraw from the Fund's deposit account the
amount stated in the Authorized Instructions and (i) deposit such amount in the
Fund's checking account, or (ii) deposit such amount in an account of State Farm
Investment
<PAGE>

Management Corporation maintained for the purpose of disbursing such dividend or
distribution payments, which may be the same account as that maintained for the
disbursement of redemption proceeds, all as provided in the Authorized
Instructions.

5. AUTHORIZED INSTRUCTIONS. For purposes of subparagraph (1) of paragraph
C of Article 2 of this Agreement, the phrase Authorized Instructions shall mean
the instructions agreed to in writing by the Fund and the Custodian as
satisfactory for this purpose. The Fund and the Custodian hereby acknowledge and
agree that the instructions described in the letter dated October 23, 1990, and
attached to this Agreement as Exhibit A, shall be satisfactory for this purpose
and shall remain in effect under the terms of this Agreement until amended by
the Fund and the Custodian.

For purposes of subparagraphs (2), (3), (4), (5), (6) and (7) of paragraph C of
Article 2 of the Agreement, "Authorized Instructions" shall mean a communication
containing the information specified in this Article 5, given in writing by two
Authorized Persons and received by the Custodian by facsimile transmission,
telegram, teletype, cablegram or other teleprocess or electronic instruction
system which the Custodian believes in good faith to have been given by the Fund
or which are transmitted with proper testing or authentication pursuant to the
terms and conditions specified in writing by the Custodian.

Authorized Persons means any persons who have been designated by or pursuant to
a resolution of the Fund's Board of Directors, a certified copy of which has
been filed with the Custodian, to act on behalf of the Fund in the performance
of any acts that the Authorized Persons may do under this Agreement pursuant to
such vote. Such persons shall continue to be Authorized Persons until such time
as there has been filed with the Custodian a properly certified copy of the
resolution of the Fund's Board of Directors revoking the authority of such
persons.

The Authorized Instructions must specify (1) the account, person, firm, or
corporation to whom the payment is to be made, (2) the purpose for which the
payment is to be made, (3) the amount of the payment, and (4) that the purpose
listed as the basis for the payment is authorized as one of the purposes under
Article 2.

6. CHECKING ACCOUNT. A checking account shall be established upon receipt
by the Custodian of a certified copy of a resolution adopted by the Fund's Board
of Directors authorizing the creation and funding of that checking account with
the Custodian. The resolution must specify the purposes for which moneys placed
in the checking account may be disbursed, that the balance maintained in the
account does not exceed the Fund's fidelity bond coverage and that the balance
maintained in the account does not exceed the amount which is necessary to meet
current or recurring expenses and distributions declared and payable to
shareowners. A check drawn on the checking account shall be honored only if:
<PAGE>

1. The check is prenumbered by a printer and is in an amount no greater
than the maximum amount established by resolution of the Fund's Board
of Directors from time to time, a certified copy of which resolution
shall have been delivered to the Custodian;

2. The check bears the signatures of at least two Authorized Persons; and

3. The check is payable to a designated payee.

7. COMPENSATION OF CUSTODIAN. The Fund agrees to pay the Custodian
reasonable compensation for its services and expenses as Custodian, as agreed
upon in writing between the Fund and the Custodian.

8. REPORTS BY THE CUSTODIAN. The Custodian shall cooperate with the Fund
and supply the information necessary to enable the Fund (1) to keep and complete
the books of account and reports for the Fund and (2) to compute the net asset
value per share of the Fund's shares. The Custodian shall furnish the Fund
following the close of each business day on which transactions in the account(s)
occur with a statement summarizing all transactions and entries for the
account(s) of the Fund.

9. CUSTODIAN'S RESPONSIBILITY. The Custodian shall be responsible for
the performance of the duties set forth in this Agreement or contained in
Authorized Instructions given to the Custodian that are consistent with the
terms of this Agreement. The Custodian is not under any duty to provide the
Fund with investment advice or supervise any investments.

