(ICON)
Prudential Municipal
Series Fund
Massachusetts
Money Market Series
- ---------------------
ANNUAL
REPORT
Aug. 31, 1996
(LOGO)
<PAGE>
Prudential Municipal Series Fund
Massachusetts Money Market Series
Performance At A Glance.
When we last reported to you in February, short-term
interest rates were
trending lower. Since then, rates rose and fell depending
upon the latest
news -- and views -- about the strength of the U.S. economy.
Throughout the
12-month period ended August 31, 1996, the Prudential
Municipal Series Fund --
Massachusetts Money Market Series provided tax-free income
at competitive
yields, maintained a $1 net asset value per share and high
credit quality. The
Series' 7-day current yield on August 31, 1996 was 2.98%,
which was equivalent
to a taxable yield of 5.61% for individuals in the highest
federal/state income
tax bracket.
<TABLE>
Fund Facts
As of 8/31/96
<CAPTION>
7-Day Net Asset
Taxable Equivalent Yield1 Weighted Avg. Total Net
Current Yld. Value
@31% @36% @39.6% Maturity Assets (mil.)
<S> <C> <C> <C>
<C> <C> <C> <C>
MA Money 2.98% $1.00
4.91% 5.29% 5.61% 57 Days $50.5
Market Fund (2.61) (4.30)
(4.63) (4.91)
IBC Financial Data
MA Tax-Exempt
Fund Avg.2 2.90 $1.00
4.78 5.15 5.46 62 Days N/A
</TABLE>
Note: Yields will fluctuate from time to time and past
performance is not
indicative of future results. An investment in the Series is
neither insured
nor guaranteed by the U.S. government and there can be no
assurance that the
Series will be able to maintain a stable net asset value.
1Some investors may be subject to the federal alternative
minimum tax and/or
state and local taxes. Taxable equivalent yields reflect
federal and applicable
state tax rates. Without waiver of management fees and/or
expense subsidies,
the Series' yield would have been lower as indicated in the
parentheses ( ).
2This is the average 7-day current yield, NAV and WAM of 10
funds in the
International Business Communications Financial Data's
Massachusetts tax-exempt
money market fund category as of 8/31/96.
Tracking Tax-Free Money Fund Yields.
Prudential Massachusetts Money Market Series
IBC Financial Data Massachusetts Tax-Free Money Fund Avg.
(GRAPH)
Weekly 7-day current yields of Prudential Massachusetts
Money Market Series
and the IBC Financial Data Massachusetts tax-free money fund
average. Past
performance is not indicative of future results.
How Investments Compared.
(As of 8/31/96)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total return averages for several Lipper mutual
fund categories to
show you that reaching for higher yields means tolerating
more risk. The
greater the risk, the larger the potential reward or loss.
In addition, we've
included historical 20-year average annual returns. These
returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices
still fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds. Unlike bond funds, bonds, if held to
maturity, generally
offer a fixed rate of return and fixed principal value.
General Municipal Debt Funds invest in bonds issued by state
governments,
state agencies and/or municipalities. This investment
provides income that is
usually exempt from federal and state income taxes.
Tax-Exempt Money Market Funds attempt to preserve a constant
share value and
provide tax-free income; they don't fluctuate much in price
but their returns
are generally among the lowest of the major investment
categories.
*18 years for Tax-Exempt Money Funds.
<PAGE>
Colleen Meehan, Fund Manager
Portfolio
Manager's Report
The Prudential Municipal Series Fund -- Massachusetts Money
Market Series
seeks current income that is exempt from federal and
Massachusetts state
income taxes, consistent with liquidity, the preservation of
capital, and
maintenance of a stable net asset value of $1 per share. The
Series intends
to invest in a portfolio of short-term municipal bonds with
maturities of 13
months or less from the State of Massachusetts, its
municipalities, local
governments and other qualifying issuers (such as Puerto
Rico, Guam and the
U.S. Virgin Islands).
A Word About Quality.
Your Series will typically purchase securities with
maturities of one year or
less that are rated Aaa, Aa; Notes: MIG-1, MIG-2, P-1 or P-2
by Moody's
Investors Service, or AAA, AA; Notes: SP-1, SP-1+, A-1 or A-
2 by Standard &
Poor's or, if not rated, deemed to be of comparable quality
by the Series'
investment adviser. Although there is never a guarantee that
the share price
of the Massachusetts Money Market Series will stay at $1,
we emphasize a
conservative, quality-oriented approach.
Strategy Session.
Rates Seesaw.
Our strategy seeks to provide you with tax-free income at a
competitive yield.
Over the past six months, achieving this meant adjusting our
investment
approach more frequently than in the first six months of our
reporting year as
market conditions warranted.
From March 1996 on, short-term interest rates fluctuated in
reaction to reports
that the U.S. economy was either improving (rates rose) or
weakening (rates
fell). February's strong jobs report (released in March)
started the first
cycle, and each one would go something like this:
- - Government report shows economy growing;
- - Opinion says growth is too fast and that Federal Reserve
must raise interest
rates to head off inflation;
- - Short-term rates rise in anticipation;
- - Different government report shows economy slowing;
- - Higher interest rate talk fades, and short-term rates
fall.
A cycle could last a few days or a couple of weeks and it
was difficult to
consistently predict. Throughout this period the Federal
Reserve did not raise
short-term interest rates.
Fluctuating interest rates weren't our only concern, of
course. Being a tax-
free money fund, your Series also contended with local bond
supply and other
factors. In April, many shareholders pulled their cash out
of money market
funds to pay their income taxes. And in July investors used
income from bond
call payments, maturities and coupon payments to invest
about $4.6 billion in
the tax-free market, according to the Bond Buyer, a trade
newspaper which
covers the tax-free bond markets.
How did we respond during this? We maintained a flexible
portfolio strategy by
adjusting our weighted average maturity (WAM) to take
advantage of either
rising rates or attractive investment opportunities when
they occurred.
Massachusetts' economy continued its slow recovery. State
Gross Domestic
Product grew at an estimated rate of 1.3% in 1996 and lagged
the country's
average of 2.5%. The state government's revenue assumptions
were realistic and
financial operations stayed in balance. Overall, the outlook
is good with
Moody's giving Massachusetts a rating of A1, which was
unchanged since our
last report to you.
<PAGE>
What Went Well.
Making The Right Moves.
We believe that the past 12 months were a time of
achievement for your Series.
Highlights included:
- - Adjusting our weighted average maturity to maintain
investment flexibility
when interest rates began to fluctuate during the past six
months;
- - Maintaining a high level of credit-enhanced securities
(about 80% of total
net assets as of August 31, 1996), backed either by a
letter of credit from
a major money center bank or by being insured, lessening
credit risk;
- - Maintaining a conservative diversification policy to limit
credit risk. On
August 31, 1996 your Series was invested in 36 issuers
from across the state.
And Not So Well.
One Move We Missed.
Surprises happen in this business and most money fund
managers, indeed most of
Wall Street, were caught off-guard in March when the U.S.
government released
its February jobs report, which showed that businesses
nationwide created far
more new positions than anticipated. While this was good
news to many
(especially those who found work), signs of economic
strength can raise fears
of inflation which always makes investors skittish. Looking
back, if we knew
what was coming we would have played things differently by
increasing our
holdings of shorter maturity securities for a couple of
weeks prior to the
report's release. The Series would then be better positioned
to take advantage
of the rising yields that followed the release of the
report.
Looking Ahead.
The past 12 months clearly demonstrated how unpredictable
interest rates can
be. The Federal Reserve wants to promote steady, non-
inflationary growth. Will
the central bank raise rates this fall or winter? A
strengthening U.S. economy
could make such a move necessary to curb inflation. If the
Federal Reserve
acts, any increase would be modest, we believe. Of course,
if taxable short-
term rates increase, so too, will tax-free yields. Whatever
the future may hold
for interest rates, the outlook for tax-free securities is
favorable.
Weighted Average Maturity Is Now Shorter Than The Average
Fund.
Prudential Massachusetts Money Market Series
IBC Financial Data Massachusetts Tax-Free Money Fund Avg.
(GRAPH)
- ------------------------------------------------------------
- ------------------
1
<PAGE>
President's Letter
October 7, 1996
(PHOTO)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996. According
to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just
as they go up). There's no better time than now to be
talking with your
Financial Advisor or Registered Representative. She or he
can help you
determine reasonable expectations about both the potential
performance and
risks associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual
and institutional investors. We plan to improve the range
and quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change in
the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
- ------------------------------------------------------------
- ------------------
2
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Boston Wtr. & Swr. Comm., Ser. 94A, F.R.W.D.
VMIG1 3.10% 9/05/96 $ 1,300 $
1,300,000
Brazos River Auth. Poll. Ctrl. Rev.,
Texas Util. Elec. Co. A, Ser. 95A, F.R.D.D.
VMIG1 3.95 9/03/96 1,300
1,300,000
Texas Util. Elec. Co., Ser. 95C, F.R.D.D.
VMIG1 4.00 9/03/96 200
200,000
Chicopee Mass., Gen. Oblig., Ser. 96, F.S.A.
Aaa 6.00 8/01/97 600
611,201
Dracut Mass., Gen. Oblig., A.M.B.A.C.
Aaa 6.00 6/01/97 740
752,373
Fitchburg Mass., Gen. Oblig., Ser. 96, A.M.B.A.C.
Aaa 5.50 3/01/97 1,200
1,212,824
Holyoke Poll. Ctrl. Rev., Ser. 88, F.R.W.D.
A-1+(c) 3.10 9/04/96 900
900,000
Mashpee Mass., Ser. 96, B.A.N.
NR 4.00 2/07/97 1,500
1,501,890
Mass. Edl. Loan Auth. Rev., Issue E, Ser. 96A, F.R.W.D.
A-1+(c) 3.40 9/04/96 1,500
1,500,000
Mass. Mun. Whsl. Elec. Co. Pwr. Supply Sys. Rev., Ser. 94C,
F.R.W.D.
VMIG1 3.35 9/04/96 2,500
2,500,000
Mass. St., Gen. Oblig., Ded. Inc.Tax, Ser. 90B, F.R.D.D.
VMIG1 3.65 9/03/96 1,700
1,700,000
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Boston Univ., Ser. 85H, T.E.C.P.
VMIG1 3.50 10/17/96 2,000
2,000,000
Cap. Asset Prog., Ser. 85C, F.R.D.D., M.B.I.A.
VMIG1 3.55 9/03/96 600
600,000
Cap. Asset Prog., Ser. D, F.R.D.D., M.B.I.A.
VMIG1 3.75 9/03/96 1,200
1,200,000
Harvard Univ., Ser. 89L, T.E.C.P.
VMIG1 3.55 12/13/96 1,300(d)
1,300,000
Mass. St. Hsg. Fin. Agcy. Rev.,
Long Opt Per. Ser. 11, A.N.N.O.T., A.M.B.A.C.
Aaa 4.00 9/01/97 1,695
1,695,000
Multi Family Rev., Ser. A, G.N.M.A., F.R.W.D.
A-1+(c) 3.35 9/04/96 1,000
1,000,000
Mass. St. Ind. Fin. Agcy. Ind. Rev.,
Bradford College, Ser. 95A, F.R.W.D.
VMIG1 3.40 9/04/96 1,500
1,500,000
Edgewood Retirement, Ser. 95C, F.R.W.D.
VMIG1 3.45 9/04/96 2,500
2,500,000
Goddard House, Ser. 95, F.R.W.D.
A-1(c) 3.55 9/05/96 2,000
2,000,000
Hazen Paper Co., Ser. 95, F.R.W.D.
A-2(c) 3.60 9/05/96 1,350
1,350,000
Nutramax Prods. Inc., Ser. 96A, F.R.W.D.
A-1+(c) 3.55 9/05/96 2,000
2,000,000
Ocean Spray Cranberries Inc. Proj., Ser. 84, A.N.N.O.T.
A+(c) 3.95 10/15/96 1,400
1,400,000
Riverdale Mills, Ser. 95, F.R.W.D.
A-2(c) 3.60 9/05/96 1,300
1,300,000
United Med. Corp. Issue, Ser. 92, F.R.W.D.
P-1 3.35 9/04/96 700
700,000
Mass. St. Ind. Fin. Agcy. Poll. Ctrl. Rev., New England
Pwr. Co.
Proj., Ser. 93A, T.E.C.P.
VMIG1 3.70 10/09/96 2,000
2,000,000
Mass. St. Wtr. Res. Auth., Fltg. Rate Rcpts., Ser. SG17,
F.R.W.D.,
A.M.B.A.C.
A-1+(c) 3.60 9/05/96 1,440
1,440,000
Mass. St.. Port. Auth. Rev., Multi Modal Rev. Ref.,
Ser.95B, F.R.D.D.
VMIG1 3.85 9/03/96 2,400
2,400,000
Town of Milford Mass., Gen. Oblig., M.B.I.A.
Aaa 4.50 8/15/97 608
611,936
Natick Mass., Gen. Oblig., Ser. 96, B.A.N.
NR 3.70 5/22/97 1,000
1,000,346
Needham Mass., Gen. Oblig., Ser. 96
Aa 4.75 5/15/97 865
871,327
North Attleborough Mass., Gen. Oblig., Ser. 93A, M.B.I.A.
Aaa 3.80 1/15/97 728
728,168
Northampton Mass., Gen. Oblig., Ser. 96, M.B.I.A.
Aaa 4.25 5/15/97 752
754,552
Peabody Mass., Gen. Oblig., Ser. 96, B.A.N.
NR 4.15 8/15/97 1,000
1,002,887
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fac., Fin.
Auth. Rev.,
Pharmaceuticals, Ser. 83A, A.N.N.O.T.
AAA(c) 3.80 12/01/96 2,000
2,000,000
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Revere Hsg. Auth. Multifamily Mtge. Rev., Waters Edge Apts.
Proj., Ser. 91C, F.R.W.D., F.S.A.
A-1(c) 4.00% 9/06/96 $ 1,990 $
1,990,000
- -----------
Total Investments--96.7%
(cost $48,822,504;(e))
48,822,504
Other assets in excess of liabilities--3.3%
1,688,908
- -----------
Net Assets--100%
$50,511,412
- -----------
- -----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate
Demand Notes is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or
direct U.S.
guaranteed obligations.
(e) The cost of securities for federal income tax purposes
is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- -----4 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilitie MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
Assets
August 31, 1996
<S>
<C>
Investments, at amortized cost which approximates market
value............................................
$48,822,504
Cash........................................................
..............................................
83,642
Receivable for investments
sold........................................................
................... 3,748,179
Receivable for Series shares
sold........................................................
................. 446,889
Interest
receivable..................................................
..................................... 274,359
Other
assets......................................................
........................................ 1,488
- ---------------
Total
assets......................................................
..................................... 53,377,061
- ---------------
Liabilities
Payable for investments
purchased...................................................
...................... 1,710,679
Payable for Series shares
reacquired..................................................
.................... 1,055,065
Accrued
expenses....................................................
...................................... 63,707
Dividends
payable.....................................................
.................................... 25,098
Management fee
payable.....................................................
............................... 5,460
Distribution fee
payable.....................................................
............................. 2,940
Deferred trustees'
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 2,865,649
- ---------------
Net
Assets......................................................
..........................................
$50,511,412
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par
value.......................................................
$ 505,114
Paid-in capital in excess of
par.........................................................
.............. 50,006,298
- ---------------
Net assets, August 31,
1996........................................................
....................... $50,511,412
- ---------------
- ---------------
Net asset value, offering price and redemption price per
share ($50,511,412 / 50,511,412 shares of
beneficial interest issued and outstanding; unlimited
number of shares authorized).....................
$1.00
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest................................. $
1,978,034
-------------
- --
Expenses
Management fee...........................
273,444
Distribution fee.........................
68,361
Custodian's fees and expenses............
60,000
Reports to shareholders..................
32,000
Transfer agent's fees and expenses.......
25,000
Registration fees........................
15,000
Amortization of organization expenses....
11,150
Audit fees and expenses..................
10,800
Legal fees and expenses..................
5,000
Trustees' fees and expenses..............
3,900
Insurance expense........................
1,000
Miscellaneous............................
2,148
-------------
- --
Total expenses........................
507,803
Less: Management fee waiver..............
(205,083)
Custodian fee credit..................
(6,728)
-------------
- --
Net expenses..........................
295,992
-------------
- --
Net investment income.......................
1,682,042
-------------
- --
Realized Loss on Investments
Net realized loss on investment
transactions.............................
(130)
-------------
- --
Net Increase in Net Assets
Resulting from Operations................... $
1,681,912
-------------
- --
-------------
- --
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended August
31,
in Net Assets 1996
1995
<S> <C> <C>
Operations
Net investment income........ $ 1,682,042 $
1,349,006
Net realized loss on
investment transactions... (130)
(663)
--------------- -------
- --------
Net increase in net assets
resulting from
operations................ 1,681,912
1,348,343
--------------- -------
- --------
Dividends to shareholders (Note
1)........................... (1,681,912)
(1,348,343)
--------------- -------
- --------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold......................... 264,188,977
209,358,640
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 1,637,636
1,276,924
Cost of shares reacquired.... (272,137,014)
(191,091,855)
--------------- -------
- --------
Net increase (decrease) in
net assets from Series
share transactions........ (6,310,401)
19,543,709
--------------- -------
- --------
Total increase (decrease)....... (6,310,401)
19,543,709
Net Assets
Beginning of year............... 56,821,813
37,278,104
--------------- -------
- --------
End of year..................... $ 50,511,412 $
56,821,813
--------------- -------
- --------
--------------- -------
- --------
</TABLE>
- ------------------------------------------------------------
- --------------------
- -----6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940, as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The Massachusetts Money
Market Series (the
``Series'') commenced investment operations on August 5,
1991. The Series is
non-diversified and seeks to provide the highest level of
income that is exempt
from Massachusetts State, local and federal income taxes
with the minimum of
risk by investing in ``investment grade'' tax-exempt
securities having a
maturity of thirteen months or less and whose ratings are
within the two highest
ratings categories by a nationally recognized statistical
rating organization,
or if not rated, are of comparable quality. The ability of
the issuers of the
securities held by the Series to meet their obligations may
be affected by
economic developments in a specific state, industry or
region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: Portfolio securities of the Series
are valued at
amortized cost, which approximates market value. The
amortized cost method of
valuation involves valuing a security at its cost on the
date of purchase and
thereafter assuming a constant amortization to maturity of
any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of investments
are calculated on the identified cost basis. Interest income
is recorded on the
accrual basis.The Fund amortizes premiums and accretes
original issue discount
on portfolio securities as adjustments to interest income.
Expenses are recorded
on the accrual basis which may require the use of certain
estimates by
management.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason, no federal income tax
provision is required.
Dividends: The Series declares daily dividends from net
investment income.
Payment of dividends is made monthly. Income distributions
and capital gain
distributions are determined in accordance with income tax
regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred
approximately $51,000 in
organization and initial registration expenses. Such amount
was deferred and
amortized over the period of 60 months ended July 1996.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the services
of PIC, the
compensation of officers of the Fund, occupancy and certain
clerical and
bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. For the year
ended August 31, 1996, PMF voluntarily waived 75% of its
management fee. The
amount of fees waived for the year ended August 31, 1996
amounted to $205,083
($.004 per share; .375% of average net assets).
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund
through January 1,
1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund
under the same terms
and conditions as under the arrangement with PMFD. The
Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares
pursuant to the plan
of distribution at an annual rate of .125 of 1% of the
Series' average daily net
assets. The distribution fee is accrued daily and payable
monthly.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are (indirect)
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year
ended August 31, 1996,
the Series incurred fees of approximately $22,800 for the
services of PMFS. As
of August 31, 1996, approximately $1,800 of such fees were
due to PMFS. Transfer
agent fees and expenses in the Statement of Operations
include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Year Ended August 31,
- -------------------------------------------------------
1996 1995 1994 1993 1992
- ------- ------- ------- ------- -------
<S>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 1.00 $ 1.00
$ 1.00 $ 1.00 $ 1.00
Net investment income and realized
gains(a).................... .031 .031
.019 .021 .034
Dividends and distributions to
shareholders.................... (.031) (.031)
(.019) (.021) (.034)
- ------- ------- ------- ------- -------
Net asset value, end of
year................................... $ 1.00 $
1.00 $ 1.00 $ 1.00 $ 1.00
- ------- ------- ------- ------- -------
- ------- ------- ------- ------- -------
TOTAL
RETURN(b):...............................................
3.12% 3.10% 1.89% 2.17% 3.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000).................................. $50,511
$56,822 $37,278 $36,608 $18,019
Average net assets
(000)....................................... $54,689
$42,919 $42,427 $32,246 $15,477
Ratios to average net assets:(a)
Expenses, including distribution
fees....................... .554% .627%
.620% .365% .125%
Expenses, excluding distribution
fees....................... .429% .502%
.495% .240% .00%
Net investment
income....................................... 3.08%
3.14% 1.86% 2.11% 3.20%
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
- -----8 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Money Market
Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, Massachusetts
Money Market Series, as of August 31, 1996, the related
statements of operations
for the year then ended and of changes in net assets for
each of the two years
in the period then ended, and the financial highlights for
each of the five
years in the period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian and
broker. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, Massachusetts Money Market Series, as of August
31, 1996, the
results of its operations, the changes in its net assets,
and its financial
highlights for the respective stated periods in conformity
with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information MASSACHUSETTS
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends paid by the Series during such fiscal year.
Accordingly, we are
advising you that in the fiscal year ended August 31, 1996,
dividends paid from
net investment income of $.031 per share were all federally
tax-exempt interest
dividends.
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
Getting The Most
From Your Prudential
Mutual Fund.
Some mutual fund shareholders won't ever read this -- they
don't read annual
and semi-annual reports. It's quite understandable. These
annual and semi-
annual reports are prepared to comply with Federal
regulations. They are often
written in language that is difficult to understand. So when
most people run
into those particularly daunting sections of these reports,
they don't read
them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of
income and appreciation the Fund has achieved in various
time periods. The
average annual total return is an annualized representation
of the Fund's
performance -- it generally smoothes out returns and gives
you an idea how
much the Fund has earned in an average year, for a given
time period. Under
the performance box, you'll see legends that explain the
performance
information, whether fees and sales charges have been
included in returns,
and the inception dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past perfor-
mance is not
indicative of future results.
Portfolio Manager's Report
The portfolio manager who invests your money for you reports
on successful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial Statements
This is the kind of technical material that can intimidate
readers, but it
does contain useful information. The Notes provide a brief
history and
explanation of your Fund's objectives. In addition, they
also outline how
Prudential Mutual Funds prices securities. The Notes also
explain who manages
and distributes the Fund's shares, and more importantly, how
much they are
paid for doing so. Finally, the Notes explain how many
shares are outstanding
and the number issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a
tax advisor.
Performance Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a
hypothetical $10,000 investment in the Fund since its
inception or for 10
years (whichever is shorter). To help you put that return in
context, we are
required to include the performance of an unmanaged, broad
based securities
index, as well. The index does not reflect the cost of
buying the securities
it contains or the cost of managing a mutual fund. Of
course, the index
holdings do not mirror those of the fund -- the index is a
broadly based
reference point commonly used by investors to measure how
well they are doing.
A definition of the selected index is also provided.
Investors generally cannot
invest directly in an index.
<PAGE>
Getting The Most
From Your Prudential
Mutual Fund.
How many times have you read these letters -- or other
financial materials --
and stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll
use this space from time to time to explain some of the
words you might have
read, but not understood. And if you have a favorite word
that no one can
explain to your satisfaction, please write to us.
Basis Point: One 1/100th of 1%. For example, one half of one
percentage point
is 50 basis points.
Call Option: A contract giving the holder a right to buy
stocks or bonds at a
predetermined price (called the strike price) before a
predetermined expiration
date. A buyer of a call option generally expects to benefit
from a rise in the
price of the stock or bond.
Capital Gain/Capital Loss: The difference between the cost
of a capital asset
(for example, a stock, bond or mutual fund share) and its
selling price. Under
current law the federal income tax rate for individuals on a
long-term capital
gain is up to 28%.
Collateralized Mortgage Obligations (CMOs): Pools of
mortgage-backed securities
sliced in maturity ranges that bear differing interest
rates. These instruments
are sensitive to changes in interest rates and homeowner
refinancing activity.
They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from another
security. The rate
of return of these financial products rises and falls --
sometimes very
suddenly -- in response to changes in some specific interest
rate, currency,
stock or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to
banks and other depository institutions.
Federal Funds Rate: The interest rate charged by one bank to
another on
overnight loans.
Futures Contract: An agreement to deliver a specific amount
of a commodity or
financial instrument at a set price at a stipulated time in
the future.
Leverage: The use of borrowed assets to enhance return on
equity. The
expectation is that the interest rate charged will be lower
than the return on
the investment. While leverage can increase profits, it can
also magnify
losses.
Liquidity: The ease with which a financial instrument (or
mutual fund) can be
bought or sold (converted into cash) in the financial
markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings
per share for a 12-month period.
Option: An agreement to sell something, such as shares of
stock, by a certain
time for a specified price. An option need not be exercised.
Spread: The difference between two values; most often used
to describe the
difference between prices bid and asked for a security.
Yankee Bond: A bond denominated in U.S. dollars but sold by
a foreign company
or government in the U.S. market.
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income growth
has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for which
Prudential Mutual Fund Management manages a state-specific
municipal bond
mutual fund
Revised: October, 1996
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M630 MF153E
Cat. #444595R
(ICON)
Prudential
Municipal Series Fund
- ---------------------
Maryland Series
ANNUAL REPORT
Aug. 31, 1996
(LOGO)
Prudential Municipal Series Fund
Maryland Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the
municipal bond market experienced a lot of turbulence.
Interest rates first
fell, then rose, and finally finished close to where they
started. As a result,
investors primarily received coupon income for the past 12
months. The
Prudential Municipal Series Fund -- Maryland Series
performed better than the
average Maryland municipal fund over the last 12 months, as
measured by Lipper
Analytical Services.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 8/31/96
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A 5.6% (5.4)4 36.1% (36.0)4
N/A 53.5% (53.4)4
Class B 5.2 (5.0)4 33.4 (33.3)4
81.5% (80.2)4 119.0 (115.7)4
Class C 4.9 (4.8)4 N/A
N/A 10.8 (10.7)4
Lipper Maryland Muni Avg.3 4.7 38.7
89.3 126.5
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1
As of 9/30/96
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C>
<C>
Class A 3.4% (3.3)4 5.7% N/A
6.3%
Class B 1.1 (1.0)4 5.8 6.2%
(6.1)4 7.1% (6.9)4
Class C 4.9 (4.8)4 N/A N/A
5.5
</TABLE>
<TABLE>
<CAPTION>
Dividends &
Yields
As of 8/31/96 Taxable
Equivalent Yield5
Total Dividends 30-Day
At Tax Rates Of
Paid for 12 Mos. SEC Yield
36% 39.6%
<S> <C> <C> <C>
<C>
Class A $0.51 4.66% (4.61)4 7.75%
(7.66)4 8.21% (8.12)4
Class B $0.47 4.40 (4.35)4 7.31
(7.23)4 7.75 (7.66)4
Class C $0.44 4.15 (4.10)4 6.90
(6.81)4 7.31 (7.22)4
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical Services. The
cumulative total returns do not take into account sales
charges. The average
annual returns do take into account applicable sales
charges. The Series
charges a maximum front-end sales load of 3% for Class A
shares and a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for six
years, for Class B shares. Class C shares have a 1% CDSC for
one year. Class B
shares automatically convert to Class A shares on a
quarterly basis, after
approximately seven years.
2Inception dates: 1/22/90 Class A; 1/22/85 Class B; 8/1/94
Class C.
3The Lipper Maryland Municipal Bond fund average includes 32
funds for one
year, 11 funds for five years, four funds for 10 years and
two funds since
inception of the Class B shares on 1/22/85.
4Without waiver of management fees and/or expense
subsidization, the Series'
cumulative and average annual total returns and yields would
have been lower,
as indicated in parentheses ( ).
5Taxable equivalent yields reflect federal and applicable
state taxes.
How Investments Compared.
(As of 8/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher yields means tolerating more risk.
The greater the
risk, the larger the potential reward or loss. In addition,
we've included
historical 20-year average annual returns. These returns
assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Marie Conti, Fund Manager (PICTURE)
Portfolio
Manager's Report
The Series primarily invests in well researched, long-term
municipal bonds that
offer a high level of income exempt from Maryland state and
federal income
taxes, consistent with preservation of capital. However,
certain shareholders
may be subject to federal alternative minimum tax. There can
be no assurance
that the Series will achieve its investment objective.
More Insurance.
As buyers become more quality conscious, more tax-free
municipal bonds are
being issued with insurance. In the first half of 1996, 46%
of all new bonds
issued nationally were insured. Insured bonds in our fund
now total 48% of
assets, up from 30% a year earlier. This benefits the
investor, because payment
of both interest and principal of a bond are guaranteed by
an insurance
company. Of course, no insurance is available to prevent the
price of bonds,
and bond funds, from fluctuating day to day.
Strategy Session.
Quite Volatile.
Municipal bond interest rates and prices experienced a lot
of volatility over
the past year. Last fall, interest rates fell and bond
prices rose as investors
feared a recession. But by early 1996, the tables turned.
The economy gained
new strength, setting off inflation fears, which pushed
interest rates higher
and bond prices lower. Municipal bond interest rates rose
from 5.63% on January
4 to 6.34% on June 13 -- a difference of nearly three-
quarters of a percentage
point, as measured by the Bond Buyer's Revenue Bond Index, a
widely-watched
industry barometer. But when the dust settled on August 31,
1996, municipal
bond interest rates were slightly lower than they had been
12 months earlier:
6.09% on August 29, 1996 vs. 6.26% a year earlier.
We Adjusted.
During the last 12 months, we periodically adjusted the
Series' holdings to
take advantage of these changing market conditions. Last
fall, as interest
rates were falling, we held a longer duration (a measure of
the Series'
sensitivity to changing interest rates) to capitalize on
rising bond prices.
