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, 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 fluctuated within a range of about 80
basis points (a basis point is .01%) over the course of the Fund's fiscal year.
However, after all was said and done, municipal yields now stand at about the
same levels which existed one year ago. Consequently, the net asset value of
your Fund has moved little, declining a mere 0.7%. The Fund's total return,
which considers the reinvestment of dividends and the change in net asset
value, for the past twelve months was 5.2%.
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
Fund's Avg Annual Total Return
1 YEAR 5 YEAR 10 YEAR
5.21% 6.85% 7.25%
MUNICIPAL LEHMAN
BOND MUNI
FUND BOND*
- ---------------------------------------------------
1986 $10,000 $10,000
1987 10,103 9,780
1988 11,123 10,820
1989 12,281 12,011
1990 13,237 12,936
1991 14,462 14,263
1992 15,763 15,693
1993 17,227 17,434
1994 16,762 16,519
1995 19,152 19,641
1996 20,139 20,795
Past performance is not predictive of future performance.
* The Lehman Brothers Municipal Bond Index includes approximately
21,000 municipal bonds which are selected to be representative of the
market. To be included in the Index, a municipal bond must meet the
following criteria: have a minimum credit rating of Baa; have been
issued as part of an issue of at least $50 million; have an amount
outstanding of at least $3 million; have been issued within the last
five years; and have a maturity of at least one year.
The Lehman Brothers Index represents unmanaged groups of bonds that
differ from the composition of the Municipal Bond Fund. Unlike an
investment in the Municipal Bond Fund, a theoretical investment in
the Index does not reflect expenses.
Valuations of municipal bonds fared better than their taxable
counterparts for most of the year. Their superior relative performance
can probably be attributed to investors becoming less concerned about
the prospects for significant federal tax reform. As you likely
2
<PAGE>
recall, a year ago politicians were openly discussing tax changes which
could have reduced the attractiveness of tax-exempt income from municipal
securities. Support for municipal bond prices was also generated from a
pickup in demand by property and casualty insurance companies.
The direction of municipal bond yields generally followed domestic
interest rate movements over the course of the year. After moving higher during
the first half of the year, yields have been trending lower over the last six
months.
Movements of interest rates on intermediate and long-term obligations
continue to be heavily influenced by how investors view the pace of general
domestic economic activity and the prospects for inflation. With the economy
seeming to slow from its speed of the second quarter to a more sustainable
pace, inflation in check, and monetary policy on hold, bond prices have been
rallying since the end of August. Results of the election, prospects for a plan
to balance the federal budget and heavy purchases of U.S. bonds by foreign
investors have added further help to bond prices over this period.
The prevailing mood in bond markets was obviously quite optimistic at the
end of the Fund's fiscal year. We again remind you that markets are very
anticipatory these days, and investor sentiment can change rapidly in
unpredictable ways. In fact, as this is being written, interest rates are
rising a bit based on some recently released strong economic data. Only time
will tell if a significant change in market fundamentals or investor
perceptions is now occurring.
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 10 to 14 years. Good quality bonds dominate the Fund's
portfolio. About 84% of long-term assets are rated Aa or better and 99% fall in
the top three rating categories. The average maturity stands at approximately
7.5 years with maturities spread out over the next 16 years.