10. TERMINATION OR ASSIGNMENT This Agreement may be terminated by the
Fund, or by the Custodian, on sixty (60) days' written notice and sent by
registered mail to the Custodian or to the Fund at the following address:

Fund - Attention: David Grimes
One State Farm Plaza
Bloomington, Illinois 61710

Custodian - Attention: Sharon Sullivan
120 North Center Street
Bloomington, Illinois 61701
<PAGE>

Upon termination of this Agreement, the Custodian shall not deliver the
Fund's property to the Fund, but shall (i) deliver such property to a successor
Custodian designated by resolution of the board of Directors of the Fund, a
certified copy of which has been delivered to the Custodian, or (ii) if no
certified copy of a resolution designating a successor custodian is received by
the Custodian within 60 days' of the Custodian's receipt of the notice of
termination, the Custodian shall deliver the Fund's property to Morgan, if
Morgan is then acting as a custodian for assets of the Fund, or (iii) if Morgan
is not then acting as a custodian for assets of the Fund, the Custodian shall
continue to hold the Fund's property pursuant to the provisions of this
Agreement or the Authorized Instructions of any Authorized Persons, until a
successor custodian is designated.

The Custodian shall not be required to make any such delivery or payment
until full payment shall have been made by the Fund of all liabilities
constituting a charge on or against the properties then held by the Custodian or
on or against the Custodian, and until full payment shall have been made to the
Custodian of all its fees, compensation, costs and expenses, subject to the
provisions of Article 7 of this Agreement. The Fund agrees to name a successor
custodian within sixty (60) days after the written notice of termination is
received or delivered.

This Agreement may not be assigned by Custodian without the consent of the
Fund authorized or approved by a resolution of its Board of Directors.

11. GOVERNING LAW. This Agreement is executed and delivered in the State
of Illinois and shall be governed by the laws of Illinois.

12. AMENDMENT. No provisions of this Agreement may be amended or modified
in any manner except by a written agreement executed by the Fund and the
Custodian.

13. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original.

14. EFFECTIVE DATE. This Agreement shall become effective on the date
first above written.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and their respective corporate seals to be affixed hereto as of the
date first above written by their respective duly authorized officers.

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Roger Joslin
--------------------------------------
Its Vice President and Treasurer

Attest: /s/ Michael L. Tipsord
------------------------
Its Assistant Secretary

PEOPLES BANK OF BLOOMINGTON

By: /s/ Sharon Sullivan
--------------------------------------
Its Senior Vice President and Cashier

Attest: /s/ Ilene R. Beach
------------------------
Its Assistant Vice President

<PAGE>

TRANSFER AGENT AGREEMENT

THIS AGREEMENT is made and entered into this 1st day of April, 1992, by and
between STATE FARM MUNICIPAL BOND FUND, INC., a Maryland corporation
(hereinafter referred to as the Fund) and State Farm Investment Management
Corporation, a Delaware corporation (hereinafter referred to as the Transfer
Agent).

WITNESSETH:

In consideration of the mutual covenants hereinafter contained, the parties
to this AGREEMENT hereby agree as follows:

1. The Fund hereby appoints the Transfer Agent as its transfer agent and
dividend disbursing agent.

2. The Transfer Agent hereby accepts appointment as the Fund's transfer
agent and dividend disbursing agent.

3. The Transfer Agent shall perform all of the usual and ordinary services
as a transfer agent and dividend disbursing agent for no consideration.
A listing of such services is included on Exhibit A which is attached
to the Agreement and incorporated herein by this reference.

4. The Transfer Agent shall perform such other extraordinary or unusual
services as directed by the Fund in exchange for payment by the Fund in
an amount to be mutually agreed upon in advance by the parties to this
Agreement.

5. This Agreement shall continue in effect until April 1, 1993, and from
year to year thereafter, but only so long as such continuance is
approved annually in a manner required by the Investment Company Act of
1940.
<PAGE>

IN WITNESS WHEREOF, the Fund and the Transfer Agent have caused this
Agreement to be executed in their names and on their behalf by their duly
authorized officers all on the day and year first above written.

