PRUDENTIAL MUNICIPAL BOND FUND, 485B24E, 1995-06-30

PRUDENTIAL MUNICIPAL BOND FUND
485B24E, 1995-06-30

Previous: PRUDENTIAL MUNICIPAL BOND FUND, 24F-2NT/A, 1995-06-30

Next: AUDIOVOX CORP, 10-Q, 1995-06-30

<PAGE>

As filed with the Securities and Exchange Commission on June 30, 1995

Securities Act Registration No. 33-10649
Investment Company Act Registration No. 811-4930
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 13 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 17 /X/

(Check appropriate box or boxes)
--------------

PRUDENTIAL MUNICIPAL BOND FUND

(Exact name of registrant as specified in charter)

ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250

S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

/X/ immediately upon filing pursuant to paragraph (b)

/ / on (date) pursuant to paragraph (b)

/ / 60 days after filing pursuant to paragraph (a)(1)

/ / on (date) pursuant to paragraph (a)(1)

/ / 75 days after filing pursuant to paragraph (a)(2)

/ / on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE* PRICE** FEE
<S> <C> <C> <C> <C>
Shares of beneficial
interest, par value $.01 per
share....................... indefinite*** N/A N/A N/A
Shares of beneficial
interest, par value $.01 per
share....................... 25,949,679 $11.18 $290,117,422 $100
</TABLE>

* Computed under Rule 457(d) on the basis of the offering price per share on
the close of business on June 27, 1995, calculated by averaging the offering
prices of the classes of each series, which offering prices on the close of
business on June 27, 1995 were: $11.23 (Insured Series), $11.36 (High Yield
Series) and $10.96 (Intermediate Series).

** Registrant elects to calculate the maximum aggregate offering price pursuant
to Rule 24e-2. $485,227,264 of shares was redeemed during the fiscal year
ended April 30, 1995. $195,399,842 of shares was used for reductions
pursuant to paragraph (c) of Rule 24f-2 during the fiscal year ended April
30, 1995. $289,827,422 of shares is the amount of redeemed shares used for
reduction for this amendment.

*** Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Rule 24f-2 Notice for the Registrant's most recent fiscal
year ended April 30, 1995 was filed on June 30, 1995.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights
Item 4. General Description of Registrant....... Cover Page; How the Fund Invests;
General Information
Item 5. Management of Fund...................... Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares
Item 8. Redemption or Repurchase................ Shareholder Guide; General Information
Item 9. Pending Legal Proceedings............... How the Fund is Managed

PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... General Information
Item 13. Investment Objectives and Policies...... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Trustees and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of
Securities.............................. Not Applicable
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... Organization and Capitalization
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
Shareholder Investment Account
Item 20. Tax Status.............................. Taxes, Dividends and Distributions
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements

PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
Prudential Municipal Bond Fund

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

PROSPECTUS DATED JUNE 30, 1995

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

Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Yield Series, the Insured Series and the Intermediate
Series (collectively, the Series). The investment objectives of the Series are
as follows: (i) the objective of the High Yield Series is to provide the maximum
amount of income that is eligible for exclusion from federal income taxes, (ii)
the objective of the Insured Series is to provide the maximum amount of income
that is eligible for exclusion from federal income taxes consistent with the
preservation of capital and (iii) the objective of the Intermediate Series
(formerly called the Modified Term Series) is to provide a high level of income
that is eligible for exclusion from federal income taxes consistent with the
preservation of capital. Although each Series will seek income that is eligible
for exclusion from federal income taxes, a portion of the dividends and
distributions paid by each Series (and, in particular, the High Yield Series)
may be treated as a preference item for purposes of the alternative minimum tax.
Each Series seeks to achieve its objective through the separate investment
policies described in this Prospectus. There can be no assurance that the
Series' investment objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies."

Subject to the limitations described herein, each Series may utilize
derivatives, including buying and selling futures contracts for the purpose of
hedging its portfolio securities. See "How the Fund Invests--Investment
Objectives and Policies."

Although the High Yield Series may invest up to 100% of its assets in lower
rated bonds, commonly known as "junk bonds," such securities typically comprise
less than half of the Series' investment portfolio. Investments of this type are
subject to a greater risk of loss of principal and interest, including default
risk, than higher rated bonds. Purchasers should carefully assess the risks
associated with an investment in this Series. See "How the Fund
Invests--Investment Objectives and Policies--Risk Factors Relating to Investing
in High Yield Securities."

The Insured Series invests at least 70% of its assets in insured obligations.
The insurance relates to the timely payment of principal and interest on
portfolio investments and not to the shares of the Series.

The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated June 30, 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.

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

INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------

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

The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.

WHAT IS PRUDENTIAL MUNICIPAL BOND FUND?

Prudential Municipal Bond Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company. The Fund is comprised of three separate
portfolios--the High Yield Series, the Insured Series and the Intermediate
Series (formerly called the Modified Term Series).

WHAT ARE THE SERIES' INVESTMENT OBJECTIVES?

The investment objective of the High Yield Series is to provide the maximum
amount of income that is eligible for exclusion from federal income taxes. The
investment objective of the Insured Series is to provide the maximum amount of
income that is eligible for exclusion from federal income taxes consistent with
the preservation of capital. The investment objective of the Intermediate Series
is to provide a high level of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital. Each Series seeks to
achieve its objective through the separate investment policies described in this
Prospectus. There can be no assurance that the Series' objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies" at page
12.