As always, we encourage you to view your investment in the Fund as a
genuinely long-term commitment and to accept market volatility as an inevitable
consequence of owning a municipal bond fund. The present intermediate maturity
structure of your Fund's portfolio is designed to be less affected by potential
interest rate changes than a portfolio of longer-term bonds. The high quality
investments of the Fund should provide 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,
Julian R. Bucher Kurt G. Moser
Vice President Vice President
December 17, 1996
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, 1996, 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
1987. 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, 1996, 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, 1996, 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 1987, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 13, 1996
4
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
LONG-TERM MUNICIPAL BONDS (97.3%):
SECURED BY U.S. TREASURY OBLIGATIONS (12.9%):
<C> <S> <C> <C>
$ 90,000 Grand River Dam Authority, Oklahoma Rev., Ser. 1978, 7.20%,
6-1-1998 (Prerefunded to 6-1-1997 at 100) Aaa $ 92,261
500,000 Orlando Utilities Commission, Florida Water and Electric Rev., Ser. 1983,
9.60%, 10-1-1999 (Escrowed to maturity) Aaa 573,695
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 at 100) AA 2,130,720
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser. 1990A,
7.00%, 10-1-2000 (Prerefunded to 10-1-1999 at 100) AA 1,076,060
2,840,000 Washington Suburban Sanitary District of Maryland, General Obligation Bonds,
7.00%, 12-1-2001 (Prerefunded to 12-1-1998 at 102) Aaa 3,065,354
250,000 Georgia Municipal Electric Authority Power Rev., Ser. H., 12.50%,
1-1-2002 (Prerefunded to 1-1-1997 at 100) AAA 251,937
1,500,000 Gwinnett County, Georgia General Obligation Bonds, 7.25%, 1-1-2002
(Prerefunded to 1-1-1997 at 102) Aaa 1,534,740
300,000 North Carolina Eastern Municipal Power Agency Power System Revenue Bonds,
Ser. 1982A, 13.25%, 1-1-2002 (Prerefunded to 1-1-1997
at 100) AAA 302,541
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 at 101%) A 2,464,988
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 at 101) A+ 3,216,840
550,000 Johnson County Water District No. 1, Kansas Water Rev., Ser. 1982A, 10.25%,
8-1-2002 (Escrowed to maturity) Aaa 692,186
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 at 100) Aaa 959,742
3,000,000 City of Lakeland, Florida Electric and Water Rev., Ser. 1989, 6.90%, 10-1-2003
(Prerefunded to 10-1-1999 at 102) Aa 3,277,890
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 at 102) AAA 2,121,120
2,000,000 Jackson, Mississippi General Obligation Bonds, Ser. 1988, 7.50%, 5-1-2004
(Prerefunded to 5-1-1998 at 100) NR 2,098,960
3,500,000 City of Los Angeles, California Wastewater System Rev. Bonds, Ser. 1990B,
6.90%, 6-1-2004 (Prerefunded to 6-1-2000 at 102) Aaa 3,881,325
3,000,000 Omaha Public Power District of Nebraska, Electric Systems Rev., Ser. A, 6.70%,
2-1-2005 (Prerefunded to 2-1-2000 at 101.5) AA 3,259,050
2,000,000 State of Wisconsin General Obligation Bonds, 1988 Series B, 7.40%, 5-1-2005
(Prerefunded to 5-1-1997 at 101) Aaa 2,051,740
2,500,000 King County, Washington, Unlimited Tax General Obligation Bonds, Ser. 1988B,
7.30%, 12-1-2005 (Prerefunded to 12-1-1998 at 100) NR 2,658,925
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 at 100) AAA 2,009,041
2,000,000 State of Texas Public Financial Authority General Obligation Bonds, Ser. 1988A,
6.50%, 10-1-2007 (Prerefunded to 10-1-1998 at 100) AA 2,089,440
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 at 102) Aaa 1,689,900
------------
41,498,455
</TABLE>
5
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STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (60.5%):
<C> <S> <C> <C>
$1,455,000 State of Louisiana General Obligation Bonds, Ser. 1986A, 7.375%, 5-1-1997 Baa1 $ 1,477,232
3,000,000 North Slope Borough, Alaska General Obligation School Construction Bonds,
Ser. Y, 7.10%, 7-1-1997 AAA 3,061,320
300,000 Maryland State & Local Facility Loan of 1982 General Obligation Bonds, 1st
Ser., 11.20%, 7-1-1997 AAA 313,326
1,100,000 Stillwater, Minnesota Independent School District #834, General Obligation
School Building Bonds, Ser. 1991, 6.25%, 2-1-1998 AAA 1,131,053
3,000,000 Scottsdale Unified School District No. 48 of Maricopa County, Arizona
Refunding Bonds, Ser. 1991, 6.75%, 7-1-1998 AA 3,135,060
1,350,000 Stillwater, Minnesota Independent School District #834, General Obligation
School Building Bonds, Ser. 1991, 6.25%, 2-1-1999 AAA 1,410,494