STATE FARM MUNICIPAL BOND FUND, INC.

By: /s/ Edward B. Rust, Jr.
--------------------------------------
Its: President

ATTEST: /s/ David R. Grimes
---------------------
Its: Secretary

STATE FARM INVESTMENT MANAGEMENT CORP.

By: /s/ Roger Joslin
--------------------------------------
Its: Vice President & Treasurer

ATTEST: /s/ David R. Grimes
---------------------
Its: Secretary
<PAGE>

EXHIBIT A

1. Opening, maintaining and safeguarding all shareowner accounts;

2. Changing names and addresses;

3. Receiving subsequent investment payments, and purchasing and crediting
shares to proper accounts;

4. Preparing and mailing historical-type confirmations of each transaction
(including initial purchase) to shareowners;

5. Preparing and mailing annual record of investment to each shareowner;

6. Addressing, enclosing and mailing quarterly, semi-annual and annual reports
to shareowners (provided they are of a size suitable for enclosing on an
automatic enclosing machine);

7. Preparing annual shareowner meeting lists in duplicate on all accounts;
preparing and mailing of proxies, notices and return envelopes; receiving
and tabulating proxies and reporting total shares voted;

8. Preparing and mailing an annual statement of dividends paid for each
shareowner account;

9. Preparing and filing all required tax returns and forms; expand to cover
all 1099 reporting including recipient statements;

10. Effecting dividend orders or special payment instructions upon receipt of
proper authorization;
<PAGE>

11. Replacing dividend checks lost upon receipt of proper affidavits.

12. Effecting stock transfers; examining stock powers and certificates
surrendered for transfer; passing on the validity of the transfer,
endorsements and signature guarantees; checking stock transfers; cancelling
surrendered certificates;

13. Issuing and delivering certificates withdrawn from a shareowner's account
and receiving and redepositing certificates to a shareowner's account; and,

14. Payment of each dividend and/or capital gain distribution whether paid in
cash or reinvested and mailing a check or confirmation to each shareowner;

15. Furnishing transcripts of account to investors.

<PAGE>

Exhibit 10

BELL, BOYD & LLOYD
Three First National Plaza
70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207

312/372-1121
Fax 312/372-2098

March 8, 1996

State Farm Municipal Bond Fund, Inc.
One State Farm Plaza
Bloomington, Illinois 61710

Dear Sirs:

We have served as counsel for State Farm Municipal Bond Fund, Inc., a
Maryland corporation (Fund), in connection with the registration under the
Securities Act of 1933 (Act) of an indefinite number of shares of the Fund's
capital stock, $1 par value per share (shares), pursuant to the Fund's
registration statement, no. 2-58161, on form N-1A (the registration statement).
In this connection, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of such documents, corporate and other records,
certificates and other papers as we deemed it necessary to examine for the
purpose of this opinion, including the charter and bylaws of the Fund,
resolutions of the board of directors authorizing the issuance of the shares,
the form of certificates to evidence the shares, and the registration statement.

Based upon the above examination, it is our opinion that:

1. The Fund is a corporation duly organized and legally existing in
good standing under the law of Maryland.

2. Upon issuance and delivery of the shares in accordance with the
charter of the Fund and the resolutions of the Fund's board of directors
authorizing the issuance of its shares, and the receipt by the Fund of a
purchase price of not less than the net asset value or the par value per
share, the shares will be legally issued and outstanding, fully paid and
nonassessable.
<PAGE>

State Farm Municipal Bond Fund, Inc.
March 8, 1996
Page 2

In giving the opinion expressed in subparagraph 2 above, we have assumed
that the number of shares issued at any time will not exceed the total number of
shares authorized to be issued by the Fund's charter.

We consent to the filing of this opinion as an exhibit to the registration
statement. In giving this consent we do not admit that we are in the category
of persons whose consent is required under section 7 of the Act.