RISK FACTORS AND SPECIAL CHARACTERISTICS

The High Yield Series invests in high yield securities, commonly known as
"junk bonds," which may be considered speculative and are subject to the risk of
an issuer's inability to meet principal and interest payments on the obligations
as well as price volatility. The Insured Series invests primarily in insured
municipal obligations. Although the insurance policies protect against the
timely payment of principal and interest on the insured municipal obligations,
the price of the municipal obligations and the stability of the Series' net
asset value are not insured. The Intermediate Series invests primarily in
municipal obligations with maturities between 3 and 15 years and will have a
dollar-weighted average portfolio maturity of more than 3 and less than 10
years. Generally, the yield earned on longer-term municipal obligations is
greater than that earned on similar obligations with shorter maturities.
However, obligations with longer maturities are subject to greater market risk
due to larger fluctuations in value given specific changes in the level of
interest rates relative to the value of shorter-term obligations. See "How the
Fund Invests-- Investment Objectives and Policies" at page 12. Each Series may
purchase and sell derivatives, including certain financial futures contracts and
options thereon, for hedging purposes. These activities may be considered
speculative and may result in higher risks and costs to the Fund. See "How the
Fund Invests--Hedging Strategies--Risks of Hedging Strategies" at page 18.

WHO MANAGES THE FUND?

Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the average daily net assets of each Series up to $1 billion and .45 of 1% of
the average daily net assets of each Series in excess of $1 billion. As of May
31, 1995, PMF served as manager or administrator to 69 investment companies,
including 39 mutual funds, with aggregate assets of approximately $49 billion.
The Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund under
a Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at page
21.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares of each Series.

Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares of each Series and is paid an annual distribution
and service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares of each Series.

See "How the Fund is Managed--Distributor" at page 22.

2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 29 and "Shareholder
Guide--Shareholder Services" at page 37.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 25 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 29.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers three classes of shares:

<TABLE>
<S> <C>
- - Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
- - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
- - Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
</TABLE>

See "Shareholder Guide--Alternative Purchase Plan" at page 30.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 32.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net investment
income, if any, and make distributions of any net capital gains at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of a Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 26.

3
<PAGE>
FUND EXPENSES
(for each Series)

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ -----------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 3% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends............................. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)......... None 5% during the first 1% on redemptions
year, decreasing by 1% made within one year
annually to 1% in the of purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees........................ None None None
Exchange Fee........................... None None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ -----------------------
<S> <C> <C> <C>
Management Fees (Before Waiver):
High Yield Series.................... .50% .50% .50%
Insured Series....................... .50 .50 .50
Intermediate Series.................. .50 .50 .50
12b-1 Fees:
High Yield Series.................... .10%++ .50% .75%++
Insured Series....................... .10++ .50 .75++
Intermediate Series.................. .10++ .50 .75++
Other Expenses:
High Yield Series.................... .11% .11% .09%
Insured Series....................... .16 .16 .16
Intermediate Series.................. .47 .47 .58
Total Fund Operating Expenses (Before
Waiver):
High Yield Series.................... .71% 1.11% 1.34%
Insured Series....................... .76 1.16 1.41
Intermediate Series.................. 1.07 1.47 1.83
<FN>
- ----------------
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of each Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-- Conversion
Feature--Class B Shares."
** Based on expenses incurred during the fiscal year ended April 30, 1995,
without taking into account the management fee waiver. Expenses for the
Class C shares are estimated as if the Class C shares had been in existence
during the entire fiscal year ended April 30, 1995. At the current level of
management fee waiver (10%). Management Fees and Total Fund Operating
Expenses would be .48% and .69%, respectively, for the High Yield Series,
.48% and 1.09%, respectively, for the Insured Series and .48% and 1.31%,
respectively, for the Intermediate Series.
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% of the
average daily net assets of the Class A and Class C shares, respectively,
the Distributor has agreed to limit its distribution fees with respect to
the Class A and Class C shares of each Series to no more than .10 of 1% and
.75 of 1% of the average daily net assets of the Class A and Class C
shares, respectively, for the fiscal year ending April 30, 1996. Total Fund
Operating Expenses of the Class A and Class C shares without such
limitation would be .91% and 1.59%, respectively, of the High Yield Series,
.96% and 1.66%, respectively, of the Insured Series and 1.27% and 2.08%,
respectively, of the Intermediate Series. See "How the Fund is
Managed--Distributor."
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
EXAMPLE (EACH SERIES) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
High Yield Series
Class A................................................ $37 $52 $68 $136
Class B................................................ $61 $65 $71 $119
Class C................................................ $24 $42 $73 $161
Insured Series
Class A................................................ $38 $54 $71 $141
Class B................................................ $62 $67 $74 $125
Class C................................................ $24 $45 $77 $169
Intermediate Series
Class A................................................ $41 $63 $87 $177
Class B................................................ $65 $76 $90 $160
Class C................................................ $29 $58 $99 $215
You would pay the following expenses on the same investment,
assuming no redemption:
High Yield Series
Class A................................................ $37 $52 $68 $136
Class B................................................ $11 $35 $61 $119
Class C................................................ $14 $42 $73 $161
Insured Series
Class A................................................ $38 $54 $71 $141
Class B................................................ $12 $37 $64 $125
Class C................................................ $14 $45 $77 $169
Intermediate Series
Class A................................................ $41 $63 $87 $177
Class B................................................ $15 $46 $80 $160
Class C................................................ $19 $58 $99 $215
The above examples are based on restated data for the Fund's fiscal year ended April 30, 1995. THE EXAMPLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor
in the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating expenses of the Series, such as
Trustees' and professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
</TABLE>

5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements.

<TABLE>
<CAPTION>
HIGH YIELD SERIES
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
JANUARY 22,
1990@
YEARS ENDED APRIL 30, THROUGH APRIL
------------------------------------------------------ 30,
1995 1994 1993 1992 1991 1990
-------- -------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.74 $11.14 $10.68 $10.45 $10.33 $10.58
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .72+ .72 .77 .77+ .79+ .23+
Net realized and unrealized
gain (loss) on investment
transactions................. (.02) (.39) .46 .23 .12 (.25)
Total from investment
operations................. .70 .33 1.23 1.00 .91 (.02)
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from capital
gains........................ -- (.01) -- -- -- --
Total distributions......... (.72) (.73) (.77) (.77) (.79) (.23)
Net asset value, end of
period....................... $10.72 $10.74 $11.14 $10.68 $10.45 $10.33
TOTAL RETURN#:................ 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets (000)...... $65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average net assets:
Expenses, including
distribution fees.......... 0.69%+ 0.69% 0.74% 0.65%+ 0.60%+ 0.60%*/+
Expenses, excluding
distribution fees.......... 0.59%+ 0.59% 0.64% 0.55%+ 0.50%+ 0.50%*/+
Net investment income....... 6.83%+ 6.42% 7.04% 7.25%+ 7.62%+ 8.17%*/+
Portfolio turnover rate....... 39% 36% 27% 34% 29% 44%
<FN>
- ---------------
@ Commencement of offering of Class A shares.
# 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.
* Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND CLASS C SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B and Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.