400,000 State of California, Variable Purpose General Obligation Bonds, 9.00%, 4-1-1999 A+ 443,252
150,000 Oregon Veterans' Welfare General Obligation Bonds, Ser. LXIV, 9.00%, 4-1-1999 AA 166,539
2,500,000 Austin Independent School District, Texas Unlimited Tax Refunding District
Obligation Bonds, Ser. 1991, 6.20%, 8-1-1999 Aaa 2,629,100
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser. 1990A,
7.00%, 10-1-1999 AA 1,077,180
3,000,000 Washington Suburban Sanitary District, Maryland Water Supply Refunding
Bonds of 1991, 6.00%, 11-1-1999 Aa1 3,160,440
200,000 City of Charleston, Illinois Water Works Improvement General Obligation
Bonds, 8.00%, 1-1-2000 A 220,208
3,000,000 State of California Various Purpose General Obligation Bonds, 5.90%, 2-1-2000 A+ 3,149,790
2,500,000 Dupage Water Commission, Illinois General Obligation Water Refunding Bonds,
Ser. 1992, 5.85%, 3-1-2000 AA+ 2,620,225
1,000,000 State of Texas Veterans Land Board General Obligation Bonds, Ser. 1984, 9.00%,
12-1-2000 AA 1,131,790
1,885,000 Anoka County, Minnesota General Obligation Capital Improvement Refunding
Bonds, Ser. 1992C, 5.20%, 2-1-2001 A1 1,945,414
1,200,000 Shelby County, Tennessee General Obligation Refunding Bonds, 1992 Ser. B,
5.20%, 3-1-2001 Aa 1,244,340
400,000 State of California General Obligation Veterans Bonds, Ser. AL, 9.60%, 4-1-2001 A+ 481,760
2,200,000 City and County of Honolulu, Hawaii General Obligation Refunding Bonds,
1992 Ser. 1, 5.60%, 6-1-2001 AA 2,316,930
2,000,000 School District of Leon County, Florida General Obligation Refunding Bonds,
Ser. 1991, 5.85%, 7-1-2001 A1 2,126,060
2,000,000 Howard County, Maryland Consolidated Public Improvement Refunding
General Obligation Bonds, Ser. 1991B, 5.80%, 8-15-2001 Aaa 2,136,220
2,110,000 State of Nevada General Obligation (Limited Tax) Hoover Uprating Refunding
Bonds, Ser. 1992, 6.00%, 10-1-2001 AA 2,261,245
900,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series 1993,
4.90%, 1-1-2002 A1 912,906
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 1,647,638
1,000,000 Williamson County, Tennessee Public Works Refunding Bonds, Ser. 1992, 5.65%,
3-1-2002 Aa 1,059,360
1,500,000 City of Tulsa, Oklahoma General Obligation Refunding Bonds of 1993, 5.05%,
6-1-2002 Aa 1,549,140
2,100,000 Jackson Public School District, Jackson, Mississippi General Obligation School
Bonds, Ser. 1992, 5.80%, 7-1-2002 A1 2,235,093
925,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series 1993,
4.90%, 7-1-2002 A1 939,190
1,000,000 Pima County Arizona General Obligation Refunding Bonds, Ser. 1992, 6.30%,
7-1-2002 Aa 1,092,410
</TABLE>
6
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$3,500,000 Milwaukee, Wisconsin Metropolitan Sewerage District General Obligation
Capital Purpose Bonds, Ser. 1990A, 6.70%, 10-1-2002 AA $ 3,901,135
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 1,913,614
1,500,000 County of Ramsey, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.40%, 12-1-2002 Aaa 1,583,340
1,505,000 Anchorage, Alaska General Obligation General Purpose Refunding Bonds,
4.60%, 2-1-2003 Aaa 1,507,318
2,000,000 Lake County, Illinois Forest Preserve District General Obligation Refunding
Bonds, Ser. 1992B, 5.70%, 2-1-2003 Aa 2,126,840
2,000,000 Oregon General Obligation Veterans' Welfare Bonds, Ser. 74A, 7.75%, 3-1-2003 Aa 2,060,100
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.15%,
5-1-2003 Aa 1,090,037
2,000,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2003 Aa 2,063,400
2,000,000 State of Illinois General Obligation Refunding Bonds, Series of June 1993,
5.00%, 6-1-2003 A1 2,042,280
1,500,000 Municipality of Anchorage, Alaska 1993 General Obligation Refunding School
Bonds, Series B, 4.90%, 9-1-2003 Aaa 1,532,760
1,750,000 State of Louisiana General Obligation Bonds, Series 1987A, 7.00%, 8-1-2003 Aaa 1,823,535
2,000,000 Texas Public Finance Authority, State of Texas General Obligation Refunding
Bonds, Ser. 1992A, 5.70%, 10-1-2003 Aa 2,145,880
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 1,
5.30%, 11-1-2003 Aa 2,099,040
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 3,
4.75%, 11-1-2003 Aa 2,034,140
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 2,629,418
2,620,000 Cherry Creek School District No. 5, Arapahoe County, Colorado General
Obligation Improvement Bonds, Ser. 1990, 7.00%, 12-15-2003 AA 2,892,794
2,000,000 Jefferson County Colorado School District No. R-1 General Obligation Bonds,
Ser. 1992, 5.75%, 12-15-2003 Aaa 2,150,660
2,025,000 County of DuPage, Illinois General Obligation Refunding Bonds (Alternate Rev.
