<PAGE>
===============================================================================
SEMI-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
================================================================================
May 31, 1996
This report is not to be distributed unless preceded or accompanied by a
prospectus.
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Dear Shareowner:
Interest rates on municipal bonds have been rising since our last
correspondence with you. Yields on the municipal securities owned by your Fund
have increased about 40 basis points (a basis point is .01%) since November
causing their values to fall. Correspondingly, the net asset value of the
Municipal Bond Fund declined 2.6% to $8.28 from $8.50 over the past six months.
The total return, which considers the reinvestment of dividends and the change
in net asset value, for the past twelve months was 4.5%.
Valuations of municipal bonds have fared better than those of their taxable
counterparts during the recent general decline of bond prices. Their superior
relative performance could signify that investors are becoming less concerned
about the prospects for significant tax reform which might make tax exempt
income from outstanding municipal securities less attractive.
Property and casualty insurance companies now appear to be the primary
buyers of new municipal bond issues. Interestingly, the appetite of individual
investors, directly and through municipal bond funds, for municipal securities
seems to be waning at the moment. Based on flows of new money to mutual funds,
we surmise that individuals are probably reacting to the volatility of interest
rates over the past three or four years and are increasingly being attracted to
the very high returns that equity investments have produced recently. As a
group, municipal bond funds have received little net new cash flow for almost a
year.
The U.S. economy has bounced back smartly from last winter's weakness which
was made worse by harsh weather and federal government shutdowns. Most sectors
of the economy are showing renewed strength at the moment. Economists have
switched from talking about the possibility of an impending recession to
discussing the consequences of the recent spurt. They are now debating whether
this is a "growth blip" which will fade away to a much slower pace of general
economic activity later this year or a sustainable improvement in general
economic conditions that may even lead to an overheated economy.
In today's capital markets interest rates tend to rise when evidence
suggests that the economy has the possibility of growing more rapidly than its
perceived sustainable long-term growth rate. Following this line of reasoning,
interest rates started to rise in February when economic reports began to show a
strong rebound was occurring. We are somewhat surprised that market interest
rates have risen so much over the last three months or so even though the
Federal Reserve Board has not engineered any increase in short-term interest
rates.
Frankly however, we believe interest rate changes are generally
unpredictable since their movements represent the collective interpretation of
many complex factors by investors. A review of past market forecasts and of
interest rate fluctuations over the past few years reinforces our opinion in
this regard. As shareholders in the Municipal Bond Fund, we suggest that you
adopt this viewpoint and expect that the net asset value of the Fund will
inevitably fluctuate unpredictably over time with interest rate changes. With
this orientation you can then concentrate on the Fund's investment objective,
which is to provide as high a rate of income exempt from federal income taxes as
is consistent with prudent investment management.
Presently, your Fund's high quality portfolio of municipal bonds is
concentrated in bonds maturing in twelve years or less. The intermediate
maturity configuration provides shareowners a fairly competitive yield, but also
likely affords less vulnerability to potential interest rate increases than a
portfolio of long-term bonds.
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<PAGE>
As you know, the Fund declares a dividend each day from its 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,
Kurt G. Moser Julian R. Bucher
Vice President Vice President
June 21, 1996
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Rating(b)
Principal (Moody's
amount Issuer or S & P) Value
LONG-TERM MUNICIPAL BONDS (98.0%):
SECURED BY U.S. TREASURY OBLIGATIONS (16.1%):
$ 130,000 Grand River Dam Authority, Oklahoma Rev., Ser. 1978, 7.20%,
6-1-1998 (Prerefunded to 6-1-1997 @ 100) Aaa $ 133,680
500,000 Orlando Utilities Commission, Florida Water and Electric Rev., Ser.