<TABLE>
<CAPTION>
HIGH YIELD SERIES
---------------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- ----------- ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.74 $11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56 $ 10.13
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .68+ .68 .73 .73+ .75+ .79+ .86+
Net realized and unrealized
gain (loss) on investment
transactions................. (.02) (.39) .46 .23 .11 (.17) .45
Total from investment
operations................. .66 .29 1.19 .96 .86 .62 1.31
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.68) (.68) (.73) (.73) (.75) (.79) (.86)
Distributions from capital
gains........................ -- (.01) -- -- -- (.05) (.02)
Total distributions......... (.68) (.69) (.73) (.73) (.75) (.84) (.88)
Net asset value, end of
period....................... $10.72 $10.74 $11.14 $10.68 $10.45 $10.34 $10.56
TOTAL RETURN#:................ 6.37% 2.46% 11.47% 9.40% 8.59% 6.04% 13.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $934,725 $1,099,640 $1,028,480 $803,838 $701,483 $622,970 $549,426
Average net assets (000)...... $1,024,132 $1,132,653 $893,203 $759,779 $667,751 $549,485 $185,367
Ratios to average net
assets:@@
Expenses, including
distribution fees.......... 1.09%+ 1.09% 1.14% 1.05%+ 1.00%+ 0.83%+ 0.27%+
Expenses, excluding
distribution fees.......... 0.59%+ 0.58% .64% 0.55%+ 0.50%+ 0.33%+ 0.12%+
Net investment income....... 6.37%+ 6.02% 6.66% 6.85%+ 7.22%+ 7.24%+ 7.26%+
Portfolio turnover rate....... 39% 36% 27% 34% 29% 44% 17%

HIGH YIELD SERIES

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

CLASS B
CLASS C
--------------
-------------- AUGUST 1,
SEPTEMBER 17, 1994@
1987* TO APRIL THROUGH APRIL
30, 30,
1988** 1995
-------------- --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period....................... $10.00 $ 10.79
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .53+ .49+
Net realized and unrealized
gain (loss) on investment
transactions................. .13 (.07)
Total from investment
operations................. .66 .42
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.53) (.49)
Distributions from capital
gains........................ -- --
Total distributions......... (.53) (.49)
Net asset value, end of
period....................... $10.13 $10.72
TOTAL RETURN#:................ 10.68% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $48,546 $3,208
Average net assets (000)...... $19,039 $1,385
Ratios to average net
assets:@@
Expenses, including
distribution fees.......... 0%+/## 1.34%+/##
Expenses, excluding
distribution fees.......... 0%+/## 0.59%+/##
Net investment income....... 7.13%+/## 6.34%+/##
Portfolio turnover rate....... 21% 39%
<FN>
- -----------------
* Commencement of offering of Class B shares.
** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
@ Commencement of offering of Class C shares.
@@ Because of the event referred to in @ and the timing of such, the ratios for
the Class C shares are not necessarily comparable to those of Class A or
Class B shares and are not necessarily indicative of future ratios.
# 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.
## Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

<TABLE>
<CAPTION>
INSURED SERIES
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
JANUARY 22,
1990@
YEARS ENDED APRIL 30, THROUGH APRIL
------------------------------------------------------ 30,
1995 1994 1993 1992 1991 1990
-------- -------- -------- ----------- ----------- -------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.71 $11.44 $10.98 $10.76 $10.25 $10.51
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .58+ .58 .61 .66+ .67+ .18+
Net realized and unrealized
gain (loss) on investment
transactions................. .12 (.43) .73 .24 .54 (.26)
Total from investment
operations................. .70 .15 1.34 .90 1.21 (.08)
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.58) (.58) (.61) (.66) (.67) (.18)
Distributions from capital
gains........................ -- (.30) (.27) (.02) (.03) --
Total distributions......... (.58) (.88) (.88) (.68) (.70) (.18)
Net asset value, end of
period....................... $10.83 $10.71 $11.44 $10.98 $10.76 $10.25
TOTAL RETURN#:................ 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $75,800 $30,669 $30,098 $19,177 $ 7,630 $2,700
Average net assets (000)...... $39,471 $32,309 $24,589 $12,731 $ 5,164 $1,280
Ratios to average net assets:
Expenses, including
distribution fees.......... 0.74%+ 0.71% 0.72% 0.62%+ 0.61%+ 0.62%+/*
Expenses, excluding
distribution fees.......... 0.64%+ 0.61% 0.62% 0.52%+ 0.51%+ 0.52%+/*
Net investment income....... 5.45%+ 5.09% 5.46% 6.06%+ 6.38%+ 6.64%+/*
Portfolio turnover rate....... 64% 105% 85% 56% 51% 82%
<FN>
- ---------------
@ Commencement of offering of Class A shares.
# 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.
* Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND C SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B and Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.