In February, we reduced duration to 7.8 years to protect
assets. When interest
rates appeared to be peaking, we increased duration once
more, ending on August
31, 1996 at 9.0 years. Throughout the 12 months, we
emphasized call protection
(many municipal bonds can be redeemed before maturity) and
tried to upgrade
credit quality where possible when the interest rate
differences between
higher- and lower-rated bonds got smaller.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
<PAGE>
What Went Well.
Time To Upgrade.
When the price difference between higher and lower quality
bonds got smaller,
we took the opportunity to upgrade the quality of our
holdings. Why? Because we
were no longer being paid enough to accept the added credit
risk. We lowered
our exposure to those bonds with credit ratings of A or
below. As a percentage
of net assets, we reduced these holdings to about 17% on
August 31, 1996 from
about 28% a year earlier. At the same time, our assets in
insured bonds rose
substantially, to 48% from 30%.
Culling Callables.
Callable bonds generally carry higher coupons to compensate
for the risk that
they might be redeemed before maturity. But we've found that
this alone is not
enough of a reason to own many of them. Prices of callable
bonds do not rise
as fast as non-callables when the bond market rallies,
because price depends on
maturity, which can't be calculated with certainty. So we've
been selling bonds
that are callable in less than eight years, and replacing
them either with
non-callable bonds or those that are callable in 10 years or
more. In this way
we'll be able to better manage the risks we face when
interest rates rise or
fall suddenly, as they have been apt to do in recent years.
Five Largest
Issuers.
5.2% Montgomery County
4.9% Maryland State
Transportation Authority
4.6% Prince Georges County
4.5% Ocean City
4.2% Harford County
Expressed as a percentage of total net assets as of 8/31/96.
And Not So Well.
A Little Long.
We believe we performed better than the average Maryland
fund by holding a
shorter duration early this year when interest rates started
to rise. We would
have performed even better had we held on to that shorter
duration just a
little longer. Since duration measures the Series'
sensitivity to changes in
interest rates, a shorter duration better protects the
Series' principal when
interest rates rise. We lengthened duration from 7.8 years
in February to 8.7
years in March, and did not shorten below that level for the
rest of the spring
and summer.
Looking Ahead.
Right now, we're cautious. We're expecting economic growth
in the second half
to slow. Meanwhile, the Federal Reserve Board is concerned
that the economy is
growing so rapidly that a shortage of workers is developing,
which could induce
wage inflation. It is possible that the board will raise
short-term interest
rates this year, if upward pressure on wages results in
inflationary price
increases to the consumer.
1
<PAGE>
President's Letter October 7,
1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996.
According to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just as
they go up). There's no better time than now to be talking
with your Financial
Advisor or Registered Representative. She or he can help
you determine
reasonable expectations about both the potential performance
and risks
associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual and
institutional investors. We plan to improve the range and
quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change
in the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
LONG-TERM INVESTMENTS--95.5%
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Baltimore Conv. Ctr. Rev., F.G.I.C.
Aaa 5.75% 9/01/08 $ 1,075 $
1,095,694
Baltimore Econ. Dev. Lease Rev., Armistead Partnership
BBB+(c) 7.00 8/01/11 1,000
1,050,410
Baltimore Rev., Ref. Wastewater Proj., Ser. A, F.G.I.C.
Aaa 5.50 7/01/26 1,100
1,042,910
Charles Cnty.
Aa 5.50 3/01/05 665
685,941
Charles Cnty.
Aa 5.50 3/01/06 695
713,626
Gaithersburg Hosp. Fac. Rev., Ref. Impvt. Shady Grove
Adventist Hosp., F.S.A.
Aaa 5.50 9/01/15 1,000
959,060
Gaithersburg Nursing Home Rev., Ref. Shady Grove Adventist
Hosp., F.S.A.
Aaa 5.50 9/01/15 1,000
959,060
Harford Cnty.
Aa 5.50 3/01/06 1,500
1,545,885
Kent Cnty., Coll. Rev. Proj. & Ref., Washington Coll. Proj.
Baa 7.70 7/01/18 750
812,573
Maryland St. & Local Facs., Second Ser.
Aaa 5.125 10/15/10 1,500
1,452,300
Maryland St. Hlth. & Higher Edl. Facs., Auth. Rev.,
Doctor's Comn. Hosp.
Baa 5.50 7/01/24 1,000
860,580
Howard Cnty. Gen. Hosp.
Baa1 5.50 7/01/21 1,000
868,970
Proj. & Ref. Mercy Medical Center, F.S.A.
Aaa 5.75 7/01/26 1,800
1,754,748
Maryland St. Hsg. & Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev. Prog., Sixth Ser.
Aa 7.125 4/01/14 705
722,569
Sngl. Fam. Mtge. Rev. Prog., Third Ser.
Aa 8.00 4/01/18 750
763,282
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. For
Physics
BBB(c) 6.625 1/01/17 1,000
1,008,150
Maryland St. Trans. Auth., Baltimore Washington Int'l.
Airport, F.G.I.C.
Aaa 6.25 7/01/14 1,750
1,813,542
Maryland Wtr. Quality Fin. Admin., Revolving Loan Fund
Rev.,
Ser. A
Aa 5.90 9/01/04 565
600,267
Montgomery Cnty.,
Cons. Pub. Impvt.
Aaa 9.75 6/01/01 450
547,614
Cons. Pub. Impvt., Ser. A
Aaa 5.75 10/01/07 1,300
1,357,577
Northeast Waste Disp. Auth., Baltimore City Sludge Proj.
NR 7.25 7/01/07 904
923,906
Ocean City,
M.B.I.A.
Aaa 5.40 10/01/11 500
486,505
M.B.I.A.
Aaa 5.50 10/01/15 1,235
1,188,366
Prince Georges Cnty.,
Cons. Pub. Impvt., M.B.I.A.
Aaa 5.25 1/01/15 750
714,315
Hosp. Rev., Dimensions Hlth. Corp.
A 5.30 7/01/24 750
667,297
Pollution Control Rev., Ref. Potomac Elec. Proj.,
M.B.I.A.
Aaa 5.75 3/15/10 1,100
1,118,623
Ref. Cons. Pub. Impvt.
A1 5.25 10/01/11 1,000
971,550
Stormwater Mgmt.
Aa 6.50 3/15/03 1,140
1,242,338
Puerto Rico Comnwlth.,
Aqueduct & Swr. Auth. Rev., M.B.I.A.
Aaa 6.00 7/01/07 1,000
1,070,690
Gen. Oblig., F.S.A.
Aaa 7.958 (d) 7/01/20 1,000
976,250
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Puerto Rico Ind. Tourist, Edu. Med. & Env. Ctrl. Facs.,
M.B.I.A.
Aaa 6.25% 7/01/24 $ 1,250 $
1,294,138
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A.
Aaa 7.065(d) 1/16/15 1,000
922,500
Takoma Park Hosp. Facs. Rev., Ref. Impvt., Washington
Adventist Hosp., F.S.A.
Aaa 6.50 9/01/12 1,000
1,086,550
Washington Dist. of Columbia, Metro. Area Transit Auth.
Rev., F.G.I.C.
Aaa 6.00 7/01/08 1,000
1,064,500
Washington Suburban San. Dist., Water Supply
Aa1 5.25 6/01/14 950
904,600
- -----------
Total long-term investments (cost $34,756,010)
35,246,886
- -----------
SHORT-TERM INVESTMENTS--3.5%
Puerto Rico Comnwlth.,
Gov't. Dev. Bank, Ser. 85, F.R.W.D.
VMIG1 3.10 9/04/96 100
100,000
Hwy. & Trans. Auth. Rev., F.R.W.D.
VMIG1 3.10 9/04/96 1,200
1,200,000
- -----------
Total short-term investments (cost $1,300,000)
1,300,000
- -----------
Total Investments--99.0%
(cost $36,056,010; Note 4)
36,546,886
Other assets in excess of liabilities--1.0%
350,914
- -----------
Net Assets--100%
$36,897,800
- -----------
- -----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate
Demand Notes is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely
indexed to a floating
interest rate. The rate shown is the rate at year end.
NR - Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- ----- 4 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MARYLAND
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
August 31, 1996
<S> <C>
- ---------------
Investments, at value (cost
$36,056,010)................................................
.................. $36,546,886
Interest
receivable..................................................
..................................... 643,847
Other
assets......................................................
........................................ 1,161
Receivable for Series shares
sold........................................................
................. 653
- ---------------
Total
assets......................................................
..................................... 37,192,547
- ---------------
Liabilities
Bank
overdraft...................................................
......................................... 71,487
Payable for Series shares
reacquired..................................................
.................... 88,264
Accrued
expenses....................................................
...................................... 81,508
Dividends
payable.....................................................
.................................... 26,793
Management fee
payable.....................................................
............................... 14,372
Distribution fee
payable.....................................................
............................. 9,623
Deferred trustees'
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 294,747
- ---------------
Net
Assets......................................................
..........................................
$36,897,800
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 34,329
Paid-in capital in excess of
par.........................................................
.............. 35,939,039
- ---------------
35,973,368
Accumulated net realized gain on
investments.................................................
.......... 433,556
Net unrealized appreciation on
investments.................................................
............ 490,876
- ---------------
Net assets, August 31,
1996........................................................
....................... $36,897,800
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($18,338,535 / 1,707,253 shares of beneficial interest
issued and outstanding)......................
$10.74
Maximum sales charge (3.0% of offering
price)......................................................
.... .33
- ---------------
Maximum offering price to
public......................................................
................. $11.07
- ---------------
- ---------------
Class B:
Net asset value, offering price and redemption price per
share
($18,512,086 / 1,721,298 shares of beneficial interest
issued and outstanding)......................
$10.75
- ---------------
- ---------------
Class C:
Net asset value, offering price and redemption price per
share
($47,179 / 4,387 shares of beneficial interest issued
and outstanding)..............................
$10.75
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest................................... $
2,210,285
-----------
- ----
Expenses
Management fee.............................
192,126
Distribution fee--Class A..................
18,483
Distribution fee--Class B..................
99,492
Distribution fee--Class C..................
324
Custodian's fees and expenses..............
66,000
Reports to shareholders....................
43,000
Registration fees..........................
36,000
Transfer agent's fees and expenses.........
31,000
Audit fee and expenses.....................
12,300
Legal fees and expenses....................
10,000
Trustees' fees and expenses................
3,900
Miscellaneous..............................
9,154
-----------
- ----
Total expenses..........................
521,779
Less: Management fee waiver................
(19,213)
Custodian fee credit....................
(17,574)
-----------
- ----
Net expenses............................
484,992
-----------
- ----
Net investment income.........................
1,725,293
-----------
- ----
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions....................
786,866
Financial futures contracts................
191,897
Written options transactions...............
13,504
-----------
- ----
992,267
-----------
- ----
Net change in unrealized
appreciation/depreciation of:
Investments................................
(677,782)
Financial futures contracts................
4,219
-----------
- ----
(673,563)
-----------
- ----
Net gain on investments.......................
318,704
-----------
- ----
Net Increase in Net Assets
Resulting from Operations..................... $
2,043,997
-----------
- ----
-----------
- ----
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August
31,
in Net Assets 1996
1995
<S> <C> <C>
Operations
Net investment income.......... $ 1,725,293 $
2,185,896
Net realized gain (loss) on
investment transactions..... 992,267
(429,571)
Net change in unrealized
appreciation/depreciation of
investments................. (673,563)
442,801
------------ -------
- -----
Net increase in net assets
resulting from operations... 2,043,997
2,199,126
------------ -------
- -----
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (867,743)
(561,997)
Class B..................... (855,800)
(1,621,246)
Class C..................... (1,750)
(2,653)
------------ -------
- -----
(1,725,293)
(2,185,896)
------------ -------
- -----
Distributions from net realized
gains
Class A..................... --
(21,234)
Class B..................... --
(419,138)
Class C..................... --
(255)
------------ -------
- -----
--
(440,627)
------------ -------
- -----
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 2,762,194
2,121,739
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 1,114,649
1,744,018
Cost of shares reacquired...... (6,489,419)
(18,256,314)
------------ -------
- -----
Net decrease in net assets from
Series share transactions... (2,612,576)
(14,390,557)
------------ -------
- -----
Total decrease.................... (2,293,872)
(14,817,954)
Net Assets
Beginning of year................. 39,191,672
54,009,626
------------ -------
- -----
End of year....................... $ 36,897,800 $
39,191,672
------------ -------
- -----
------------ -------
- -----
</TABLE>
- ------------------------------------------------------------
- --------------------
- ----- 6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940, as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The Maryland Series (the
``Series'') commenced
investment operations in January, 1985. The Series is
diversified and seeks to
achieve its investment objective of obtaining the maximum
amount of income
exempt from federal and applicable state income taxes with
the minimum of risk
by investing in ``investment grade'' tax-exempt securities
whose ratings are
within the four highest ratings categories by a nationally
recognized
statistical rating organization or, if not rated, are of
comparable quality. The
ability of the issuers of the securities held by the Series
to meet their
obligations may be affected by economic or political
developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: The Fund values municipal securities
(including
commitments to purchase such securities on a ``when-issued''
basis) on the basis
of prices provided by a pricing service which uses
information with respect to
transactions in bonds, quotations from bond dealers, market
transactions in
comparable securities and various relationships between
securities in
determining values. If market quotations are not readily
available from such
pricing service, a security is valued at its fair value as
determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of debt
securities at a set
price for delivery on a future date. Upon entering into a
financial futures
contract, the Series is required to pledge to the broker an
amount of cash
and/or other assets equal to a certain percentage of the
contract amount. This
amount is known as the ``initial margin''. Subsequent
payments, known as
``variation margin'', are made or received by the Series
each day, depending on
the daily fluctuations in the value of the underlying
security. Such variation
margin is recorded for financial statement purposes on a
daily basis as
unrealized gain or loss. When the contract expires or is
closed, the gain or
loss is realized and is presented in the statement of
operations as net realized
gain (loss) on financial futures contracts. The Series
invests in financial
futures contracts in order to hedge its existing portfolio
securities or
securities the Series intends to purchase, against
fluctuations in value caused
by changes in prevailing interest rates. Should interest
rates move
unexpectedly, the Series may not achieve the anticipated
benefits of the
financial futures contracts and may realize a loss. The use
of futures
transactions involves the risk of imperfect correlation in
movements in the
price of futures contracts, interest rates and the
underlying hedged assets.
Option Writing: When the Fund writes an option, an amount
equal to the premium
received by the Fund is recorded as a liability and is
subsequently adjusted to
the current market value of the option written. Premiums
received from writing
options which expire unexercised are treated by the Fund on
the expiration date
as realized gains from securities or currencies based upon
the type of option
written. The difference between the premium and the amount
paid on effecting a
closing purchase transaction, including brokerage
commissions, is also treated
as a realized gain, or if the premium received is less than
the amount paid for
the closing purchase transaction, as a realized loss. If a
call option is
exercised, the premium is added to the proceeds from the
sale of the underlying
security or currency in determining whether the Fund has
realized a gain or
loss. If a put option is exercised, the premium reduces the
cost basis of the
securities or currencies purchased by the Fund. The Fund as
writer of an option
may have no control over whether the underlying securities
may be sold (call) or
purchased (put) and as a result bears the market risk of an
unfavorable change
in the price of the security underlying the writen option.
There were no written
options outstanding at August 31, 1996.
Securities Transactions and Investment Income: Securities
transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. Expenses are recorded on the accrual basis
which may require the
use of certain estimates by management. The Series amortizes
premiums and
original issue discount paid on purchases of portfolio
securities as adjustments
to interest income.
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
based upon the
relative proportion of net assets of each class at the
beginning of the day.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
to continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason and because substantially all
of the Series' gross
income consists of tax-exempt interest, no federal income
tax provision is
required.
Dividends and Distributions: The Series declares daily
dividends from net
investment income. Payment of dividends is made monthly.
Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management, LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the services
of PIC, the
compensation of officers of the Fund, occupancy and certain
clerical and
bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily
net assets) of its
management fee, which amounted to $19,213 ($0.006 per share
for Class A, B and C
shares; .05% of average net assets) until further notice.
The Series' is not
required to reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996,
Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A
shares of the Fund
and is serving the Fund under the same terms and conditions
as under the
arrangement with PMFD. PSI is also the distributor of the
Class B and Class C
shares of the Fund. The Fund compensates PMFD and PSI for
distributing and
servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution (the ``Class A, B and C Plans'') regardless of
expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with
respect to Class A
shares, for distribution-related activities at an annual
rate of up to .30 of
1%, .50 of 1% and 1%, of the average daily net assets of the
Class A, B and C
shares, respectively. Such expenses under the Plans were .10
of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class
A, B and C shares,
respectively, for the year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received
approximately
$4,400 in front-end sales charges resulting from sales of
Class A shares during
the year ended August 31, 1996. From these fees, PMFD and
PSI paid such sales
charges to an affiliated broker-dealer which in turn paid
commissions to
salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August
31, 1996, it received
approximately $33,400 and $200 in contingent deferred sales
charges imposed upon
certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year
ended August 31, 1996,
the Series incurred fees of approximately $23,900 for the
services of PMFS. As
of August 31, 1996, approximately $1,900 of such fees were
due to PMFS. Transfer
agent fees and expenses in the Statement of Operations
include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series,
excluding short-term
investments, for the year ended August 31, 1996 were
$15,255,672 and
$16,830,152, respectively.
- ------------------------------------------------------------
- --------------------
- ----- 8
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
The cost basis of investments for federal income tax
purposes is substantially
the same as for financial reporting purposes and,
accordingly, as of August 31,
1996, net unrealized appreciation of investments for federal
income tax purposes
is $490,876 (gross unrealized appreciation--$836,497; gross
unrealized
depreciation $345,621).
The Fund utilized its capital loss carryforward of
approximately $399,100 to
offset the Series net taxable gains realized and recognized
in the fiscal year
ended August 31, 1996.
Transactions in written options during the period ended
August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number
of Premiums
Contracts Received
----------- ---------
- -
<S> <C> <C>
Options written................... 60 $
13,504
Options expired................... )(60
(13,504)
----------- ---------
- -
Options outstanding at August 31,
1996 0 $
0
----------- ---------
- -
----------- ---------
- -
</TABLE>
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class
A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares
are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Class C shares are sold
with a contingent
deferred sales charge of 1% during the first year. Class B
shares will
automatically convert to Class A shares on a quarterly basis
approximately seven
years after purchase. A special exchange privilege is also
available for
shareholders who qualify to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of
beneficial interest of
each class at $.01 par value per share. Transactions in
shares of beneficial
interest for the fiscal years ended August 31, 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ----------------------------------- ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 58,783 $
649,434
Shares issued in reinvestment of
dividends........................ 53,117
575,999
Shares reacquired.................. (308,466)
(3,328,355)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................ (196,566)
(2,102,922)
Shares issued upon conversion from
Class B.......................... 240,370
2,604,069
---------- --------
- ----
Net increase in shares
outstanding...................... 43,804 $
501,147
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class A Shares
Amount
- ----------------------------------- ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 30,696 $
321,277
Shares issued in reinvestment of
dividends and distributions...... 36,276
380,528
Shares reacquired.................. (516,337)
(5,397,762)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................ (449,365)
(4,695,957)
Shares issued upon conversion from
Class B.......................... 1,858,567
19,167,920
---------- --------
- ----
Net increase in shares
outstanding...................... 1,409,202 $
14,471,963
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 192,644 $
2,088,999
Shares issued in reinvestment of
dividends........................ 49,517
537,616
Shares reacquired.................. (287,898)
(3,130,338)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................ (45,737)
(503,723)
Shares reacquired upon conversion
into Class A..................... (240,066)
(2,604,069)
---------- --------
- ----
Net decrease in shares
outstanding...................... (285,803) $
(3,107,792)
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold........................ 168,521 $
1,765,335
Shares issued in reinvestment of
dividends and distributions...... 133,516
1,361,503
Shares reacquired.................. (1,235,993)
(12,775,937)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................ (933,956)
(9,649,099)
Shares reacquired upon conversion
into Class A..................... (1,856,766)
(19,167,920)
---------- --------
- ----
Net decrease in shares
outstanding...................... (2,790,722)
$(28,817,019)
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 2,200 $
23,761
Shares issued in reinvestment of
dividends........................ 96
1,034
Shares reacquired.................. (2,795)
(30,726)
---------- --------
- ----
Net decrease in shares
outstanding...................... (499) $
(5,931)
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold........................ 3,361 $
35,127
Shares issued in reinvestment of
dividends and distributions...... 194
1,987
Shares reacquired.................. (8,221)
(82,615)
---------- --------
- ----
Net decrease in shares
outstanding...................... (4,666) $
(45,501)
---------- --------
- ----
---------- --------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
----------------------
- -------------------------------
Year
Ended August 31,
----------------------
- -------------------------------
1996 1995
1994 1993 1992
------- -------
- ------- ------ ------
<S> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 10.66 $ 10.66
$ 11.64 $11.11 $10.67
------- -------
- ------- ------ ------
Income from investment operations
Net investment income............... .51(a) .53(a)
.57 .62 .63
Net realized and unrealized gain
(loss) on investment
transactions..................... .08 .10
(.77) .65 .44
------- -------
- ------- ------ ------
Total from investment
operations.................... .59 .63
(.20) 1.27 1.07
------- -------
- ------- ------ ------
Less distributions
Dividends from net investment
income........................... (.51) (.53)
(.57) (.62) (.63)
Distributions from net realized
gains............................ -- (.10)
(.21) (.12) --
------- -------
- ------- ------ ------
Total distributions.............. (.51) (.63)
(.78) (.74) (.63)
------- -------
- ------- ------ ------
Net asset value, end of year........ $ 10.74 $ 10.66
$ 10.66 $11.64 $11.11
------- -------
- ------- ------ ------
------- -------
- ------- ------ ------
TOTAL RETURN(b):.................... 5.58% 6.32%
(1.75)% 11.89% 10.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $18,339 $17,726
$ 2,709 $2,930 $1,335
Average net assets (000)............ $18,484 $11,341
$ 2,877 $2,068 $1,080
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.10%(a)
1.30%(a) .95% .96% .96%
Expenses, excluding distribution
fees.......................... 1.00%(a)
1.20%(a) .85% .86% .86%
Net investment income............ 4.69%(a)
4.96%(a) 5.18% 5.51% 5.80%
Portfolio turnover rate............. 42% 49%
40% 41% 34%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each year reported and includes reinvestment
of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
- ----- 10 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------
- --------------------------------- ----------------------
- -------
Year
Ended August 31, Year Ended August
31,
----------------------
- --------------------------------- ----------------------
- -------
1996 1995
1994 1993 1992 1996 1995
------- -------
- ------- ------- ------- ------------ -------
- -----
<S> <C> <C>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.67 $ 10.67
$ 11.65 $ 11.12 $ 10.68 $10.67 $
10.67
------- -------
- ------- ------- ------- ----- ---
- ---
Income from investment operations
Net investment income............... .47(a) .49(a)
.53 .58 .59 .44(a)
.47(a)
Net realized and unrealized gain
(loss) on investment
transactions..................... .08 .10
(.77) .65 .44 .08 .10
------- -------
- ------- ------- ------- ----- ---
- ---
Total from investment
operations.................... .55 .59
(.24) 1.23 1.03 .52 .57
------- -------
- ------- ------- ------- ----- ---
- ---
Less distributions
Dividends from net investment
income........................... (.47) (.49)
(.53) (.58) (.59) (.44)
(.47)
Distributions from net realized
gains............................ -- (.10)
(.21) (.12) -- --
(.10)
------- -------
- ------- ------- ------- ----- ---
- ---
Total distributions.............. (.47) (.59)
(.74) (.70) (.59) (.44)
(.57)
------- -------
- ------- ------- ------- ----- ---
- ---
Net asset value, end of period...... $ 10.75 $ 10.67
$ 10.67 $ 11.65 $ 11.12 $10.75 $
10.67
------- -------
- ------- ------- ------- ----- ---
- ---
------- -------
- ------- ------- ------- ----- ---
- ---
TOTAL RETURN(b):.................... 5.16% 5.88%
(2.13)% 11.43% 9.90% 4.90%
5.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $18,512 $21,414
$51,198 $57,598 $51,313 $ 47 $
52
Average net assets (000)............ $19,898 $33,497
$55,223 $53,780 $50,970 $ 43 $
58
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.50%(a)
1.55%(a) 1.35% 1.36% 1.37% 1.75%(a)
1.82%(a)
Expenses, excluding distribution
fees.......................... 1.00%(a)
1.05%(a) .85% .86% .87% 1.00%(a)
1.07%(a)
Net investment income............ 4.30%(a)
4.84%(a) 4.77% 5.11% 5.42% 4.05%(a)
4.55%(a)
Portfolio turnover rate............. 42% 49%
40% 41% 34% 42% 49%
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.70
----------
Income from investment operations
Net investment income............... .05
Net realized and unrealized gain
(loss) on investment
transactions..................... (.03)
----------
Total from investment
operations.................... .02
----------
Less distributions
Dividends from net investment
income........................... (.05)
Distributions from net realized
gains............................ --
----------
Total distributions.............. (.05)
----------
Net asset value, end of period...... $ 10.67
----------
----------
TOTAL RETURN(b):.................... .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $ 102
Average net assets (000)............ $ 31
Ratios to average net assets:
Expenses, including distribution
fees.......................... 2.21%(c)
Expenses, excluding distribution
fees.......................... 1.47%(c)
Net investment income............ 4.75%(c)
Portfolio turnover rate............. 40%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less than a
full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
11 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Maryland Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, Maryland
Series as of August 31, 1996, the related statements of
operations for the year
then ended and of changes in net assets for each of the two
years in the period
then ended, and the financial highlights for each of the
five years in the
period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, Maryland Series, as of August 31, 1996, the
results of its
operations, the changes in its net assets, and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information MARYLAND SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends paid by the Series during such fiscal year.
Accordingly, we are
advising you that in the fiscal year ended August 31, 1996,
dividends paid from
net investment income of $.51 per Class A share, $.47 per
Class B share, and
$.44 per Class C share were all federally tax-exempt
interest dividends.
We wish to advise you that the corporate dividends received
deduction for the
Series is zero. Only funds that invest in U.S. equity
securities are entitled to
pass-through a corporate dividends received deduction.
In January 1997, you will be advised on IRS Form 1099 DIV or
substitute 1099 DIV
as to the federal tax status of the distributions received
by you in calendar
year 1996.
- ------------------------------------------------------------
- --------------------
- ----- 12
<PAGE>
Prudential Muni Series Fund: Maryland Series
- --Lehman Bros. General Muni Debt. Index
Comparing A $10,000 Investment.
Prudential Municipal Series Fund: Maryland Series vs.
Lehman Bros. General Muni Debt Index.
(Chart)
(Class A)
(Chart)
(Class B)
(Chart)
(Class C)
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, will be
worth more or less than their original cost. The charts on
the right are
designed to give you an idea how much the Series' returns
can fluctuate from
year to year by measuring the best and worst calendar years
in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Municipal
Series Fund: Maryland
Series (Class A, Class B and Class C) with a similar
investment in the Lehman
Brothers Municipal Bond Index by portraying the initial
account values at the
commencement of operations of each class, and subsequent
account values at the
end of the most recent reporting period (August 31), as
measured on a quarterly
basis, beginning in 1990 for Class A shares; 1986 for Class
B shares; and 1994
for Class C shares. For purposes of the graphs, and unless
otherwise indicated,
in the accompanying tables it has been assumed (a) that the
maximum applicable
front-end sales charge was deducted from the initial $10,000
investment in
Class A shares; (b) the maximum applicable contingent
deferred sales charge was
deducted from the value of the investment in Class B and
Class C shares,
assuming full redemption on August 31, 1996; (c) all
recurring fees (including
management fees) were deducted; and (d) all dividends and
distributions were
reinvested. Class B shares automatically convert to Class A
shares, on a
quarterly basis, approximately seven years after purchase.
This conversion
feature is not reflected in the graph. The graph and
accompanying tables
reflect the past subsidy and/or waiver of expenses and/or
management fees.
* Without waivers and expense subsidies the value of the
$10,000 investment in
the Series and the Series' average annual total return, as
illustrated above,
would have been lower, as indicated in parentheses ( ).
The Index is a weighted index comprised of 21,000 municipal
bonds (General
obligation bonds, revenue bonds, insured bonds and
prerefunded bonds) selected
by Lehman Brothers as representative of the long-term
investment grade
municipal bond market. It is an unmanaged index that
includes the reinvestment
of all dividends, but does not reflect the transaction costs
and advisory fees
paid by the Series' investors. The Index's holdings differ
from the Series'
portfolio. The Index is not the only one that may be used to
characterize
performance of bond funds and other indices may portray
different comparative
performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M705 MF125E
74435M804 Cat. #6420828
74435M572
(ICON)
Prudential
Municipal
Series Fund
New York Series
ANNUAL
REPORT
Aug. 31, 1996
(LOGO)
<PAGE>
Prudential Municipal Series Fund
New York Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the municipal
bond market
experienced a lot of turbulence. Interest rates first fell,
then rose, and
finally finished close to where they started. As a result,
investors primarily
received coupon income for the past 12 months. The
Prudential Municipal Series
Fund - New York Series performed competitively with the
average New York
municipal fund over the last 12 months, as measured by
Lipper Analytical
Services.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 8/31/96
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A 4.5% (4.4) 4 41.6% (41.5)4
N/A 61.0% (60.9)4
Class B 4.1 (4.0)4 38.8 (38.7)4
81.6% (81.5)4 155.7 (155.5)4
Class C 3.9 (3.8)4 N/A
N/A 11.2 (11.1)4
Lipper New York Muni Avg.3 4.5 39.7
94.0 173.6
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1
As of 9/30/96
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A 2.3% (2.2)4 6.5%
N/A 7.1%
Class B 0.0 6.6 (6.5)4
6.4% 8.3
Class C 3.7 N/A
N/A 5.8 (5.7)4
</TABLE>
<TABLE>
<CAPTION>
Dividends
& Yields
Taxable Equivalent Yield5
As of Total Dividends 30-Day
At Tax Rates Of
8/31/96 Paid for 12 Mos. SEC Yield
36% 39.6%
<S> <C> <C>
<C> <C>
Class A $0.63 4.80% (4.75)4
8.14% (8.05)4 8.63% (8.53)4
Class B $0.58 4.54 (4.49)4
7.70 (7.61)4 8.16 (8.07)4
Class C $0.55 4.29 (4.24)4
7.28 (7.19)4 7.71 (7.62)4
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical Services. The
cumulative total returns do not take into account sales
charges. The average
annual returns do take into account applicable sales
charges. The Series charges
a maximum front-end sales load of 3% for Class A shares and
a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for six
years, for Class B shares. Class C shares have a 1% CDSC for
one year. Class B
shares automatically convert to Class A shares on a
quarterly basis, after
approximately seven years.