1983, 9.60%, 10-1-1999 (Escrowed to maturity) Aaa 577,825
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 2,135,040
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 1,074,580
2,840,000 Washington Suburban Sanitary District of Maryland, General
Obligation Bonds, 7.00%, 12-1-2001 (Prerefunded to 12-1-1998 @
102) Aaa 3,072,539
250,000 Georgia Municipal Electric Authority Power Rev., Ser. H., 12.50%,
1-1-2002 (Prerefunded to 1-1-1997 @ 100) AAA 262,562
1,500,000 Gwinnett County, Georgia General Obligation Bonds, 7.25%, 1-1-2002
(Prerefunded to 1-1-1997 @ 102) Aaa 1,559,940
300,000 North Carolina Eastern Municipal Power Agency, Ser. 1982A, 13.25%,
1-1-2002 (Prerefunded to 1-1-1997 @ 100) AAA 316,452
2,250,000 Pima County, Arizona Unified School District No. 1, Tucson School
Improvement Bonds, Ser. 1990B, 6.90%, 7-1-2002 (Prerefunded to
7-1-2000 @ 101) A 2,446,448
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) A+ 3,167,370
550,000 Johnson County Water District No. 1, Kansas Water Rev., Ser. 1982A,
10.25%, 8-1-2002 (Escrowed to maturity) Aaa 689,904
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 983,871
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 2,058,420
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 3,269,520
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 2,151,800
2,000,000 Jackson, Mississippi General Obligation Bonds, Ser. 1988, 7.50%,
5-1-2004 (Prerefunded to 5-1-1998 @ 100) NR 2,120,600
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 3,847,270
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) Aa+ 2,045,060
</TABLE>
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
<S> <C> <C> <C>
SECURED BY U.S. TREASURY OBLIGATIONS (CONTINUED)
$ 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 $ 3,239,310
2,000,000 State of Wisconsin General Obligation Bonds, 1988 Series B, 7.40%,
5-1-2005 (Prerefunded to 5-1-1997 @ 101) Aaa 2,085,100
1,000,000 Shawnee County, Kansas General Obligation Refunding and Improvement,
Ser. 1985-C (MBIA Insured), 9.125%, 9-1-2005 (Prerefunded to
9-1-1996 @ 100) AAA 1,013,460
1,250,000 State of Washington General Obligation Refunding Bonds, Ser. R-86D,
8.00%, 9-1-2005 (Prerefunded to 9-1-1996 @ 100) Aaa 1,263,388
2,500,000 King County, Washington, Health Care Capital Improvement Bonds
(Harborview Project), Ser. 1988B, 7.30%, 12-1-2005 (Prerefunded
to 12-1-1998 @ 100) NR 2,676,225
1,900,000 Fort Worth Independent School District, Texas School Building
Unlimited Tax Bonds, Ser. 1989, 6.75%, 2-15-2006 (Prerefunded to
2-15-1999 @ 100) Aaa 2,010,067
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 1,534,245
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 2,097,400
1,500,000 Washington Public Power Supply System Nuclear Project No. 2, Rev.
Refunding Bonds, Ser. 1990A, 7.625%, 7-1-2008 (Prerefunded to
7-1-2000 @ 102) AAA 1,684,230
------------
49,516,306
GENERAL OBLIGATIONS (57.0%):
1,455,000 State of Louisiana General Obligation Bonds, Ser. 1986A, 7.375%,
5-1-1997 A- 1,488,159
3,000,000 North Slope Borough, Alaska General Obligation School Construction
Bonds, Ser. Y, 7.10%, 7-1-1997 AAA 3,102,960
300,000 Maryland State & Local Facility Loan of 1982 General Obligation
Bonds, 1st Ser., 11.20%, 7-1-1997 AAA 323,511
1,100,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1998 AAA 1,136,575
3,000,000 Scottsdale Unified School District No. 48 of Maricopa County,
Arizona Refunding Bonds, Ser. 1991, 6.75%, 7-1-1998 AA 3,155,220
1,350,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1999 AAA 1,410,372
400,000 State of California, Variable Purpose General Obligation Bonds,
9.00%, 4-1-1999 A1 447,116
150,000 Oregon Veterans' Welfare General Obligation Bonds, Ser. LXIV, 9.00%,
4-1-1999 AA 168,092
2,500,000 Austin Independent School District, Texas Unlimited Tax Refunding
Bonds, Ser. 1991, 6.20%, 8-1-1999 Aaa 2,623,950
1,000,000 State of Texas Public Finance Authority General Obligation Bonds,
Ser. 1990A, 7.00%, 10-1-1999 AA 1,075,860
3,000,000 Washington Suburban Sanitary District, Maryland Water Supply
Refunding Bonds of 1991, 6.00%, 11-1-1999 Aa1 3,149,640
200,000 Charleston, Illinois Water Works Improvement Bonds, 8.00%, 1-1-2000 A 219,862
3,000,000 State of California Various Purpose General Obligation Bonds, 5.90%,
2-1-2000 A1 3,126,900
2,500,000 DuPage Water Commission, Illinois General Obligation Water Refunding
Bonds, Ser. 1992, 5.85%, 3-1-2000 AAA 2,598,450
</TABLE>
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RATING(b)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S&P) Value
<C> <S> <C> <C>
GENERAL OBLIGATIONS (CONTINUED)
$ 1,000,000 State of Texas Veterans' Land Board General Obligation Bonds, Ser.