Source - Stormwater Project), 5.10%, 1-1-2004 Aaa 2,084,332
2,000,000 Indianapolis, Indiana Local Public Improvement Bond Bank, Limited
Obligation Bonds, Series 1993A Bonds, 5.25%, 1-10-2004 Aaa 2,074,320
2,100,000 Cherokee County School Systems Georgia, General Obligation School Series
1993, 4.90%, 2-1-2004 A1 2,136,708
2,300,000 Osseo Area Schools, Minnesota, General Obligation Refunding Bonds, Series
1993, 4.60%, 2-1-2004 A1 2,300,690
2,300,000 Indianapolis, Indiana Local Public Improvement Bond Bank Refunding Bonds,
Limited Obligation Bonds, Ser. 1993B, 4.70%, 2-15-2004 Aaa 2,296,780
1,600,000 County of Buncombe, North Carolina Refunding General Obligation Bonds,
Series 1993, 5.10%, 3-1-2004 Aa 1,661,760
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.25%,
5-1-2004 Aa 1,090,498
2,000,000 Davis County School District, Davis County, Utah, General Obligation
Refunding Bonds, Series 1993A, 4.50%, 6-1-2004 Aaa 1,978,680
2,000,000 Alachua County School District, Alachua County, Florida General Obligation
Refunding Bonds, Ser. 1994, 4.50%, 7-1-2004 Aaa 1,984,700
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 2,076,920
</TABLE>
7
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$1,205,000 DeKalb County School District, Georgia General Obligation Refunding Bonds,
Series 1993, 5.10%, 7-1-2004 Aa $ 1,248,645
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 1,148,220
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 1,594,439
3,215,000 State of Minnesota General Obligation State Refunding Bonds, 5.125%, 8-1-2004 Aaa 3,335,145
2,000,000 Harris County, Texas Road and Refunding Bonds, Ser. 1993, 4.70%, 10-1-2004 Aa 2,011,880
2,000,000 City of Seattle, Washington Unlimited Tax General Obligation Refunding Bonds,
1993, 4.80%, 12-1-2004 Aa1 2,020,780
1,000,000 Bismarck, North Dakota Public School District #1, Burleigh County General
Obligation Building Bonds of 1986, 7.00%, 4-1-2005 A1 1,010,050
1,800,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2005 Aa 1,847,412
1,625,000 Charleston County, South Carolina General Obligation Refunding Bonds of 1994
(ULT), 5.40%, 6-1-2005 Aa 1,714,489
1,100,000 Municipality of Anchorage, Alaska 1994 General Obligation School Bonds,
5.40%, 7-1-2005 Aaa 1,149,896
2,000,000 Oklahoma City, Oklahoma General Obligation Refunding Bonds, Series 1993,
5.30%, 8-1-2005 Aa 2,093,220
2,500,000 State of Illinois General Obligation Refunding Bonds, Ser. 1987, 6.80%, 4-1-2006 A1 2,571,925
1,600,000 Natrona County, Wyoming School District No. 1 General Obligation Bonds, Ser.
