Scudder Tax Free Money Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Supplement to the Combined Prospectus
Dated March 1, 1997
The Boards of Trustees of the above Funds have approved a change in the quality
requirements of the debt securities the Funds are permitted to purchase, as well
as changes in certain types of investments the Funds are permitted to make. The
changes are set forth in detail below, and serve to amend the text of the
prospectus and Statement of Additional Information in their entirety.
These changes give the Funds (with the exception of Scudder Tax Free Money Fund)
increased flexibility to invest in medium or lower rated securities. Lower rated
bonds typically provide higher yields and involve greater price variability in
certain periods and a higher degree of speculation with respect to payment of
principal and interest than do higher rated bonds. To the extent that a Fund
will invest in lower rated bonds, the increased risk should be taken into
account when reading "Selecting among the Funds" in the prospectus. In the case
of Scudder Limited Term Tax Free Fund, the ability to invest in lower rated
securities is one factor that distinguishes the Fund from tax-free money market
funds, which invest only in high quality securities and seek to maintain a
stable share price. Investors in Scudder High Yield Tax Free Fund should
consider whether they are willing to assume the risks associated with a fund
that may invest up to 50% of its assets in securities rated below investment
grade.
Scudder Tax Free Money Fund
The Fund may invest its assets in municipal securities which are rated, or
issued by an issuer rated, P2 by Moody's, A2 by S&P, or F2 by Fitch, to the
extent permitted by Rule 2a-7 under the Investment Company Act of 1940, as
amended.
The Fund may invest up to 20% of its assets in securities subject to the
alternative minimum tax ("AMT bonds"). The Fund's distributions from interest on
AMT bonds may be taxable depending upon an investor's particular situation. (For
more information please see the Statement of Additional Information.)
Scudder Medium Term Tax Free Fund
Normally, the Fund invests at least 65% of its net assets in municipal bonds
which are rated within the three highest quality rating categories of Moody's
(Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or equivalent ratings by another
nationally recognized statistical rating organization, or, if unrated, judged by
the Fund's Adviser, Scudder, Stevens & Clark, Inc. ("Scudder"), to be of
comparable quality at the time of purchase. The Fund will not invest in any debt
security rated lower than Baa by Moody's, BBB by S&P or Fitch or of equivalent
quality as determined by the Adviser. The Fund may, however, invest in a debt
security so rated by one rating agency even though the security may be rated
lower by one or more of the other agencies.
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Scudder Managed Municipal Bonds
Normally, the Fund invests at least 65% of its net assets in securities rated,
or issued by an issuer rated, within the three highest quality rating categories
of Moody's (Aaa, Aa and A), S&P or Fitch (AAA, AA and A) or equivalent ratings
by another nationally recognized statistical rating organization, or, if
unrated, judged by the Fund's Adviser, Scudder, Stevens & Clark, Inc.
("Scudder"), to be of comparable quality at the time of purchase. The Fund may
invest up to 10% of its assets in debt securities rated lower than Baa by
Moody's, BBB by S&P or Fitch or of equivalent quality as determined by the
Adviser, but will not purchase bonds rated below B by Moody's, S&P or Fitch, or
their equivalent.
The Fund may invest up to 20% of its assets in securities subject to the
alternative minimum tax ("AMT bonds"). The Fund's distributions from interest on
AMT bonds may be taxable depending upon an investor's particular situation. (For
more information please see the Statement of Additional Information.)
Scudder High Yield Tax Free Fund
PROSPECTUS COVER: Scudder High Yield Tax Free Fund may invest up to 50% of its
assets in lower quality bonds, commonly referred to as municipal junk bonds.
Bonds of this type are considered to be speculative with regard to the payment
of interest and return of principal. Purchasers should carefully assess the
risks associated with an investment in this Fund.
Scudder High Yield Tax Free Fund, a diversified series of Scudder Municipal
Trust, seeks to provide a high level of income exempt from regular federal
income tax, from an actively managed portfolio of municipal securities. The Fund
will invest at least 50% of its assets in municipal bonds rated, at the time of
purchase, within the four highest quality rating categories of Moody's (Aaa, Aa,
A or Baa), S&P or Fitch (AAA, AA, A or BBB), or their equivalents as determined
by the Adviser. The Fund may invest, however, up to 50% of its total assets in
bonds rated below Baa by Moody's or below BBB by S&P or Fitch, or unrated
securities considered to be of equivalent quality. The Fund may not invest in
bonds rated below B by Moody's, S&P or Fitch, or their equivalent.
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Risk Factors of Investing in High Yield/High Risk Securities: Debt securities
rated below Baa by Moody's or BBB by S&P or Fitch are considered to be below
investment grade. These types of high yield/high risk debt obligations (commonly
referred to as "junk bonds") are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with their terms and
generally involve a greater risk of default and more volatility in price than
securities in higher rating categories. These debt instruments generally offer a
higher current yield than that available from higher grade issues, but typically
involve greater risk. Lower rated and unrated securities are especially subject
to adverse changes in general economic conditions, to changes in the financial
condition of their issuers, and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
issuers of these instruments may experience financial stress that could
adversely affect their ability to make payments of principal and interest and
increase the possibility of default. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of these securities, especially in a market characterized by only a
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small amount of trading. Perceived credit quality in this market can change
suddenly and unexpectedly, and may not fully reflect the actual risk posed by a
particular lower rated or unrated security.
DESCRIPTION OF MUNICIPAL SECURITY RATINGS:
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A, Baa, Ba
and B. Bonds rated Aaa are judged by Moody's to be of the best quality. 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. Together
with securities rated A and Baa, they comprise investment grade securities.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade.
Moody's judges municipal bonds rated Ba to have speculative elements, with very
moderate protection of interest and principal payments and thereby not well
safeguarded under any future conditions. Municipal bonds rated B by Moody's
generally lack characteristics of desirable investments. Long-term assurance of
the contract terms of B-rated municipal bonds, such as interest and principal
payments, may be small. Securities rated Ba or below are commonly referred to as
"junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA (High
grade), A (Good grade), BBB (Investment grade), BB (Below investment grade) and
B. Bonds rated AAA have the highest rating assigned by S&P to a municipal
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in a small degree. Bonds rated A
have a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions. Bonds rated BBB have an adequate capacity to pay interest and to
repay principal. Adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds of this category than for bonds of higher rated categories. Securities
rated BB or below by S&P are considered below investment grade. Debt rated BB by
S&P faces major ongoing uncertainties or exposure to adverse conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. Municipal bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Securities rated BB or below are commonly referred to as "junk" bonds and as
such they carry a high margin of risk.
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S&P's top ratings for municipal notes are SP-1 and SP-2. The designation SP-1
indicates a very strong capacity to pay principal and interest. A "+" is added
for those issues determined to possess overwhelming safety characteristics. An
SP-2 designation indicates a satisfactory capacity to pay principal and
interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A, BBB, BB and
B. Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+. Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade. Fitch
considers bonds rated BB to be speculative because the issuer's ability to pay
interest and repay principal may be affected over time by adverse economic
changes, although financial alternatives can be identified to assist the issuer
in meeting its obligations. While bonds rated B are currently meeting debt
service requirements, they are considered highly speculative in light of the
issuer's limited margin of safety. Securities rated BB or below are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
March 20, 1997