1984, 9.00%, 12-1-2000 AA $ 1,135,220
1,885,000 Anoka County, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.20%, 2-1-2001 A1 1,916,856
1,200,000 Shelby County, Tennessee General Obligation Refunding Bonds, 1992
Ser. B, 5.20%, 3-1-2001 Aa 1,225,704
400,000 State of California General Obligation Veterans Bonds, Ser. AL,
9.60%, 4-1-2001 A1 481,364
2,200,000 City and County of Honolulu, Hawaii General Obligation Refunding
Bonds, 1992 Ser. 1, 5.60% 6-1-2001 AA 2,280,388
2,000,000 School District of Leon County, Florida General Obligation Refunding
Bonds, Ser. 1991, 5.85%, 7-1-2001 A1 2,096,400
2,000,000 Howard County, Maryland Consolidated Public Improvement Refunding
Bonds, Ser. 1991B, 5.80%, 8-15-2001 Aaa 2,106,040
2,110,000 State of Nevada General Obligation (Limited Tax) Hoover Uprating
Refunding Bonds, Ser. 1992, 6.00%, 10-1-2001 AA 2,229,764
900,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series
1993, 4.90%, 1-1-2002 A1 894,330
1,535,000 Columbus, Ohio Sewer Improvement No. 27 Refunding Bonds, Ser. 1991,
5.90%, 2-15-2002 Aaa 1,622,188
1,000,000 Williamson County, Tennessee Public Works Refunding Bonds, Ser.
1992, 5.65%, 3-1-2002 Aa 1,040,660
1,500,000 City of Tulsa, Oklahoma General Obligation Refunding Bonds of 1993,
5.05%, 6-1-2002 Aa 1,517,010
925,000 Monroe County Jail, Indiana First Mortgage Refunding Bonds, Series
1993, 4.90%, 7-1-2002 A1 918,727
2,100,000 Jackson Public School District, Mississippi General Obligation
School Bonds, Ser. 1992, 5.80%, 7-1-2002 A1 2,193,807
1,000,000 Pima County, Arizona General Obligation Refunding Bonds, Ser. 1992,
6.30%, 7-1-2002 Aa 1,075,440
3,500,000 Milwaukee, Wisconsin Metropolitan Sewerage District General Obligation
Capital Purpose Bonds, Ser. 1990A, 6.70%, 10-1-2002 AA 3,837,995
1,885,000 Federal Way School District No. 210, King County, Washington Unlimited
Tax General Obligation Refunding Bonds, 1987, 6.75%, 12-1-2002 A1 1,900,815
1,500,000 County of Ramsey, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.40%, 12-1-2002 Aaa 1,548,900
1,505,000 Anchorage, Alaska General Obligation General Purpose Refunding
Bonds, 4.60%, 2-1-2003 Aaa 1,463,823
2,000,000 Lake County, Illinois Forest Preserve District General Obligation
Refunding Bonds, Ser. 1992B, 5.70%, 2-1-2003 Aa 2,080,680
2,000,000 Oregon General Obligation Veterans' Welfare Bonds, Ser. 74A, 7.75%,
3-1-2003 Aa 2,093,200
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993,
5.15%, 5-1-2003 Aa 1,062,127
2,000,000 Nashville and Davidson County, Tennessee General Obligation
Refunding Bonds of 1993, 5.00%, 5-15-2003 Aa 2,011,620
2,000,000 State of Illinois General Obligation Refunding Bonds, Series of June
1993, 5.00%, 6-1-2003 A1 1,990,680
1,750,000 State of Louisiana General Obligation Bonds, Series 1987A, 7.00%,
8-1-2003 Baal 1,816,990
1,500,000 Municipality of Anchorage, Alaska 1993 General Obligation Refunding
School Bonds, Series B, 4.90%, 9-1-2003 Aaa 1,491,765
</TABLE>
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (CONTINUED)
$ 2,000,000 Texas Public Finance Authority, State of Texas General Obligation
Refunding Bonds, Ser. 1992A, 5.70%, 10-1-2003 Aa $ 2,093,660
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 1,
5.30%, 11-1-2003 Aa 2,045,420
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 3,
4.75%, 11-1-2003 Aa 1,977,780
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 2,560,572
2,620,000 Cherry Creek School District No. 5, Arapahoe County, Colorado General