Very truly yours,

<PAGE>

Exhibit 11

CONSENT OF INDEPENDENT AUDITORS
-------------------------------

We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
December 15, 1995 in the Registration Statement (Form N-1A) and its
incorporation by reference in the related Prospectus and Statement of Additional
Information of the State Farm Municipal Bond Fund, Inc., filed with the
Securities and Exchange Commission in this Post-Effective Amendment No. 24 to
the Registration Statement under the Securities Act of 1933 (File No. 2-58161)
and this Amendment No. 22 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-2727).

/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP

Chicago, Illinois
March 15, 1996

<PAGE>

<TABLE>
<CAPTION>
3 MONTH(S) ACCRUED DIVIDEND
NET ASSET VALUES FOR VALUATION: AT VALUATION DATE
30-Nov-95 $8.50 0.080524584
30-Nov-94 7.88
30-Nov-90 7.98
30-Nov-85 7.19

STATE FARM MUNICIPAL BOND FUND
INVESTMENT RECORD - ALL DIVIDENDS AND CAPITAL GAINS REINVESTED
1, 5, AND 10 YEAR AVERAGE RETURNS
30-Nov-95

QUARTER C.G. DIV REINV. INVESTMENT C.G. DIV SHARES SHARES
ENDED ACTION RATE RATE PRICE AMOUNT AMOUNT AMOUNT AQUIRED OWNED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

30-Nov-85 INITIAL INVEST. N/A N/A $7.19 $1,000.00 N/A N/A 139.082 139.082
28-Feb-96 DIVIDEND * N/A 0.146691278 7.82 0.00 20.40 2.609 141.691
31-May-86 DIVIDEND N/A 0.145593017 7.50 0.00 20.63 2.751 144.441
29-Aug-86 DIVIDEND N/A 0.144682660 7.93 0.00 20.90 2.636 147.077
30-Nov-86 DIVIDEND N/A 0.144406740 8.06 0.00 21.24 2.635 149.712
28-Feb-87 DIVIDEND N/A 0.142651049 8.22 0.00 21.36 2.599 152.311
31-May-87 DIVIDEND N/A 0.142417894 7.58 0.00 21.69 2.861 155.172
31-Aug-87 DIVIDEND N/A 0.140882340 7.66 0.00 21.86 2.854 158.026
30-Sep-87 DIVIDEND N/A 0.046585827 7.36 0.00 7.36 1.000 159.026
31-Dec-87 DIVIDEND N/A 0.143893976 7.65 0.00 22.88 2.991 162.017
31-Mar-88 DIVIDEND N/A 0.141565727 7.73 0.00 22.94 2.968 164.984