2Inception dates: 1/22/90 Class A; 9/13/84 Class B; 8/1/94
Class C.
3The Lipper New York Municipal Bond fund average includes 98
funds for one year,
43 funds for five years, 18 funds for 10 years and 12 funds
since inception of
the Class B shares on 9/13/84.
4Without waiver of management fees and/or expense
subsidization, the Series'
cumulative and average annual total returns and yields would
have been lower,
as indicated in parentheses ( ).
5Taxable equivalent yields reflect federal and applicable
state taxes.
How Investments Compared.
(As of 8/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets
change, so a mutual fund's
past performance should never be used to predict future
results. The risks to
each of the investments listed above are different - we
provide 12-month total
returns for several Lipper mutual fund categories to show
you that reaching for
higher yields means tolerating more risk. The greater the
risk, the larger the
potential reward or loss. In addition, we've included
historical 20-year average
annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Peter J. Allegrini and Christian Smith, Fund Managers
(PICTURE)
Portfolio
Managers' Report
(PICTURE)
The Series primarily invests in well reseached, long-term
municipal bonds that
offer a high level of income that is exempt from New York
state, New York City,
and federal income taxes, while simultaneously attempting to
preserve capital.
However, certain shareholders may be subject to federal
alternative minimum tax.
There can be no assurance that the Series will achieve its
investment objective.
More Insurance.
As municipal bond buyers become more quality conscious, more
tax-free municipal
bonds are being issued with insurance. In the first half of
1996, 33% of all
new bonds issued in New York were insured. Insured bonds in
our fund now total
40% of assets, up from 37% a year earlier. This benefits the
investor, because
payment of both interest and principal of a bond is
guaranteed by an insurance
company. Of course, no insurance is available to prevent the
price of bonds, and
bond funds, from fluctuating day to day.
Strategy Session.
Quite Volatile.
Municipal bond interest rates and prices experienced a lot
of volatility over
the past year, but ended close to where they started. Last
fall, interest rates
fell and bond prices rose as investors feared a recession.
But by early 1996,
the tables turned. The economy gained new strength, setting
off inflation fears,
which pushed interest rates higher and bond prices lower.
Municipal bond
interest rates rose from 5.63% on January 4 to 6.34% on
June 13 - a difference
of nearly three-quarters of a percentage point, as measured
by the Bond Buyer's
Revenue Bond Index, a widely-watched industry barometer. But
when the dust
settled on August 31, 1996, municipal bond interest rates
were slightly lower
than they had been 12 months earlier: 6.09% on August 29,
1996 vs. 6.26% a
year earlier.
We Adjusted Duration.
During the last 12 months, we periodically adjusted the
Series' holdings to
take advantage of these changing market conditions. Last
fall, as interest rates
were falling, we held a longer duration (a measure of the
Series' sensitivity to
changing interest rates) to capitalize on rising bond
prices. In 1996, we
reduced duration to protect assets. Throughout the 12
months, we emphasized
call protection (many municipal bonds can be redeemed before
maturity) and tried
to upgrade credit quality where possible when the interest
rate differences
between higher- and lower-rated bonds got smaller.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
CHART
<PAGE>
What Went Well.
Time To Upgrade.
When the price difference between higher and lower quality
bonds gets smaller,
it often appears to be a good time to upgrade the quality of
our holdings,
because we are no longer being paid enough to accept added
credit risk. We took
advantage of this opportunity by increasing our assets in
insured bonds to 40%
as of August 31, 1996, up from 37% a year ago.
A Bit More Safety.
We've been more interested this year in debt issued by
governmental entities
that have their own revenue streams dedicated to the
repayment of bonds, rather
than those that depend on annual appropriations by the state
legislature. For
example, over the last 12 months we've purchased bonds
issued by the
Metropolitan Transportation Authority and New York State
Environmental
Facilities Corp. because they have more readily identifiable
revenues to fund
debt service.
And Not So Well.
Too Long, Too Long.
Late in 1995, the U.S. economy was growing slowly. We
expected this to continue
into early 1996, so we held our duration - a measure of the
Series' sensitivity
to interest rate changes - fairly long, at 8.5 years as
late as March. But the
economic slowdown was only temporary, largely the result of
the government
shutdown and the severe weather in the Northeast. When the
economy accelerated,
we were caught off guard. A shorter duration would have
offered better
protection against rising interest rates. Our duration is
now 7.7 years, a
more neutral position.
Credit Quality.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
Five Largest Issuers.
8.9% New York City
General Obligation
8.2% New York State
Dormitory Authority
City University
7.3% New York State
Urban Development
6.4% Metropolitan Transit
Authority
Trans. Facs. Rev.
4.8% New York State Local
Govt. Assistance
Expressed as a percentage of total net assets as of 8/31/96.
Looking Ahead.
Right now, we're cautious. We're expecting economic growth
in the second half
of 1996 to slow. Meanwhile, the Federal Reserve Board is
concerned that the
economy is growing so rapidly that a shortage of workers is
developing, which
could induce wage inflation. It is possible that the board
will raise short-term
interest rates this year, if upward pressure on wages
results in inflationary
price increases to the consumer.
1
<PAGE>
President's Letter
October 7, 1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996.
According to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just
as they go up). There's no better time than now to be
talking with your
Financial Advisor or Registered Representative. She or he
can help you
determine reasonable expectations about both the potential
performance and
risks associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual
and institutional investors. We plan to improve the range
and quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change
in the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit. We're excited about our future and hope that
you are, too. Thank
you for your continued support and confidence in Prudential
Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
LONG-TERM INVESTMENTS--94.9%
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
City of Elmira, Wtr. Impt., Ser. B, A.M.B.A.C.
Aaa 5.95% 3/01/16 $ 5,395 $
5,420,087
City of New Rochelle Ind. Dev. Agcy.,
Coll. of New Rochelle
BBB-(c) 6.625 7/01/12 500
513,290
Coll. of New Rochelle
BBB-(c) 6.75 7/01/22 2,000
2,051,040
Dutchess Cnty. Res. Rec. Agcy. Rev., Solid Waste Mgmt.,
Ser. A, F.G.I.C.
Aaa 7.50 1/01/09 1,150
1,251,534
Islip Res. Rec., Ser. B, A.M.B.A.C.
Aaa 7.20 7/01/10 1,745
2,015,580
Jefferson Cnty. Ind. Dev. Agcy., Solid Waste Disp. Rev.
Baa1 7.20 12/01/20 1,500
1,590,630
Met. Trans. Auth. Facs. Rev.,
Commuter Facs., Ser. 7
Baa1 Zero 7/01/08 8,760
4,356,260
Commuter Facs., Ser. 7
Baa1 Zero 7/01/09 4,445
2,057,991
Commuter Facs., Ser. A, F.G.I.C.
Aaa 5.60 7/01/09 500
502,535
Commuter Facs., Ser. A, F.G.I.C.
Aaa 5.70 7/01/10 1,000
1,006,760
Commuter Facs., Ser. O
Baa1 5.50 7/01/17 2,500
2,307,575
Trans. Facs. Rev., Ser. A, F.S.A.
Aaa 5.50 7/01/08 3,630
3,629,709
Trans. Facs. Rev., Ser. A, F.S.A.
Aaa 5.60 7/01/09 2,900
2,897,129
Trans. Facs. Rev., Ser. A, F.S.A.
Aaa 5.70 7/01/10 4,600
4,603,496
Trans. Facs. Rev., Ser. N, F.G.I.C.
Aaa Zero 7/01/12 5,575
2,271,757
Trans. Facs. Rev., Ser. N, F.G.I.C.
Aaa Zero 7/01/13 4,000
1,532,600
Trans. Facs. Rev., Ser. O
Baa1 5.75 7/01/08 2,740
2,693,667
Trans. Facs. Rev., Ser. O
Baa1 5.75 7/01/13 1,975
1,898,686
Mun. Assist. Corp. for New York City, Ser. E
Aa 6.00 7/01/06 6,700
7,134,629
New York City Ind. Dev. Agcy., Spec. Fac. Rev.,
U.S.T.A. National Tennis Center Proj., F.S.A.
Aaa 6.375 11/15/14 1,000
1,055,550
Y.M.C.A. Of Greater N.Y. Proj.
NR 8.00 8/01/16 1,350
1,448,982
New York City, Gen. Oblig.,
Ser. A
Aaa 7.75 3/15/03 3,330(d)
3,701,928
Ser. B
Aaa 8.00 6/01/99 890(d)
972,610
Ser. B
Baa1 8.00 6/01/99 130
140,349
Ser. B
Baa1 7.50 2/01/01 4,000
4,340,000
Ser. B
Baa1 5.875 8/15/12 9,000
8,531,550
Ser. D
Baa1 8.00 8/01/03 2,500
2,785,600
Ser. D
Baa1 7.70 2/01/09 3,040
3,366,982
Ser. F
Baa1 8.20 11/15/03 3,000
3,371,400
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
New York St. Dorm. Auth. Rev.,
City Univ., Ser. A
Baa1 5.75% 7/01/13 $ 3,500 $
3,361,190
City Univ. Refunding Bonds
Baa1 6.00 7/01/14 6,500
6,415,370
City Univ. Sys. Cons., Ser. A
Baa1 8.125 7/01/07 3,435
3,697,331
City Univ. Sys. Cons., Ser. A
Baa1 5.625 7/01/16 5,600
5,271,280
City Univ. Sys. Cons., Ser. C, F.G.I.C.
Aaa 7.50 7/01/10 3,500
4,181,030
City Univ. Sys. Cons., Ser. D
Baa1 7.00 7/01/09 1,880
2,065,913
Coll. & Univ. Ed., M.B.I.A.
Aaa Zero 7/01/04 2,255
1,504,694
Episcopal Hlth. Svcs., G.N.M.A.
AAA(c) 7.55 8/01/29 3,000
3,239,970
Insured Mount Sinai Med. Sch., Ser. A, M.B.I.A.
Aaa 5.00 7/01/13 2,945
2,723,506
Long Island Med. Ctr., Ser. A, F.H.A.
Aa 7.625 8/15/08 2,595
2,739,749
Long Island Med. Ctr., Ser. A, F.H.A.
Aa 7.75 8/15/27 4,100
4,335,832
Mental Hlth. Svcs. Fac. Impvt., Ser. B
Baa1 6.50 8/15/11 3,000
3,101,640
Spec. Act. Sch. Districts, F.G.I.C.
Aaa 7.00 7/01/13 3,050
3,316,326
St. Univ. Edl. Facs., Ser. A
Baa1 5.25 5/15/15 8,600
7,754,706
St. Univ. Edl. Facs., Ser. B
Baa1 7.50 5/15/11 4,660
5,355,878
New York St. Energy Resch. & Dev. Auth. Rev.,
Brooklyn Union Gas Co., Ser. B, M.B.I.A.
Aaa 6.75 2/01/24 2,000(f)
2,132,860
Brooklyn Union Gas Co., Ser. D, M.B.I.A.
Aaa 5.635(e) 7/08/26 4,000
3,735,120
Con. Edison Co.
Aa3 7.50 7/01/25 6,735
7,204,429
Con. Edison Co., Ser.A
Aa3 7.50 1/01/26 4,775
5,131,215
New York St. Environ. Facs. Corp., Poll. Ctrl. Rev.,
Ser. C
Aaa 5.35 7/15/07 2,000
2,012,980
Ser. C
Aaa 5.45 7/15/08 3,090
3,110,641
Ser. C
Aaa 5.55 7/15/09 1,375
1,384,130
St. Wtr. Revolving Fund, Ser. B
Aa 7.50 3/15/11 1,300
1,402,154
St. Wtr. Revolving Fund, Ser. E
Aa 6.50 6/15/14 1,000
1,059,590
New York St. Hsg. Fin. Agcy. Rev., Ser. A,
Multifamily Hsg.
Aa 7.05 8/15/24 1,000
1,050,160
Ref. Hsg. Proj. Mtge., Ser. A, F.S.A.
Aaa 6.10 11/01/15 8,900
8,921,182
St. Univ. Constr., Ser. A
Aaa 8.00 5/01/11 3,600(d)
4,415,256
New York St. Local Gov't. Assistance Corp.,
Ser. C
A Zero 4/01/14 11,882
4,229,992
Ser. E
A 6.00 4/01/14 6,135
6,302,915
Ser. E
A 5.25 4/01/16 4,500
4,197,330
</TABLE>
- ------------------------------------------------------------
- --------------------
- -----4 See Notes to
Financial Statements.
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
New York St. Med. Care Facs. Fin. Agcy. Rev.,
Mental Hlth. Svcs., M.B.I.A.
Aaa 6.00% 8/15/02 $ 3,000 $
3,179,790
Mental Hlth. Svcs., Ser. A
Baa1 7.50 8/15/07 815
899,964
New York Hosp., Ser. A, A.M.B.A.C., F.H.A.
Aaa 6.50 8/15/29 3,000
3,207,270
St. Francis Hosp., Proj. A, F.G.I.C.
Aaa 7.60 11/01/08 2,350
2,534,310
New York St. Mtge. Agcy. Rev.,
Homeowner Mtge., Ser. A
Aa 8.05 10/01/21 3,110
3,261,457
Homeowner Mtge., Ser 55
Aa 5.95 10/01/17 2,000
1,966,880
New York St. Mun. Bond Bank Agcy., Spec. Proj. Rev., Ser.
A
A+(c) 6.75 3/15/11 3,000
3,195,030
New York St. Thrwy. Auth. Svc. Contract Rev., Local
Highway & Bridge
Baa1 6.45 4/01/15 1,000
1,023,800
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs., A.M.B.A.C.
Aaa Zero 1/01/08 10,000
5,424,000
Correctional Cap. Facs., Ser.5, A.M.B.A.C.
Aaa 6.00 1/01/04 4,415
4,688,553
St. Facs.
Baa1 5.75 4/01/11 5,000
4,832,200
St. Facs.
Baa1 5.75 4/01/12 5,750
5,532,305
St. Facs.
Baa1 5.60 4/01/15 2,000
1,881,140
Port Auth. of New York & New Jersey, Ser. 70
A1 7.25 8/01/25 1,000
1,069,700
Puerto Rico Comnwlth.,
Gen. Oblig., A.M.B.A.C.
Aaa 7.00 7/01/10 6,500
7,503,860
Pub. Impvt. Rfdg., M.B.I.A.
Aaa 7.00 7/01/10 1,250
1,443,050
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev., Ser. W
Aaa 5.50 7/01/13 11,000
10,856,560
Puerto Rico Elec. Pwr. Auth. Rev., Pub. Impvt. Ref.,
M.B.I.A.
Aaa Zero 7/01/04 11,895
8,028,649
Puerto Rico Pub. Bldgs. Auth. Rev. Gtd. Gov't. Facs., Ser.
A, A.M.B.A.C.
Aaa 6.25 7/01/15 2,050
2,183,886
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A.
Aaa 6.677(e) 1/25/07 7,875
7,707,656
Rockland Cnty. Solid Waste Mgmt. Auth., Ser. B, A.M.B.A.C.
Aaa 5.625 12/15/14 1,585
1,525,325
Suffolk Cnty. Ind. Dev. Agcy., Southwest Swr. Sys. Rev.,
F.G.I.C.
Aaa 6.00 2/01/07 1,000
1,067,830
Suffolk Cnty. Wtr. Auth. Rev., Ser. W
AAA(c) 6.80 6/01/12 1,740(d)
1,913,530
Suffolk Cnty. Wtr. Auth., Waterworks Rev., M.B.I.A.
Aaa 6.00 6/01/09 5,160
5,461,757
Triborough Bridge & Tunl. Auth. Rev., Ser. A, M.B.I.A.
Aaa 6.00 1/01/10 2,000
2,110,900
Western Nassau Cnty. Wtr. Auth., Wtr. Sys. Rev.,
A.M.B.A.C.
Aaa 5.65 5/01/26 2,000
1,932,880
- ------------
Total long-term investments (cost $281,374,188)
289,236,557
- ------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
SHORT-TERM INVESTMENTS--4.2%
New York City Hsg. Dev. Corp., E.17th St. Property, Ser.
93A, F.R.D.D.
A-1(c) 3.85% 9/03/96 $ 200 $
200,000
New York City Ind. Dev. Agcy. Rev., Japan Airlines, Ser.
91, F.R.D.D.
A1+(c) 3.90 9/03/96 800
800,000
New York St. Energy. Resch. & Dev. Auth., Poll. Ctrl.
Rev.,
Niagara Mohawk Pwr. Corp., Ser. 85A, F.R.D.D.
A1+(c) 3.95 9/03/96 900
900,000
Niagara Mohawk Pwr. Corp., Ser. 86A, F.R.D.D.
P1 3.95 9/03/96 3,300
3,300,000
Niagara Mohawk Pwr. Corp., Ser. 87A, F.R.D.D.
A2 4.05 9/03/96 5,900
5,900,000
Niagara Mohawk Pwr. Corp., Ser. 87B, F.R.D.D.
A1+(c) 4.05 9/03/96 1,300
1,300,000
Port Auth. of New York & New Jersey, Ser. 3, F.R.D.D.
VMIG1 3.65 9/03/96 200
200,000
- ------------
Total short-term investments (cost $12,600,000)
12,600,000
- ------------
Total Investments--99.1%
(cost $ 293,974,188; Note 4)
301,836,557
Other assets in excess of liabilities--0.9%
>2,840,839
- ------------
Net Assets--100%
$304,677,396
- ------------
- ------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate
Demand Notes is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or
direct U.S.
guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely
indexed to a floating
interest rate. The rate shown is the rate at year end.
(f) Pledged as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- -----6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
August 31, 1996
<S> <C>
- ---------------
Investments, at value (cost
$293,974,188)...............................................
.................. $ 301,836,557
Cash........................................................
..............................................
51,745
Interest
receivable..................................................
..................................... 3,398,940
Receivable for Series shares
sold........................................................
................. 163,993
Due from broker-variation
margin......................................................
.................... 58,219
Prepaid expenses and other
assets......................................................
................... 9,386
- ---------------
Total
assets......................................................
..................................... 305,518,840
- ---------------
Liabilities
Payable for Series shares
reacquired..................................................
.................... 312,861
Dividends
payable.....................................................
.................................... 247,785
Management fee
payable.....................................................
............................... 118,098
Accrued
expenses....................................................
...................................... 86,487
Distribution fee
payable.....................................................
............................. 73,513
Deferred trustee's
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 841,444
- ---------------
Net
Assets......................................................
.......................................... $
304,677,396
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 258,869
Paid-in capital in excess of
par.........................................................
.............. 289,823,156
- ---------------
290,082,025
Accumulated net realized gain on
investments.................................................
.......... 6,655,377
Net unrealized appreciation on
investments.................................................
............ 7,939,994
- ---------------
Net assets, August 31,
1996........................................................
....................... $ 304,677,396
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($168,036,760 / 14,279,015 shares of beneficial
interest issued and outstanding)....................
$11.77
Maximum sales charge (3% of offering
price)......................................................
...... .36
- ---------------
Maximum offering price to
public......................................................
................. $12.13
- ---------------
- ---------------
Class B:
Net asset value, offering price and redemption price per
share
($135,764,197 / 11,533,381 shares of beneficial
interest issued and outstanding)....................
$11.77
- ---------------
- ---------------
Class C:
Net asset value, offering price and redemption price per
share
($876,439 / 74,455 shares of beneficial interest
issued and outstanding)............................
$11.77
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
7 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest and discount earned............ $
19,028,429
--------------
- ---
Expenses
Management fee..........................
1,608,029
Distribution fee--Class A...............
168,291
Distribution fee--Class B...............
763,278
Distribution fee--Class C...............
4,941
Transfer agent's fees and expenses......
165,000
Custodian's fees and expenses...........
98,000
Reports to shareholders.................
76,000
Registration fees.......................
44,500
Audit fees and expenses.................
12,300
Legal fees and expenses.................
10,000
Trustees' fees..........................
3,900
Miscellaneous...........................
22,260
--------------
- ---
Total expenses.......................
2,976,499
Less: Management fee waiver.............
(160,803)
Custodian fee credit................
(17,613)
--------------
- ---
Net expenses............................
2,798,083
--------------
- ---
Net investment income......................
16,230,346
--------------
- ---
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
Investment transactions.................
8,098,900
Financial futures transactions..........
903,272
--------------
- ---
9,002,172
--------------
- ---
Net change in unrealized appreciation on:
Investments.............................
(11,379,989)
Financial futures contracts.............
77,625
--------------
- ---
(11,302,364)
--------------
- ---
Net loss on investments....................
(2,300,192)
--------------
- ---
Net Increase in Net Assets
Resulting from Operations.................. $
13,930,154
--------------
- ---
--------------
- ---
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 16,230,346 $
17,632,805
Net realized gain (loss) on
investment transactions..... 9,002,172
(425,049)
Net change in unrealized
appreciation of
investments................. (11,302,364)
5,023,826
------------ --------
- ----
Net increase in net assets
resulting from operations... 13,930,154
22,231,582
------------ --------
- ----
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (8,811,465)
(5,367,852)
Class B..................... (7,388,688)
(12,248,452)
Class C..................... (30,193)
(16,501)
------------ --------
- ----
(16,230,346)
(17,632,805)
------------ --------
- ----
Distributions from net realized
gains
Class A..................... (701,061)
- --
Class B..................... (645,835)
- --
Class C..................... (2,246)
- --
------------ --------
- ----
(1,349,142)
- --
------------ --------
- ----
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 18,427,055
18,761,553
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 10,492,197
10,361,213
Cost of shares reacquired...... (47,159,422)
(52,939,335)
------------ --------
- ----
Net decrease in net assets from
Series share transactions... (18,240,170)
(23,816,569)
------------ --------
- ----
Total decrease.................... (21,889,504)
(19,217,792)
Net Assets
Beginning of year................. 326,566,900
345,784,692
------------ --------
- ----
End of year....................... $304,677,396
$326,566,900
------------ --------
- ----
------------ --------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
- -----8 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940 as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The New York Series (the
``Series'') commenced
investment operations in September, 1984. The Series is
diversified and seeks to
achieve its investment objective of obtaining the maximum
amount of income
exempt from federal and applicable state and city income
taxes with the minimum
of risk by investing in ``investment grade'' tax-exempt
securities and whose
ratings are within the four highest ratings categories by a
nationally
recognized statistical rating organization or, if not rated,
are of comparable
quality. The ability of the issuers of the securities held
by the Series to meet
their obligations may be affected by economic developments
in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: The Series values municipal
securities (including
commitments to purchase such securities on a ``when-issued''
basis) on the basis
of prices provided by a pricing service which uses
information with respect to
transactions in bonds, quotations from bond dealers, market
transactions in
comparable securities and various relationships between
securities in
determining values. If market quotations are not readily
available from such
pricing service, a security is valued at its fair value as
determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of
securities at a set price
for delivery on a future date. Upon entering into a
financial futures contract,
the Series is required to pledge to the broker an amount of
cash and/or other
assets equal to a certain percentage of the contract amount.
This amount is
known as the ``initial margin''. Subsequent payments, known
as ``variation
margin'', are made or received by the Series each day,
depending on the daily
fluctuations in the value of the underlying security. Such
variation margin is
recorded for financial statement purposes on a daily basis
as unrealized gain or
loss. When the contract expires or is closed, the gain or
loss is realized and
is presented in the statement of operations as net realized
gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order
to hedge its existing
portfolio securities or securities the Series intends to
purchase, against
fluctuations in value caused by changes in prevailing
interest rates. Should
interest rates move unexpectedly, the Series may not achieve
the anticipated
benefits of the financial futures contracts and may realize
a loss. The use of
futures transactions involves the risk of imperfect
correlation in movements in
the price of futures contracts, interest rates and the
underlying hedged assets.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. The Series amortizes premiums and original
issue discount paid on
purchases of portfolio securities as adjustments to interest
income. Expenses
are recorded on the accrual basis which may require the use
of certain estimates
by management.
Net investment income (other than distribution fees), and
unrealized and
realized gains or losses are allocated daily to each class
of shares based upon
the relative proportion of net assets of each class at the
beginning of the day.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason and because substantially all
of the Series' gross
income consists of tax-exempt interest, no federal income
tax provision is
required.
Dividends and Distributions: The Series declares daily
dividends from net
investment income. Payment of dividends is made monthly.
Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the cost of
the subadviser's
services, the compensation of officers of the Fund,
occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and
expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily
net assets) of its
management fee, which amounted to $160,803 ($0.006 per share
for the fiscal year
ended August 31, 1996). The Series is not required to
reimburse PMF for such
waiver.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996,
Prudential Securities
Incorporated (``PSI'') became distributor of the Class A
shares of the Fund and
is serving the Fund under the same terms and conditions as
under the arrangement
with PMFD. PSI is also the distributor of the Class B and
Class C shares of the
Fund. The Fund compensated PMFD and PSI for distributing and
servicing the
Fund's Class A, Class B, and Class C shares, pursuant to
plans of distribution,
(the ``Class A, B and C plans'') regardless of expenses
actually incurred by
them. The distribution fees are accrued daily and payable
monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with
respect to Class A
shares, for distribution-related activities at an annual
rate of up to .30 of
1%, .50 of 1% and 1%, of the average daily net assets of the
Class A, B and C
shares, respectively. Such expenses under the Plans were .10
of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class
A, B and C shares,
respectively, for the fiscal year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received
approximately
$44,000 in front-end sales charges resulting from sales of
Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD
and PSI paid such
sales charges to affiliated broker-dealers which in turn
paid commissions to
salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended
August 31, 1996, it
received approximately $317,700 in contingent deferred sales
charges imposed
upon certain redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal
year ended August
31, 1996, the Series incurred fees of approximately $127,000
for the services of
PMFS. As of August 31, 1996, approximately $9,800 of such
fees were due to PMFS.
Transfer agent fees and expenses in the Statement of
Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series,
excluding short-term
investments, for the fiscal year ended August 31, 1996 were
$276,839,476 and
$285,033,908, respectively.
The cost basis of investments for federal income tax
purposes at August 31, 1996
was substantially the same as for financial reporting
purposes and, accordingly,
net unrealized appreciation on investments for federal
income tax purposes was
$7,862,369 (gross unrealized appreciation--$10,288,888,
gross unrealized
depreciation--$2,426,519).
The Series utilized its capital loss carryforward of
approximately $1,071,600 to
offset net taxable gains realized and recognized during the
fiscal year ended
August 31, 1996.
At August 31, 1996 the Series sold 69 financial futures on
U.S. Treasury bonds
which expire in December 1996. The value at sale of such
contracts was
$7,445,531. The value of such contracts on August 31, 1996
was $7,367,906,
thereby resulting in an unrealized gain of $77,625.
- ------------------------------------------------------------
- --------------------
- -----10
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class
A shares are sold
with a front-end sales charge of up to 3%. Class B shares
are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Class C shares are sold
with a contingent
deferred sales charge of 1% during the first year. Class B
shares automatically
convert to Class A shares on a quarterly basis approximately
seven years after
purchase. A special exchange privilege is also available for
shareholders who
qualified to purchase Class A shares at net asset value.
The Fund has authorized an unlimited number of shares of
beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal
years ended August
31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold....................... 288,545 $
3,471,580
Shares issued in reinvestment of
dividends and distributions..... 482,548
5,793,739
Shares reacquired................. (1,836,870)
(21,951,600)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion............... (1,065,777)
(12,686,281)
Shares issued upon conversion from
Class B......................... 1,655,227
19,855,903
----------- ---------
- ----
Net increase in shares
outstanding..................... 589,450 $
7,169,622
----------- ---------
- ----
----------- ---------
- ----
Year ended August 31 1995:
Shares sold....................... 277,184 $
3,225,910
Shares issued in reinvestment of
dividends....................... 267,148
3,155,429
Shares reacquired................. (1,006,903)
(11,817,623)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion............... (462,571)
(5,436,284)
Shares issued upon conversion from
Class B......................... 12,985,377
149,561,617
----------- ---------
- ----
Net increase in shares
outstanding..................... 12,522,806 $
144,125,333
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold....................... 1,214,638 $
14,603,191
Shares issued in reinvestment of
dividends and distributions..... 388,580
4,669,975
Shares reacquired................. (2,099,335)
(25,184,658)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion............... (496,117)
(5,911,492)
Shares reacquired upon conversion
into Class A.................... (1,655,227)
(19,855,903)
----------- ---------
- ----
Net decrease in shares
outstanding..................... (2,151,344) $
(25,767,395)
----------- ---------
- ----
----------- ---------
- ----
Year ended August 31, 1995:
Shares sold....................... 1,310,430 $
15,158,331
Shares issued in reinvestment of
dividends....................... 627,938
7,192,642
Shares reacquired................. (3,612,951)
(41,102,851)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion............... (1,674,583)
(18,751,878)
Shares reacquired upon conversion
into Class A.................... (12,985,377)
(149,561,617)
----------- ---------
- ----
Net decrease in shares
outstanding..................... (14,659,960)
$(168,313,495)
----------- ---------
- ----
----------- ---------
- ----
Class C
- ----------------------------------
Year ended August 31, 1996:
Shares sold....................... 29,584 $
352,284
Shares issued in reinvestment of
dividends and distributions..... 2,378
28,483
Shares reacquired................. (1,951)
(23,164)
----------- ---------
- ----
Net increase in shares
outstanding..................... 30,011 $
357,603
----------- ---------
- ----
----------- ---------
- ----
Year ended August 31, 1995:
Shares sold....................... 32,796 $
377,312
Shares issued in reinvestment of
dividends....................... 1,131
13,142
Shares reacquired................. (1,612)
(18,861)
----------- ---------
- ----
Net increase in shares
outstanding..................... 32,315 $
371,593
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
11 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
--------------------
- ----------------------------------------
<S> <C> <C>
<C> <C> <C>
Year Ended August 31,
--------------------
- ----------------------------------------
1996
1995 1994 1993 1992
------------ ---
- ----- ------- ------- ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 11.91 $
11.71 $ 12.54 $ 11.75 $11.08
------------ ---
- ----- ------- ------- ------
Income from investment operations
Net investment income............... .63(a)
.66(a) .67 .70 .71
Net realized and unrealized gain
(loss) on investment
transactions..................... (.09)
.20 (.83) .79 .67
------------ ---
- ----- ------- ------- ------
Total from investment
operations.................... .54
.86 (.16) 1.49 1.38
------------ ---
- ----- ------- ------- ------
Less distributions
Dividends from net investment
income........................... (.63)
(.66) (.67) (.70) (.71)
Distributions from net realized
gains............................ (.05)
- -- -- -- --
------------ ---
- ----- ------- ------- ------
Total distributions.............. (.68)
(.66) (.67) (.70) (.71)
------------ ---
- ----- ------- ------- ------
Net asset value, end of year........ $ 11.77 $
11.91 $ 11.71 $ 12.54 $11.75
------------ ---
- ----- ------- ------- ------
------------ ---
- ----- ------- ------- ------
TOTAL RETURN(b):.................... 4.53%
7.70% (1.38)% 13.06% 12.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $168,037
$163,025 $13,661 $11,821 $6,057
Average net assets (000)............ $168,291 $
95,024 $13,454 $ 8,755 $4,024
Ratios to average net assets:
Expenses, including distribution
fees.......................... .68%(a)
.69%(a) .74% .74% .74%
Expenses, excluding distribution
fees.......................... .58%(a)
.59%(a) .64% .64% .64%
Net investment income............ 5.24%(a)
5.65%(a) 5.46% 5.78% 6.19%
Portfolio turnover rate............. 92%
57% 49% 44% 45%
</TABLE>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends.