Obligation Improvement Bonds, Ser. 1990, 7.00%, 12-15-2003 AA 2,860,202
2,000,000 Jefferson County, Colorado School District No. R-1 General Obligation
Bonds, Ser. 1992, 5.75%, 12-15-2003 Aaa 2,102,180
2,025,000 County of DuPage, Illinois General Obligation Refunding Bonds (Alternate
Rev. Source - Stormwater Project), 5.10%, 1-1-2004 Aaa 2,026,174
2,000,000 Indianapolis, Indiana Local Public Improvement Bond Bank, Series 1993A
Bonds, 5.25%, 1-10-2004 Aaa 2,017,360
2,100,000 Cherokee County School Systems, Georgia General Obligation School
Series 1993, 4.90%, 2-1-2004 A1 2,071,650
2,300,000 Osseo Area Schools, Minnesota, General Obligation Refunding Bonds,
Series 1993, 4.60%, 2-1-2004 A1 2,224,514
2,300,000 Indianapolis, Indiana Local Public Improvement Bond Bank Refunding
Bonds, Series 1993 B, 4.70%, 2-15-2004 Aaa 2,217,108
1,600,000 County of Buncombe, North Carolina Refunding Bonds, Series 1993,
5.10%, 3-1-2004 Aa 1,617,216
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.25%,
5-1-2004 Aa 1,062,085
2,000,000 Davis County School District, Davis County, Utah General Obligation
Refunding Bonds, Series 1993A, 4.50%, 6-1-2004 Aaa 1,910,580
2,000,000 Alachua County School District, Alachua County, Florida General
Obligation Refunding Bonds, Series 1994, 4.50%, 7-1-2004 Aaa 1,912,300
2,000,000 Deer Valley Unified School District No. 97 of Maricopa County, Arizona
School Improvement Bonds, Project of 1992, Series A (1993), 5.125%,
7-1-2004 Aaa 2,016,360
1,205,000 DeKalb County School District, Georgia General Obligation Refunding
Bonds, Series 1993, 5.10%, 7-1-2004 Aa 1,210,495
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1990A, 7.10%, 7-1-2004 A1 1,125,440
1,540,000 Joint School District No. 2, Ada and Canyon Counties, Idaho, General
Obligation School Bonds, Series 1994, 5.0%, 7-30-2004 Aa 1,536,828
3,215,000 State of Minnesota General Obligation State Refunding Bonds, 5.125%,
8-1-2004 Aaa 3,242,585
2,000,000 Harris County, Texas Road and Refunding Bonds, Series 1993, 4.70%,
10-1-2004 Aa 1,945,580
2,000,000 City of Seattle, Washington Unlimited Tax General Obligation Refunding
Bonds, 1993, 4.80%, 12-1-2004 Aa1 1,955,260
1,000,000 Bismarck, North Dakota Public School District #1, Burleigh County
General Obligation Building Bonds of 1986, 7.00%, 4-1-2005 A1 1,024,940
1,800,000 Nashville and Davidson County, Tennessee General Obligation
Refunding Bonds of 1993, 5.00%, 5-15-2005 Aa 1,787,148
1,625,000 Charleston County, South Carolina General Obligation Bonds of 1994
(ULT) 5.40%, 6-1-2005 Aa 1,656,314
1,100,000 Municipality of Anchorage, Alaska 1994 General Obligation School
Bonds, 5.40%, 7-1-2005 Aaa 1,112,540
</TABLE>
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (CONTINUED)
$ 2,000,000 Oklahoma City, Oklahoma General Obligation Refunding Bonds, Series
1993, 5.30%, 8-1-2005 Aa $ 2,021,560
2,500,000 State of Illinois General Obligation Refunding Bonds, Ser. 1987, 6.80%,
4-1-2006 A1 2,594,900
1,600,000 Natrona County, Wyoming School District No. 1 General Obligation
Bonds, Ser. 1994, 5.45%, 7-1-2006 Aaa 1,613,648
2,340,000 City of Phoenix, Arizona General Obligation Refunding Bonds, Ser. 1993 A,
5.30%, 7-1-2006 Aa1 2,362,464
2,125,000 Southwest Allen, Indiana High School Building Corp., 1st Mortgage
Refunding Bonds, Series 1996B, 4.85%, 7-15-2006 Aaa 2,030,820
2,000,000 State of California Various Purpose General Obligation Bonds, 6.00%,
10-1-2006 A1 2,113,380