30-Jun-88 DIVIDEND N/A 0.142026783 7.74 0.00 23.43 3.027 168.012
30-Sep-88 DIVIDEND N/A 0.142903983 7.79 0.00 24.01 3.082 171.094
30-Dec-88 DIVIDEND N/A 0.141590983 7.80 0.00 24.23 3.106 174.200
31-Mar-89 DIVIDEND N/A 0.148226412 7.69 0.00 25.82 3.358 177.558
30-Jun-89 DIVIDEND N/A 0.147648911 7.98 0.00 26.22 3.286 180.843
30-Sep-89 DIVIDEND N/A 0.144366158 7.83 0.00 26.11 3.335 184.178
31-Dec-89 DIVIDEND N/A 0.144590859 7.99 0.00 26.63 3.333 187.511
31-Mar-90 DIVIDEND N/A 0.145176732 7.86 0.00 27.22 3.463 190.974
30-Jun-90 DIVIDEND N/A 0.144727268 7.90 0.00 27.64 3.499 194.473
30-Sep-90 DIVIDEND N/A 0.141127468 7.78 0.00 27.45 3.528 198.001
31-Dec-90 DIVIDEND N/A 0.145942309 7.96 0.00 28.90 3.631 201.632
31-Mar-91 DIVIDEND N/A 0.133622584 8.00 0.00 26.94 3.368 204.999
30-Jun-91 DIVIDEND N/A 0.137463357 8.01 0.00 28.18 3.518 208.517
30-Sep-91 DIVIDEND N/A 0.137647359 8.15 0.00 28.70 3.521 212.039
31-Dec-91 DIVIDEND 0.002017998 0.133875048 8.27 0.43 28.39 3.485 215.524
31-Mar-92 DIVIDEND N/A 0.131308849 8.14 0.00 28.30 3.477 219.000
30-Jun-92 DIVIDEND N/A 0.130954700 8.29 0.00 28.68 3.460 222.460
30-Sep-92 DIVIDEND N/A 0.133795116 8.37 0.00 29.76 3.556 226.016
31-Dec-92 DIVIDEND 0.001436310 0.128232845 8.37 0.32 28.98 3.501 229.516
31-Mar-93 DIVIDEND N/A 0.126744151 8.48 0.00 29.09 3.430 232.947
30-Jun-93 DIVIDEND N/A 0.124495686 8.59 0.00 29.00 3.376 236.323
30-Sep-93 DIVIDEND N/A 0.124919772 8.70 0.00 29.52 3.393 239.716
31-Dec-93 DIVIDEND 0.017087489 0.121357031 8.66 4.10 29.09 3.833 243.548
31-Mar-94 DIVIDEND N/A 0.120600170 8.26 0.00 29.37 3.556 247.104
30-Jun-94 DIVIDEND N/A 0.120336660 8.21 0.00 29.74 3.622 250.726
30-Sep-94 DIVIDEND N/A 0.120312413 8.15 0.00 30.17 3.702 254.428
31-Dec-94 DIVIDEND N/A 0.119308000 7.96 0.00 30.36 3.814 258.242
31-Mar-95 DIVIDEND N/A 0.122390227 8.25 0.00 31.61 3.832 262.074
30-Jun-95 DIVIDEND N/A 0.120734368 8.34 0.00 31.64 3.794 265.868
30-Sep-95 DIVIDEND N/A 0.118543113 8.41 0.00 31.52 3.748 269.615