- ------------------------------------------------------------
- --------------------
- -----12 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
----------------------
- --------------------------------------------- Year
Year Ended August 31, Ended
----------------------
- --------------------------------------------- August
31,
1996
1995 1994 1993 1992 1996
<S> <C>
<C> <C> <C> <C> <C>
------------ --
- ------ -------- -------- -------- -----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 11.91 $
11.71 $ 12.54 $ 11.75 $ 11.08 $11.91
------------ --
- ------ -------- -------- -------- -----
Income from investment operations
Net investment income............... .58(a)
.61(a) .62 .65 .66 .55(a)
Net realized and unrealized gain
(loss) on investment
transactions..................... (.09)
.20 (.83) .79 .67 (.09)
------------ --
- ------ -------- -------- -------- -----
Total from investment
operations.................... .49
.81 (.21) 1.44 1.33 .46
------------ --
- ------ -------- -------- -------- -----
Less distributions
Dividends from net investment
income........................... (.58)
(.61) (.62) (.65) (.66) (.55)
Distributions from net realized
gains............................ (.05)
- -- -- -- -- (.05)
------------ --
- ------ -------- -------- -------- -----
Total distributions (.63)
(.61) (.62) (.65) (.66) (.60)
------------ --
- ------ -------- -------- -------- -----
Net asset value, end of period...... $ 11.77 $
11.91 $ 11.71 $ 12.54 $ 11.75 $11.77
------------ --
- ------ -------- -------- -------- -----
------------ --
- ------ -------- -------- -------- -----
TOTAL RETURN(b):.................... 4.12%
7.27% (1.77)% 12.61% 12.32% 3.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $135,764
$163,013 $331,982 $358,607 $316,472 $
876
Average net assets (000)............ $152,656
$230,033 $350,564 $330,823 $303,016 $
659
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.08%(a)
1.11%(a) 1.14% 1.14% 1.14%
1.33%(a)
Expenses, excluding distribution
fees.......................... .58%(a)
.61%(a) .64% .64% .64% .58%(a)
Net investment income............ 4.84%(a)
5.30%(a) 5.06% 5.38% 5.79%
4.59%(a)
Portfolio turnover rate............. 92%
57% 49% 44% 45% 92%
<CAPTION>
August 1,
Ended
Through
August 31,
August 31,
1995
1994
<S> <C> <C>
----- --
- ---
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $11.71
$11.74
----- --
- ---
Income from investment operations
Net investment income............... .58(a)
.04
Net realized and unrealized gain
(loss) on investment
transactions..................... .20
(.03)
----- --
- ---
Total from investment
operations.................... .78
.01
----- --
- ---
Less distributions
Dividends from net investment
income........................... (.58)
(.04)
Distributions from net realized
gains............................ --
- --
----- --
- ---
Total distributions (.58)
(.04)
----- --
- ---
Net asset value, end of period...... $11.91
$11.71
----- --
- ---
----- --
- ---
TOTAL RETURN(b):.................... 7.01%
0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $ 529 $
142
Average net assets (000)............ $ 325 $
42
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.36%(a)
1.62%(c)
Expenses, excluding distribution
fees.......................... .61%(a)
.87%(c)
Net investment income............ 5.05%(a)
5.17%(c)
Portfolio turnover rate............. 57%
49%
</TABLE>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends.
Total returns for periods of less than a full year are
not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
13 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, New York
Series, as of August 31, 1996, the related statements of
operations for the year
then ended and of changes in net assets for each of the two
years in the period
then ended, and the financial highlights for each of the
five years in the
period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian and
broker. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, New York Series, as of August 31, 1996, the
results of its
operations, the changes in its net assets, and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information NEW YORK SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends paid by the Series during such fiscal year.
Accordingly, we are
advising you that in the fiscal year ended August 31, 1996,
dividends paid from
net investment income of $.63 per share for Class A shares,
$.58 per Class B
shares and $.55 per Class C shares were all federally tax-
exempt interest
dividends. In addition, the Series paid to Class A, B and C
shares a special
taxable income distribution of $.004 which is taxable as
ordinary income and a
long-term capital gain distribution of $.046 which is
taxable as such.
We wish to advise you that the corporate dividends received
deduction for the
Series is zero. Only funds that invest in U.S. equity
securities are entitled to
pass-through a corporate dividends received deduction.
In January 1997, you will be advised on IRS Form 1099 DIV or
substitute 1099 DIV
as to the federal tax status of the dividends and
distributions received by you
in calendar year 1996.
- ------------------------------------------------------------
- --------------------
- -----14
<PAGE>
Getting
The Most
From Your
Prudential
Mutual Fund.
When you invest through Prudential Mutual Funds, you receive
financial advice
through a Prudential Securities financial advisor or
Prudential/Pruco Securities
registered representative. Your advisor or representative
can provide you with
the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help
you match the
reward you seek with the risk you can tolerate. And risk can
be difficult to
gauge -sometimes even the simplest investments bear
surprising risks. The
educated investor knows that markets seldom move in just one
direction - there
are times when a market sector or asset class will lose
value or provide little
in the way of total return. Managing your own expectations
is easier with help
from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help
you wade through the
numerous mutual funds available to find the ones that fit
your own individual
investment profile and risk tolerance. While the newspapers
and popular
magazines are full of advice about investing, they are aimed
at generic groups
of people or representative individuals, not at you
personally. Your financial
advisor or registered representative will review your
investment objectives with
you. This means you can make financial decisions based on
the assets and
liabilities in your current portfolio and your risk
tolerance - not just based
on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the
bottom are among the
most common investor mistakes. But sometimes it's difficult
to hold on to an
investment when it's losing value every month. Your
financial advisor or
registered representative can answer questions when you're
confused or worried
about your investment, and remind you that you're investing
for the long haul.
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income growth
has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for which
Prudential Mutual Fund Management manages a state-specific
municipal bond
mutual fund
Revised: October, 1996
<PAGE>
Comparing A $10,000 Investment.
Prudential Municipal Series Fund: New York Series
vs. Lehman Bros. General Muni Debt Index.
Prudential Muni Series Fund:
New York Series
Lehman Bros. General
Muni Debt. Index
(CHART)
Average Annual
Total Returns
With Sales Load*
7.0% Since Inception
6.6% for 5 Years
1.4% for 1 Year (1.3%)
(CHART)
(CHART)
Without Sales Load*
7.5% Since Inception
7.2% for 5 Years
4.5% for 1 Year (4.4%)
Average Annual
Total Returns
With Sales Load*
8.2% Since Inception
6.2% for 10 Years
6.6% for 5 Years
- -0.9% for 1 Year
(CHART)
Without Sales Load*
8.2% Since Inception
6.2% for 10 Years (6.1%)
6.8% for 5 Years
4.1% for 1 Year (4.0%)
Average Annual
Total Returns
With Sales Load*
5.2% Since Inception
2.8% for 1 Year (2.7%)
(CHART)
Without Sales Load*
5.2% Since Inception'
3.9% for 1 Year (3.8%)
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, will be
worth more or less than their original cost. The charts on
the right are
designed to give you an idea how much the Series' returns
can fluctuate from
year to year by measuring the best and worst calendar years
in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Municipal
Series Fund: New York
Series (Class A, Class B and Class C) with a similar
investment in the Lehman
Brothers Municipal Bond Index by portraying the initial
account values at the
commencement of operations (10 years for Class B), and
subsequent account values
at the end of the most recent reporting period (August 31),
as measured on a
quarterly basis, beginning in 1990 for Class A shares; 1986
for Class B shares;
and 1994 for Class C shares. For purposes of the graphs, and
unless otherwise
indicated, in the accompanying tables it has been assumed
(a) that the maximum
applicable front-end sales charge was deducted from the
initial $10,000
investment in Class A shares; (b) the maximum applicable
contingent deferred
sales charge was deducted from the value of the investment
in Class B and Class
C shares, assuming full redemption on August 31, 1996; (c)
all recurring fees
(including management fees) were deducted; and (d) all
dividends and
distributions were reinvested. Class B shares automatically
convert to Class A
shares, on a quarterly basis, approximately seven years
after purchase. This
conversion feature is not reflected in the graph. The graph
and accompanying
tables reflect the past subsidy and/or waiver of expenses
and/or management
fees.
* Without waivers and expense subsidies the value of the
$10,000 investment in
the Series and the Series' average annual total return, as
illustrated above,
would have been lower, as indicated in parentheses ( ).
The Index is a weighted index comprised of 21,000 municipal
bonds (General
obligation bonds, revenue bonds, insured bonds and
prerefunded bonds) selected
by Lehman Brothers as representative of the long-term
investment grade municipal
bond market. It is an unmanaged index that includes the
reinvestment of all
dividends, but does not reflect the transaction costs and
advisory fees paid by
the Series' investors. The Index's holdings differ from the
Series' portfolio.
The Index is not the only one that may be used to
characterize performance of
bond funds and other indices may portray different
comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three 100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M747
MF122E
74435M754
Cat. #6423319
74435M523
(ICON)
Prudential
Municipal
Series Fund
Hawaii Income Series
ANNUAL
REPORT
Aug. 31, 1996
(LOGO)
<PAGE>
Prudential Municipal Series Fund
Hawaii Income Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the municipal
bond market
experienced a lot of turbulence. Interest rates first fell,
then rose, and
finally finished close to where they started. As a result,
investors primarily
received coupon income for the past 12 months. The
Prudential Municipal Series
Fund - Hawaii Income Series performed competitively with the
average Hawaii
municipal fund over the last 12 months, as measured by
Lipper Analytical
Services.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 8/31/96
One
Since
Year
Inception2
<S> <C>
<C>
Class A 5.0% (3.8)4 14.9%
(12.2)4
Class B 4.6 (3.4)4 14.0
(11.4)4
Class C 4.3 (3.1)4 13.5
(10.9)4
Lipper Hawaii Muni Avg.3 4.9 14.0
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As
of 9/30/96
One Since
Year Inception2
<S> <C> <C>
Class A 3.2% (2.0)4 6.3%
(5.0)4
Class B 0.9 (-0.2) 6.1
(4.8)4
Class C 4.7 (3.5) 7.2
(5.9)4
</TABLE>
<TABLE>
<CAPTION>
Dividends
& Yields
Taxable Equivalent Yield5
As of Total Dividends 30-Day
At Tax Rates Of
8/31/96 Paid for 12 Mos. SEC Yield
36% 39.6%
<S> <C> <C>
<C> <C>
Class A $0.66 5.14% (3.36)4
8.92% (5.84)4 9.46% (6.19)4
Class B $0.61 4.90 (3.07)4
8.51 (5.32)4 9.01 (5.64)4
Class C $0.57 4.65 (2.82)4
8.07 (4.89)4 8.55 (5.18)4
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical Services. The
cumulative total returns do not take into account sales
charges. The average
annual returns do take into account applicable sales
charges. The Fund charges
a maximum front-end sales load of 3% for Class A shares and
a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for six
years, for Class B shares. Class C shares have a 1% CDSC for
one year. Class B
shares automatically convert to Class A shares on a
quarterly basis, after
approximately seven years.
2Inception dates: 9/19/94 for Class A, Class B and Class C.
3The Lipper Hawaii Municipal Bond fund average includes 15
funds for one year
and 10 funds since inception of the Class B shares on
9/19/94.
4Without waiver of management fees and/or expense
subsidization, the Series'
cumulative and average annual total returns and yields would
have been lower,
as indicated in parentheses ( ).
5Taxable equivalent yields reflect federal and applicable
state taxes.
How Investments Compared.
(As of 8/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets
change, so a mutual fund's
past performance should never be used to predict future
results. The risks to
each of the investments listed above are different - we
provide 12-month total
returns for several Lipper mutual fund categories to show
you that reaching for
higher yields means tolerating more risk. The greater the
risk, the larger the
potential reward or loss. In addition, we've included
historical 20-year average
annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Christian Smith, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Series primarily invests in carefully-selected, long-
term municipal bonds
that offer a high level of income exempt from Hawaii state
and federal income
taxes, while simultaneously attempting to preserve capital.
However, certain
shareholders may be subject to the federal alternative
minimum tax. There can
be no assurance that the Series' objective will be achieved.
High Quality.
All obligations purchased by the Series were considered
investment grade,
meaning that they were of the four highest quality grades
determined by Moody's
Investors Service (Aaa, Aa, A or Baa), by Standard & Poor's
Ratings Group (AAA,
AA, A or BBB), or if unrated, considered comparable in the
view of our
analysts.
Strategy Session.
Quite Volatile.
Municipal bond interest rates and prices experienced a lot
of volatility over
the past year, but ended close to where they started. Last
fall, interest rates
fell and bond prices rose as investors feared a recession.
But by early 1996,
the tables turned. The economy gained new strength, setting
off inflation fears,
which pushed interest rates higher and bond prices lower.
Municipal bond
interest rates rose from 5.63% on January 4 to 6.34% on
June 13 - a difference
of nearly three-quarters of a percentage point, as measured
by the Bond Buyer's
Revenue Bond Index, a widely-watched industry barometer. But
when the dust
settled on August 31, 1996, municipal bond interest rates
were slightly lower
than they had been 12 months earlier: 6.09% on August 29,
1996 vs. 6.26% a year
earlier.
We Adjusted Duration.
During the last 12 months, we periodically adjusted the
Series' holdings to take
advantage of these changing market conditions. Last fall, as
interest rates were
falling, we held a longer duration (a measure of the Series'
sensitivity to
changing interest rates) to capitalize on rising bond
prices. In 1996, we
reduced duration to protect assets. Throughout the 12
months, we emphasized
call protection (many municipal bonds can be redeemed before
maturity) and
tried to upgrade credit quality where possible when the
interest rate
differences between higher- and lower-rated bonds got
smaller.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
<PAGE>
What Went Well.
Buying Hawaiian.
We haven't always been able to buy the Hawaiian bonds we've
wanted because high
quality bonds with the right specifications are not always
available at
reasonable prices. Plus, there is not much supply and lots
of demand. But over
the past year we've been adding to positions in the
University of Hawaii housing
bonds, the State Housing Finance and Development
Corporation's multifamily
housing bonds and the City of Honolulu Water System. As of
August 31, 1996, we
held 53% of assets in Hawaiian bonds. We now hold only 45%
of assets (down from
53% a year earlier) in bonds issued by Puerto Rico, the
Virgin Islands or Guam.
These bonds are tax-exempt federally and in virtually all
states, including
Hawaii.
Culling Callables.
Callable bonds generally carry higher coupons to compensate
for the risk that
they might be redeemed before maturity. We've found that
this alone is not
enough of a reason to own many of them. Prices of callable
bonds do not rise
as fast as non-callables when the bond market rallies,
because price depends on
maturity, which can't be calculated with certainty. So we've
been selling bonds
that are callable in less than eight years, and replacing
them either with
non-callable bonds or those that are callable in 10 years or
more. In this
way we'll be able to better manage the risks we face when
interest rates rise
or fall suddenly, as they have been apt to do in recent
years.
And Not So Well.
Too Long, Too Long.
Late in 1995, the U.S. economy was inching ahead slowly. We
expected this to
continue into early 1996, so we held our duration - a
measure of the Series'
sensitivity to interest rate changes - fairly long, at
about eight years. But
the economic slowdown was only temporary, largely the result
of the government
shutdown and the severe weather in the Northeast. When the
economy accelerated
in February, we were caught off-guard. A shorter duration
would have offered
better protection against rising interest rates. Our
duration is now 7.8 years,
still slightly long, but a more neutral position compared
to our competition.
Credit Quality.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
Five Largest
Issuers.
6.4% Puerto Rico
Telephone Authority
6.2% State of Hawaii
6.0% Honolulu City & County
5.3% Guam Power Authority
5.2% Puerto Rico Industrial
Expressed as a percentage of total net assets as of 8/31/96.
Looking Ahead.
Right now, we're cautious. We're expecting economic growth
in the second half
of 1996 to slow. Meanwhile, the Federal Reserve Board is
concerned that the
economy is growing so rapidly that a shortage of workers is
developing, which
could induce wage inflation. It is possible that the board
will raise short-term
interest rates this year, if upward pressure on wages
results in inflationary
price increases to the consumer.
1
<PAGE>
President's Letter
October 7, 1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996.
According to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just
as they go up). There's no better time than now to be
talking with your
Financial Advisor or Registered Representative. She or he
can help you
determine reasonable expectations about both the potential
performance and
risks associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual and
institutional investors. We plan to improve the range and
quality of investment
products and services that we can provide you by better
leveraging Prudential's
strengths. There will, however, be no change in the service
you receive from
your Financial Advisor, Registered Representative or our
Customer Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL
SERIES FUND
as of August 31, 1996 HAWAII INCOME SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
LONG-TERM INVESTMENTS--96.3%
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Guam Gov't., Gen. Oblig., Ser. A
BBB(c) 5.90% 9/01/05 $ 500 $
496,560
Guam Pwr. Auth. Rev.,
Ser. A
BBB(c) 6.625 10/01/14 250
255,045
Ser. A
BBB(c) 6.75 10/01/24 525
537,679
Hawaii St. Arpt. Sys. Rev., 2nd Ser.
A 7.00 7/01/18 365
387,626
Hawaii St. Arpt. Sys. Rev., 2nd Ser. 90, F.G.I.C.
Aaa 7.50 7/01/20 500
546,595
Hawaii St. Dept. Budget & Fin.,
Hawaiian Elec. Co., Ser. C, M.B.I.A.
Aaa 7.375 12/01/20 500
547,190
Kapiolani Hlth. Care Sys.
A 6.30 7/01/08 500
515,650
Kapiolani Hosp.
A 6.00 7/01/11 250
250,185
Queens Med. Ctr.
Aa 5.80 7/01/10 500
501,655
Queens Med. Ctr. Proj., F.G.I.C.
Aaa 5.90 7/01/07 230 (d)
245,971
Hawaii St. Gen. Oblig., Ser. CJ
Aa 6.25 1/01/15 650
671,222
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C.
Aaa 6.25 7/01/10 250 (e)
260,030
F.G.I.C.
Aaa 6.25 7/01/15 500
511,745
Hawaii St. Hsg. Fin. & Dev. Corp. Rev.,
Affordable Rental Proj., Ser. A
A1 6.05 7/01/22 725
710,094
Sngl. Fam. Mtge. Rev., Ser. B, F.N.M.A.
Aa 5.85 7/01/17 500
494,615
Univ. of Hawaii Fac. Hsg. Proj., A.M.B.A.C.
Aaa 5.65 10/01/16 500
487,670
Honolulu City & Cnty.,
Ref. & Impvt., Ser. B, F.G.I.C.
Aaa 5.50 10/01/11 900
899,037
Water Sys. Rev.
Aa 5.80 7/01/16 500
497,040
Maui Cnty., Ser. A, M.B.I.A.
Aaa 5.65 6/01/10 570
573,352
Puerto Rico Comnwlth., Gen. Oblig.
Baa1 6.45 7/01/17 500
525,965
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O
Baa1 5.00 7/01/12 600
538,032
Puerto Rico Hwy. & Trans. Auth. Rev., Ser. V
Baa1 6.375 7/01/08 500
526,240
Puerto Rico Ind., Tourist, Ed., Med. & Env. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A.
AAA(c) 6.125 8/01/25 500
508,635
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A.
Aaa 6.25 7/01/16 500
522,800
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A.
Aaa 6.25 7/01/24 250
258,827
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A.
Aaa 6.00 7/01/14 250
253,498
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A.
Aaa 5.449 1/16/15 1,000
961,670
Puerto Rico Univ. Sys. Rev., Ser. M, M.B.I.A.
Aaa 5.25 6/01/25 750
692,550
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B
BBB-(c) 7.375 10/01/10 300
323,319
Ref. Matching Loan Notes, Ser. A
NR 7.25 10/01/18 250
265,335
- -----------
Total long-term investments (cost $14,327,900)
14,765,832
- -----------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL
SERIES FUND
as of August 31, 1996 HAWAII INCOME SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
SHORT-TERM INVESTMENTS--1.9%
Puerto Rico Comnwlth., Gov't Dev. Bank., Ser. 85, F.R.W.D.
(cost $300,000)
VMIG1 3.10% 9/04/96 $ 300 $
300,000
- -----------
Total Investments--98.2%
(cost $14,627,900; Note 5)
15,065,832
Other assets in excess of liabilities--1.8%
269,107
- -----------
Net Assets--100%
$15,334,939
- -----------
- -----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate Demand Notes is considered to be the
later of
the next date on which the security can be redeemed at
par, or the next date on which the rate of interest is
adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or
direct U.S. guaranteed obligations.
(e) Pledged as initial margin on financial futures
contracts.
</TABLE>
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- ----- 4 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<S>
<C>
Assets
August 31, 1996
Investments, at value (cost
$14,627,900)................................................
.................. $ 15,065,832
Cash........................................................
..............................................
40,121
Interest
receivable..................................................
..................................... 203,652
Deferred expenses and other
assets......................................................
.................. 64,310
Due from
Manager.....................................................
..................................... 41,472
Receivable for Series shares
sold........................................................
................. 31,814
Due from broker-variation
margin......................................................
.................... 4,938
- ---------------
Total
assets......................................................
..................................... 15,452,139
- ---------------
Liabilities
Accrued
expenses....................................................
...................................... 76,933
Payable for Series shares
reacquired..................................................
.................... 19,590
Dividends
payable.....................................................
.................................... 13,441
Distribution fee
payable.....................................................
............................. 5,536
Deferred trustees'
fees........................................................
........................... 1,700
- ---------------
Total
liabilities.................................................
..................................... 117,200
- ---------------
Net
Assets......................................................
.......................................... $
15,334,939
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 12,775
Paid-in capital in excess of
par.........................................................
.............. 14,911,740
- ---------------
14,924,515
Accumulated net realized loss on
investments.................................................
.......... (36,759 )
Net unrealized appreciation on
investments.................................................
............ 447,183
- ---------------
Net assets, August 31,
1996........................................................
....................... $ 15,334,939
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($3,800,184 / 316,580 shares of beneficial interest
issued and outstanding).........................
$12.00
Maximum sales charge (3% of offering
price)......................................................
...... .37
Maximum offering price to
public......................................................
................. $12.37
Class B:
Net asset value, offering price and redemption price per
share
($10,126,267 / 843,579 shares of beneficial interest
issued and outstanding)........................
$12.00
Class C:
Net asset value, offer price and redemption price per
share
($1,408,488 / 117,335 shares of beneficial interest
issued and outstanding).........................
$12.00
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Year
Ended
<CAPTION>
August
31,
Net Investment Income 1996
-----------
- ----
<S> <C>
Income
Interest................................... $
835,223
-----------
- ----
Expenses
Management fee.............................
71,610
Distribution fee--Class A..................
3,620
Distribution fee--Class B..................
47,993
Distribution fee--Class C..................
8,274
Custodian's fees and expenses..............
64,000
Reports to shareholders....................
41,000
Registration fees..........................
36,000
Amortization of organization expense.......
20,976
Audit fee expenses.........................
12,300
Legal fees and expenses....................
10,000
Transfer agent's fees and expenses.........
5,500
Trustees' fees and expenses................
3,900
Miscellaneous..............................
4,411
-----------
- ----
Total expenses..........................
329,584
Less: Management fee waiver................
(7,161)
Expense subsidy........................
(212,409)
-----------
- ----
Net expenses............................
110,014
-----------
- ----
Net investment income.........................
725,209
-----------
- ----
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions....................
57,939
Financial futures contract transactions....
(101,589)
-----------
- ----
(43,650)
-----------
- ----
Net change in unrealized appreciation (depreciation) on:
Investments................................
(57,716)
Financial futures contracts................
23,782
-----------
- ----
(33,934)
-----------
- ----
Net loss on investments.......................
(77,584)
-----------
- ----
Net Increase in Net Assets
Resulting from Operations..................... $
647,625
-----------
- ----
-----------
- ----
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
September
19,
1994*
Year Ended
through
Increase (Decrease) August 31, August
31,
in Net Assets 1996
1995
------------ -------
- -----
<S> <C> <C>
Operations
Net investment income.......... $ 725,209 $
457,043
Net realized gain (loss) on
investment transactions..... (43,650)
94,967
Net change in unrealized
appreciation (depreciation)
of investments.............. (33,934)
481,117
------------ -------
- -----
Net increase in net assets
resulting from operations... 647,625
1,033,127
------------ -------
- -----
Dividends and Distributions (Note
1):
Dividends from net investment
income
Class A..................... (194,875)
(140,503)
Class B..................... (478,063)
(299,569)
Class C..................... (52,271)
(16,971)
------------ -------
- -----
(725,209)
(457,043)
------------ -------
- -----
Distributions from net realized
gains
Class A..................... (22,739)
- --
Class B..................... (58,916)
- --
Class C..................... (6,421)
- --
------------ -------
- -----
(88,076)
- --
------------ -------
- -----
Series share transactions (net of
share conversions) (Note 6):
Net proceeds from shares
sold........................ 3,550,148
13,508,423
Net asset value of shares
issued
in reinvestment of dividends
and distributions........... 434,866
199,822
Cost of shares reacquired...... (1,563,629)
(1,205,115)
------------ -------
- -----
Net increase in net assets from
Series share transactions... 2,421,385
12,503,130
------------ -------
- -----
Total increase.................... 2,255,725
13,079,214
Net Assets
Beginning of period............... 13,079,214
- --
------------ -------
- -----
End of period..................... $ 15,334,939 $
13,079,214
------------ -------
- -----
------------ -------
- -----
</TABLE>
- ------------
* Commencement of investment operations.
- ------------------------------------------------------------
- --------------------
- ----- 6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940, as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The Hawaii Income Series
(the ``Series'')
commenced investment operations on September 19, 1994. The
Series is
non-diversified and seeks to provide the maximum amount of
income that is exempt
from Hawaii State and federal income taxes consistent with
the preservation of
capital by investing in investment grade municipal
obligations but may also
invest a portion of its assets in lower-quality municipal
obligations or in
non-rated securities which, in the opinion of the Fund's
investment adviser, are
of comparable quality. The ability of the issuers of the
securities held by the
Series to meet their obligations may be affected by economic
or political
developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: The Fund values municipal securities
(including
commitments to purchase such securities on a ``when-issued''
basis) on the basis
of prices provided by a pricing service which uses
information with respect to
transactions in bonds, quotations from bond dealers, market
transactions in
comparable securities and various relationships between
securities in
determining values. If market quotations are not readily
available from such
pricing service, a security is valued at its fair value as
determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of
securities at a set price
for delivery on a future date. Upon entering into a
financial futures contract,
the Series is required to pledge to the broker an amount of
cash and/or other
assets equal to a certain percentage of the contract amount.
This amount is
known as the ``initial margin''. Subsequent payments, known
as ``variation
margin'', are made or received by the Series each day,
depending on the daily
fluctuations in the value of the underlying security. Such
variation margin is
recorded for financial statement purposes on a daily basis
as unrealized gain or
loss. When the contract expires or is closed, the gain or
loss is realized and
is presented in the statement of operations as net realized
gain(loss) on
financial futures contracts. The Series invests in financial
futures contracts
in order to hedge its existing portfolio securities or
securities the Series
intends to purchase, against fluctuations in value caused by
changes in
prevailing interest rates. Should interest rates move
unexpectedly, the Series
may not achieve the anticipated benefits of the financial
futures contracts and
may realize a loss. The use of futures transactions involves
the risk of
imperfect correlation in movements in the price of futures
contracts, interest
rates and the underlying hedged assets.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. The Series amortizes premiums and original
issue discount paid on
purchases of portfolio securities as adjustments to interest
income. Expenses
are recorded on the accrual basis which may require the use
of certain estimates
by management.
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
based upon the
relative proportion of net assets of each class at the
beginning of the day.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
meet the requirements of the Internal Revenue Code
applicable to regulated
investment companies and to distribute all of its net income
to shareholders.
For this reason and because substantially all of the Series'
gross income
consists of tax-exempt interest, no federal income tax
provision is required.
Dividends and Distributions: The Series declares daily
dividends from net
investment income. Payment of dividends is made monthly.
Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Deferred Organization Expenses: The Series incurred $98,700
in organization and
initial registration expenses. Such amount has been deferred
and is being
amortized over a period of 60 months ending September 1999.