3,215,000 Forsyth County School District, Georgia, General Obligation Bonds, Series
1995, 5.05%, 7-1-2007 Aaa 3,107,619
2,000,000 Arapahoe County School District #6, Colorado, Littleton Public Schools
General Obligation Improvement Bonds, Series 1995A, 5.00%,
12-1-2007 Aa 1,925,500
2,780,000 Salt Lake County, Utah General Obligation Jail Bonds, Series 1995, 5.00%,
12-15-2007 Aaa 2,699,297
2,355,000 Carrollton-Farmers Branch Independent School District (Dallas and
Denton Counties, Texas) School Building Unlimited Tax Bonds, Series
1996, 5.20%, 2-15-2008 Aaa 2,290,638
2,000,000 State of Wisconsin General Obligation Bonds of 1995, Series A, 6.00%,
5-1-2008 Aa 2,079,620
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 1,936,800
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.10%, 7-1-2008 A1 1,140,780
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series
1995, 5.10%, 8-1-2008 Aaa 1,658,809
3,000,000 State of Texas Public Finance Authority General Obligation Refunding
Bonds, Series 1996B, 5.40%, 10-1-2008 Aa 2,988,540
1,200,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2009 A1 1,355,460
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series
1995, 5.25%, 8-1-2009 Aaa 1,672,919
2,500,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2010 A1 2,822,025
2,500,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Ser. 2,
5.125%, 11-1-2010 Aa 2,369,250
3,000,000 State of Hawaii General Obligation Bonds of 1992, Series BW, 6.375%,
3-1-2011 Aa 3,209,160
2,000,000 Washington and Clackamas Counties School District #23J (Tigard-
Tualatin), Oregon, General Obligation Bonds, Series 1995, 5.55%,
6-1-2011 A1 1,962,120
2,000,000 State of Georgia, General Obligation Bonds, Series 1995C, 5.70%, 7-1-2011 Aaa 2,030,280
1,125,000 The State of Delaware General Obligation Bonds, Series 1994B, 6.00%,
12-1-2011 Aa1 1,157,400
3,000,000 State of Georgia General Obligation Bonds, Series 1995B, 5.75%, 3-1-2012 Aaa 3,046,380
4,500,000 State of Washington General Obligation Bonds, Series 1993A, 5.75%,
10-1-2012 Aa 4,547,205
1,125,000 The State of Delaware General Obligation Bonds, Series 1994B, 6.00%,
12-1-2012 Aa1 1,153,575
-----------
175,261,600
</TABLE>
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<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
MUNICIPAL REVENUE (21.6%):
$ 2,000,000 City of St. Petersburg, Florida Public Utility Refunding Rev. Bonds, Ser.
1991, 6.10%, 10-1-1998 Aa $ 2,082,140
3,000,000 City of Colorado Springs, Colorado Utilities System Refunding Rev., Ser.
1991A, 6.10%, 11-15-1998 AA 3,130,170
1,490,000 San Antonio, Texas Water System Rev. Refunding Bonds, Ser. 1992, 5.80%,
5-15-1999 AAA 1,543,014
1,250,000 Washington Public Power Supply System Nuclear Project No. 3, Refunding
Rev. Bonds, Ser. 1991A, 6.25%, 7-1-2000 Aa 1,302,325
1,250,000 State of New York Power Authority General Purpose Bonds, Ser. Z, 6.00%,
1-1-2001 Aa 1,313,625
1,400,000 San Diego County Water Authority Water Rev. Certificates of Participation,
Ser. 1991A, 6.00%, 5-1-2001 AA 1,463,392
1,500,000 Intermountain Power Agency, Utah Power Supply Rev. Refunding Bonds,
1986 Ser. F, 7.00%, 7-1-2001 AA 1,533,735
1,250,000 Municipal Subdistrict, Northern Colorado Water Conservancy District
Water Rev., Ser. D, 7.60%, 12-1-2001 A1 1,295,488
2,000,000 Nashville and Davidson County, Tennessee Electric System Rev. Bonds,
1992 Series B, 5.50%, 5-15-2002 Aa 2,065,640
1,000,000 Washington Public Power Supply System Nuclear Project No. 1, Rev.