1994, 5.45%, 7-1-2006 Aaa 1,665,424
2,340,000 City of Phoenix, Arizona General Obligation Refunding Bonds, Ser. 1993A,
5.30%, 7-1-2006 Aa1 2,450,963
2,125,000 Southwest Allen, Indiana High School Building Corp., 1st Mortgage Refunding
Bonds, Series 1996B, 4.85%, 7-15-2006 Aaa 2,123,916
2,000,000 State of California Various Purpose General Obligation Bonds, 6.00%, 10-1-2006 A1 2,196,180
3,215,000 Forsyth County School District, Georgia, General Obligation Bonds, Series 1995,
5.05%, 7-1-2007 Aaa 3,249,015
2,000,000 Arapahoe County School District #6, Colorado, Littleton Public Schools General
Obligation Improvement Bonds, Series 1995A 5.00%, 12-1-2007 Aa 2,033,880
2,780,000 Salt Lake County, Utah General Obligation Jail Bonds, Series 1995, 5.00%,
12-15-2007 Aaa 2,822,367
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 2,382,318
2,000,000 State of Wisconsin General Obligation Bonds of 1995, Series A, 6.00%, 5-1-2008 Aa 2,150,240
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 2,021,740
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.10%, 7-1-2008 A1 1,185,590
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series 1995,
5.10%, 8-1-2008 Aaa 1,734,969
3,000,000 State of Texas Public Finance Authority General Obligation Refunding Bonds,
Series 1996B, 5.40%, 10-1-2008 Aa 3,096,870
1,200,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2009 A1 1,413,516
3,590,000 State of Georgia General Obligation Bonds, Series 1996C, 6.25%, 8-1-2009 Aaa 4,032,360
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series 1995,
5.25%, 8-1-2009 Aaa 1,737,519
4,000,000 City and County of Honolulu, Hawaii General Obligation Bonds, Series 1996A,
5.40%, 9-1-2009 Aaa 4,097,680
</TABLE>
8
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$4,000,000 State of Illinois General Obligation Bonds, Series of September 1996, 5.45%,
9-1-2009 Aaa $ 4,081,840
2,500,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2010 A1 2,958,700
2,500,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Ser. 2, 5.125%,
11-1-2010 Aa 2,493,500
2,540,000 (c) Mesa County, Colorado Valley School District #51, General Obligation Bonds,
Series 1996, 5.30%, 12-1-2010 Aaa 2,563,622
3,000,000 State of Hawaii, General Obligation Refunding Bonds of 1992, Series BW,
6.375%, 3-1-2011 Aa 3,364,410
2,000,000 Washington and Clackamas Counties School District #23J (Tigard-Tualatin),
Oregon, General Obligation Bonds, Series 1995, 5.55%, 6-1-2011 A1 2,030,980
2,000,000 State of Georgia, General Obligation Bonds, Series 1995C, 5.70%, 7-1-2011 Aaa 2,113,440
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B, 6.00%, 12-1-2011 Aa1 1,190,115
3,000,000 State of Georgia, General Obligation Bonds, Series 1995B, 5.75%, 3-1-2012 Aaa 3,175,290
4,500,000 State of Washington General Obligation Bonds, Series 1993A, 5.75%, 10-1-2012 Aa 4,754,520
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B, 6.00%, 12-1-2012 Aa1 1,186,335
------------
194,409,794
MUNICIPAL REVENUE (20.8%):
2,000,000 City of St. Petersburg, Florida Public Utility Refunding Rev. Bonds, Ser. 1991,
6.10%, 10-1-1998 Aa 2,076,940
3,000,000 City of Colorado Springs, Colorado Utilities System Refunding Rev., Ser. 1991A,
6.10%, 11-15-1998 AA 3,123,510
1,490,000 City of San Antonio, Texas Water System Revenue Refunding Special Obligation
Bonds, Ser. 1992, 5.80%, 5-15-1999 AAA 1,549,406
1,250,000 Washington Public Power Supply System Nuclear Project No. 3, Refunding Rev.