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management, LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the services
of PIC, the cost of
compensation of officers of the Fund, occupancy and certain
clerical and
bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily
net assets) of its
management fee, which amounted to $7,161 ($0.006 per share
for Class A, B, and C
shares; .05% of average net assets). The Series is not
required to reimburse PMF
for such waiver.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996,
Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A
shares of the Fund
and is serving the Fund under the same terms and conditions
as under the
arrangement with PMFD. PSI is also the distributor of the
Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI for
distributing and
servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of
expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with
respect to Class A
shares, for distribution-related activities at an annual
rate of up to .30 of
1%, .50 of 1% and 1%, of the average daily net assets of the
Class A, B and C
shares, respectively. Such expenses under the Plans were .10
of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class
A, B and C shares,
respectively, for the fiscal year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received
approximately
$7,200 in front-end sales charges resulting from sales of
Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD
and PSI paid such
sales charges to affiliated broker-dealers which in turn
paid commissions to
sales persons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended
August 31, 1996, it
received approximately $37,500 and $200 in contingent
deferred sales charges
imposed upon certain redemptions by Class B and C
shareholders, respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal
year ended August
31, 1996, the Series incurred fees of approximately $4,200
for the services of
PMFS. As of August 31, 1996, approximately $300 of such fees
were due to PMFS.
Transfer agent fees and expenses in the Statement of
Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Expense Subsidy
PMF has agreed to subsidize expenses so that total operating
expenses do not
exceed .45%, .85% and 1.10% of the average net assets of the
Class A shares,
Class B shares and Class C shares, respectively, until
further notice. For the
fiscal year ended August 31, 1996, PMF subsidized $212,409
($0.17 per share for
Class A, B and C shares; 1.48% of average net assets) of the
Series' expenses.
The Series is not required to reimburse PMF for such
subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of portfolio securities of the Series,
excluding short-term
investments, for the fiscal year ended August 31, 1996 were
$4,466,168 and
$2,553,985, respectively.
At August 31, 1996, the Series sold 60 financial futures
contracts on the U.S.
Treasury Index of which 40 expire in September 1996 and 20
expire in December
1996. The value at disposition of such contracts is
$652,063. The value of such
contracts on August 31, 1996 was $642,812, thereby resulting
in an unrealized
gain of $9,251.
The cost basis of investments for federal income tax
purposes is substantially
the same as for financial reporting purposes and,
accordingly, as of
- ------------------------------------------------------------
- --------------------
- ----- 8
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
August 31, 1996, net unrealized appreciation for federal
income tax purposes was
$437,932 (gross unrealized appreciation--$464,899; gross
unrealized
depreciation--$26,967).
The Series will elect to treat net realized capital losses
of approximately
$31,150 incurred in the ten month period ended August 31,
1996 as having been
incurred in the following fiscal year.
- ------------------------------------------------------------
Note 6. Capital
The Series offers Class A, Class B and Class C shares. Class
A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares
are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Class C shares are sold
with a contingent
deferred sales charge of 1% during the first year. Class B
shares will
automatically convert to Class A shares on a quarterly basis
approximately seven
years after purchase. A special exchange privilege is also
available for
shareholders who qualify to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of
beneficial interest of
each class at $.01 par value per share. Of the 1,277,494
shares of beneficial
interest issued and outstanding at August 31, 1996, PMF
owned 171,821 shares.
Transactions in shares of beneficial interest for the fiscal
year ended August
31, 1996 and the period ended August 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- --------------------------------------- -------- ------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 36,885 $
448,439
Shares issued in reinvestment of
dividends and distributions.......... 4,000
48,647
Shares reacquired...................... (10,531)
(126,891)
-------- ------
- ----
Net increase in shares outstanding
before conversion.................... 30,354
370,195
Shares issued upon conversion from
Class B.............................. 11,406
137,525
<CAPTION>
-------- ------
- ----
Net increase in shares outstanding..... 41,760 $
507,720
-------- ------
- ----
-------- ------
- ----
September 19, 1994* through
August 31, 1995:
Shares sold............................ 279,870
$3,255,106
Shares issued in reinvestment of
dividends............................ 1,566
18,665
Shares reacquired...................... (10,702)
(123,633)
-------- ------
- ----
Net increase in shares outstanding
before conversion.................... 270,734
3,150,138
Shares issued upon conversion from
Class B.............................. 4,086
49,084
-------- ------
- ----
Net increase in shares outstanding..... 274,820
$3,199,222
-------- ------
- ----
-------- ------
- ----
Class B Shares
Amount
- --------------------------------------- -------- ------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 204,563
$2,491,095
Shares issued in reinvestment of
dividends and distributions.......... 28,137
342,549
Shares reacquired...................... (115,555)
(1,409,389)
-------- ------
- ----
Net increase in shares outstanding
before conversion.................... 117,145
1,424,255
Shares reacquired upon conversion into
Class A.............................. (11,406)
(137,525)
-------- ------
- ----
Net increase in shares outstanding..... 105,739
$1,286,730
-------- ------
- ----
-------- ------
- ----
September 19, 1994* through
August 31, 1995:
Shares sold............................ 816,861
$9,471,988
Shares issued in reinvestment of
dividends............................ 14,410
171,145
Shares reacquired...................... (89,345)
(1,066,264)
-------- ------
- ----
Net increase in shares outstanding
before conversion.................... 741,926
8,576,869
Shares reacquired upon conversion into
Class A.............................. (4,086)
(49,084)
-------- ------
- ----
Net increase in shares outstanding..... 737,840
$8,527,785
-------- ------
- ----
-------- ------
- ----
<CAPTION>
Class C
- ---------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 50,226 $
610,614
Shares issued in reinvestment of
dividends and distributions.......... 3,592
43,670
Shares reacquired...................... (2,216)
(27,349)
-------- ------
- ----
Net increase in shares outstanding..... 51,602 $
626,935
-------- ------
- ----
-------- ------
- ----
September 19, 1994* through
August 31, 1995:
Shares sold............................ 66,136 $
781,329
Shares issued in reinvestment of
dividends............................ 845
10,012
Shares reacquired...................... (1,248)
(15,218)
-------- ------
- ----
Net increase in shares outstanding..... 65,733 $
776,123
-------- ------
- ----
-------- ------
- ----
- ---------------
* Commencement of investment operations.
</TABLE>
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A Class B
Class C
----------
- ------------------ ---------------------------- ----
- ------
September 19, September 19,
Year
1994(b) Year 1994(b) Year
Ended
Through Ended Through Ended
August 31,
August 31, August 31, August 31, August 31,
1996
1995 1996 1995 1996
-----
- ----- ---------- ----- -----
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $12.13
$ 11.64 $ 12.13 $ 11.64 $12.13
-----
- ----- ---------- ----- -----
Income from investment operations
Net investment income(d)...................... .66
.58 .61 .54 .57
Net realized and unrealized gain on investment
transactions............................... (.05)
.49 (.05) .49 (.05)
-----
- ----- ---------- ----- -----
Total from investment operations........... .61
1.07 .56 1.03 .52
-----
- ----- ---------- ----- -----
Less distributions
Dividends from net investment income.......... (.66)
(.58) (.61) (.54) (.57)
Distributions from net realized gains......... (.08)
- -- (.08) -- (.08)
-----
- ----- ---------- ----- -----
Total distributions........................ (.74)
(.58) (.69) (.54) (.65)
-----
- ----- ---------- ----- -----
Net asset value, end of period................ $12.00
$ 12.13 $ 12.00 $ 12.13 $12.00
-----
- ----- ---------- ----- -----
-----
- ----- ---------- ----- -----
TOTAL RETURN(c):.............................. 5.01%
9.42% 4.60% 9.03% 4.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,800
$ 3,333 $ 10,126 $ 8,949 $1,409
Average net assets (000)...................... $3,620
$ 2,778 $ 9,599 $ 6,270 $1,103
Ratios to average net assets:(d)
Expenses, including distribution fees...... .45%
.46%(a) .85% .86%(a) 1.10%
Expenses, excluding distribution fees...... .35%
.36%(a) .35% .36%(a) .35%
Net investment income...................... 5.38%
5.32%(a) 4.98% 5.03%(a) 4.74%
Portfolio turnover rate....................... 18%
75% 18% 75% 18%
<CAPTION>
September
19,
1994(b)
Through
August 31,
1995
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.64
-----
Income from investment operations
Net investment income(d)...................... .51
Net realized and unrealized gain on investment
transactions............................... .49
-----
Total from investment operations........... 1.00
-----
Less distributions
Dividends from net investment income.......... (.51)
Distributions from net realized gains......... --
-----
Total distributions........................ (.51)
-----
Net asset value, end of period................ $ 12.13
-----
-----
TOTAL RETURN(c):.............................. 8.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 797
Average net assets (000)...................... $ 373
Ratios to average net assets:(d)
Expenses, including distribution fees......
1.11%(a)
Expenses, excluding distribution fees......
.36%(a)
Net investment income......................
4.79%(a)
Portfolio turnover rate....................... 75%
</TABLE>
- ---------------
(a) Annualized.
(b) Commencement of investment operations.
(c) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends.
Total returns for periods of less than a full year are
not annualized.
(d) Net of expense subsidy and management fee waiver.
- ------------------------------------------------------------
- --------------------
- ----- 10 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report HAWAII INCOME
SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Hawaii Income Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, Hawaii Income
Series as of August 31, 1996, the related statements of
operations for the year
then ended and of changes in net assets and the financial
highlights for the
year then ended and the period September 19, 1994
(commencement of investment
operations) to August 31, 1995. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian and
broker. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, Hawaii Income Series, as of August 31, 1996,
the results of its
operations, the changes in its net assets, and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL MUNICIPAL
SERIES FUND
Federal Income Tax Information HAWAII INCOME SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends and distributions paid by the Series during such
fiscal year.
Accordingly, we are advising you that in the fiscal year
ended August 31, 1996,
dividends paid from net investment income of $.66 per Class
A share, $.61 per
Class B share, and $.57 per Class C share were all federally
tax-exempt interest
dividends. In addition, the Series paid to Class A, B and C
shares a long-term
capital gain distribution of $.08 per share, which is
taxable as such.
In January 1997, you will be advised on IRS Form 1099 DIV or
substitute 1099 DIV
as to the federal tax status of the distributions received
by you in calendar
year 1996.
- ------------------------------------------------------------
- --------------------
11 -----
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income growth
has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for which
Prudential Mutual Fund Management manages a state-specific
municipal bond
mutual fund
Revised: October, 1996
<PAGE>
Comparing A $10,000 Investment.
Prudential Municipal Series Fund: Hawaii Income
Series vs. Lehman Bros. General Muni Debt Index.
Prudential Muni Series Fund:
Hawaii Income Series
Lehman Bros. General
Muni Debt. Index
Average Annual
Total Returns
With Sales Load*
5.7% Since Inception (4.5%)
1.9% for 1 Year (0.7%)
(CHART)
Without Sales Load*
7.4% Since Inception (6.1%)
5.0% for 1 Year (3.8%)
Average Annual
Total Returns
With Sales Load*
5.0% Since Inception (3.8%)
- -0.4% for 1 Year (-1.6%)
(CHART)
Without Sales
Load* 7.0% Since Inception (5.7%)
4.6% for 1 Year (3.4%)
Average Annual
Total Returns
With Sales Load*
6.7% Since Inception (5.4%)
3.3% for 1 Year (2.1%)
(CHART)
Without Sales Load*
6.7% Since Inception (5.4%)
4.3% for 1 Year (3.1%)
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, will be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Municipal
Series Fund: Hawaii
Income Series (Class A, Class B and Class C) with a similar
investment in the
Lehman Brothers Municipal Bond Index by portraying the
initial account values
at the commencement of operations of each class, and
subsequent account values
at the end of the most recent reporting period (August 31),
as measured on a
quarterly basis, beginning in 1994 for all three shares
classes. For purposes
of the graphs, and unless otherwise indicated, in the
accompanying tables it
has been assumed (a) that the maximum applicable front-end
sales charge was
deducted from the initial $10,000 investment in Class A
shares; (b) the maximum
applicable contingent deferred sales charge was deducted
from the value of the
investment in Class B and Class C shares, assuming full
redemption on August 31,
1996; (c) all recurring fees (including management fees)
were deducted; and (d)
all dividends and distributions were reinvested. Class B
shares automatically
convert to Class A shares, on a quarterly basis,
approximately seven years
after purchase. This conversion feature is not reflected in
the graph. The
graph and accompanying tables reflect the past subsidy
and/or waiver of expenses
and/or management fees.
* Without waivers and expense subsidies the value of the
$10,000 investment in
the Series and the Series' average annual total return, as
illustrated above,
would have been lower, as indicated in parentheses ( ).
The Index is a weighted index comprised of 21,000 municipal
bonds (General
obligation bonds, revenue bonds, insured bonds and
prerefunded bonds) selected
by Lehman Brothers as representative of the long-term
investment grade municipal
bond market. It is an unmanaged index that includes the
reinvestment of all
dividends, but does not reflect the transaction costs and
advisory fees paid
by the Series' investors. The Index's holdings differ from
the Series'
portfolio. The Index is not the only one that may be used to
characterize
performance of bond funds and other indices may portray
different comparative
performance.
<PAGE>
Prudential Mutual Funds
Gateway Center
Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard
A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL
60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective
investors unless preceded or accompanied by a current
prospectus.
74435M473 MF165E
74435M465 Cat. #42M160Y
74435M457
(ICON)
Prudential
Municipal
Series Fund
North Carolina Series
ANNUAL REPORT
AUG. 31, 1996
(LOGO)
Prudential Municipal Series Fund
North Carolina Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the municipal
bond market
experienced a lot of turbulence. Interest rates first fell,
then rose, and
finally finished close to where they started. The Prudential
Municipal Series
Fund -- North Carolina Series performed competitively with
the average North
Carolina municipal fund over the last 12 months, as measured
by Lipper
Analytical Services.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 8/31/96
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C>
<C>
Class A 4.7% (4.6)4 37.4% (37.2)4 N/A
55.1% (55.0)4
Class B 4.3 (4.2)4 34.6 (34.5)4 77.9%
(76.6)4 126.1 (123.5)4
Class C 4.0 (3.9)4 N/A N/A
10.5 (10.4)4
Lipper NC Muni Avg.3 4.8 37.9 86.0
141.6
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1
As of 9/30/96
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C>
<C>
Class A 2.7% (2.6)4 6.0% (5.9)4 N/A
6.5%
Class B 0.3 6.0 6.2%
(6.1)4 7.4 (7.3)4
Class C 4.1 (4.0)4 N/A N/A
5.4
</TABLE>
<TABLE>
<CAPTION>
Dividends &
Yields
As of 8/31/96 Taxable
Equivalent Yield
Total Dividends 30-Day
At Tax Rates Of
Paid for 12 Mos. SEC Yield
36% 39.6%
<S> <C> <C> <C>
<C>
Class A $0.53 4.71% (4.66)4 7.98%
(7.89)4 8.45% (8.36)4
Class B $0.49 4.45 (4.40)4 7.54
(7.45)4 7.99 (7.90)4
Class C $0.46 4.20 (4.15)4 7.11
(7.02)4 7.54 (7.44)4
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical Services. The
cumulative total returns do not take into account sales
charges. The average
annual returns do take into account applicable sales
charges. The Series
charges a maximum front-end sales load of 3% for Class A
shares and a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for six
years, for Class B shares. Class C shares have a 1% CDSC for
one year. Class B
shares automatically convert to Class A shares on a
quarterly basis, after
approximately seven years.
2Inception dates: 1/22/90 Class A; 2/13/85 Class B; 8/1/94
Class C.
3The Lipper North Carolina Municipal Bond fund average
includes 34 funds for
one year, seven funds for five years, three funds for 10
years and two funds
since inception of the Class B shares on 2/13/85.
4Without waiver of management fees and/or expense
subsidization, the Series'
cumulative and average annual total returns and yields would
have been lower,
as indicated in parentheses ( ).
5Taxable equivalent yields reflect federal and applicable
state taxes.
How Investments Compared.
(As of 8/31/96)
(Chart)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher yields means tolerating more risk.
The greater the
risk, the larger the potential reward or loss. In addition,
we've included
historical 20-year average annual returns. These returns
assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Marie Conti, Fund Manager (PICTURE)
Portfolio
Manager's Report
The Series primarily invests in carefully-selected, long-
term municipal bonds
that offer a high level of income exempt from North Carolina
state and federal
income taxes, consistent with preservation of capital.
However, certain
shareholders may be subject to the federal alternative
minimum tax. There can
be no assurance that the Series will achieve its investment
objective.
More Insurance.
As buyers become more quality conscious, more tax-free
municipal bonds are
being issued with insurance. In the first half of 1996, 47%
of all new bonds
issued nationally were insured. Insured bonds in our fund
now total 40% of
assets. This benefits the investor, because payment of both
interest and
principal of a bond is guaranteed by an insurance company.
Of course, no
insurance is available to prevent the price of bonds, and
bond funds, from
fluctuating from day to day.
Strategy Session.
Quite Volatile.
Municipal bond interest rates and prices experienced a lot
of volatility over
the past year. Last fall, interest rates fell and bond
prices rose as investors
feared a recession. But by early 1996, the tables turned.
The economy gained
new strength, setting off inflation fears, which pushed
interest rates higher
and bond prices lower. Municipal bond interest rates rose
from 5.63% on January
4 to 6.34% on June 13 -- a difference of nearly three-
quarters of a percentage
point, as measured by the Bond Buyer's Revenue Bond Index, a
widely-watched
industry barometer. But when the dust settled on August 31,
1996, municipal
bond interest rates were slightly lower than they had been
12 months earlier:
6.09% on August 29, 1996 vs. 6.26% a year earlier.
We Adjusted.X#XDuring the last 12 months, we periodically
adjusted the Series'
holdings to take advantage of changing market conditions.
Last fall, as
interest rates were falling, we had a longer duration (a
measure of the Series'
sensitivity to changing interest rates) to capitalize on
rising bond prices.
In April, we reduced duration to 8.6 years to protect
assets. Over the summer,
when interest rates appeared to be peaking, we increased
duration once more,
ending on August 31, 1996 at 9.6 years. Throughout the 12
months, we emphasized
call protection (many municipal bonds can be redeemed before
maturity) and
tried to upgrade quality where possible when the interest
rate differences
between higher- and lower-rated bonds narrowed.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
<PAGE>
What Went Well.
Time To Upgrade.
When the price difference between higher and lower quality
bonds got smaller,
we took the opportunity to upgrade the quality of our
holdings. Why? Because
we were no longer being paid enough to accept the added
credit risk. Our
holdings in insured bonds now represent 40% of total net
assets. Nationally,
47% of municipal bonds issued through the first half of 1996
were insured --
up from 43% for all of 1995.
Culling Callables.
Callable bonds generally carry higher coupons to compensate
for the risk that
they might be redeemed before maturity. But we've found that
this alone is not
enough of a reason to own many of them. Prices of callable
bonds do not rise as
fast as non-callables when the bond market rallies, because
price depends on
maturity, which can't be calculated with certainty. So we've
been selling bonds
that are callable in less than eight years, and replacing
them either with
non-callable bonds or those that are callable in 10 years or
more. In this way
we'll be able to better manage the risks we face when
interest rates rise or
fall suddenly, as they have been apt to do in recent years.
Five Largest
Issuers.
7.0% NC Municipal Power
Agency
5.2% NC Eastern Municipal
Power Agency
5.0% Durham County
4.5% Charlotte Convention
Facility Project
4.4% Puerto Rico
Commonwealth
Expressed as a percentage of total net assets as of 8/31/96.
And Not So Well.
Shortening Sooner.
Late in 1995, the U.S. economy was inching ahead slowly. We
expected this to
continue into early 1996, so we held our duration -- a
measure of the Series'
sensitivity to interest rate changes -- fairly long, at 8.8
years. But the
economic slowdown was only temporary, largely the result of
the government
shutdown and the severe weather in the Northeast. When the
economy accelerated,
we reduced duration to 8.6 years in April. That was good,
but we would have
performed better if we cut back even more just a little bit
earlier.
Credit Quality.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
Looking Ahead.
Right now, we're cautious. We're expecting economic growth
in the second half
to slow. Meanwhile, the Federal Reserve Board is concerned
that the economy has
been growing so rapidly that a shortage of workers is
developing, which could
induce wage inflation. It is possible that the board will
raise short-term
interest rates this year, if upward pressure on wages
results in inflationary
price increases to the consumer.
1
<PAGE>
President's Letter October 7,
1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996. According
to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just as
they go up). There's no better time than now to be talking
with your Financial
Advisor or Registered Representative. She or he can help
you determine
reasonable expectations about both the potential performance
and risks
associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual
and institutional investors. We plan to improve the range
and quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change
in the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NORTH CAROLINA
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
LONG-TERM INVESTMENTS--96.5%
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Buncombe Cnty., Pub. Impvt. Bonds
Aa 6.90% 3/01/09 $ 1,000 (d) $
1,077,810
Cary Sanitary Sewer
Aa1 5.20 4/01/09 500
490,925
Charlotte Pub. Impvt.
Aaa 5.40 4/01/15 1,500
1,457,115
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev.
Aa 6.25 1/01/20 750
760,920
Charlotte Wtr. & Swr.
Aaa 6.20 6/01/17 1,500 (d)
1,633,995
Charlotte Wtr. & Swr.
Aaa 5.90 2/01/19 1,000
1,025,210
Charlotte, Cert. of Part., Conv. Fac. Proj., A.M.B.A.C.
Aaa 5.00 12/01/21 3,000
2,629,710
City of Greensboro Enterprise Sys. Rev., Comb Ser. A
A1 5.30 6/01/15 1,000
954,190
Concord Util. Sys. Rev., M.B.I.A.
Aaa 5.50 12/01/14 1,000
977,390
Craven Cnty., M.B.I.A.
Aaa 5.50 6/01/16 1,000
978,700
Dare Cnty., Util. Sys. Rev., M.B.I.A.
Aaa 5.75 6/01/14 500
489,075
Davidson Cnty.
Aa 5.40 6/01/14 800
776,648
Durham Cnty., Pub. Impvt.
Aaa 4.60 5/01/04 2,000
1,972,200
Durham, Gen. Oblig.
Aa1 5.10 2/01/15 1,000
931,750
Fayetteville, Cert. of Part., San. Swr. & Pub. Impvt.,
A.M.B.A.C.
Aaa 6.875 12/01/08 1,750
1,908,655
Gastonia, Gen. Oblig., Wtr. Sys. & St. Impvt., F.G.I.C.
Aaa 5.25 4/01/09 1,625
1,594,141
Haywood Cnty., Ind. Facs. & Poll. Ctrl.,
Fin. Auth. Environ. Impvt. Rev.
Baa1 6.25 9/01/25 750
737,970
Fin. Auth. Environ. Impvt. Rev., Ser. A
Baa1 5.75 12/01/25 1,000
911,350
Lincoln Cnty. Gen. Oblig., Ref., F.G.I.C.
Aaa 5.10 6/01/09 1,170
1,123,984
Martin Cnty. Ind. Facs. & Poll. Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj.
A2 8.50 6/15/99 200
219,124
Mecklenberg Cnty., Pub. Impvt.
Aaa 5.00 4/01/08 1,000
976,760
Mecklenburg Cnty., Pub. Impvt.
Aaa 4.80 3/01/06 1,050
1,031,929
New Hanover Cnty. Hosp. Rev., Regl. Med. Ctr. Proj.,
A.M.B.A.C.
Aaa 4.75 10/01/23 1,600
1,345,040
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev. A.M.B.A.C.
Aaa 6.00 1/01/18 1,000
1,027,920
Pwr. E.T.M. prerefunded, Ser. A
Aaa 6.50 1/01/18 1,995
2,198,251
Pwr. Sys. Rev., Ser. A
A 6.50 1/01/18 1,005
1,039,090
Pwr. Sys. Rev., Ser. B
Aaa 6.00 1/01/26 650 (d)
659,288
Pwr. Sys. Rev., Ser. A
A 6.40 1/01/21 1,000
995,010
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NORTH CAROLINA
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
No. Carolina Hsg. Fin. Agcy., Sngl. Fam. Mtge. Rev., Ser. G
Aa 7.80% 3/01/21 $ 670 $
701,329
No. Carolina Med. Care Comn., Hlth. Care Facs. Rev.,
Stanley Mem. Hosp. Proj.
Baa1 7.80 10/01/19 650
722,781
North Carolina Med. Care Comn. Hlth. Care Fac. Rev.,
Stanley Mem. Hosp. Proj., A.M.B.A.C.
Aaa 5.375 10/01/19 1,500
1,397,730
No. Carolina Med. Care Comn., Hosp. Rev.,
Annie Pen Mem. Hosp. Proj.
Baa 7.50 8/15/21 1,000
1,032,310
Rex Hosp. Proj.
A1 6.25 6/01/17 1,750
1,761,497
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev., A.M.B.A.C.
Aaa 5.25 1/01/09 1,000
981,250
No. 1 Catawba Elec. Rev., M.B.I.A.
Aaa 6.00 1/01/10 1,250
1,310,825
No. 1 Catawba Elec. Rev., M.B.I.A.
Aaa 6.97(e) 1/01/12 2,000
1,830,000
North Carolina Gen. Oblig. Cap. Impvt., Ser. A
Aaa 4.70 2/01/10 1,200
1,104,540
Northern Hosp. Dist. Surry Cnty. Hlth. Care Facs. Rev., No.
Carolina Hosp.
Ba1 7.875 10/01/21 1,500
1,563,120
Pitt Cnty. Rev., Pitt Cnty. Mem. Hosp.
Aa 5.25 12/01/21 1,500
1,369,005
Puerto Rico Comnwlth.,
Gen. Oblig., F.S.A.
Aaa 7.958 (e) 7/01/20 1,300
1,269,125
Gen. Oblig., Ser. A, M.B.I.A.
Aaa 6.25 7/01/10 1,240
1,306,315
Puerto Rico Elec. Pwr. Auth. Rev., Pwr. Rev. Bds.
Baa1 5.50 7/01/20 1,520
1,402,474
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Facs., Upjohn
Co. Proj.
Aa3 7.50 12/01/23 500
544,860
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A.
Aaa 6.677 (e) 1/25/07 1,000
978,750
Puerto Rico Univ. Sys. Rev., Ser. M, M.B.I.A.
Aaa 5.25 6/01/25 1,000
923,400
Union Cnty. Wtr. & Swr., Solid Waste Rev.
A1 6.50 4/01/07 850
912,645
University of No. Carolina Chapel Hill Hosp. Rev.
Aa 5.25 2/15/26 1,000
914,860
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91
NR 7.75 10/01/06 415
437,701
Wake Cnty. Hosp. Rev., M.B.I.A.
Aaa 5.125 10/01/26 1,500
1,321,890
Winston Salem, Sngl. Fam. Mtge. Rev.
A1 8.00 9/01/07 410
425,961
Winston Salem, Wtr. & Swr., Sys. Rev., Ser. B
Aa 5.70 6/01/17 1,000
977,310
- -----------
Total long-term investments (cost $56,471,948)
57,113,828
- -----------
</TABLE>
- ------------------------------------------------------------
- --------------------
4 See Notes to
Financial Statements.
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NORTH CAROLINA
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
SHORT-TERM INVESTMENTS--2.5%
Halifax Cnty. Ind. Facs. & Poll. Ctrl., Westmoreland L.G. &
E. Partners, Ser. 93 F.R.D.D.
A-1+(c) 3.95% 9/03/96 $ 1,400 $
1,400,000
Halifax Cnty. Ind. Facs. & Poll. Ctrl., Westmoreland-Hadson
Roano, Ser. 91 F.R.D.D.
Aa2 4.05 9/03/96 100
100,000
- -----------
Total short-term investments (cost $1,500,000)
1,500,000
- -----------
Total Investments--99.0%
(cost $ 57,971,948; Note 4)
58,613,828
Other assets in excess of liabilities--1.0%
576,319
- -----------
Net Assets--100%
$59,190,147
- -----------
- -----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate
Demand Notes is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or
direct U.S.
guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely
indexed to a floating
interest rate. The rate shown is the rate at year end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<S>
<C>
Assets
August 31, 1996
Investments, at value (cost
$57,971,948)................................................
.................. $ 58,613,828
Cash........................................................
..............................................
30,458
Interest
receivable..................................................
..................................... 892,099
Receivable for Series shares
sold........................................................
................. 15,250
Receivable for investments
sold........................................................
................... 15,000
Other
assets......................................................
........................................ 1,873
- ---------------
Total
assets......................................................
..................................... 59,568,508
- ---------------
Liabilities
Payable for Series shares
reacquired..................................................
.................... 166,195
Accrued
expenses....................................................
...................................... 124,846
Dividends
payable.....................................................
.................................... 45,802
Management
payable.....................................................
................................... 22,969
Distribution fee
payable.....................................................
............................. 15,849
Deferred trustees'
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 378,361
- ---------------
Net
Assets......................................................
.......................................... $
59,190,147
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 53,528
Paid-in capital in excess of
par.........................................................
.............. 57,679,667
- ---------------
57,733,195
Accumulated net realized gain on
investments.................................................
.......... 815,072
Net unrealized appreciation on
investments.................................................
............ 641,880
- ---------------
Net assets, August 31,
1996........................................................
....................... $ 59,190,147
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($28,088,731 / 2,540,740 shares of beneficial interest
issued and outstanding)......................
$11.06
Maximum sales charge (3% of offering
price)......................................................
...... .34
- ---------------
Maximum offering price to
public......................................................
................. $11.40
- ---------------
- ---------------
Class B:
Net asset value, offering price and redemption price per
share
($31,028,910 / 2,805,475 shares of beneficial interest
issued and outstanding)......................
$11.06
- ---------------
- ---------------
Class C:
Net asset value, offering price and redemption price per
share
($72,506 / 6,556 shares of beneficial interest issued
and outstanding)..............................
$11.06
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest................................... $
3,671,215
-----------
- ----
Expenses
Management fee.............................
316,510
Distribution fee--Class A..................
27,628
Distribution fee--Class B..................
178,025
Distribution fee--Class C..................
514
Reports to shareholders....................
105,000
Custodian's fees and expenses..............