<TABLE>
<CAPTION>
INSURED SERIES
---------------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- ----------- ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54 $ 10.18
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .54+ .54 .56 .62+ .63+ .67+ .76+
Net realized and unrealized
gain (loss) on investment
transactions................. .13 (.43) .72 .25 .54 (.22) .42
Total from investment
operations................. .67 .11 1.28 .87 1.17 .45 1.18
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.54) (.54) (.56) (.62) (.63) (.67) (.76)
Distributions from capital
gains........................ -- (.30) (.27) (.02) (.03) (.07) (.06)
Total distributions......... (.54) (.84) (.83) (.64) (.66) (.74) (.82)
Net asset value, end of
period....................... $10.84 $10.71 $11.44 $10.99 $10.76 $10.25 $10.54
TOTAL RETURN#:................ 6.40% 0.63% 12.14% 8.24% 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $567,648 $740,447 $770,060 $638,451 $578,412 $497,139 $447,101
Average net assets (000)...... $660,237 $807,794 $705,846 $609,516 $537,275 $446,904 $160,158
Ratios to average net assets:@@
Expenses, including
distribution fees.......... 1.14%+ 1.11% 1.12% 1.02%+ 1.01%+ 0.85%+ 0.22%+
Expenses, excluding
distribution fees.......... 0.64%+ 0.61% 0.62% 0.52%+ 0.51%+ 0.35%+ 0.13%+
Net investment income....... 4.99%+ 4.69% 5.06% 5.66%+ 5.98%+ 6.07%+ 6.52%+
Portfolio turnover rate....... 64% 105% 85% 56% 51% 82% 87%

INSURED SERIES

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

CLASS B
CLASS C
--------------
-------------- AUGUST 1,
SEPTEMBER 17, 1994@
1987* TO APRIL THROUGH APRIL
30, 30,
1988** 1995
-------------- --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period....................... $ 10.00 $ 10.79
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .42+ .39+
Net realized and unrealized
gain (loss) on investment
transactions................. .18 .05
Total from investment
operations................. .60 .44
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.42) (.39)
Distributions from capital
gains........................ -- --
Total distributions......... (.42) (.39)
Net asset value, end of
period....................... $10.18 $10.84
TOTAL RETURN#:................ 9.76% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $45,058 $525
Average net assets (000)...... $19,378 $224
Ratios to average net assets:@@
Expenses, including
distribution fees.......... 0%##/+ 1.39%##/+
Expenses, excluding
distribution fees.......... 0%##/+ 0.64%##/+
Net investment income....... 6.34%##/+ 4.92%##/+
Portfolio turnover rate....... 117% 64%
<FN>
- -----------------
* Commencement of offering of Class B shares.
** On March 1,1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
@ Commencement of offering of Class C shares.
@@ Because of the event referred to in @ and the timing of such, the ratios
for the Class C shares are not necessarily comparable to those of Class A
or Class B shares and are not necessarily indicative of future ratios.
# 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.
## Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

9
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE SERIES1
---------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------
JANUARY 22,
1990@
YEARS ENDED APRIL 30, THROUGH APRIL
------------------------------------------------------ 30,
1995 1994 1993 1992 1991 1990
-------- -------- -------- ----------- ----------- -------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .51+ .53 .54+ .57+ .59+ .18+
Net realized and unrealized
gain (loss) on investment
transactions................. (.03) (.19) .60 .26 .50 (.23)
Total from investment
operations................. .48 .34 1.14 .83 1.09 (.05)
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in excess of net
investment income............ (.01) -- -- -- -- --
Distributions from capital
gains........................ (.18) (.22) (.11) (.15) -- --
Total distributions......... (.70) (.75) (.65) (.72) (.59) (.18)
Net asset value, end of
period....................... $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
TOTAL RETURN#:................ 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets (000)...... $7,742 $4,981 $1,883 $599 $305 $80
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.05%+ 1.00% 1.06%+ 1.06%+ 0.92%+ 0.63%+/*
Expenses, excluding
distribution fees.......... 0.95%+ 0.90% 0.96%+ 0.96%+ 0.82%+ 0.53%+/*
Net investment income....... 4.75%+ 4.63% 5.09%+ 5.41%+ 5.92%+ 6.26%+/*
Portfolio turnover rate....... 30% 55% 22% 78% 128% 91%
<FN>
- ---------------
1 Prior to June 29, 1995, the Intermediate Series was called the Modified
Term Series.
@ Commencement of offering of Class A shares.
# 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.
* Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

10
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND CLASS C SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1995, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class B and Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.

<TABLE>
<CAPTION>
INTERMEDIATE SERIES1
---------------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.68 $11.09 $10.60 $10.48 $ 9.98 $10.17 $10.14
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .45+ .48 .50+ .53+ .56+ .62+ .70+
Net realized and unrealized
gain (loss) on investment
transactions................. (.04) (.19) .60 .27 .50 (.16) .09
Total from investment
operations................. .41 .29 1.10 .80 1.06 .46 .79
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.45) (.48) (.50) (.53) (.56) (.62) (.70)
Distributions in excess of net
investment income............ (.01) -- -- -- -- -- --
Distributions from capital
gains........................ (.18) (.22) (.11) (.15) -- (.03) (.06)
Total distributions......... (.64) (.70) (.61) (.68) (.56) (.65) (.76)
Net asset value, end of
period....................... $10.45 $10.68 $11.09 $10.60 $10.48 $ 9.98 $10.17
TOTAL RETURN#:................ 3.99% 2.43% 10.62% 7.68% 10.82% 4.61% 8.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $51,039 $65,215 $57,049 $45,440 $45,401 $47,838 $45,362
Average net assets (000)...... $60,174 $59,811 $50,154 $44,439 $46,521 $46,246 $30,515
Ratios to average net
assets:@@
Expenses, including
distribution fees.......... 1.45%+ 1.40% 1.46%+ 1.46%+ 1.32%+ 0.83%+ 0.15%+
Expenses, excluding
distribution fees.......... 0.95%+ 0.90% 0.96%+ 0.96%+ 0.82%+ 0.33%+ 0.05%+
Net investment income....... 4.35%+ 4.23% 4.69%+ 5.01%+ 5.52%+ 6.03%+ 6.59%+
Portfolio turnover rate....... 30% 55% 22% 78% 128% 91% 135%