Refunding Bonds, Ser. 1990C, 7.70%, 7-1-2002 AA 1,114,560
1,080,000 Charleston, South Carolina Waterworks and Sewer Systems Rev. Refunding
Bonds, Ser. 1986A, 6.90%, 1-1-2003 A1 1,103,026
2,000,000 City of Des Moines, Iowa Sewer Rev. Bonds, Ser. 1992D, 6.00%, 6-1-2003 Aaa 2,103,640
2,500,000 City of Albuquerque, New Mexico Joint Water and Sewer Refunding Rev.
Bonds, Ser. 1990B, 7.00%, 7-1-2003 Aa 2,720,425
2,000,000 Washington Public Power Supply System, Nuclear Project No. 3 Refunding
Revenue Bonds, Series 1993C, 4.80%, 7-1-2003 Aa 1,896,420
2,000,000 City of Lincoln, Nebraska, Water Revenue and Refunding Bonds, Series
1993, 4.90%, 8-15-2003 Aa 1,996,260
2,850,000 City of Lincoln, Nebraska, Electric System Revenue Refunding Bonds, 1993
Series A, 4.70%, 9-1-2003 Aa 2,805,141
2,000,000 Fargo, North Dakota Water Revenue of 1993, 5.00%, 1-1-2004 Aaa 1,982,500
1,500,000 Nashville and Davidson County, Tennessee Water and Sewer Revenue
Refunding Bonds, Series 1993, 4.90%, 1-1-2004 Aaa 1,487,775
1,710,000 Southern Minnesota Municipal Power Agency, Power Supply System
Revenue Bonds, Series 1993 B, 4.60%, 1-1-2004 A 1,649,004
1,500,000 Municipal Electric Authority of Georgia General Power Rev. Bonds, 1993A
Series, 5.00%, 1-1-2004 A 1,467,555
2,000,000 City of Dallas, Texas Waterworks and Sewer System Rev. Refunding
Bonds, Series 1993, 4.90%, 4-1-2004 Aa 1,976,840
2,045,000 City of Iowa City, Johnson County, Iowa Sewer Rev. Bonds, 5.875%,
7-1-2004 Aaa 2,127,986
2,000,000 City of Jackson, Mississippi Water and Sewer System Rev. Refunding Bonds,
Series 1993-A, 4.85%, 9-1-2004 Aaa 1,968,360
1,685,000 Hampton Roads Sanitation District, Virginia Wastewater Refunding and
Capital Improvement Revenue Bonds, Series 1993, 4.70%, 10-1-2004 Aa 1,644,729
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 2,937,120
2,200,000 The Water Works and Sewer Board, Birmingham, Alabama Water and
Sewer Revenue Bonds, Series 1994, 4.75%, 1-1-2005 Aa 2,124,672
1,500,000 Omaha, Nebraska Public Power District Electric System Rev. Bonds,
1993, Series B, 5.10%, 2-1-2005 Aa 1,493,670
1,325,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds,
Series 1995B, 5.00%, 6-1-2007 Aa 1,279,341
</TABLE>
-9-
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
<C> <S> <C> <C>
MUNICIPAL REVENUE (CONTINUED)
$ 2,600,000 Washington Public Power Supply System Nuclear Project No. 1, Rev.
Refunding Bonds, Ser. 1989A, 7.50%, 7-1-2007 AA $ 2,800,980
2,830,000 Sacramento County, California Sanitary District Financing Authority
Revenue Bonds, 1995, 5.00%, 12-1-2007 Aa 2,726,931
4,500,000 Nashville and Davidson County, Tennessee Water & Sewer Revenue
Refunding Bonds, Series 1996, 5.25%, 1-1-2008 Aaa 4,430,790
1,665,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds,
Series 1995B, 5.10%, 6-1-2008 Aa 1,608,473
1,500,000 Sacramento County, California Sanitary District Financing Authority
Revenue Bonds, 1995, 5.00%, 12-1-2008 Aa 1,423,740
1,840,000 City of Dallas, Texas Waterworks and Sewer System Revenue Bonds,
Series 1994A, 6.375%, 10-1-2012 Aa 1,911,539
--------------
66,510,826
INDUSTRIAL REVENUE - UTILITIES (3.3%):
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 308,568
200,000 City of Joliet, Illinois Pollution Control Rev. Bonds, Ser. 1976, 6.80%,
7-1-2006 (Commonwealth Edison Company Project) Baa3 200,066
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.) A2 3,176,370
6,000,000 Omaha Public Power District, Nebraska Electric System Revenue Bonds,
1992, Series B, 6.15%, 2-1-2012 Aa 6,360,000
--------------
10,045,004
--------------
Total long-term municipal bonds (cost: $290,888,803) 301,333,736
SHORT-TERM INVESTMENTS (2.7%):
5,400,000 U.S. Treasury bills, 4.81% to 4.99% effective yield, due June to August, 1996............ 5,365,704
1,515,000 General Motors Acceptance Corp., 5.24%, 6-4-1996......................................... 1,515,883
100,000 General Motors Acceptance Corp., 5.24%, 6-4-1996......................................... 100,044
700,000 Ford Motor Credit Co., 5.3%, 6-4-1996.................................................... 700,103
465,000 Ford Motor Credit Co., 5.27%, 6-4-1996................................................... 465,136
--------------
Total short-term investments (cost: $8,145,356) 8,146,870
--------------
TOTAL INVESTMENTS (100.7%) (cost: $299,034,159) 309,480,606
CASH AND OTHER ASSETS, LESS LIABILITIES (-.7%) (2,153,930)
---------------
NET ASSETS (100.0%) $ 307,326,676
===============
Notes (a) At May 31, 1996, net unrealized appreciation of $10,446,447
consisted of gross unrealized appreciation of $12,065,449
and gross unrealized depreciation of $1,619,002 based on
cost of $299,034,159 for federal income tax purposes.