90,000
Transfer agent's fees and expenses.........
37,000
Registration fees..........................
35,000
Audit fee and expenses.....................
12,300
Legal fees and expenses....................
10,000
Directors' fees and expenses...............
3,900
Miscellaneous..............................
12,118
-----------
- ----
Total expenses..........................
827,995
Less: Management fee waiver.............
(31,651)
Custodian fee credit.................
(4,609)
-----------
- ----
Net expenses............................
791,735
-----------
- ----
Net investment income.........................
2,879,480
-----------
- ----
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions....................
1,009,689
Financial futures contracts................
(56,144)
Written options transactions...............
16,880
-----------
- ----
970,425
-----------
- ----
Net change in unrealized
appreciation/depreciation on:
Investments................................
(957,729)
Financial futures contracts................
(52,187)
-----------
- ----
(1,009,916)
-----------
- ----
Net loss on investments.......................
(39,491)
-----------
- ----
Net Increase in Net Assets
Resulting from Operations..................... $
2,839,989
-----------
- ----
-----------
- ----
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August
31,
<S> <C> <C>
in Net Assets 1996
1995
Operations
Net investment income.......... $ 2,879,480 $
3,451,275
Net realized gain on investment
transactions................ 970,425
675,725
Net change in unrealized
depreciation of
investments................. (1,009,916)
(130,375)
------------ -------
- -----
Net increase in net assets
resulting from operations... 2,839,989
3,996,625
------------ -------
- -----
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (1,319,689)
(800,554)
Class B..................... (1,556,956)
(2,649,245)
Class C..................... (2,835)
(1,476)
------------ -------
- -----
(2,879,480)
(3,451,275)
------------ -------
- -----
Distributions from net realized
gains
Class A..................... (283,246)
- --
Class B..................... (369,288)
- --
Class C..................... (674)
- --
------------ -------
- -----
(653,208)
- --
------------ -------
- -----
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 2,409,691
4,576,741
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 1,901,502
1,814,783
Cost of shares reacquired...... (11,119,778)
(11,959,150)
------------ -------
- -----
Net decrease in net assets from
Series share transactions... (6,808,585)
(5,567,626)
------------ -------
- -----
Total decrease.................... (7,501,284)
(5,022,276)
Net Assets
Beginning of year................. 66,691,431
71,713,707
------------ -------
- -----
End of year....................... $ 59,190,147 $
66,691,431
------------ -------
- -----
------------ -------
- -----
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940, as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The North Carolina Series
(the ``Series'')
commenced investment operations in February, 1985. The
Series is diversified and
seeks to achieve its investment objective of obtaining the
maximum amount of
income exempt from federal and applicable state income taxes
with the minimum of
risk by investing in ``investment grade'' tax-exempt
securities whose ratings
are within the four highest ratings categories by a
nationally recognized
statistical rating organization or, if not rated, are of
comparable quality. The
ability of the issuers of the securities held by the Series
to meet their
obligations may be affected by economic or political
developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: The Fund values municipal securities
(including
commitments to purchase such securities on a ``when-issued''
basis) on the basis
of prices provided by a pricing service which uses
information with respect to
transactions in bonds, quotations from bond dealers, market
transactions in
comparable securities and various relationships between
securities in
determining values. If market quotations are not readily
available from such
pricing service, a security is valued at its fair value as
determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of debt
securities at a set
price for delivery on a future date. Upon entering into a
financial futures
contract, the Series is required to pledge to the broker an
amount of cash
and/or other assets equal to a certain percentage of the
contract amount. This
amount is known as the ``initial margin''. Subsequent
payments, known as
``variation margin'', are made or received by the Series
each day, depending on
the daily fluctuations in the value of the underlying
security. Such variation
margin is recorded for financial statement purposes on a
daily basis as
unrealized gain or loss until the contracts expire or are
closed, at which time
the gain or loss is reclassified to realized gain or loss.
The Series invests in
financial futures contracts solely for the purpose of
hedging its existing
portfolio securities, or securities the Series intends to
purchase against
fluctuations in value caused by changes in prevailing market
conditions. Should
market conditions move unexpectedly, the Series may not
achieve the anticipated
benefits of the financial futures contracts and may realize
a loss. The use of
futures transactions involves the risk of imperfect
correlation in movements in
the price of futures contracts, interest rates and the
underlying hedged assets.
Option Writing: When the Fund writes an option, an amount
equal to the premium
received by the Fund is recorded as a liability and is
subsequently adjusted to
the current market value of the option written. Premiums
received from writing
options which expire unexercised are treated by the Fund on
the expiration date
as realized gains from securities or currencies based upon
the type of option
written. The difference between the premium and the amount
paid on effecting a
closing purchase transaction, including brokerage
commissions, is also treated
as a realized gain, or if the premium received is less than
the amount paid for
the closing purchase transaction, as a realized loss. If a
call option is
exercised, the premium is added to the proceeds from the
sale of the underlying
security or currency in determining whether the fund has
realized a gain or
loss. If a put option is exercised, the premium reduces the
cost basis of the
securities or currencies purchased by the Fund. The Fund as
writer of an option
may have no control over whether the underlying securities
may be sold (call) or
purchased (put) and as a result bears the market risk of an
unfavorable change
in the price of the security underlying the written option.
There were no
written options outstanding at August 31, 1996.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. The Series amortizes premiums and original
issue discount paid on
purchases of portfolio securities as adjustments to interest
income. Expenses
are recorded on the accrual basis which may require the use
of certain estimates
made by management.
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
based upon the
relative proportion of net assets of each class at the
beginning of the day.
- ------------------------------------------------------------
- --------------------
8
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason and because substantially all
of the Series' gross
income consists of tax-exempt interest, no federal income
tax provision is
required.
Dividends and Distributions: The Series declares daily
dividends from net
investment income. Payment of dividends is made monthly.
Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles. These differences are primarily due to differing
treatments for
short-term capital gains and market discount.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the cost of
the subadviser's
services, the cost of compensation of officers of the Fund,
occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund
bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily
net assets) of its
management fee, which amounted to $31,651 ($0.006 per share
for Class A, B and C
shares; .05% of average net assets, annualized). The Series
is not required to
reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996
Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A
shares of the Fund
and is serving the Fund under the same terms and conditions
as under the
arrangement with PMFD. PSI is also the distributor of the
Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI for
distributing and
servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of
expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI and PMFD for
the period September 1, 1995 through January 1, 1996 with
respect to Class A
shares, for distribution-related activities at an annual
rate of up to .30 of
1%, .50 of 1% and 1%, of the average daily net assets of the
Class A, B and C
shares, respectively. Such expenses under the Plans were .10
of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class
A, B and C shares,
respectively, for the year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received
approximately
$2,600 in front-end sales charges resulting from sales of
Class A shares during
the year ended August 31, 1996. From these fees, PMFD and
PSI paid such sales
charges to affiliated broker-dealers which in turn paid
commissions to sales
persons and incurred other distribution costs.
PSI has advised the Series that for the year ended August
31, 1996, it received
approximately $109,600 in contingent deferred sales charges
imposed upon certain
redemptions by Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year
ended August 31,
1996, the Series incurred fees of approximately $26,800 for
the services of
PMFS. As of August 31, 1996, approximately $2,000 of such
fees were due to PMFS.
Transfer agent fees and expenses in the Statement of
Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series,
excluding short-term
investments, for the year ended August 31, 1996 were
$13,823,323 and
$19,348,514, respectively.
The cost basis of investments for federal income tax
purposes was substantially
the same as for financial reporting purposes and,
accordingly, as of August 31,
1996, net unrealized appreciation for federal income tax
purposes was $641,880
(gross unrealized appreciation--$1,567,100; gross unrealized
depreciation--$925,220).
Transactions in written options during the period ended
August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written...................... 75 16,880
Options expired...................... (75)
(16,880)
--------- --------
Options outstanding at August 31,
1996............................... 0 0
--------- --------
--------- --------
</TABLE>
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C
shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B
shares are sold with
a contingent deferred sales charge which declines from 5% to
zero depending on
the period of time the shares are held. Class C shares are
sold with a
contingent deferred sales charge of 1% during the first
year. Class B shares
will automatically convert to Class A shares on a quarterly
basis approximately
seven years after purchase. A special exchange privilege is
also available for
shareholders who qualify to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of
beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years
ended August 31,
1996 and 1995, were as follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ------------------------------------ ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 26,122 $
294,382
Shares issued in reinvestment of
dividends and distributions....... 77,298
872,346
Shares reacquired................... (371,852)
(4,173,584)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (268,432)
(3,006,856)
Shares issued upon conversion from
Class B........................... 438,352
4,936,059
---------- --------
- ----
Net increase in shares
outstanding....................... 169,920 $
1,929,203
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class A Shares
Amount
- ------------------------------------ ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 101,495 $
1,107,658
Shares issued in reinvestment of
dividends......................... 40,041
444,345
Shares reacquired................... (219,838)
(2,440,629)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (78,302)
(888,626)
Shares issued upon conversion from
Class B........................... 2,245,102
24,527,190
---------- --------
- ----
Net increase in shares
outstanding....................... 2,166,800 $
23,638,564
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 184,643 $
2,097,677
Shares issued in reinvestment of
dividends and distributions....... 90,870
1,026,914
Shares reacquired................... (617,133)
(6,946,194)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (341,620)
(3,821,603)
Shares issued upon conversion from
Class B........................... (437,963)
(4,936,059)
---------- --------
- ----
Net decrease in shares
outstanding....................... (779,583) $
(8,757,662)
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold......................... 313,714 $
3,421,366
Shares issued in reinvestment of
dividends......................... 126,657
1,369,272
Shares reacquired................... (889,076)
(9,511,942)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (448,705)
(4,721,304)
Shares reacquired upon conversion
into Class A...................... (2,245,029)
(24,527,190)
---------- --------
- ----
Net decrease in shares
outstanding....................... (2,693,734)
$(29,248,494)
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 1,566 $
17,632
Shares issued in reinvestment of
dividends......................... 199
2,242
---------- --------
- ----
Net increase in shares
outstanding....................... 1,765 $
19,874
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold......................... 4,353 $
47,717
Shares issued in reinvestment of
dividends......................... 105
1,166
Shares reacquired................... (592)
(6,579)
---------- --------
- ----
Net increase in shares
outstanding....................... 3,866 $
42,304
---------- --------
- ----
---------- --------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
10
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
--------------------
- --------------------------------
Year
Ended August 31,
--------------------
- --------------------------------
1996 1995
1994 1993 1992
<CAPTION>
------- -------
- ------ ------ ------
<S> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.19 $ 11.06
$12.04 $11.37 $10.86
------- -------
- ------ ------ ------
Income from investment operations
Net investment income................ .53
.60(a) .61 .65 .67
Net realized and unrealized gain
(loss) on investment
transactions...................... (.01) .13
(.76) .67 .51
------- -------
- ------ ------ ------
Total from investment
operations..................... .52 .73
(.15) 1.32 1.18
------- -------
- ------ ------ ------
Less distributions
Dividends from net investment
income............................ (.53) (.60)
(.61) (.65) (.67)
Distributions from net realized
gains............................. (.12) --
(.22) -- --
------- -------
- ------ ------ ------
Total distributions............... (.65) (.60)
(.83) (.65) (.67)
------- -------
- ------ ------ ------
Net asset value, end of year......... $ 11.06 $ 11.19
$11.06 $12.04 $11.37
------- -------
- ------ ------ ------
------- -------
- ------ ------ ------
TOTAL RETURN(b):..................... 4.70% 6.86%
(1.35)% 11.99% 11.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $28,089 $26,519
$2,256 $1,777 $ 917
Average net assets (000)............. $27,628 $15,244
$2,067 $1,316 $ 612
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.03%(a)
.98%(a) .88% .87% .91%
Expenses, excluding distribution
fees........................... .93%(a)
.88%(a) .78% .77% .81%
Net investment income............. 4.78%(a)
5.25%(a) 5.31% 5.55% 5.90%
Portfolio turnover rate.............. 23% 28%
17% 38% 36%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
11 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------
- ---------------------------------- ---------------------
- ----
<S> <C> <C>
<C> <C> <C> <C> <C>
Year Year
Year
Ended August 31, Ended Ended
---------------------
- ---------------------------------- August 31, August
31,
1996 1995
1994 1993 1992 1996 1995
------- -------
- ------- ------- ------- ---------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.19 $ 11.06
$ 12.05 $ 11.37 $ 10.86 $ 11.19 $11.06
------- -------
- ------- ------- ------- ---------- -----
Income from investment operations
Net investment income................ .49(a)
.55(a) .56 .60 .62 .46
.52(a)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.01) .13
(.77) .68 .51 (.01) .13
------- -------
- ------- ------- ------- ---------- -----
Total from investment
operations..................... .48 .68
(.21) 1.28 1.13 .45 .65
------- -------
- ------- ------- ------- ---------- -----
Less distributions
Dividends from net investment
income............................ (.49) (.55)
(.56) (.60) (.62) (.46) (.52)
Distributions from net realized
gains............................. (.12) --
(.22) -- -- (.12) --
------- -------
- ------- ------- ------- ---------- -----
Total distributions............... (.61) (.55)
(.78) (.60) (.62) (.58) (.52)
------- -------
- ------- ------- ------- ---------- -----
Net asset value, end of period....... $ 11.06 $ 11.19
$ 11.06 $ 12.05 $ 11.37 $ 11.06 $11.19
------- -------
- ------- ------- ------- ---------- -----
------- -------
- ------- ------- ------- ---------- -----
TOTAL RETURN(b):..................... 4.28% 6.44%
(1.82)% 11.62% 10.64% 4.03% 6.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $31,029 $40,119
$69,448 $75,515 $63,573 $ 72 $ 53
Average net assets (000)............. $35,605 $51,963
$73,606 $67,997 $60,751 $ 69 $ 32
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.43%(a)
1.34%(a) 1.28% 1.27% 1.31% 1.68%(a)
1.63%(a)
Expenses, excluding distribution
fees........................... .93%(a)
.84%(a) .78% .77% .81% .93%(a)
.88%(a)
Net investment income............. 4.37%(a)
5.10%(a) 4.89% 5.18% 5.58% 4.14%(a)
4.59%(a)
Portfolio turnover rate.............. 23% 28%
17% 38% 36% 23% 28%
<CAPTION>
<S> <C>
August 1,
1994(d)
through
August 31,
1994
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $11.09
-----
Income from investment operations
Net investment income................ .04
Net realized and unrealized gain
(loss) on investment
transactions...................... (.03)
-----
Total from investment
operations..................... .01
-----
Less distributions
Dividends from net investment
income............................ (.04)
Distributions from net realized
gains............................. --
-----
Total distributions............... (.04)
-----
Net asset value, end of period....... $11.06
-----
-----
TOTAL RETURN(b):..................... .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 10
Average net assets (000)............. $ 5
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.67%(c)
Expenses, excluding distribution
fees........................... .92%(c)
Net investment income............. 5.06%(c)
Portfolio turnover rate.............. 17%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of less than a
full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C Shares.
- ------------------------------------------------------------
- --------------------
12 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, North Carolina Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, North
Carolina Series, as of August 31, 1996, the related
statements of operations for
the year then ended and of changes in net assets for each of
the two years in
the period then ended, and the financial highlights for each
of the five years
in the period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, North Carolina Series, as of August 31, 1996,
the results of its
operations, the changes in its net assets, and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information NORTH
CAROLINA SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends and distributions paid by the Series during such
fiscal year.
Accordingly, we are advising you that in the fiscal year
ended August 31, 1996,
dividends paid from net investment income of $0.53 per Class
A share, $0.49 per
Class B share, and $0.46 per Class C share were all
federally tax-exempt
interest dividends. The Series also paid $0.12 per Class A
share, per Class B
share and per Class C share which represents distributions
from long-term
capital gains and are taxable as such.
We wish to advise you that the corporate dividends received
deduction for the
Series is zero. Only funds that invest in U.S. equity
securities are entitled to
pass-through a corporate dividends received deduction.
In January 1997, you will be advised on IRS Form 1099 DIV or
Substitute 1099 DIV
as to the federal tax status of the distributions received
by you in calendar
year 1996.
- ------------------------------------------------------------
- --------------------
13 -----
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Some mutual fund shareholders won't ever read this -- they
don't read annual
and semi-annual reports. It's quite understandable. These
annual and
semi-annual reports are prepared to comply with Federal
regulations. They
are often written in language that is difficult to
understand. So when most
people run into those particularly daunting sections of
these reports, they
don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of income
and appreciation the Fund has achieved in various time
periods. The average
annual total return is an annualized representation of the
Fund's
performance -- it generally smoothes out returns and gives
you an idea how
much the Fund has earned in an average year, for a given
time period. Under the
performance box, you'll see legends that explain the
performance information,
whether fees and sales charges have been included in
returns, and the inception
dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past
performance is not
indicative of future results.
Portfolio
Manager's Report
The portfolio manager who invests your money for you reports
on successful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of
Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets
And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of
Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes
In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial
Statements
This is the kind of technical material that can intimidate
readers, but it does
contain useful information. The Notes provide a brief
history and explanation
of your Fund's objectives. In addition, they also outline
how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the
Fund's shares, and more importantly, how much they are paid
for doing so.
Finally, the Notes explain how many shares are outstanding
and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent
Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a
tax advisor.
Performance
Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a hypothetical
$10,000 investment in the Fund since its inception or for 10
years (whichever
is shorter). To help you put that return in context, we are
required to include
the performance of an unmanaged, broad based securities
index, as well. The
index does not reflect the cost of buying the securities it
contains or the
cost of managing a mutual fund. Of course, the index
holdings do not mirror
those of the fund -- the index is a broadly based reference
point commonly used
by investors to measure how well they are doing. A
definition of the selected
index is also provided. Investors generally cannot invest
directly in an index
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income
growth has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for
which Prudential Mutual Fund Management manages a state-
specific municipal
bond mutual fund Revised: October, 1996
<PAGE>
Prudential Municipal Series Fund: North Carolina Series
- -- Lehman Bros. General Municipal Debt Index
Comparing A $10,000 Investment.
Prudential Municipal Series Fund: North Carolina
Series vs. Lehman Bros. General Muni Debt Index.
(Chart)
(Class A)
(Chart)
(Class B)
(Chart)
(Class C)
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, will be
worth more or less than their original cost. The charts on
the right are
designed to give you an idea how much the Series' returns
can fluctuate from
year to year by measuring the best and worst calendar years
in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Municipal
Series Fund: North
Carolina Series (Class A, Class B and Class C) with a
similar investment in
the Lehman Brothers Municipal Bond Index by portraying the
initial account
values at the commencement of operations of each class, and
subsequent account
values at the end of the most recent reporting period
(August 31), as measured
on a quarterly basis, beginning in 1990 for Class A shares;
1986 for Class B
shares; and 1994 for Class C shares. For purposes of the
graphs, and unless
otherwise indicated, in the accompanying tables it has been
assumed (a) that
the maximum applicable front-end sales charge was deducted
from the initial
$10,000 investment in Class A shares; (b) the maximum
applicable contingent
deferred sales charge was deducted from the value of the
investment in Class B
and Class C shares, assuming full redemption on August 31,
1996; (c) all
recurring fees (including management fees) were deducted;
and (d) all dividends
and distributions were reinvested. Class B shares
automatically convert to
Class A shares, on a quarterly basis, approximately seven
years after purchase.
This conversion feature is not reflected in the graph. The
graph and
accompanying tables reflect the past subsidy and/or waiver
of expenses and/or
management fees.
* Without waivers and expense subsidies the value of the
$10,000 investment in
the Series and the Series' average annual total return, as
illustrated above,
would have been lower, as indicated in parentheses ( ).
The Index is a weighted index comprised of 21,000 municipal
bonds (General
obligation bonds, revenue bonds, insured bonds and
prerefunded bonds) selected
by Lehman Brothers as representative of the long-term
investment grade
municipal bond market. It is an unmanaged index that
includes the reinvestment
of all dividends, but does not reflect the transaction costs
and advisory fees
paid by the Series' investors. The Index's holdings differ
from the Series'
portfolio. The Index is not the only one that may be used to
characterize
performance of bond funds and other indices may portray
different comparative
performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M812 MF126E
74435M820 Cat. #642962S
74435M515
(ICON)
Prudential
Municipal
Series Fund
New Jersey
Money Market Series
ANNUAL
REPORT
Aug. 31, 1996
(LOGO)
<PAGE>
Prudential Municipal Series Fund
New Jersey Money Market Series
Performance At A Glance.
When we last reported to you in February, short-term
interest rates were
trending lower. Since then, rates rose and fell depending
upon the latest
news -- and views -- about the strength of the U.S. economy.
Throughout the
12-month period ended August 31, 1996, the Prudential
Municipal Series
Fund -- New Jersey Money Market Series provided tax-free
income at competitive
yields, maintained a $1 net asset value per share and high
credit quality. The
Series' 7-day current yield on August 31, 1996 was 2.74%,
which was equivalent
to a taxable yield of 4.86% for individuals in the highest
federal income tax
bracket.
<TABLE>
Fund Facts
As of 8/31/96
<CAPTION>
7-Day Net Asset Taxable Equivalent
Yield1 Weighted Avg. Total Net
Current Yld. Value @31% @36%
@39.6% Maturity Assets (mil.)
<S> <C> <C> <C> <C>
<C> <C> <C>
NJ Money
Market Fund 2.74% $1.00 4.25% 4.58%
4.86% 66 Days $181.4
IBC Financial Data
NJ Tax-Exempt
Fund Average2 2.81 1.00 4.36 4.70
4.98 60 Days N/A
</TABLE>
Note: Yields will fluctuate from time to time and past
performance is not
indicative of future results.
An investment in the Series is neither insured nor
guaranteed by the U.S.
government and there canbe no assurance that the Series will
be able to
maintain a stable net asset value.
1Some investors may be subject to the federal alternative
minimum tax and/or
state and local taxes. Taxable equivalent yields reflect
federal and
applicable state tax rates.
2This is the average 7-day current yield, NAV and WAM of 11
funds in the
International Business Communications Financial DataOs New
Jersey tax-exempt
money market fund category as of 8/31/96.
Tracking Tax-Free Money Fund Yields.
(GRAPHIC)
Weekly 7-day current yields of Prudential New Jersey Money
Market Series and
the IBC Financial Data New Jersey tax-free money fund
average. Past performance
is not indicative of future results.
How Investments Compared.
(As of 8/31/96)
(GRAPHIC)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total return averages for several Lipper mutual
fund categories to
show you that reaching for higher yields means tolerating
more risk. The
greater the risk, the larger the potential reward or loss.
In addition, we've
included historical 20-year average annual returns. These
returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds. Unlike bond funds, bonds, if held to
maturity, generally
offer a fixed rate of return and fixed principal value.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Tax-Exempt Money Market Funds attempt to preserve a constant
share value and
provide tax-free income; they don't fluctuate much in price
but their returns
are generally among the lowest of the major investment
categories.
*18 years for Tax-Exempt Money Funds.
<PAGE>
Ken Potts, Fund Manager
<PHOTO)
Portfolio
Manager's Report
The Prudential Municipal Series Fund -- New Jersey Money
Market Series seeks
the highest current income that is exempt from federal and
New Jersey state
income taxes, consistent with liquidity, the preservation of
capital, and
mainte-nance of a stable net asset value of $1 per share.
The Series intends
to invest in a portfolio of short-term municipal bonds with
maturities of 13
months or less from the State of New Jersey, its
municipalities, local
governments and other qualifying issuers (such as Puerto
Rico, Guam and the
U.S. Virgin Islands).
A Word About Quality.
Your Series will typically purchase securities with
maturities of one year or
less that are rated Aaa, Aa; Notes: MIG-1, MIG-2, P-1 or P-2
by Moody's
Investors Service, or AAA, AA; Notes: SP-1, SP-1+, A-1 or A-
2 by Standard &
Poor's or, if not rated, deemed to be of comparable quality
by the Series'
investment adviser. Although there is never a guarantee that
the share price
of the New Jersey Money Market Series will stay at $1, we
emphasize a
conservative, quality-oriented approach.
Strategy Session.
Rates Seesaw.
Our strategy seeks to provide you with tax-free income at a
competitive yield.
Over the past six months, achieving this meant adjusting our
investment
approach more frequently than in the firstsix months of our
reporting year as
market conditions warranted.
From March 1996 on, short-term interest rates fluctuated in
reaction to reports
that the U.S. economy was either improving (rates rose) or
weakening (rates
fell). February's strong jobs report (released in March)
started the first
cycle, and each one would go something like this:
- - Government report shows economy growing;
- - Opinion says growth is too fast and that Federal Reserve
must raise interest
rates to head off inflation;
- - Short-term rates rise in anticipation;
- - Different government report shows economy slowing;
- - Higher interest rate talk fades, and short-term rates
fall.
A cycle could last a few days or a couple of weeks and it
was difficult to
consistently predict. Throughout this whole time the Federal
Reserve did not
raise short-term interest rates.
Fluctuating interest rates weren't our only concern, of
course. Being a tax-
free money fund, your Series also contended with local bond
supply and other
factors. In April, many shareholders pulled their cash out
of money market
funds to pay their income taxes. And in July investors used
income from bond
call payments, maturities and coupon payments to invest
about $4.6 billion in
the tax-free market, according to the Bond Buyer, a trade
newspaper which
covers the tax-free bond markets.
How did we respond during this? We maintained a flexible
portfolio strategy by
adjusting our weighted average maturity (WAM) to take
advantage of either
rising rates or attractive investment opportunities when
they occurred.
Garden State Blossoms.
New Jersey is expected to have the best economic growth rate
in the tri-state
region (New Jersey, New York, Connecticut), although it lags
the national
average. The state maintained its good financial policies
and its bond rating
by Moody's was Aa1, unchanged since our last report to you.
<PAGE>
What Went Well.
Making The Right Moves.
We believe that the past 12 months were a time of
achievement for your Series.
Highlights included:
- - Following a conservative investment philosophy to preserve
higher yields as
interest rates fell last year;
- - Adjusting our weighted average maturity to maintain
investment flexibility
when interest rates began to fluctuate wildly during the
past six months;
- - Maintaining a high level of credit-enhanced securities
(56% of total net
assets as of August 31, 1996), backed either by a letter of
credit from a
major money center bank or by being insured, lessening
credit risk;
- - Maintaining a conservative diversification policy to limit
credit risk. On
August 31, 1996 your Series was invested in 44 issuers from
across the state.
And Not So Well.
One Move We Missed.
Surprises happen in this business and most money fund
managers, indeed most of
Wall Street, were caught off-guard in March when the U.S.
government released
its February jobs report, which showed that businesses
nationwide created far
more new positions than anticipated. While this was good
news to many
(especially those who found work), signs of economic
strength can raise fears
of inflation which always makes investors skittish. Looking
back, if we knew
what was coming we would have done things differently by
increasing our
holdings of shorter maturity securities for a couple of
weeks prior to the
report's release. The Series would then be better positioned
to take advantage
of the rising yields that followed the release of the
report.
Looking Ahead.
The past 12 months clearly demonstrated how unpredictable
interest rates can
be. The Federal Reserve wants to promote steady, non-
inflationary growth. Will
the central bank raise rates this fall or winter? A
strengthening U.S. economy
could make such a move necessary to curb inflation. If the
Federal Reserve
acts, any increase would be modest, we believe. Of course,
if taxable short-
term rates increase, so too, will tax-free yields. Whatever
the future may
hold for interest rates, the outlook for tax-free securities
is favorable.
Weighted Average Maturity Is Now Longer Than The Average
Fund.
Prudential New Jersey Money Market Series
IBC Financial Data New Jersey Tax-Free Money Fund Avg.
(GRAPHIC)
- ------------------------------------------------------------
- ------------------
1
<PAGE>
President's Letter
October 7, 1996
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996.
According to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of
$33 billion in January of 1996. An additional $66 billion
was invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just
as they go up). There's no better time than now to be
talking with your
Financial Advisor or Registered Representative. She or he
can help you
determine reasonable expectations about both the potential
performance and
risks associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual
and institutional investors. We plan to improve the range
and quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change in
the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
- ------------------------------------------------------------
- ------------------
2
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Atlantic Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D.
VMIG1 3.20% 9/04/96 $ 1,300 $
1,300,000
Bergen Cnty., Ser. 96, G.O.
Aaa 4.50 6/15/97 1,690
1,698,371
Bernards Twnshp., Ser. 96, B.A.N.
NR 4.00 5/23/97 3,801
3,808,165
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co., Ser. 95C, F.R.D.D.
VMIG1 4.00 9/03/96 2,000
2,000,000
Essex Cnty. Impvt. Auth. Rev., F.R.W.D.
VMIG1 3.00 9/04/96 4,000
4,000,000
Gloucester Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev.,
Monsanto Co. Proj., Ser. 92, F.R.W.D.
P-1 3.20 9/04/96 3,120
3,120,000
Hudson Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D.
A-1(c) 3.50 9/05/96 4,445
4,445,000
Jersey City, B.A.N.
P-1 4.25 9/27/96 7,000
7,001,970
Morris Cnty., B.A.N.
VMIG1 3.95 8/07/97 7,000
7,001,831
New Jersey Sports & Expo. Auth., Ser. 92C, F.R.W.D.,
M.B.I.A.
VMIG1 3.15 9/05/96 4,300
4,300,000
New Jersey St. Econ. Dev. Auth.,
Brach Jersey Ave, Ser. 86, F.R.W.D.
P-1 3.30 9/04/96 2,200
2,200,000
Catholic Cmnty. Svcs Proj., Ser. 93, F.R.W.D.
VMIG1 3.35 9/05/96 5,900
5,900,000
Catholic Cmnty. Svcs Proj., Ser. 95, F.R.W.D.
VMIG1 3.35 9/05/96 2,500
2,500,000
Chambers Cogen. Ltd., Ser. 91, T.E.C.P.
VMIG1 3.50 10/25/96 3,000
3,000,000
Chambers Cogen. Ltd., Ser. 91, T.E.C.P.
VMIG1 3.50 12/16/96 4,400
4,400,000
East Meadow Corp., Ser. 86A, F.R.W.D.
VMIG1 3.60 9/04/96 2,675
2,675,000
Econ. Growth Bds., Ser. 94B, F.R.W.D.