INTERMEDIATE SERIES

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

CLASS B
CLASS C
--------------
-------------- AUGUST 1,
SEPTEMBER 17, 1994@
1987* TO APRIL THROUGH APRIL
30, 30,
1988** 1994
-------------- --------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.00 $10.54
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .43+ .35+
Net realized and unrealized
gain (loss) on investment
transactions................. .14 (.08)
Total from investment
operations................. .57 .27
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.43) (.36)
Distributions in excess of net
investment income............ -- (.01)
Distributions from capital
gains........................ -- --
Total distributions......... (.43) (.37)
Net asset value, end of
period....................... $10.14 $10.45
TOTAL RETURN#:................ 9.07% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $17,102 $167
Average net assets (000)...... $6,298 $28
Ratios to average net
assets:@@
Expenses, including
distribution fees.......... 0%+/## 1.81%+/##
Expenses, excluding
distribution fees.......... 0%+/## 1.06%+/##
Net investment income....... 6.16%+/## 4.34%+/##
Portfolio turnover rate....... 54% 30%
<FN>
- -----------------
1 Prior to June 29, 1995, the Intermediate Series was called the Modified
Term Series.
* Commencement of offering of Class B shares.
** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
@ Commencement of offering of Class C shares.
@@ Because of the event referred to in @ and the timing of such, the ratios
for the Class C shares are not necessarily comparable to those of Class A
or Class B shares and are not necessarily indicative of future ratios.
# 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.
## Annualized.
+ Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

11
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVES AND POLICIES

THE FUND IS COMPRISED OF THREE SEPARATE DIVERSIFIED PORTFOLIOS--THE HIGH YIELD
SERIES, THE INSURED SERIES AND THE INTERMEDIATE SERIES (FORMERLY CALLED THE
MODIFIED TERM SERIES)--EACH OF WHICH IS, IN EFFECT, A SEPARATE FUND ISSUING ITS
OWN SHARES. THE INVESTMENT OBJECTIVES OF THE SERIES ARE AS FOLLOWS: (I) THE
OBJECTIVE OF THE HIGH YIELD SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME
THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, (II) THE OBJECTIVE OF
THE INSURED SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME THAT IS ELIGIBLE
FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND (III) THE OBJECTIVE OF THE INTERMEDIATE SERIES IS TO PROVIDE A HIGH
LEVEL OF INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES
CONSISTENT WITH THE PRESERVATION OF CAPITAL. THERE CAN BE NO ASSURANCE THAT SUCH
OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and Policies" in the
Statement of Additional Information. Although each Series will seek income that
is eligible for exclusion from federal income taxes, a portion of the dividends
and distributions paid by each Series (and, in particular, the High Yield
Series) may be treated as a preference item for purposes of the alternative
minimum tax. See "Taxes, Dividends and Distributions."

EACH SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING VOTING SECURITIES OF THE SERIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE SERIES
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.

EACH SERIES PURSUES ITS INVESTMENT OBJECTIVE THROUGH THE SEPARATE INVESTMENT
POLICIES DESCRIBED BELOW. These policies differ with respect to the maturity and
quality of portfolio securities in which a Series may invest and can affect the
yield for each Series and the degree of market risk and credit risk to which
each Series is subject.

EACH SERIES WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS
GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). THE PORTFOLIO SECURITIES HELD BY EACH OF
THE SERIES WILL VARY WITH RESPECT TO YIELD, MARKET PRICE VOLATILITY AND QUALITY.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. In addition,
lower rated municipal obligations typically provide a higher yield than higher
rated municipal obligations of similar maturity. However, lower rated municipal
obligations are also subject to a greater degree of risk with respect to the
ability of the issuer to meet the principal and interest payments on the
obligations (credit risk) and may also be subject to greater price volatility
due to the market perceptions of the creditworthiness of the issuer. Insurance
policies may be obtained to insure against credit risk, but not against market
risk.

THE HIGH YIELD SERIES

THE HIGH YIELD SERIES WILL INVEST IN MUNICIPAL OBLIGATIONS WHICH ARE RATED "B"
OR BETTER BY MOODY'S INVESTORS SERVICE (MOODY'S) OR STANDARD & POOR'S RATINGS
GROUP (S&P) OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION
AND WHICH GENERALLY HAVE MATURITIES IN EXCESS OF TEN YEARS AT THE TIME OF
PURCHASE, ALTHOUGH THE SERIES ALSO WILL INVEST IN MUNICIPAL OBLIGATIONS HAVING
MATURITIES RANGING FROM ONE YEAR TO TEN YEARS, PROVIDED THAT THE WEIGHTED
AVERAGE MATURITY OF THE SERIES' INVESTMENT PORTFOLIO REMAINS WITHIN THE TWENTY
TO THIRTY YEAR RANGE. Subsequent to its purchase by the Series, a municipal
obligation may be assigned a lower rating or cease to be rated. Such an

12
<PAGE>
event would not require the elimination of the issue from the portfolio, but the
investment adviser will consider such an event in determining whether the Series
should continue to hold the security in its portfolio. The High Yield Series may
invest up to 35% of the Series' total assets in municipal obligations rated
higher than "Baa" or "BBB" by Moody's or S&P, respectively. Securities rated
"Baa" by Moody's, although considered to be investment grade, lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Securities rated "BB" or "Ba" or lower by S&P or Moody's, respectively, are
generally considered to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal and are commonly referred
to as "junk bonds." While such securities may have some quality and protective
characteristics, those are outweighed by large uncertainties or major risk
exposures to adverse conditions. See "Description of Security Ratings" in the
Appendix.

THE SERIES MAY ALSO INVEST IN MUNICIPAL SECURITIES WHICH ARE NOT RATED IF,
BASED UPON A CREDIT ANALYSIS BY THE FUND'S INVESTMENT ADVISER, THE INVESTMENT
ADVISER BELIEVES THAT SUCH SECURITIES ARE OF COMPARABLE QUALITY TO MUNICIPAL
SECURITIES RATED "B" OR BETTER BY MOODY'S OR S&P OR A SIMILAR NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION. The High Yield Series normally can
be expected to offer the highest yields of the three Series, but it will also be
subject to the greatest market and credit risk.