Bonds, Ser. 1991A, 6.25%, 7-1-2000 Aa1 1,320,837
1,250,000 State of New York Power Authority General Purpose Bonds, Ser. Z, 6.00%,
1-1-2001 Aa 1,329,812
1,400,000 San Diego County Water Authority Water Rev. Certificates of Participation, Ser.
1991A, 6.00%, 5-1-2001 Aa 1,491,392
1,250,000 Municipal Subdistrict, Northern Colorado Water Conservancy District Water
Rev., Ser. D, 7.60%, 12-1-2001 A1 1,275,275
2,000,000 Nashville and Davidson County, Tennessee Electric System Rev. Bonds, 1992
Series B, 5.50%, 5-15-2002 Aa 2,109,300
1,000,000 Washington Public Power Supply System Nuclear Project No. 1, Rev. Refunding
Bonds, Ser. 1990C, 7.70%, 7-1-2002 Aa1 1,142,730
1,080,000 Charleston, South Carolina Waterworks and Sewer Systems Rev. Refunding
Bonds, Ser. 1986A, 6.90%, 1-1-2003 A1 1,104,700
2,000,000 City of Des Moines, Iowa Sewer Rev. Bonds, Ser. 1992D, 6.00%, 6-1-2003 Aaa 2,142,840
2,500,000 City of Albuquerque, New Mexico Joint Water and Sewer Refunding Rev. Bonds,
Ser. 1990B, 7.00%, 7-1-2003 Aa 2,752,750
2,000,000 Washington Public Power Supply System, Nuclear Project No. 3 Refunding
Revenue Bonds, Series 1993C, 4.80%, 7-1-2003 Aa1 1,998,800
2,000,000 City of Lincoln, Nebraska, Water Revenue and Refunding Bonds, Series 1993,
4.90%, 8-15-2003 Aa 2,050,420
2,850,000 City of Lincoln, Nebraska, Electric System Revenue Refunding Bonds, 1993
Series A, 4.70%, 9-1-2003 Aa 2,887,677
2,000,000 Fargo, North Dakota, Water Revenue of 1993, 5.00%, 1-1-2004 Aaa 2,040,560
1,500,000 Municipal Electric Authority of Georgia General Power Rev. Bonds, 1993A
Series, 5.00%, 1-1-2004 A 1,514,190
1,500,000 Nashville and Davidson County, Tennessee, Water and Sewer Revenue
Refunding Bonds, Series 1993, 4.90%, 1-1-2004 Aaa 1,531,455
1,710,000 Southern Minnesota Municipal Power Agency, Power Supply System Revenue
Bonds, Series 1993 B, 4.60%, 1-1-2004 A 1,689,993
</TABLE>
9
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
MUNICIPAL REVENUE (Continued)
<C> <S> <C> <C>
$2,000,000 City of Dallas, Texas Waterworks and Sewer System Rev. Refunding Bonds,
Series 1993, 4.90%, 4-1-2004 Aa $ 2,031,440
2,045,000 City of Iowa City, Johnson County, Iowa Sewer Rev. Bonds, 5.875%, 7-1-2004 Aaa 2,171,095
2,000,000 City of Jackson, Mississippi Water and Sewer System Rev. Refunding Bonds,
Series 1993-A, 4.85%, 9-1-2004 Aaa 2,030,860
1,685,000 Hampton Roads Sanitation District, Virginia, Wastewater Refunding and
Capital Improvement Revenue Bonds, Series 1993, 4.70%, 10-1-2004 Aa 1,700,519
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 3,049,560
2,200,000 The Water Works and Sewer Board, Birmingham, Alabama Water and Sewer
Revenue Bonds, Series 1994, 4.75%, 1-1-2005 Aa 2,211,660
1,500,000 Omaha, Nebraska Public Power District Electric System Rev. Bonds, 1993,
Series B, 5.10%, 2-1-2005 Aa 1,543,305
1,325,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds, Series
1995B, 5.00%, 6-1-2007 Aa 1,344,478
2,600,000 Washington Public Power Supply System Nuclear Project No. 1, Rev. Refunding
Bonds, Ser. 1989A, 7.50%, 7-1-2007 Aa1 2,856,230
2,830,000 Sacramento County, California Sanitary District Financing Authority Revenue
Bonds, 1995, 5.00%, 12-1-2007 Aa 2,868,262
4,500,000 Nashville and Davidson County, Tennessee Water & Sewer Revenue Refunding
Bonds, Series 1996, 5.25%, 1-1-2008 Aaa 4,621,680
1,665,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds, Series
1995B, 5.10%, 6-1-2008 Aa 1,685,679
1,500,000 Sacramento County, California Sanitary District Financing Authority Revenue
Bonds, 1995, 5.00%, 12-1-2008 Aa 1,506,300
1,840,000 City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series
1994A, 6.375%, 10-1-2012 Aa 1,956,067
------------
66,709,722
INDUSTRIAL REVENUE - UTILITIES (3.1%):
3,000,000 Becker, Minnesota Pollution Control Rev. Refunding Bonds, Ser. 1989A, 6.80%,
4-1-2007, (Northern States Power Co. - Sherburne Cnty. Gen. Sta. Units 1 & 2
Proj.) A2 3,188,130
6,000,000 Omaha, Nebraska Public Power District Electric System Revenue Bonds, Ser.