A-1(c) 3.25 9/05/96 1,800
1,800,000
Franciscan Oaks Proj., Ser. 92B, F.R.W.D.
A-1+(c) 3.30 9/04/96 1,600
1,600,000
Hillcrest Health Svcs. Sys. Proj., Ser. 95, F.R.W.D.
P-1 3.40 9/04/96 8,000
8,000,000
Hoffman La-Roche Inc. Proj., Ser. 93, F.R.D.D.
Aaa 3.60 9/03/96 6,800
6,800,000
Kent Place, Ser. 92L, F.R.W.D.
VMIG1 3.40 9/05/96 1,930
1,930,000
Keystone Proj., Ser. 92, T.E.C.P.
VMIG1 3.55 9/20/96 2,360
2,360,000
Keystone Proj., Ser. 92, T.E.C.P.
VMIG1 3.55 10/24/96 2,600
2,600,000
Keystone Proj., Ser. 92, T.E.C.P.
VMIG1 3.50 12/17/96 1,500
1,500,000
Michael Shalit Proj., Ser. 93, F.R.D.D.
P-1 3.80 9/03/96 1,700
1,700,000
North Plainfield Hldg., Ser. 92, A.O.T.
VMIG1 4.00 9/01/97 3,635
3,635,000
Ocean Spray Cranberry Inc. Proj., Ser. 87, S.A.O.T.
A+(c)(e) 4.10 7/01/97 4,000
4,000,000
Office Court Assoc. Proj., F.R.W.D.
A-1+(c) 3.45 9/04/96 1,800
1,800,000
Peddie Sch. Proj., Ser. 94B, F.R.W.D.
A-1(c) 3.25 9/05/96 3,000
3,000,000
RJB Associates Ltd., F.R.W.D.
A-1(c) 3.50 9/05/96 1,480
1,480,000
Russ Berrie & Co., Ser. 83, F.R.W.D.
A-1+(c) 3.15 9/04/96 200
200,000
Thermal Energy Ltd., Ser. 95, S.A.O.T.
NR 3.60 12/12/96 2,500
2,500,000
Volvo America Corp, Ser. 84, F.R.W.D.
A-1+(c) 4.015 9/04/96 1,500
1,500,000
New Jersey St. Hsg. Fin. Agcy., Ser. 92A, Q.T.P.O.T.
AA+(c) 3.75 11/01/96 3,000
3,000,000
New Jersey St. Tpke. Auth. Rev., Ser. D, F.R.W.D.,
F.G.I.C.
VMIG1 3.00 9/04/96 3,000
3,000,000
Newark Healthcare Facs. Rev., Ser. 95A, F.R.W.D.
A-1(c) 3.60 9/05/96 2,955
2,955,000
Ocean Cnty., Ser. 96, B.A.N.
VMIG1 4.10 7/01/97 3,000
3,008,544
Piscataway Twnshp., Ser. 96, B.A.N.
NR 4.25 4/25/97 3,000
3,012,157
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL
MUNICIPAL SERIES FUND
as of August 31, 1996 NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Port Auth. of New York & New Jersey,
Ser. 93, F.R.D.D.
VMIG1 3.65% 9/03/96 $ 5,000 $
5,000,000
Ser. 93-2, F.R.W.D.
P-1 3.441 9/03/96 8,000
8,000,000
Ser. 94, F.R.D.D.
VMIG1 3.80 9/03/96 4,200
4,200,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank, Ser. 85, F.R.W.D.
VMIG1 3.10 9/04/96 400
400,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P.
A-1+(c) 3.35 9/12/96 1,300
1,300,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P.
A-1+(c) 3.45 9/12/96 2,500
2,500,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P.
A-1+(c) 3.60 10/07/96 4,000
4,000,000
Randolph Twnshp., B.A.N.
NR 4.25 9/06/96 3,593
3,592,642
Roxbury Twnshp., Ser. 96, B.A.N.
NR 3.75 2/14/97 7,798
7,815,067
Salem Cnty. Ind. Poll. Ctrl. Rev., Ser. 93A, T.E.C.P.
VMIG1 3.50 12/17/96 8,000
8,000,000
Sussex Cnty., B.A.N.
NR 4.50 9/13/96 5,000
5,000,945
Washington Twnshp., Ser. 96, B.A.N.
NR 3.50 10/21/96 5,334
5,335,064
West Orange Twnshp., B.A.N.
NR 3.75 10/03/96 3,951
3,951,843
Woodbridge., Ser. 96, T.A.N.
NR 3.43 2/13/97 1,250
1,248,504
- ------------
Total Investments--99.8%
(amortized cost $181,075,103; (d))
181,075,103
Other assets in excess of liabilities--0.2%
321,190
- ------------
Net Assets--100%
$181,396,293
- ------------
- ------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Corp.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
G.O.--General Obligation.
M.B.I.A.--Municipal Bond Investors Assurance.
Q.T.P.O.T.--Quarterly Third Party Optional Tender.
S.A.O.T.--Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity
date of such
securities is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) The cost of securities for federal income tax purposes
is substantially the
same as for financial reporting purposes.
(e) This security has been deemed comparable in quality to
an eligible
investment.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- -----4 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
August 31, 1996
- ---------------
<S>
<C>
Investments, at amortized cost which approximates market
value............................................ $
181,075,103
Interest
receivable..................................................
..................................... 1,521,811
Receivable for Series shares
sold........................................................
................. 1,010,016
Receivable for investments
sold........................................................
................... 245,000
Deferred expenses and other
assets......................................................
.................. 5,318
- ---------------
Total
assets......................................................
..................................... 183,857,248
- ---------------
Liabilities
Payable for Series shares
reacquired..................................................
.................... 2,198,593
Accrued expenses and other
liabilities.................................................
................... 87,001
Dividends
payable.....................................................
.................................... 84,560
Management fee
payable.....................................................
............................... 77,411
Distribution fee
payable.....................................................
............................. 10,690
Deferred trustees'
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 2,460,955
- ---------------
Net
Assets......................................................
.......................................... $
181,396,293
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par
value.......................................................
$ 1,813,963
Paid-in capital in excess of
par.........................................................
.............. 179,582,330
- ---------------
Net assets, August 31,
1996........................................................
....................... $ 181,396,293
- ---------------
- ---------------
Net asset value, offering price and redemption price per
share ($181,396,293 / 181,396,293 shares of
beneficial interest
issued and outstanding; unlimited number of shares
authorized).........................................
$1.00
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest and discount earned............... $
6,925,960
-----------
- ----
Expenses
Management fee.............................
963,088
Distribution fee...........................
240,772
Transfer agent's fees and expenses.........
87,000
Custodian's fees and expenses..............
60,000
Reports to shareholders....................
35,000
Registration fees..........................
24,000
Audit fee..................................
10,800
Legal fees.................................
5,000
Trustee's fees.............................
3,900
Deferred organization expenses.............
2,000
Miscellaneous..............................
9,198
-----------
- ----
Total expenses..........................
1,440,758
Less: Management fee waiver (note 2).......
(85,123)
Custodian fee credit....................
(1,632)
-----------
- ----
Net expenses............................
1,354,003
-----------
- ----
Net investment income.........................
5,571,957
-----------
- ----
Net Increase in Net Assets
Resulting from Operations..................... $
5,571,957
-----------
- ----
-----------
- ----
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income....... $ 5,571,957 $
5,328,982
------------- ---------
- ----
Net increase in net assets
resulting from
operations............... 5,571,957
5,328,982
------------- ---------
- ----
Dividends to shareholders...... (5,571,957)
(5,328,982)
------------- ---------
- ----
Series share transactions
(at $1 per share)
Net proceeds from shares
subscribed............... 686,158,251
621,173,812
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................ 5,403,204
5,178,490
Cost of shares reacquired... (692,617,954)
(602,179,432)
------------- ---------
- ----
Net increase (decrease) in
net assets from Series
share transactions....... (1,056,499)
24,172,870
------------- ---------
- ----
Total increase (decrease)...... (1,056,499)
24,172,870
Net Assets
Beginning of year.............. 182,452,792
158,279,922
------------- ---------
- ----
End of year.................... $ 181,396,293 $
182,452,792
------------- ---------
- ----
------------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
- -----6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940 as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The New Jersey Money
Market Series (the
``Series'') commenced investment operations on December 3,
1990. The Series is
non-diversified and seeks to achieve its investment
objective of providing the
highest level of income that is exempt from New Jersey State
and federal income
taxes with a minimum of risk by investing in ``investment
grade'' tax-exempt
securities maturing within 13 months or less and whose
ratings are within the
two highest ratings categories by a nationally recognized
statistical rating
organization, or if not rated, are of comparable quality.
The ability of the
issuers of the securities held by the Series to meet their
obligations may be
affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: Portfolio securities of the Series
are valued at
amortized cost, which approximates market value. The
amortized cost method of
valuation involves valuing a security at its cost on the
date of purchase and
thereafter assuming a constant amortization to maturity of
any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of investments
are calculated on the identified cost basis. Interest income
is recorded on the
accrual basis. Expenses are recorded on the accrual basis
which may require the
use of certain estimates by management.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason and because substantially all
of the Series' gross
income consists of tax-exempt interest, no federal income
tax provision is
required.
Dividends: The Series declares daily dividends from net
investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Deferred Organization Expenses: The Series incurred $32,200
in organization and
initial registration expenses. Such amount was deferred and
amortized over a
period of 60 months ended December 1995.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the cost of
the subadviser's
services, the compensation of officers of the Fund,
occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and
expenses.
The management fee paid to PMF is computed daily and payable
monthly, at an
annual rate of .50 of 1% of the average daily net assets of
the Series. During
the year ended August 31, 1996, PMF waived 25% of its
management fee for the
period September 1, 1995 through December 31, 1995. The
amount of such fees
waived for the year ended August 31, 1996 amounted to
$85,123 ($.0004 per share;
.044% of average net assets). Effective January 1, 1996 PMF
ceased waiving any
portion of its management fee.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund
through January 1,
1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund
under the same terms
and conditions as under the arrangement with PMFD. The
Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares
pursuant to the plan
of distribution at an annual rate of .125 of 1% of the
Series average daily net
assets. The distribution fee is accrued daily and payable
monthly.
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY
MONEY MARKET SERIES
- ------------------------------------------------------------
- --------------------
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are (indirect)
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year
ended August 31, 1996,
the Series incurred fees of approximately $79,000 for the
services of PMFS. As
of August 31, 1996, approximately $6,200 of such fees were
due to PMFS. Transfer
agent fees and expenses in the Statement of Operations
include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
- --------------------
- -----8
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Year Ended August 31,
----------
- --------------------------------------------------
1996
1995 1994 1993 1992
--------
- -------- -------- -------- --------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 1.00
$ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains(a)................................... .03
.03 .02 .02 .04
Dividends and distributions................... (.03)
(.03) (.02) (.02) (.04)
--------
- -------- -------- -------- --------
Net asset value, end of year.................. $ 1.00
$ 1.00 $ 1.00 $ 1.00 $ 1.00
--------
- -------- -------- -------- --------
--------
- -------- -------- -------- --------
TOTAL RETURN(b):.............................. 2.92%
3.15% 1.90% 2.31% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $181,396
$182,453 $158,280 $163,087 $164,092
Average net assets (000)...................... $192,617
$171,223 $169,123 $170,103 $155,915
Ratios to average net assets(a):
Expenses, including distribution fee....... .70%
.64% .68% .64% .32%
Expenses, excluding distribution fee....... .57%
.51% .55% .51% .19%
Net investment income...................... 2.89%
3.11% 1.87% 2.02% 3.33%
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Money Market
Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, New Jersey
Money Market Series, as of August 31, 1996, the related
statements of operations
for the year then ended and of changes in net assets for
each of the two years
in the period then ended, and the financial highlights for
each of the five
years in the period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, New Jersey Money Market Series, as of August
31, 1996, the results
of its operations, the changes in its net assets, and its
financial highlights
for the respective stated periods in conformity with
generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information NEW JERSEY MONEY
MARKET SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends paid by the Series during such fiscal year.
Accordingly, we are
advising you that in the fiscal year ended August 31, 1996,
dividends paid from
net investment income of $.03 per share were federally tax-
exempt interest
dividends.
- ------------------------------------------------------------
- --------------------
- -----10
<PAGE>
Getting
The Most
From Your Prudential
Mutual Fund.
When you invest through Prudential Mutual Funds, you receive
financial advice
through a Prudential Securities financial advisor or
Prudential/Pruco
Securities registered representative. Your advisor or
representative can
provide you with the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help
you match the
reward you seek with the risk you can tolerate. And risk can
be difficult to
gauge -- sometimes even the simplest investments bear
surprising risks. The
educated investor knows that markets seldom move in just one
direction --
there are times when a market sector or asset class will
lose value or provide
little in the way of total return. Managing your own
expectations is easier
with help from someone who understands the markets and who
knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help
you wade through the
numerous mutual funds available to find the ones that fit
your own individual
investment profile and risk tolerance. While the newspapers
and popular
magazines are full of advice about investing, they are aimed
at generic groups
of people or representative individuals, not at you
personally. Your financial
advisor or registered representative will review your
investment objectives
with you. This means you can make financial decisions based
on the assets and
liabilities in your current portfolio and your risk
tolerance -- not just
based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the
bottom are among the
most common investor mistakes. But sometimes it's difficult
to hold on to an
nvestment when it's losing value every month. Your financial
advisor or
registered representative can answer questions when you're
confused or worried
about your investment, and remind you that you're investing
for the long haul.
<PAGE>
Getting
The Most
From Your Prudential
Mutual Fund.
How many times have you read these letters -- or other
financial materials --
and stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll
use this space from time to time to explain some of the
words you might have
read, but not understood. And if you have a favorite word
that no one can
explain to your satisfaction, please write to us.
Basis Point: One 1/100th of 1%. For example, one half of one
percentage point
is 50 basis points.
Call Option: A contract giving the holder a right to buy
stocks or bonds at a
predetermined price (called the strike price) before a
predetermined
expiration date. A buyer of a call option generally expects
to benefit from a
rise in the price of the stock or bond.
Capital Gain/Capital Loss: The difference between the cost
of a capital asset
(for example, a stock, bond or mutual fund share) and its
selling price. Under
current law the federal income tax rate for individuals on a
long-term capital
gain is up to 28%.
Collateralized Mortgage Obligations (CMOs): Pools of
mortgage-backed securities
sliced in maturity ranges that bear differing interest
rates. These instruments
are sensitive to changes in interest rates and homeowner
refinancing activity.
They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from another
security. The
rate of return of these financial products rises and falls -
- - sometimes very
suddenly -- in response to changes in some specific interest
rate, currency,
stock or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to
banks and other depository institutions.
Federal Funds Rate: The interest rate charged by one bank to
another on
overnight loans.
Futures Contract: An agreement to deliver a specific amount
of a commodity or
financial instrument at a set price at a stipulated time in
the future.
Leverage: The use of borrowed assets to enhance return on
equity. The
expectation is that the interest rate charged will be lower
than the return on
the investment. While leverage can increase profits, it can
also magnify
losses.
Liquidity: The ease with which a financial instrument (or
mutual fund) can be
bought or sold (converted into cash) in the financial
markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings
per share for a 12-month period.
Option: An agreement to sell something, such as shares of
stock, by a certain
time for a specified price. An option need not be exercised.
Spread: The difference between two values; most often used
to describe the
difference between prices bid and asked for a security.
Yankee Bond: A bond denominated in U.S. dollars but sold by
a foreign company
or government in the U.S. market.
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income growth
has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for which
Prudential Mutual Fund Management manages a state-specific
municipal bond
mutual fund
Revised: October, 1996
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M762 MF147E
Cat. #444354I
(ICON)
Prudential
Municipal Series Fund
- ---------------------
Massachusetts Series
ANNUAL REPORT
Aug. 31, 1996
(LOGO)
Prudential Municipal Series Fund
Massachusetts Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the municipal
bond market
experienced a lot of turbulence. Interest rates first fell,
then rose, and
finally finished close to where they started. The Prudential
Municipal Series
Fund -- Massachusetts Series performed competitively with
the average
Massachusetts municipal fund over the last 12 months, as
measured by Lipper
Analytical Services.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 8/31/96
One Five Ten
Since
Year Years
Years Inception2
<S> <C> <C> <C>
<C>
Class A 4.9% (4.8)4 41.6% (41.5)4 N/A
60.6% (60.4)4
Class B 4.5 (4.4)4 38.6 (38.4)4
85.3% (84.2)4 145.6 (142.2)4
Class C 4.3 (4.2)4 N/A N/A
12.1 (12.0)4
Lipper Mass. Muni Avg.3 4.9 40.8
92.8 166.3
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1
As of 9/30/96
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C>
<C>
Class A 2.7% (2.6)4 6.6% (6.5)4 N/A
7.1%
Class B 0.4 6.6 6.5%
(6.4)4 7.9% (7.8)4
Class C 4.2 (4.0)4 N/A N/A
6.0%
</TABLE>
<TABLE>
<CAPTION>
Dividends &
Yields
As of 8/31/96 Taxable
Equivalent Yield5
Total Dividends 30-Day
At Tax Rates Of
Paid for 12 Mos. SEC Yield
36% 39.6%
<S> <C> <C> <C>
<C>
Class A $0.59 4.62% (4.57)4 8.20%
(8.11)4 8.69% (8.59)4
Class B $0.54 4.36 (4.31)4 7.74
(7.64)4 8.20 (8.10)4
Class C $0.51 4.10 (4.05)4 7.28
(7.19)4 7.71 (7.62)4
</TABLE>
Past performance is not indicative of future results.
Principal and investment
return will fluctuate so that an investor's shares, when
redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical Services. The
cumulative total returns do not take into account sales
charges. The average
annual returns do take into account applicable sales
charges. The Fund charges
a maximum front-end sales load of 3% for Class A shares and
a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for six
years, for Class B shares. Class C shares have a 1% CDSC for
one year. Class B
shares automatically convert to Class A shares on a
quarterly basis, after
approximately seven years.
2Inception dates: 1/22/90 Class A; 9/25/84, Class B; 8/1/94
Class C.
3The Lipper Massachusetts Municipal Bond fund average
includes 51 funds for one
year, 20 funds for five years, seven funds for 10 years and
four funds since
inception of the Class B shares on 9/25/84.
4Without waiver of management fees and/or expense
subsidization, the Series'
cumulative and average annual total returns and yields would
have been lower,
as indicated in parentheses ( ).
5Taxable equivalent yields reflect federal and applicable
state taxes.
How Investments Compared.
(As of 8/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets
change, so a mutual
fund's past performance should never be used to predict
future results. The
risks to each of the investments listed above are different
- -- we provide
12-month total returns for several Lipper mutual fund
categories to show you
that reaching for higher yields means tolerating more risk.
The greater the
risk, the larger the potential reward or loss. In addition,
we've included
historical 20-year average annual returns. These returns
assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received higher
historical total returns from stocks than from most other
investments. Smaller
capitalization stocks offer greater potential for long-term
growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth
out their total returns year by year. But their prices still
fluctuate
(sometimes significantly) and their returns have been
historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state
agencies and/or municipalities. This investment provides
income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share
value; they don't
fluctuate much in price but, historically, their returns
have been generally
among the lowest of the major investment categories.
<PAGE>
Marie Conti, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Series primarily invests in carefully-selected, long-
term municipal bonds
that offer a high level of income exempt from Massachusetts
state and federal
income taxes, consistent with preservation of capital.
However, certain
shareholders may be subject to federal alternative minimum
tax. There can be
no assurance that the Series will achieve its investment
objective.
More Insurance.
As buyers become more quality conscious, more tax-free
municipal bonds are
being issued with insurance. In the first half of 1996, 53%
of all new bonds
issued in Massachusetts were insured. As a result, insured
bonds in our fund
now total 47% of assets. This benefits the investor, because
payment of both
interest and principal of a bond are guaranteed by an
insurance company. Of
course, no insurance is available to prevent the price of
bonds, and bond
funds, from fluctuating from day to day.
Strategy Session.
Quite Volatile.
Municipal bond interest rates and prices experienced a lot
of volatility over
the past year. Last fall, interest rates fell and bond
prices rose as investors
feared a recession. But by early 1996, the tables turned.
The economy gained
new strength, setting off inflation fears, which pushed
interest rates higher
and bond prices lower. Municipal bond interest rates rose
from 5.63% on January
4 to 6.34% on June 13 -- a difference of nearly three-
quarters of a percentage
point, as measured by the Bond Buyer's Revenue Bond Index, a
widely-watched
industry barometer. But when the dust settled on August 31,
1996, municipal
bond interest rates were slightly lower than they had been
12 months earlier:
6.09% on August 29, 1996 vs. 6.26% a year earlier.
We Adjusted.
During the last 12 months, we periodically adjusted the
Series' holdings to
take advantage of changing market conditions. Last fall, as
interest rates
were falling, we had a longer duration (a measure of the
Series' sensitivity to
changing interest rates) to capitalize on rising bond
prices. In February, we
reduced duration to 8.1 years to protect assets. Over the
summer, when interest
rates appeared to be peaking, we increased duration once
more, ending on August
31, 1996 at 8.9 years. Throughout the 12 months, we
emphasized call protection
(many municipal bonds can be redeemed before maturity) and
tried to upgrade
quality where possible when the interest rate differences
between higher- and
lower-rated bonds narrowed.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
<PAGE>
What Went Well.
Time To Upgrade.
When the price difference between higher and lower quality
bonds got smaller,
we took the opportunity to upgrade the quality of our
holdings. Why? Because we
were no longer being paid enough to accept the added credit
risk. We reduced
our exposure to the lowest investment grade bonds we own --
those rated
Triple-B. As a percentage of assets, we lowered these
holdings to about 11% on
August 31, 1996 from about 13% a year earlier. At the same
time, our assets in
insured bonds rose to 47% from 42%.
Culling Callables.
Callable bonds generally carry higher coupons to compensate
for the risk that
they might be redeemed before maturity. But we've found that
this alone is not
enough of a reason to own many of them. Prices of callable
bonds do not rise
as fast as non-callables when the bond market rallies,
because price depends on
maturity, which can't be calculated with certainty. So we've
been selling bonds
that are callable in less than eight years, and replacing
them either with
non-callable bonds or those that are callable in 10 years or
more. In this way
we'll be able to better manage the risks we face when
interest rates rise or
fall suddenly, as they have been apt to do in recent years.
And Not So Well.
Shortening Sooner.
Late in 1995, the U.S. economy was growing slowly. We
expected this to continue
into early 1996, so we held our duration -- a measure of the
Series'
sensitivity to interest rate changes -- fairly long, at 8.8
years. But the
economic slowdown was only temporary, largely the result of
the government
shutdown and the severe weather in the Northeast. When the
economy accelerated
in February, we reduced duration to 8.1 years. That was
good, but we would have
performed better if we cut back even more and moved just a
little bit earlier.
Credit Quality.
Expressed as a percentage of
total investments as of 8/31/96.
(CHART)
Five Largest
Issuers.
6.5% Puerto Rico
Commonwealth
5.0% Massaschusetts G.O.
4.2% Mass. Water Pollution
4.0% Mass. Health &
Education Facility
4.0% City of Gloucester G.O.
Expressed as a percentage of total net assets as of 8/31/96.
Looking Ahead.
Right now, we're cautious. We're expecting economic growth
in the second half
to slow. Meanwhile, the Federal Reserve Board is concerned
that the economy is
growing so rapidly that a shortage of workers is developing,
which could induce
wage inflation. It is possible that the board will raise
short-term interest
rates this year, if upward pressure on wages results in
inflationary price
increases to the consumer.
1
<PAGE>
President's Letter
October 7, 1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new money
into mutual funds in the first few months of 1996. According
to figures
released by the Investment Company Institute, a mutual fund
industry trade
group, new investments in mutual funds reached an all-time
monthly high of $33
billion in January of 1996. An additional $66 billion was
invested in the
following three months, although this rapid inflow subsided
somewhat in late
spring.
While we are pleased that mutual funds are attracting new
investors, we're
concerned that some of them may be "buying last year's
returns." Few expect
1995's virtual non-stop returns from the stock and bond
markets. In fact,
1996's markets have been volatile so far (stock and bond
prices go down just as
they go up). There's no better time than now to be talking
with your Financial
Advisor or Registered Representative. She or he can help
you determine
reasonable expectations about both the potential performance
and risks
associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that were made
with you in mind. Prudential Mutual Funds has moved under
the umbrella of
Prudential's newly created "Prudential Investments." This
group manages and
administers nearly $190 billion in client assets and
provides mutual funds,
annuities, defined benefit and defined contribution plans to
our individual and
institutional investors. We plan to improve the range and
quality of
investment products and services that we can provide you by
better leveraging
Prudential's strengths. There will, however, be no change
in the service you
receive from your Financial Advisor, Registered
Representative or our Customer
Service unit.
We're excited about our future and hope that you are, too.
Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL
SERIES FUND
as of August 31, 1996 MASSACHUSETTS SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
LONG-TERM INVESTMENTS--97.3%
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Attleboro Massachusetts, Gen. Oblig., A.M.B.A.C.
Aaa 5.125% 12/01/15 $ 1,000 $
924,420
Boston Mass. Ind. Dev. Fin. Auth., Swr. Fac. Rev.,
Harbor Electric Energy Co. Proj.
Baa1 7.375 5/15/15 1,500
1,599,465
Boston Mass. Rev., Boston City Hospital, F.H.A.
Aa 5.75 2/15/23 2,000
1,916,160
Brockton Massachusetts Gen. Oblig.
Baa1 6.125 6/15/18 1,030
1,035,099
Gloucester Massachusetts Gen. Oblig., F.S.A.
Aaa 5.50 11/15/13 2,000
1,960,600
Holyoke Massachusetts Gen. Oblig., School Proj., M.B.I.A.
Aaa 8.10 6/15/05 700
832,265
Lowell Massachusetts Gen. Oblig.
Aaa 7.625 2/15/10 750(e)
856,695
Lynn Mass. Wtr. & Swr. Comn., Gen. Rev., Ser. A, M.B.I.A.
Aaa 7.25 12/01/10 2,100(e)
2,347,149
Mass. Bay Trans. Auth., Gen. Trans., Ser. B, A.M.B.A.C.
Aaa 5.375 3/01/25 1,000
933,190
Mass. St. Gen. Oblig.,
Ser. A
A Zero 8/01/06 665
396,945
Ser. A, A.M.B.A.C.
Aaa 5.00 7/01/12 1,000
935,470
Ser. C, F.G.I.C.
Aaa 6.00 8/01/09 1,500
1,585,725
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Beth Israel Hospital, A.M.B.A.C.
Aaa 8.623(d) 7/01/25 1,500
1,486,875
Dana Farber Cancer Proj., Ser. G-1
A1 6.25 12/01/22 625
626,931
Faulkner Hospital, Ser. C
Baa1 6.00 7/01/23 1,500
1,370,370
Holyoke Hospital, Ser. B
Baa1 6.50 7/01/15 1,500
1,429,965
Jordan Hospital, Ser. C
A-(c) 6.875 10/01/22 1,350
1,396,764
Med Academic & Scientific A
A-(c) 6.625 1/01/15 1,000
1,030,430
Newton-Wellesley Hospital, M.B.I.A.
Aaa 5.875 7/01/15 1,000
995,960
Newton-Wellesley Hospital, M.B.I.A.
Aaa 6.00 7/01/18 1,000
999,900
Valley Regional Hlth. Sys.
AAA(c) 7.00 7/01/10 825
933,397
Valley Regional Hlth. Sys., Ser. B
Aaa 8.00 7/01/18 1,000(e)
1,132,760
Winchester Hospital, Ser. D
AAA(c) 5.75 7/01/24 2,000
1,893,820
Mass. St. Hsg. Fin. Agcy. Hsg. Rev., Sngl. Fam. Mtge., Ser.
6
Aa 8.10 12/01/14 1,755
1,848,278
Mass. St. Ind. Fin. Agcy. Rev.,
Brooks School
A 5.95 7/01/23 640
619,142
Cape Cod Hlth. Sys.
Aaa 8.50 11/15/20 2,000(e)
2,323,140
Phillips Academy
Aa1 5.375 9/01/23 1,695
1,566,960
Mass. St. Mun. Wholesale Elec. Co. Pwr. Supply Sys. Rev.,
Ser. A, A.M.B.A.C.
Aaa 5.00 7/01/14 1,500
1,350,645
Mass. St. Port Authority Rev., Ser. B
Aa 5.00 7/01/18 1,000
871,410
Mass. St. Water Pollution Abatement Trust,
Water Pollution Rev.
Aa 6.00 8/01/05 1,000
1,060,860
Water Pollution Rev.
Aa 6.375 2/01/15 1,000
1,050,850
Mass. St. Water Res. Auth., Ser. B, M.B.I.A.
Aaa 6.25 12/01/11 1,000
1,078,800
Palmer Massachusetts Gen. Oblig., Ser. F, A.M.B.A.C.
Aaa 7.30 3/01/10 500(e)
552,395
Plymouth County Corr. Facs. Proj., Cert. of Part., Ser. A
A-(c) 7.00 4/01/22 500
549,870
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL
SERIES FUND
as of August 31, 1996 MASSACHUSETTS SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a)
(Unaudited) Rate Date (000) (Note
1)
<S>
<C> <C> <C> <C> <C>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------
Puerto Rico Commonwealth,
Aqueduct & Swr. Auth. Rev., M.B.I.A.
Aaa 6.00% 7/01/07 $ 1,000 $
1,070,690
Gen. Oblig.
Baa1 5.25 7/01/18 1,000
899,200
Gen. Oblig., A.M.B.A.C.
Aaa 7.00 7/01/10 1,000
1,154,440
Gen. Oblig., F.S.A.
Aaa 7.958(d) 7/01/20 1,250
1,220,312
Hwy. & Trans. Auth. Rev., Ser. T
Baa1 6.625 7/01/18 1,380 (e)
1,533,263
Puerto Rico Electric Pwr. Auth. Pwr. Rev., Ser. T
Baa1 6.375 7/01/24 1,000
1,040,260
Quabbin Mass. Reg. School Dist., Jr.-Sr. High Sch. Proj.,
M.B.I.A.