From time to time, the Series may own the majority of a municipal obligation.
Such majority-owned holdings may present market and credit risks.

THE SERIES ALSO MAY INVEST IN SHORT-TERM MUNICIPAL OBLIGATIONS (I.E., CASH
EQUIVALENTS) THAT ARE, AT THE TIME OF PURCHASE, RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S (CURRENTLY "MIG 1," "MIG 2," "MIG
3" AND "MIG 4" FOR NOTES AND "P-1," "P-2" AND "P-3" FOR COMMERCIAL PAPER) OR S&P
(CURRENTLY "A-1," "A-2" AND "A-3" FOR COMMERCIAL PAPER AND "SP-1" AND "SP-2" FOR
NOTES). See "Other Investments and Policies--General" below.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. FIXED INCOME
SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET PRINCIPAL
AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE SUBJECT
TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY AND THE
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER (MARKET RISK). Lower
rated or unrated (I.E., high yield) securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The investment adviser considers both credit risk and market risk in
making investment decisions for the Series. Investors should carefully consider
the relative risks of investing in high yield securities and understand that
such securities are not generally meant for short-term trading.

The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the investment adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Series' net asset value.
Under circumstances where the Fund owns the majority of an issue, such market
and credit risks may be greater.

From time to time proposals have been introduced to limit the use, or tax and
other advantages, of municipal securities which, if enacted, could adversely
affect the Series' net asset value and investment practices. Such proposals
could also adversely affect the secondary market for high yield municipal
securities, the financial condition of issuers of these securities and the value
of outstanding high yield municipal securities. Reevaluation of the Series'
investment objective and structure might be necessary in the future due to
market conditions which may result from future changes in state or federal law.

13
<PAGE>
LOWER RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the portfolio and increasing the
exposure of the Series to the risks of high yield securities.
During the year ended April 30, 1995, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------------ -------------------
<S> <C>
AAA/Aaa 12.8%
AA/Aa 5.1%
A/A 4.4%
BBB/Baa 13.7%
BB/Ba 3.9%
BB 0.8%
CCC/Caa 0.0%
Unrated
AAA/Aaa 2.1%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 2.9%
BB/Ba 20.7%
B/B 30.7%
CCC/Caa 1.0%
D 1.4%
</TABLE>

THE INSURED SERIES

THE INSURED SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH ARE
(I) INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED "AAA" BY MOODY'S OR "AAA" BY S&P, OR A SIMILAR NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION, SO THAT THE OBLIGATION IS RATED "AAA" OR "AAA"
OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS, (II) RATED "AAA" OR
"AAA" BY MOODY'S OR S&P, RESPECTIVELY, OR A SIMILAR NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION (OR, IN THE CASE OF NOTES OR VARIABLE RATE
SECURITIES, "A-1," "P-1," "MIG 1" OR "SP-1"), BASED ON THE CREDIT OF THE ISSUER
OR (III) BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. See
"Description of Security Ratings" in the Appendix. The Series may also invest in
municipal securities which are not rated if, based upon a credit analysis by the
Fund's investment adviser, the investment adviser believes that such securities
are of comparable quality to other municipal securities that the Series may
purchase.

UNDER NORMAL CONDITIONS, AT LEAST 70% OF THE SERIES' TOTAL ASSETS WILL CONSIST
OF INSURED OBLIGATIONS. AS OF APRIL 30, 1995, APPROXIMATELY 92% OF THE SERIES'
TOTAL ASSETS WERE OBLIGATIONS INSURED BY A MUNICIPAL BOND INSURER. This
insurance may be provided either (i) under a "new issue" insurance policy
obtained by the issuer or underwriter of a bond or note, (ii) under a "secondary
market" insurance policy on a particular bond or note purchased either by the
Series or a previous bondholder or noteholder or (iii) under a portfolio
insurance policy maintained by the Series. See "Insurance" below. As noted
above, the Series will acquire insurance only from, and purchase municipal bonds
and notes insured by, insurers whose claims-paying ability is rated "AAA" or
"Aaa" at the time of purchase. Changes in the financial condition of an insurer
could result in a subsequent reduction or withdrawal of this rating. In each
case, the insurance policies protect only against the timely payment of
principal and interest on the insured municipal bonds and notes. The price of
the municipal obligations, which may fluctuate due to changes in interest rates
generally or factors affecting the credit of the insurer, and the stability of
the Series' net asset value are not insured.

14
<PAGE>
INSURANCE. THE INSURED SERIES HAS OBTAINED A PORTFOLIO INSURANCE POLICY WHICH
GUARANTEES PAYMENT OF PRINCIPAL AND INTEREST ON ELIGIBLE MUNICIPAL BONDS AND
NOTES HELD BY THE INSURED SERIES WHICH ARE NOT OTHERWISE INSURED BY "NEW ISSUE"
OR "SECONDARY MARKET" INSURANCE AND WHICH REQUIRE INSURANCE COVERAGE UNDER THE
SERIES' INVESTMENT POLICIES. Under a portfolio policy, the insurer may from time
to time establish criteria for determining municipal bonds and notes eligible
for insurance. The Insured Series will not purchase a municipal bond or note
which is not eligible for coverage under this policy unless the bond or note is
insured at the time of purchase or satisfies the other criteria for investment
by the Series.