ACCRUED DIVIDEND / PER SHARE 0.080524584

SHARES OWNED 269.615
NAV 30-Nov-95 $8.50
ACCOUNT VALUE - 10 YEAR INVESTMENT $2,313.44 SEC YLD FORMULA

ONE YEAR AVERAGE RETURN 14.25% SEC Yld Recalculated 2.82%
FIVE YEAR AVERAGE RETURN 7.66%
TEN YEAR AVERAGE RETURN 8.75% SEC Yld Report 3.08%

</TABLE>
<PAGE>

STATE FARM MUNICIPAL BOND FUND
1 MONTH(S)

3 YEAR
QUARTER CALCULATION C.G. DIVIDEND C.G. DIVIDEND REIN. SHARES SHARES
ENDED ORIGINAL INV. RATE RATE AMOUNT AMOUNT PRICE AQUIRED OWNED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Nov-90 INITIAL INVEST. $1,000.00 $7.98 125.313 125.313
31-Dec-90 DIVIDEND * N/A 0.145942309 0.00 6.10 7.96 0.766 126.080
31-Mar-91 DIVIDEND N/A 0.133622584 0.00 16.85 8.00 2.106 128.186
30-Jun-91 DIVIDEND N/A 0.137463357 0.00 17.62 8.01 2.200 130.386
30-Sep-91 DIVIDEND N/A 0.137647359 0.00 17.95 8.15 2.202 132.588
31-Dec-91 DIVIDEND 0.002017998 0.133875048 0.27 17.75 8.27 2.179 134.767
31-Mar-92 DIVIDEND N/A 0.131308849 0.00 17.70 8.14 2.174 136.941
30-Jun-92 DIVIDEND N/A 0.130954700 0.00 17.93 8.29 2.163 139.104
30-Sep-92 DIVIDEND N/A 0.133795116 0.00 18.61 8.37 2.223 141.328
31-Dec-92 DIVIDEND 0.001436310 0.128232845 0.20 18.12 8.37 2.189 143.517
31-Mar-93 DIVIDEND N/A 0.126744151 0.00 18.19 8.48 2.145 145.662
30-Jun-93 DIVIDEND N/A 0.124495686 0.00 18.13 8.59 2.111 147.772
30-Sep-93 DIVIDEND N/A 0.124919772 0.00 18.46 8.70 2.122 149.894
31-Dec-93 DIVIDEND 0.017087489 0.121357031 2.56 18.19 8.66 2.396 152.290
31-Mar-93 DIVIDEND N/A 0.120600170 0.00 18.37 8.26 2.224 154.514
30-Jun-94 DIVIDEND N/A 0.120336660 0.00 18.59 8.21 2.264 156.778
30-Sep-94 DIVIDEND N/A 0.120312413 0.00 18.86 8.15 2.314 159.092
31-Dec-94 DIVIDEND N/A 0.119308000 0.00 18.98 7.96 2.384 161.477
31-Mar-95 DIVIDEND N/A 0.122390227 0.00 19.76 8.25 2.395 163.872
30-Jun-95 DIVIDEND N/A 0.120734368 0.00 19.78 8.34 2.372 166.244
30-Sep-95 DIVIDEND N/A 0.118543113 0.00 19.71 8.41 2.344 168.587

SHARES OWNED 168.587
NAV 30-Nov-95 $8.50
ACCRUED DIVIDEND 0.080524584
ACCOUNT VALUE - 5 YEAR INVESTMENT $1,446.57

1 YEAR
QUARTER CALCULATION C.G. DIVIDEND C.G. DIVIDEND REIN. SHARES SHARES
ENDED ORIGINAL INV. RATE RATE AMOUNT AMOUNT PRICE AQUIRED OWNED

30-Nov-94 INITIAL INVEST. $1,000.00 7.88 126.904 126.904
31-Dec-94 DIVIDEND * N/A 0.119308000 0.00 5.05 7.96 0.634 127.538
31-Mar-95 DIVIDEND N/A 0.122390227 0.00 15.61 8.25 1.892 129.430
30-Jun-95 DIVIDEND N/A 0.120734368 0.00 15.63 8.34 1.874 131.304
30-Sep-95 DIVIDEND N/A 0.118543113 0.00 15.57 8.41 1.851 133.156

SHARES OWNED 133.156
NAV 30-Nov-95 $8.50
ACCRUED DIVIDEND 0.080524584
ACCOUNT VALUE - 1 YEAR INVESTMENT $1,142.54

* Dividend amount = rate * # of months/3, representing the number of months
the amount was invested for the quarter

1 YEAR
QUARTER CALCULATION C.G. DIVIDEND C.G. DIVIDEND REIN. SHARES SHARES
ENDED ORIGINAL INV. RATE RATE AMOUNT AMOUNT PRICE AQUIRED OWNED

31-Dec-88 INITIAL INVEST. $1,000.00 7.88 126.904 126.904
31-Dec-94 DIVIDEND N/A 0.038964819 0.00 4.94 7.96 0.621 127.524
31-Mar-95 DIVIDEND N/A 0.122390227 0.00 15.61 8.25 1.892 129.416
30-Jun-95 DIVIDEND N/A 0.120734368 0.00 15.62 8.34 1.873 131.289
30-Sep-95 DIVIDEND N/A 0.118543113 0.00 15.56 8.41 1.850 133.139

SHARES OWNED 133.139
NAV 30-Nov-95 $8.50
ACCRUED DIVIDEND 0.080524584
ACCOUNT VALUE - 1 YEAR INVESTMENT $1,142.41

* Dividend amount = rate * # of months/3, representing the number of months
the amount was invested for the quarter

</TABLE>

<PAGE>

<ARTICLE> 6
<CIK> 0000205926
<NAME> STATE FARM MUNICIPAL BOND FUND, INC.

<F1> $.48 per share in 1995.
</FN>

</TABLE>