Aaa 5.50 6/15/06 1,045
1,069,537
- -----------
Total long-term investments (cost $46,726,526)
49,480,407
- -----------
SHORT-TERM INVESTMENTS--1.6%
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Cap. Asset Prog.,
Ser. D, M.B.I.A., F.R.D.D.
VMIG1 3.75 9/03/96 700
700,000
Mass. St. Ind. Fin. Agcy., Pollution Control Rev. Ser. 92
F.R.D.D.
VMIG1 3.60 9/03/96 100
100,000
- -----------
Total short-term investments (cost $800,000)
800,000
- -----------
Expiration
OUTSTANDING CALL OPTION PURCHASED
Date Contracts(f)
- ---------- ---------
U.S. Treasury Bond Future, expiring Sept. '96 @ $114.00
(cost $18,435)
NR -- 9/21/96 50
781
Total Investments--98.9%
(cost $47,544,961; Note 4)
50,281,188
Other assets in excess of liabilities --1.1%
580,698
- -----------
Net Assets--100%
$50,861,886
- -----------
- -----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) For purposes of amortized cost valuation, the maturity
date of Floating Rate
Demand Notes is considered to be the later of the next
date on which the
security can be redeemed at par, or the next date on
which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely
indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Prerefunded issues are secured by escrowed cash and/or
direct U.S.
guaranteed obligations.
(f) One contract equals $1,000 face value.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of
Moody's and Standard & Poor's ratings.
- ------------------------------------------------------------
- --------------------
- ----- 4 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<S>
<C>
Assets
August 31, 1996
Investments, at value (cost
$47,544,961)................................................
.................. $ 50,281,188
Cash........................................................
..............................................
63,452
Interest
receivable..................................................
..................................... 637,161
Receivable for Series shares
sold........................................................
................. 34,829
Deferred expenses and other
assets......................................................
.................. 1,507
- ---------------
Total
assets......................................................
..................................... 51,018,137
- ---------------
Liabilities
Accrued
expenses....................................................
...................................... 81,993
Dividends
payable.....................................................
.................................... 39,686
Management fee
payable.....................................................
............................... 19,675
Distribution fee
payable.....................................................
............................. 12,197
Deferred trustees'
fees........................................................
........................... 2,700
- ---------------
Total
liabilities.................................................
..................................... 156,251
- ---------------
Net
Assets......................................................
.......................................... $
50,861,886
- ---------------
- ---------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
......... $ 44,098
Paid-in capital in excess of
par.........................................................
.............. 47,510,044
- ---------------
47,554,142
Accumulated net realized gain on
investments.................................................
.......... 571,517
Net unrealized appreciation on
investments.................................................
............ 2,736,227
- ---------------
Net assets, August 31,
1996........................................................
....................... $ 50,861,886
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($28,058,042 / 2,431,996 shares of beneficial interest
issued and outstanding)......................
$11.54
Maximum sales charge (3% of offering
price)......................................................
...... .36
- ---------------
Maximum offering price to
public......................................................
................. $11.90
- ---------------
- ---------------
Class B:
Net asset value, offering price and redemption price per
share
($22,758,409 / 1,973,880 shares of beneficial interest
issued and outstanding)......................
$11.53
- ---------------
- ---------------
Class C:
Net asset value, offer price and redemption price per
share
($45,435 / 3,941 shares of beneficial interest issued
and outstanding)..............................
$11.53
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
Net Investment Income August 31,
1996
<S> <C>
Income
Interest................................... $
3,296,943
-----------
- ----
Expenses
Management fee.............................
269,415
Distribution fee--Class A..................
28,091
Distribution fee--Class B..................
128,755
Distribution fee--Class C..................
304
Reports to shareholders....................
86,000
Custodian's fees and expenses..............
75,000
Registration fees..........................
50,000
Transfer agent's fees and expenses.........
35,000
Audit fee and expenses.....................
12,300
Legal fees and expenses....................
12,000
Trustees' fees and expenses................
3,900
Miscellaneous..............................
4,289
-----------
- ----
Total expenses..........................
705,054
Less: Management fee waiver.............
(26,941)
Custodian fee credit.................
(4,246)
-----------
- ----
Net expenses...............................
673,867
-----------
- ----
Net investment income.........................
2,623,076
-----------
- ----
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions....................
1,055,600
Financial futures transactions.............
(57,631)
Written options transactions...............
16,842
-----------
- ----
1,014,811
-----------
- ----
Net change in unrealized depreciation on:
Investments................................
(1,098,536)
-----------
- ----
Net loss on investments.......................
(83,725)
-----------
- ----
Net Increase in Net Assets
Resulting from Operations..................... $
2,539,351
-----------
- ----
-----------
- ----
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August
31,
In Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income............ $ 2,623,076 $
3,002,835
Net realized gain on investment
transactions.................. 1,014,811
294,358
Net change in unrealized
appreciation/depreciation of
investments................... (1,098,536)
871,511
----------- -------
- ----
Net increase in net assets
resulting from operations..... 2,539,351
4,168,704
----------- -------
- ----
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A....................... (1,420,826)
(884,881)
Class B....................... (1,200,467)
(2,117,251)
Class C....................... (1,783)
(703)
----------- -------
- ----
(2,623,076)
(3,002,835)
----------- -------
- ----
Distributions from net realized
gains
Class A....................... (162,429)
- --
Class B....................... (151,088)
- --
Class C....................... (242)
- --
----------- -------
- ----
(313,759)
- --
----------- -------
- ----
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares sold.... 2,218,216
3,105,413
Net asset value of shares issued
in reinvestment of
dividends..................... 1,723,072
1,755,219
Cost of shares reacquired........ (8,587,851)
(7,833,814)
----------- -------
- ----
Net decrease in net assets from
Series share transactions..... (4,646,563)
(2,973,182)
----------- -------
- ----
Total decrease................... (5,044,047)
(1,807,313)
Net Assets
Beginning of year................... 55,905,933
57,713,246
----------- -------
- ----
End of year......................... $50,861,886
$55,905,933
----------- -------
- ----
----------- -------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
- ----- 6 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
Prudential Municipal Series Fund (the ``Fund'') is
registered under the
Investment Company Act of 1940, as an open-end investment
company. The Fund was
organized as a Massachusetts business trust on May 18, 1984
and consists of
fourteen series. The monies of each series are invested in
separate,
independently managed portfolios. The Massachusetts Series
(the ``Series'')
commenced investment operations in September, 1984. The
Series is diversified
and seeks to achieve its investment objective of obtaining
the maximum amount of
income exempt from federal and applicable state income taxes
with the minimum of
risk by investing in ``investment grade'' tax-exempt
securities whose ratings
are within the four highest ratings categories by a
nationally recognized
statistical rating organization or, if not rated, are of
comparable quality. The
ability of the issuers of the securities held by the Series
to meet their
obligations may be affected by economic developments in a
specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund, and the Series, in the preparation of its financial
statements.
Securities Valuations: The Fund values municipal securities
(including
commitments to purchase such securities on a ``when-issued''
basis) on the basis
of prices provided by a pricing service which uses
information with respect to
transactions in bonds, quotations from bond dealers, market
transactions in
comparable securities and various relationships between
securities in
determining values. If market quotations are not readily
available from such
pricing service, a security is valued at its fair value as
determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of debt
securities at a set
price for delivery on a future date. Upon entering into a
financial futures
contract, the Series is required to pledge to the broker an
amount of cash
and/or other assets equal to a certain percentage of the
contract amount. This
amount is known as the ``initial margin''. Subsequent
payments, known as
``variation margin'', are made or received by the Series
each day, depending on
the daily fluctuations in the value of the underlying
security. Such variation
margin is recorded for financial statement purposes on a
daily basis as
unrealized gain or loss. The Series invests in financial
futures contracts
solely for the purpose of hedging its existing portfolio
securities or
securities the Series intends to purchase against
fluctuations in value caused
by changes in prevailing market interest rates. Should
interest rates move
unexpectedly, the Series may not achieve the anticipated
benefits of the
financial futures contracts and may realize a loss. The use
of futures
transactions involves the risk of imperfect correlation in
movements in the
price of futures contracts, interest rates and the
underlying hedged assets.
Options: The Fund may either purchase or write options in
order to hedge against
adverse market movements or fluctuations in value caused by
changes in
prevailing interest rates or foreign currency exchange rates
with respect to
securities or currencies which the Fund currently owns or
intends to purchase.
When the Fund purchases an option, it pays a premium and an
amount equal to that
premium is recorded as an investment. When the Fund writes
an option, it
receives a premium and an amount equal to that premium is
recorded as a
liability. The investment or liability is adjusted daily to
reflect the current
market value of the option. If an option expires
unexercised, the Fund realizes
a gain or loss to the extent of the premium received or
paid. If an option is
exercised, the premium received or paid is an adjustment to
the proceeds from
the sale or the cost basis of the purchase in determining
whether the Fund has
realized a gain or loss. The difference between the premium
and the amount
received or paid on effecting a closing purchase or sale
transaction is also
treated as a realized gain or loss. Gain or loss on
purchased options is
included in net realized gain (loss) on investment
transactions.
The Fund, as writer of an option, has no control over
whether the underlying
securities or currencies may be sold (called) or purchased
(put). As a result,
the Fund bears the market risk of an unfavorable change in
the price of the
security or currency underlying the written option. The
Series, as purchaser of
an option, bears the risk of the potential inability of the
counterparties to
meet the terms of their contracts.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains and losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. The Series amortizes premiums and original
issue discount paid on
purchases of portfolio securities as adjustments to interest
income. Expenses
are recorded on the accrual basis which may require the use
of certain estimates
by management.
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
based upon the
relative proportion of net assets of each class at the
beginning of the day.
Federal Income Taxes: For federal income tax purposes, each
series in the Fund
is treated as a separate taxpaying entity. It is the intent
of the Series to
continue to meet the requirements of the Internal Revenue
Code applicable to
regulated investment companies and to distribute all of its
net income to
shareholders. For this reason and because substantially all
of the Series' gross
income consists of tax-exempt interest, no federal income
tax provision is
required.
Dividends and Distributions: The Series declares daily
dividends from net
investment income. Payment of dividends is made monthly.
Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles. These differences are primarily due to differing
treatments for
short-term capital gains and market discount.
Custody Fee Credits: The Fund has an arrangement with its
custodian bank,
whereby uninvested monies earn credits which reduce the fees
charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the cost of
the subadviser's
services, the compensation of officers of the Fund,
occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and
expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the average daily net assets of the
Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily
net assets) of its
management fee, which amounted to $26,941 ($0.01 per share;
.05% of average net
assets) until further notice. The Series is not required to
reimburse PMF for
such waiver.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996,
Prudential Securities
Incorporated (``PSI''), became the distributor of the Class
A shares of the Fund
and is serving the Fund under the same terms and conditions
as under the
arrangement with PMFD. PSI is also distributor of the Class
B and Class C shares
of the Fund. The Fund compensated PMFD and PSI for
distributing and servicing
the Fund's Class A, Class B and Class C shares, pursuant to
plans of
distribution, (the ``Class A, B and C Plans''), regardless
of expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates
PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with
respect to Class A
shares for distribution-related activities at an annual rate
of up to .30 of 1%,
.50 of 1% and 1%, of the average daily net assets of the
Class A, B and C
shares, respectively. Such expenses under the Plans were .10
of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class
A, B and C shares,
respectively, for the year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received
approximately
$6,700 in front-end sales charges resulting from sales of
Class A shares during
the year ended August 31, 1996. From these fees, PMFD and
PSI paid such sales
charges to affiliated broker-dealers, which in turn paid
commissions to sales
persons and incurred other distribution costs.
PSI has advised the Series that for the year ended August
31, 1996, it received
approximately $41,400 in contingent deferred sales charges
imposed upon certain
redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year
ended August 31,
1996, the Series incurred fees of approximately $25,300 for
the services of
PMFS. As of August 31, 1996, approximately $2,000 of such
fees were due to PMFS.
Transfer agent fees and expenses in the statement of
operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
- --------------------
- ----- 8
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series,
excluding short-term
investments, for the year ended August 31, 1996, were
$9,435,421 and
$12,728,317, respectively.
The cost basis of investments for federal income tax
purposes, at August 31,
1996, was $47,653,790 and, accordingly, net unrealized
appreciation of
investments for federal income tax purposes was $2,627,398
(gross unrealized
appreciation--$2,867,364, gross unrealized depreciation--
$239,966).
Transactions in written options during the year ended August
31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written...................... 75 $ 16,842
Options expired...................... (75)
(16,842)
--------- --------
Options outstanding at August 31,
1996............................... 0 $ 0
--------- --------
--------- --------
</TABLE>
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C
shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B
shares are sold with
a contingent deferred sales charge which declines from 5% to
zero depending on
the period of time the shares are held. Class C shares are
sold with a
contingent deferred sales charge of 1% during the first
year. Class B shares
will automatically convert to Class A shares on a quarterly
basis approximately
seven years after purchase. A special exchange privilege is
also available for
shareholders who qualify to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of
beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the year
ended August 31, 1996
and fiscal year ended August 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ------------------------------------ ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 41,217 $
487,329
Shares issued in reinvestment of
dividends and distributions....... 80,396
943,108
Shares reacquired................... (389,160)
(4,544,162)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (267,547)
(3,113,725)
Shares issued upon conversion from
Class B........................... 333,272
3,892,048
---------- --------
- ----
Net increase in shares
outstanding....................... 65,725 $
778,323
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold......................... 32,229 $
365,268
Shares issued in reinvestment of
dividends and distributions....... 44,959
516,523
Shares reacquired................... (153,318)
(1,754,945)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (76,130)
(873,154)
Shares issued upon conversion from
Class B........................... 2,240,731
25,201,555
---------- --------
- ----
Net increase in shares
outstanding....................... 2,164,601 $
24,328,401
---------- --------
- ----
---------- --------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Shares
Amount
- ------------------------------------ ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 144,346 $
1,689,531
Shares issued in reinvestment of
dividends and distributions....... 66,308
777,976
Shares reacquired................... (343,488)
(4,032,383)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (132,834)
(1,564,876)
Shares reacquired upon conversion
into Class A...................... (333,455)
(3,892,048)
---------- --------
- ----
Net decrease in shares
outstanding....................... (466,289) $
(5,456,924)
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold......................... 241,751 $
2,725,137
Shares issued in reinvestment of
dividends and distributions....... 111,056
1,237,961
Shares reacquired................... (546,923)
(6,076,741)
---------- --------
- ----
Net decrease in shares outstanding
before conversion................. (194,116)
(2,113,643)
Shares reacquired upon conversion
into Class A...................... (2,242,679)
(25,201,555)
---------- --------
- ----
Net decrease in shares
outstanding....................... (2,436,795)
$(27,315,198)
---------- --------
- ----
---------- --------
- ----
<CAPTION>
Class C Shares
Amount
- ------------------------------------ ---------- --------
- ----
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 3,492 $
41,356
Shares issued in reinvestment of
dividends and distributions....... 170
1,988
Shares reacquired................... (958)
(11,306)
---------- --------
- ----
Net increase in shares
outstanding....................... 2,704 $
32,038
---------- --------
- ----
---------- --------
- ----
Year ended August 31, 1995:
Shares sold......................... 1,340 $
15,008
Shares issued in reinvestment of
dividends......................... 65
735
Shares reacquired................... (187)
(2,128)
---------- --------
- ----
Net increase in shares
outstanding....................... 1,218 $
13,615
---------- --------
- ----
---------- --------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
- ----- 10
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
-------------
- ------------------------------------------
Year Ended August 31,
-------------
- ------------------------------------------
1996
1995 1994 1993 1992
----------
- ------- ------ ------ ------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $ 11.63
$ 11.37 $12.17 $11.50 $10.94
----------
- ------- ------ ------ ------
Income from investment operations
Net investment income........................ .59(a)
.65(a) .67 .68 .69
Net realized and unrealized gain (loss) on
investment transactions................... (.02)
.26 (.73) .67 .56
----------
- ------- ------ ------ ------
Total from investment operations.......... .57
.91 (.06) 1.35 1.25
----------
- ------- ------ ------ ------
Less distributions
Dividends from net investment income......... (.59)
(.65) (.67) (.68) (.69)
Distributions from net realized gains........ (.07)
- -- (.07) -- --
----------
- ------- ------ ------ ------
Total distributions....................... (.66)
(.65) (.74) (.68) (.69)
----------
- ------- ------ ------ ------
Net asset value, end of year................. $ 11.54
$ 11.63 $11.37 $12.17 $11.50
----------
- ------- ------ ------ ------
----------
- ------- ------ ------ ------
TOTAL RETURN(b):............................. 4.93%
8.33% (.58)% 12.10% 11.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................ $ 28,058
$27,525 $2,293 $2,325 $ 903
Average net assets (000)..................... $ 28,091
$15,837 $2,578 $1,336 $ 770
Ratios to average net assets:
Expenses, including distribution fees..... 1.06%(a)
.97%(a) .87% .95% .99%
Expenses, excluding distribution fees..... .96%(a)
.87%(a) .77% .85% .89%
Net investment income..................... 5.06%(a)
5.59%(a) 5.60% 5.79% 6.14%
Portfolio turnover rate...................... 18%
36% 33% 56% 32%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
11 -----
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Class C
-------------
- ------------------------------------------ -------------
- -----
Year Ended
Year Ended August 31, August 31,
-------------
- ------------------------------------------ -------------
- -----
1996
1995 1994 1993 1992 1996
1995
------- -
- ------ ------- ------- ------- ------- -
- -----
<S> <C>
<C> <C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $ 11.62 $
11.36 $ 12.17 $ 11.49 $ 10.94 $ 11.62
$11.36
------- -
- ------ ------- ------- ------- ------- -
- -----
Income from investment operations
Net investment income........................ .54(a)
.60(a) .61 .63 .64 .51(a)
.57(a)
Net realized and unrealized gain (loss) on
investment transactions................... (.02)
.26 (.74) .68 .55 (.02)
.26
------- -
- ------ ------- ------- ------- ------- -
- -----
Total from investment operations.......... .52
.86 (.13) 1.31 1.19 .49
.83
------- -
- ------ ------- ------- ------- ------- -
- -----
Less distributions
Dividends from net investment income......... (.54)
(.60) (.61) (.63) (.64) (.51)
(.57)
Distributions from net realized gains........ (.07)
- -- (.07) -- -- (.07) -
- -
------- -
- ------ ------- ------- ------- ------- -
- -----
Total distributions....................... (.61)
(.60) (.68) (.63) (.64) (.58)
(.57)
------- -
- ------ ------- ------- ------- ------- -
- -----
Net asset value, end of year................. $ 11.53 $
11.62 $ 11.36 $ 12.17 $ 11.49 $ 11.53
$11.62
------- -
- ------ ------- ------- ------- ------- -
- -----
------- -
- ------ ------- ------- ------- ------- -
- -----
TOTAL RETURN(b):............................. 4.51%
7.90% (1.15)% 11.77% 11.23% 4.26%
7.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................ $22,758
$28,367 $55,420 $61,121 $53,449 $ 45
$ 14
Average net assets (000)..................... $25,751
$39,455 $59,544 $55,965 $50,607 $ 41
$ 14
Ratios to average net assets:
Expenses, including distribution fees..... 1.46%(a)
1.34%(a) 1.27% 1.35% 1.39% 1.72%(a)
1.60%(a)
Expenses, excluding distribution fees..... .96%(a)
.84%(a) .77% .85% .89% .97%(a)
.85%(a)
Net investment income..................... 4.66%(a)
5.37%(a) 5.20% 5.39% 5.74% 4.39%(a)
5.07%(a)
Portfolio turnover rate...................... 18%
36% 33% 56% 32% 18%
36%
<CAPTION>
<S> <C>
August 1,
1994(d)
through
August 31,
1994
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $11.41
-----
Income from investment operations
Net investment income........................ .04
Net realized and unrealized gain (loss) on
investment transactions................... (.05)
-----
Total from investment operations.......... (.01)
-----
Less distributions
Dividends from net investment income......... (.04)
Distributions from net realized gains........ --
-----
Total distributions....................... (.04)
-----
Net asset value, end of year................. $11.36
-----
-----
TOTAL RETURN(b):............................. (0.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................ $ 216(e)
Average net assets (000)..................... $ 15(e)
Ratios to average net assets:
Expenses, including distribution fees..... 1.57%(c)
Expenses, excluding distribution fees..... .82%(c)
Net investment income..................... 5.06%(c)
Portfolio turnover rate...................... 33%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales
loads. Total
return is calculated assuming a purchase of shares on
the
first day and a sale on the last day of each period
reported
and includes reinvestment of dividends and
distributions.
Total returns for periods of less than a full year are
not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Amounts are actual and not rounded to the nearest
thousand.
- ------------------------------------------------------------
- --------------------
- ----- 12 See Notes to
Financial Statements.
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Series
We have audited the accompanying statement of assets and
liabilities, including
the portfolio of investments, of Prudential Municipal Series
Fund, Massachusetts
Series, as of August 31, 1996, the related statements of
operations for the year
then ended and of changes in net assets for each of the two
years in the period
then ended, and the financial highlights for each of the
five years in the
period then ended. 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 the
securities owned as of
August 31, 1996 by correspondence with the custodian and
broker. 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, such financial statements and financial
highlights present
fairly, in all material respects, the financial position of
Prudential Municipal
Series Fund, Massachusetts Series, as of August 31, 1996,
the results of its
operations, the changes in its net assets, and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
PRUDENTIAL
MUNICIPAL SERIES FUND
Federal Income Tax Information MASSACHUSETTS
SERIES
- ------------------------------------------------------------
- --------------------
We are required by the Internal Revenue Code to advise you
within 60 days of the
Series' fiscal year end (August 31, 1996) as to the federal
tax status of
dividends and distributions paid by the Series during such
fiscal year.
Accordingly, we are advising you that in the fiscal year
ended August 31, 1996,
dividends paid from net investment income of $.59 per Class
A share, $.54 per
Class B share, and $.51 per Class C share were all federally
tax-exempt interest
dividends. In addition, the Series paid to Class A, B and C
shares a long-term
capital gain distribution of $.067 per share which is
taxable as such.
We wish to advise you that the corporate dividends received
deduction for the
Series is zero. Only funds that invest in U.S. equity
securities are entitled to
pass-through a corporate dividends received deduction.
In January 1997, you will be advised on IRS Form 1099 DIV or
substitute 1099 DIV
as to the federal tax status of the distributions received
by you in calendar
year 1996.
- ------------------------------------------------------------
- --------------------
13 -----
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Some mutual fund shareholders won't ever read this -- they
don't read annual
and semi-annual reports. It's quite understandable. These
annual and
semi-annual reports are prepared to comply with Federal
regulations. They are
often written in language that is difficult to understand.
So when most people
run into those particularly daunting sections of these
reports, they don't read
them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of
income and appreciation the Fund has achieved in various
time periods. The
average annual total return is an annualized representation
of the Fund's
performance -- it generally smoothes out returns and gives
you an idea how much
the Fund has earned in an average year, for a given time
period. Under the
performance box, you'll see legends that explain the
performance information,
whether fees and sales charges have been included in
returns, and the inception
dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past
performance is not
indicative of future results.
Portfolio
Manager's Report
The portfolio manager who invests your money for you reports
onsuccessful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of
Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets
And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of
Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes
In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial
Statements
This is the kind of technical material that can intimidate
readers, but it does
contain useful information. The Notes provide a brief
history and explanation
of your Fund's objectives. In addition, they also outline
how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the
Fund's shares, and more importantly, how much they are paid
for doing so.
Finally, the Notes explain how many shares are outstanding
and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent
Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a tax
advisor.
Performance
Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a hypothetical
$10,000 investment in the Fund since its inception or for 10
years (whichever
is shorter). To help you put that return in context, we are
required to include
the performance of an unmanaged, broad based securities
index, as well. The
index does not reflect the cost of buying the securities it
contains or the
cost of managing a mutual fund. Of course, the index
holdings do not mirror
those of the fund -- the index is a broadly based reference
point commonly used
by investors to measure how well they are doing. A
definition of the selected
index is also provided. Investors generally cannot invest
directly in an
index.
<PAGE>
How Does Your State Stack Up?
Economic conditions vary from state to state. While one
region may be
experiencing strong fiscal management and prosperity,
another may languish
under the weight of declining industry or chronic state
budget problems.
State economic conditions, fiscal management and interest
rates play dominant
roles in the performance of individual municipal bonds. A
strong economy
generally leads to higher tax revenues and other income
sources for the state,
enabling it to more easily repay its debts. Additionally,
sound state financial
management often results in high ratings from bond rating
agencies. High
ratings are attractive to investors and can help bonds
retain value in the
market.
California
- -World's 8th largest economy.
- -Entertainment jobs growing.
- -Recovery continues, growth is exceeding the national
average and yielding tax
revenue well above estimates.
- -General obligation debt upgraded by Standard & Poor's.
- -Implementation of welfare reform may pose problems.
Hawaii
- -Tourism provides 60% of jobs.
- -Strong financial management.
- -Slow recovery from early-1990s U.S. and Japanese
recessions, which bit into
tourism and real estate.
- -Government eliminated 1,100 state jobs.
Ohio
- -Shift from manufacturing to service trades.
- -Economic and personal income growth ahead of national
averages.
- -Debt is low.
Pennsylvania
- -Slowly rebuilding economy, but needs new engine of growth.
- -Modest debt rapidly amortized.
- -Sound financial management.
Michigan
- -Economic growth is 3.5%, higher than national average.
- -Once car capital of the world, now more diversified.
- -Strengthening fiscal management.
Massachusetts
- -Painful cuts in defense and health care eliminated jobs.
- -Slowly rebuilding economy.
- -Personal income is high.
New York
- -High taxes restrain growth, although efforts underway to
ease the tax burden.
- -Personal income remains high.
- -Debt level is high.
- -Implementation of welfare reform may pose problems.
Maryland
- -One of wealthiest states.
- -Personal income 115% of national average, but income growth
has stabilized.
- -Good financial controls.
Florida
- -Economy and personal income growing much faster than
national rate.
- -Unemployment and debt are low.
- -Ended 1995 with a budget surplus for the third year in a
row.
- -Implementation of welfare reform may pose problems.
Connecticut
- -Nation's wealthiest citizens.
- -Economically weak from defense cuts.
- -Slow growth -- recovery may take years.
- -Attempts at "quick fixes" won't provide permanent relief.
- -Spurt of growth in personal income tax revenues.
New Jersey
- -Broad-based economy and high personal wealth.
- -Economic growth gaining but behind national average.
- -"Pro-business" tactics siphoned revenue, but may spur more
growth.
North Carolina
- -Robust, model economy.
- -Personal income quickly growing.
- -Unemployment well below national average.
- -New jobs from financial services, research and high
technology.
- -Strong financial management.
Source: Prudential Investment Corporation. Selected states
are those for which
Prudential Mutual Fund Management manages a state-specific
municipal bond
mutual fund Revised: October,
1996
<PAGE>
Prudential Muni Series Fund: Massachusetts Series
- --Lehman Bros. General Muni Debt. Index
Comparing A $10,000 Investment.
Prudential Municipal Series Fund: Massachusetts
Series vs. Lehman Bros. General Muni Debt Index.
Past performance is not indicative of future results.
Investment return and
principal value will fluctuate so an investor's shares, when
redeemed, will be
worth more or less than their original cost. The charts on
the right are
designed to give you an idea how much the Series' returns
can fluctuate from
year to year by measuring the best and worst calendar years
in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC
regulations. They
compare a $10,000 investment in the Prudential Municipal
Series Fund:
Massachusetts Series (Class A, Class B and Class C) with a
similar investment
in the Lehman Brothers Municipal Bond Index by portraying
the initial account
values at the commencement of operations of each class
(8/31/86 for Class B),
and subsequent account values at the end of the most recent
reporting period
(August 31), as measured on a quarterly basis, beginning in
1990 for Class A
shares; 1986 for Class B shares; and 1994 for Class C
shares. For purposes of
the graphs, and unless otherwise indicated, in the
accompanying tables it has
been assumed (a) that the maximum applicable front-end sales
charge was
deducted from the initial $10,000 investment in Class A
shares; (b) the maximum
applicable contingent deferred sales charge was deducted
from the value of the
investment in Class B and Class C shares, assuming full
redemption on August
31, 1996; (c) all recurring fees (including management fees)
were deducted; and
(d) all dividends and distributions were reinvested. Class B
shares
automatically convert to Class A shares, on a quarterly
basis, approximately
seven years after purchase. This conversion feature is not
reflected in the
graph. The graph and accompanying tables reflect the past
subsidy and/or waiver
of expenses and/or management fees.
* Without waivers and expense subsidies the value of the
$10,000 investment in
the Series and the Series' average annual total return, as
illustrated above,
would have been lower, as indicated in parentheses ( ).
The Index is a weighted index comprised of 21,000 municipal
bonds (general
obligation bonds, revenue bonds, insured bonds and
prerefunded bonds) selected
by Lehman Brothers as representative of the long-term
investment grade
municipal bond market. It is an unmanaged index that
includes the reinvestment
of all dividends, but does not reflect the transaction costs
and advisory fees
paid by the Series' investors. The Index's holdings differ
from the Series'
portfolio. The Index is not the only one that may be used to
characterize
performance of bond funds and other indices may portray
different comparative
performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852 http:\\www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio
holdings are for the period covered by this report and are
subject to change
thereafter.
This report is not authorized for distribution to
prospective investors unless
preceded or accompanied by a current prospectus.
74435M655 MF119E
74435M663 Cat. #642984M
74435M564
(ICON)
Prudential
Municipal Series Fund
- ---------------------
Massachusetts Series
ANNUAL REPORT
Aug. 31, 1996
(LOGO)
Prudential Municipal Series Fund
Massachusetts Series
Performance At A Glance.
During the 12 months ended August 31, 1996, the municipal
bond market
experienced a lot of turbulence. Interest rates first fell,
then r Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Series' portfolio holdings are for the period covered by
this
report and are subject to change thereafter.
This report is not authorized for distribution to
prospective
investors unless preceded or accompanied by a current
prospectus.
74435M721 MF127E
Cat. #642401A