Unlike "new issue" or "secondary market" insurance (which continues in force
for the life of the municipal obligation), a municipal bond or note will be
entitled to the benefit of insurance under the portfolio policy of the Series
only so long as the bond or note is owned by the Series. If the bond or note is
sold, the insurance protection is terminated. As a result, the Series will
generally not attribute any value to portfolio insurance in valuing its
investments. However, in the event any municipal bond or note is in default or
presents a material risk of default, the Series intends to continue to hold the
bond or note in its portfolio and to place a value on the insurance protection.
The investment adviser's ability to manage the portfolio of the Series or to
obtain portfolio insurance from other insurers may be limited to the extent that
it holds defaulted bonds or notes. Portfolio insurance cannot be cancelled by
the insurer with respect to any municipal bond or note already held by the
Series except for non-payment of premiums. There is no assurance that portfolio
insurance will continue to be available at reasonable premium rates.

The Series may at times purchase secondary market insurance on municipal bonds
and notes which it holds or acquires. Secondary market insurance would be
reflected in the market value of the municipal obligation and may enable the
Series to dispose of a defaulted obligation at a price similar to that of
comparable municipal obligations which are not in default.

Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the municipal bonds and notes held by the Insured Series
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, I.E., the market value, of the municipal obligations caused by changes in
interest rates and other factors, nor in turn against fluctuations in the net
asset value of the shares of the Insured Series.

The ratings of insured municipal obligations depend, in substantial part, on
the creditworthiness of the insurer; thus their value will fluctuate largely on
the basis of factors relating to the insurer's ability to satisfy its
obligations, as well as on market factors generally. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities, among
others: Municipal Bond Insurance Association (MBIA), MBIA Insurance Corporation
(MBIA Corp.), AMBAC Indemnity Corporation (AMBAC), Financial Guaranty Insurance
Company (FGIC), Capital Guaranty Insurance Company (CGIC) and Financial Security
Assurance Inc. (FSA). S&P rates securities insured by all of these companies
"AAA." Moody's rates securities insured by all of these companies "Aaa." The
Insured Series may, from time to time, purchase municipal securities insured by
other entities or acquire insurance coverage for individual uninsured municipal
securities directly from another insurer provided any such entity has a
claims-paying ability rated "AAA" or "Aaa" by S&P or Moody's, respectively. See
"Investment Objectives and Policies--The Insured Series" in the Statement of
Additional Information for additional information concerning the insurers.

New issue insurance is obtained by the issuer or underwriter upon issuance of
a bond or note, and the insurance premiums are reflected in the price of such
bond or note. Insurance premiums with respect to portfolio insurance and
secondary insurance may, on the other hand, be paid by the Series. Insurance
premiums paid by the Series for portfolio insurance will be treated as an
expense of the Series, reducing the net investment income and thus the yield of
the Series. While the amount of premiums depends on the composition of the
portfolio of the Series, the Series estimates that its annual premium expense
for portfolio insurance (at current rates) will average from .20 of 1% to .35 of
1% of that portion of the assets of the Series which is covered by such
insurance. Premiums paid, however, for secondary market insurance will be
treated as capital costs, increasing the cost basis of the investment and
thereby reducing the effective yield of the investment.

15
<PAGE>
THE INTERMEDIATE SERIES

THE INTERMEDIATE SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WITH
MATURITIES BETWEEN 3 AND 15 YEARS AND WILL HAVE A DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY OF MORE THAN 3 AND LESS THAN 10 YEARS. ALL OF THE MUNICIPAL
OBLIGATIONS HELD BY THE INTERMEDIATE SERIES WILL BE RATED AT LEAST "BAA" BY
MOODY'S OR "BBB" BY S&P OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION AT THE TIME OF PURCHASE OR BE NON-RATED OBLIGATIONS OF COMPARABLE
QUALITY IN THE OPINION OF THE FUND'S INVESTMENT ADVISER. Subsequent to its
purchase by the Series, a municipal obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the investment adviser will consider such an event in
determining whether the Series should continue to hold the security in its
portfolio. Under normal circumstances, at least 60% of the municipal obligations
purchased by the Series will be rated "A" or better by Moody's or S&P or a
similar nationally recognized statistical rating organization. See "Description
of Security Ratings" in the Appendix.

For purposes of determining the dollar-weighted average portfolio maturity of
the Series' portfolio, the maturity of a municipal security will be its ultimate
maturity, unless it is probable that the issuer of the security will take
advantage of maturity-shortening devices such as a call, refunding or redemption
provision, in which case the maturity date will be the date on which it is
probable that the security will be called, refunded or redeemed. If the
municipal security includes the right to demand payment, the maturity of the
security for purposes of determining the Series' dollar-weighted average
portfolio maturity will be the period remaining until the principal amount of
the security can be recovered by exercising the right to demand payment.

GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 75-125
basis points (.75%-1.25%) more than 10-year obligations and have 60-70% more
price volatility (market risk) than 10-year obligations.

THE INTERMEDIATE SERIES INTENDS TO INVEST IN LONGER-TERM, HIGHER YIELDING
OBLIGATIONS AND REDUCE THE GREATER MARKET RISK OF SUCH OBLIGATIONS THROUGH THE
USE OF FINANCIAL FUTURES CONTRACTS. SPECIFICALLY, THE SERIES WILL INVEST IN
MUNICIPAL OBLIGATIONS WITH MATURITIES OF BETWEEN 5 AND 30 YEARS AND
SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY OF SUCH OBLIGATIONS THROUGH THE SALE
OF FUTURES CONTRACTS. RATHER THAN HEDGING THE MUNICIPAL OBLIGATION ENTIRELY, THE
SERIES WILL SELL FUTURES CONTRACTS IN SUFFICIENT AMOUNTS SO THAT THE
DOLLAR-WEIGHTED AVERAGE MATURITY OF THE COMBINED MUNICIPAL OBLIGATION/FUTURES
POSITION WILL BE MORE THAN 3 AND LESS THAN 10 YEARS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A "SYNTHETIC OBLIGATION" THROUGH THE CONSTRUCTION
OF A PARTIALLY HEDGED LONGER-TERM OBLIGATION POSITION.