</TABLE>
-10-
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments, at value (cost $299,034,159)....... $309,480,606
Cash............................................ 1,055,043
Receivable for:
Interest...................................... $5,606,878
Sundry........................................ 5,316 5,612,194
----------
Prepaid expenses................................ 29,336
------------
Total assets................................ 316,177,179
LIABILITIES AND NET ASSETS
Payable for:
Securities purchased.......................... 5,203,656
Dividends to shareowners...................... 2,976,919
Shares of the Fund redeemed................... 563,172
Other accounts payable (including $98,393 to
Manager).................................... 106,756
----------
Total liabilities........................... 8,850,503
------------
Net assets applicable to 37,108,969 shares
outstanding of $1 par value common stock
(100,000,000 shares authorized)............... $307,326,676
============
Net asset value, offering price and redemption
price per share............................... $ 8.28
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares
over amounts paid on redemptions of shares on
account of capital............................ $296,762,112
Undistributed net realized gain on sales of
investments................................... 118,117
Unrealized appreciation of investments.......... 10,446,447
------------
Net assets applicable to shares outstanding..... $307,326,676
============
</TABLE>
See accompanying notes to financial statements.
-11-
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1996 NOVEMBER 30,
(UNAUDITED) 1995
<S> <C> <C>
INVESTMENT INCOME:
Tax-exempt interest...................................... $ 8,663,164 16,931,069
Taxable interest......................................... 219,408 446,122
------------ ----------
Total investment income................................. 8,882,572 17,377,191
EXPENSES:
Investment advisory and management fees.................. 191,365 366,394
Audit fees............................................... 10,634 21,113
Legal fees............................................... 2,205 4,264
Fidelity bond expense.................................... 2,402 5,077
Directors' fees.......................................... 1,800 2,200
Reports to shareowners................................... 2,525 9,024
Securities evaluation fees............................... 9,941 19,822
Franchise Taxes.......................................... 9,095 16,598
Custodian Fees........................................... 13,240 29,930
Other.................................................... 10,781 21,799
----------- ----------
Total expenses.......................................... 253,988 496,221
Less: Custodian fees paid indirectly.................... 9,791 25,465
----------- ----------
Net expenses............................................ 244,197 470,756
----------- ----------
Net investment income..................................... 8,638,375 16,906,435
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) on sales of investments......... 118,117 264,519
Change in net unrealized appreciation.................... (7,923,402) 21,451,782
----------- ----------
Net realized and unrealized gain (loss) on
investments............................................. (7,805,285) 21,716,301
----------- ----------
Net change in net assets
resulting from operations............................... $ 833,090 38,622,736
=========== ==========
</TABLE>
See accompanying notes to financial statements.