1992B, 6.15%, 2-1-2012 Aa 6,652,680
------------
9,840,810
Total long-term municipal bonds (cost: $295,897,155) 312,458,781
SHORT-TERM INVESTMENTS (2.7%):
6,000,000 U.S. Treasury bills, 5.005% to 5.155% effective yield, due 12-1996 to 2-1997 5,964,660
2,460,000 Ford Motor Credit Company, 5.30%, 12-3-1996 2,461,449
275,000 Ford Motor Credit Company, 5.40%, 12-3-1996 275,124
------------
Total short-term investments (cost: $8,699,005) 8,701,233
------------
TOTAL INVESTMENTS (100.0%) (cost: $304,596,160) 321,160,014
LIABILITIES, LESS CASH AND OTHER ASSETS (0%) (10,393)
------------
NET ASSETS (100.0%) $321,149,621
============
</TABLE>
Notes: (a) At November 30, 1996, net unrealized appreciation of $16,563,854
consisted of gross unrealized appreciation of $16,601,552 and gross
unrealized depreciation of $37,698 based on cost of $304,596,160
for federal income tax purposes.
(b) Ratings not covered by the report of independent auditors. NR
denotes no rating available.
(c) Purchased on a `when-issued' basis.
10
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (cost $304,596,160) $321,160,014
Cash 304,236
Receivable for:
Interest $5,708,064
Shares of the Fund sold 200
Sundry 5,316 5,713,580
----------
Prepaid expenses 17,761
------------
Total assets 327,195,591
LIABILITIES AND NET ASSETS
Payable for:
Dividends to shareowners 3,197,502
Securities purchased 2,546,731
Shares of the Fund redeemed 174,483
Other accounts payable (including $117,874 to Manager) 127,254
----------
Total liabilities 6,045,970
------------
Net assets applicable to 38,035,010 shares outstanding of
$1 par value common stock (100,000,000 shares authorized) $321,149,621
============
Net asset value, offering price and redemption price per
share $ 8.44
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares over
amounts paid on redemptions of shares on account of
capital $304,463,942
Accumulated net realized gain on
sales of investments 121,825
Net unrealized appreciation of investments 16,563,854
------------
Net assets applicable to shares outstanding $321,149,621
============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
INVESTMENT INCOME:
Tax-exempt interest $17,621,142 16,931,069
Taxable interest 735,320 446,122
---------------------------
Total investment income 18,356,462 17,377,191
EXPENSES:
Investment advisory and management fees 385,258 366,394
Audit fees 21,106 21,113
Legal fees 3,006 4,264
Fidelity bond expense 4,433 5,077
Directors' fees 3,000 2,200
Reports to shareowners 5,141 9,024
Securities evaluation fees 19,874 19,822
Franchise taxes 16,602 16,598
Custodian fees 24,936 29,930
Other 18,775 21,799
---------------------------
Total expenses 502,131 496,221
Less: Custodian fees paid indirectly 18,709 25,465
---------------------------
Net expenses 483,422 470,756
---------------------------
Net investment income 17,873,040 16,906,435
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments 121,825 264,519
Change in net unrealized appreciation (1,805,995) 21,451,782
---------------------------
Net realized and unrealized gain (loss) on investments (1,684,170) 21,716,301
---------------------------
Net change in net assets resulting from operations $16,188,870 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>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
From operations:
Net investment income $ 17,873,040 16,906,435
Net realized gain on sales of investments 121,825 264,519
Change in net unrealized appreciation (1,805,995) 21,451,782
-----------------------------
Net change in net assets resulting
from operations 16,188,870 38,622,736
Dividends to shareowners from:
Net investment income (per share $.48 in 1996
and $.48 in 1995) (17,873,040) (16,906,435)
Net realized gain (per share $.006 in 1996) (214,926) --
----------------------------
Total distributions to shareowners (18,087,966) (16,906,435)
From Fund share transactions:
Proceeds from shares sold 27,900,088 25,292,645
Reinvestment of ordinary income dividends
and capital gain distributions 13,618,482 12,894,959
----------------------------
41,518,570 38,187,604
Less payments for shares redeemed 25,886,170 22,392,823
----------------------------