-12-
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six months
ended
May 31, Year ended November 30,
1996 1995 1994
(Unaudited)
<S> <C> <C> <C>
From operations:
Net investment income.......................................... $ 8,638,375 16,906,435 16,237,050
Net realized gain (loss) on sales of
investments.................................................... 118,117 264,519 (49,593)
Change in net unrealized
appreciation/depreciation...................................... (7,923,402) 21,451,782 (23,629,677)
------------ ----------------------------
Net change in net assets resulting from
operations..................................................... 833,090 38,622,736 (7,442,220)
Dividends to shareowners from:
Net investment income (per share $.24 in
1996, $.48 in 1995 and $.48 in 1994).......................... (8,638,375) (16,906,435) (16,237,050)
Net realized gain (per share $.006 in 1996,
$.017 in 1994)................................................ (214,926) -- (551,997)
------------ ----------------------------
(8,853,301) (16,906,435) (16,789,047)
From Fund share transactions:
Proceeds from shares sold...................................... 15,953,580 25,292,645 37,360,622
Reinvestment of ordinary income
dividends and capital gain distributions....................... 6,718,591 12,894,959 13,048,768
------------ ----------------------------
22,672,171 38,187,604 50,409,390
Less payments for shares redeemed.............................. 14,741,601 22,392,823 32,624,914
------------ ----------------------------
Net increase in net assets from Fund share
transactions................................................... 7,930,570 15,794,781 17,784,476
------------ ----------------------------
Total increase (decrease) in net assets.......................... (89,641) 37,511,082 (6,446,791)
Net assets:
Beginning of period............................................ 307,416,317 269,905,235 276,352,026
------------ ----------------------------
End of period.................................................. $307,326,676 307,416,317 269,905,235
============ ============================
</TABLE>
See accompanying notes to financial statements.
-13-
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES VALUATION --
Long-term debt securities and U.S. Treasury bills are valued using
quotations provided by an independent pricing service. Short-term debt
securities, other than U.S. Treasury bills, 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.
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 gains
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 Rev. Code available to investment companies and, in the manner provided
therein, to distribute all of its taxable 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
(UNAUDITED)
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 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 $191,365 for
the six months ended May 31, 1996 and $366,394 for the year ended November 30,
1995. The Fund does not pay any discount, commission or other compensation for
transfer agent or 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 six months ended May 31, 1996 and the year ended November 30, 1995,
except for directors' fees of $1,800 and $2,200, respectively, paid to the
Fund's independent directors.
3. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term instruments) are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
MAY 31, NOVEMBER 30,
1996 1995
<S> <C> <C>
Purchases......................................... $16,187,784 34,619,287
Proceeds from sales............................... 7,697,000 18,616,250
=========== ===========
</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>
SIX MONTHS
ENDED
MAY 31, YEAR ENDED NOVEMBER 30,
1996 1995 1994
<S> <C> <C>
Shares sold................................ 1,889,433 3,052,147 4,463,884
Shares issued in reinvestment of
ordinary income dividends and
capital gain distributions............... 795,764 1,565,349 1,567,732
--------- --------- ---------
2,685,197 4,617,496 6,031,616
Less shares redeemed....................... 1,748,999 2,709,601 3,949,631
--------- --------- ---------
Net increase in shares outstanding......... 936,198 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
the period)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1996
(UNAUDITED) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period................... $ 8.50 7.88 8.59 8.34 8.15 7.98
Income from Investment
______________________
Operations
__________
Net Investment Income................. .24 .48 .48 .50 .53 .54
Net Gains or Losses on
Securities (both
realized and unrealized)............ (.21) .62 (.69) .25 .19 .17
-------------------------------------------------------------
Total from Investment
Operations............................ .03 1.10 (.21) .75 .72 .71
Less Distributions
__________________
Dividends (from net
investment income).................. (.24) (.48) (.48) (.50) (.53) (.54)
Distributions (from capital
gains).............................. (.01) -- (.02) -- -- --
-------------------------------------------------------------
Total Distributions..................... (.25) (.48) (.50) (.50) (.53) (.54)
Net Asset Value, End of
Period................................ $ 8.28 8.50 7.88 8.59 8.34 8.15
=============================================================
Total Return............................ .25% 14.25% (2.55%) 9.17% 9.05% 9.17%
____________
Ratios/Supplemental Data
________________________
Net assets, end of period
(millions)............................ $ 307.3 307.4 269.9 276.4 211.3 167.2
Ratio of expenses to average
net assets............................ .16%(a) .17% .16% .18% .19% .21%
Ratio of net investment
income to average
net assets............................ 5.61%(a) 5.80% 5.80% 5.84% 6.36% 6.75%
Portfolio turnover rate................. 6%(a) 7% 8% 5% 4% 2%
Number of shares out-
standing at end of period
(millions)............................ 37.1 36.2 34.3 32.2 25.3 20.5
</TABLE>
Notes: (a) Determined on an annualized basis.
G-4100.37
-16-