Net increase in net assets from Fund share
transactions 15,632,400 15,794,781
----------------------------
Total increase in net assets 13,733,304 37,511,082
Net assets:
Beginning of year 307,416,317 269,905,235
----------------------------
End of year $321,149,621 307,416,317
============================
</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 --
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. At November 30, 1996, there were
commitments of $2,546,731 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. Distributions of net realized
gains 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.
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 $385,258
for 1996 and $366,394 for 1995. 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, 1996,
except for directors' fees of $3,000 for 1996 and $2,200 for 1995 paid
to the Fund's independent directors.
3. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term investments) for each
of the two years ended November 30 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Purchases $30,463,407 34,619,287
Proceeds from sales 17,540,000 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>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
Shares sold 3,324,581 3,052,147
Shares issued in reinvestment of
ordinary income dividends and
capital gain distributions 1,626,301 1,565,349
--------------------------
4,950,882 4,617,496
Less shares redeemed 3,088,643 2,709,601
--------------------------
Net increase in shares outstanding 1,862,239 1,907,895
==========================
</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 YEAR
ENDED ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30, MAY 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55 7.53
Income from
Investment
Operations
Net investment
income .48 .48 .48 .50 .53 .54 .58 .58 .57 .28 .57
Net gain or loss
on securities (both
realized and
unrealized) (.06) .62 (.69) .25 .19 .17 .02 .20 .18 .03 .02
------------------------------------------------------------------------------------------------------------
Total from
investment
operations .42 1.10 (.21) .75 .72 .71 .60 .78 .75 .31 .59
Less Distributions
Net investment
income (.48) (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57)
Capital gain (b) -- -- (.02) -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57)
Net asset value, end
of period $ 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55
============================================================================================================
Total Return 5.21% 14.25% (2.55%) 9.17% 9.05% 9.17% 7.78% 10.44% 10.14% 4.19% 7.72%
Ratios/Supplemental
Data
Net assets, end of
period (millions) $ 321.1 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2 70.7 66.4
Ratio of expenses to
average net assets .16% .17%(c) .16% .18% .19% .21% .23% .25% .29% .30%(a) .31%
Ratio of net
investment income
to average net
assets 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36% 7.49%(a) 7.30%
Portfolio turnover
rate 6% 7% 8% 5% 4% 2% 8% 7% 2% 4%(a) 0%
Number of shares
outstanding at end
of period
(millions) 38.0 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0 9.3 8.8
</TABLE>
Notes: (a) Ratios and rates have been calculated on an annualized basis.
(b) Distributions representing less than $.01 were made in 1996, 1993
and 1992.
(c) The ratio based on net custodian expenses would have been .16% in
1995.
16
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
TAX INFORMATION
The Fund paid ordinary income dividends in March, June, September and
December 1996. Of those dividends, 98% in March, 97% in June, 97% in
September and 98% 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 1997.
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, 1996, the Fund made a capital gain distribution of $.003
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>
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18
<PAGE>
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19
<PAGE>
ANNUAL
REPORT
November 30, 1996
STATE
FARM
MUNICIPAL BOND
FUND, INC.
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
TELEPHONE (309) 766-2029
G 4100.38