The Fund's investment adviser intends to create such synthetic obligation
positions when, in its opinion, the Series will realize one or more of the
following benefits compared to buying municipal obligations with shorter
maturities: (a) greater market liquidity; (b) lower transaction costs; (c)
greater expected capital appreciation or enhanced preservation of capital; or
(d) higher yields.

In the municipal securities market, most new issues are structured with many
serial maturities that are relatively small in principal amount and one or
several longer-term maturities that are relatively large in principal amount.
Therefore, long-term municipal obligations typically have greater liquidity and
the associated transaction costs are relatively less than obligations with
maturities of 3 to 15 years.

It is expected that synthetic obligation positions will often provide greater
returns than actual intermediate maturity municipal obligations. This can occur
when interest rate futures contracts are relatively overpriced in relation to
the current prices of municipal obligations, so that the sale of the futures
contracts, as part of a synthetic position, would be advantageous to the Series.
Synthetic positions can also be more attractive to the Series when the
investment adviser expects yields on longer-term

16
<PAGE>
municipal obligations to decrease more (or increase less) than yields on
medium-term municipal obligations. If such expectations are correct, the net
capital appreciation of the synthetic obligation position should exceed (or the
price decline be less than) that of an actual intermediate-term municipal
obligation.

THERE IS NO ASSURANCE THAT THE SYNTHETIC OBLIGATION POSITION WILL TRADE LIKE
AN INTERMEDIATE-TERM MUNICIPAL OBLIGATION. ANY USE OF FUTURES CONTRACTS INVOLVES
THE RISK OF IMPERFECT CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES
CONTRACTS AND MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE,
THE SERIES' ABILITY TO CREATE SYNTHETIC OBLIGATIONS IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Hedging Strategies--Futures Contracts and Options Thereon"
below.

THE SERIES ALSO MAY USE FUTURES CONTRACTS TO HEDGE AGAINST OVERALL MARKET RISK
OF THE ENTIRE PORTFOLIO, as described under "Hedging Strategies--Futures
Contracts and Options Thereon" below.

HEDGING STRATEGIES

FUTURES CONTRACTS AND OPTIONS THEREON

EACH SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST FLUCTUATIONS
IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING
AGAINST INCREASES IN THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. In
that regard, the Intermediate Series may sell futures contracts to create
"synthetic positions" by partially hedging longer-term obligation positions. See
"Investment Objectives and Policies--The Intermediate Series" above. The
successful use of futures contracts and options thereon by a Series involves
additional transaction costs, is subject to various risks and depends upon the
investment adviser's ability to predict the direction of the market and interest
rates.

A FUTURES CONTRACT OBLIGATES THE SELLER OF A CONTRACT TO DELIVER TO THE
PURCHASER OF A CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made. A
Series will engage in transactions in only those futures contracts and options
thereon that are traded on a commodities exchange or a board of trade.

EACH SERIES INTENDS TO ENGAGE IN FUTURES CONTRACTS AND OPTIONS THEREON AS A
HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDITIONS, IN THE VALUE OF
SECURITIES WHICH ARE HELD IN THE SERIES' PORTFOLIO OR WHICH THE SERIES INTENDS
TO PURCHASE, IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMODITY
FUTURES TRADING COMMISSION (THE CFTC). The Series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series. A Series may purchase and sell
futures contracts and options thereon for bona fide hedging transactions, except
that a Series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Fund's total assets.
In addition, a Series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, the sum of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options thereon, would exceed 20% of the total assets of the
Series. There are no limitations on the percentage of a portfolio which may be
hedged and no limitations on the use of a Series' assets to cover futures
contracts and options thereon, except that the aggregate value of the
obligations underlying put options will not exceed 50% of a Series' assets.

Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
Series may also engage in transactions in other

17
<PAGE>
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging investments in municipal obligations.

THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.

THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY A SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.

THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.

RISKS OF HEDGING STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. If the investment adviser's prediction of movements in the direction
of the securities and interest rate markets is inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of futures contracts and
options thereon include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates and securities
prices or the movement in indicies; (2) imperfect correlation between the price
of futures contracts and options thereon and movements in the prices of the
securities being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability of the Fund to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objectives and Policies" and "Taxes, Dividends and Distributions" in the
Statement of Additional Information.

OTHER INVESTMENTS AND POLICIES

GENERAL

MUNICIPAL SECURITIES INCLUDE BONDS AND NOTES ISSUED BY OR ON BEHALF OF STATES,
TERRITORIES AND POSSESSIONS OF THE UNITED STATES AND THEIR POLITICAL
SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS GENERALLY

18
<PAGE>
ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAX. MUNICIPAL BONDS ARE TYPICALLY
ISSUED TO OBTAIN FUNDS FOR VARIOUS PUBLIC PURPOSES, INCLUDING THE CONSTRUCTION
OF A WIDE RANGE OF PUBLIC FACILITIES SUCH AS AIRPORTS, BRIDGES, HIGHWAYS,
HOUSING, HOSPITALS, MASS TRANSPORTATION, SCHOOLS, STREETS, WATER AND SEWER WORKS
AND GAS AND ELECTRIC UTILITIES. MUNICIPAL NOTES GENERALLY ARE USED TO FINANCE
SHORT-TERM CAPITAL NEEDS AND TYPICALLY HAVE MATURITIES OF ONE YEAR OR LESS.

EACH SERIES MAY INVEST MORE THAN 5% OF ITS NET ASSETS IN FLOATING RATE AND
VARIABLE RATE SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN. Floating
and variable rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
Bonds or Bills or the prime rate at a major commercial bank. These securities
also allow the holder to demand payment of the obligation on short notice at par
plus accrued interest, which amount may be more or less than the amount the
Series paid for them. Variable rate securities provide for a specified periodic
adjustment in the interest rate. The interest rate on floating rate securities
changes whenever there is a change in the designated base interest rate.

Each Series may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that the
inverse floater's price will be considerably more volatile than that of a fixed
rate bond. The market for inverse floaters is relatively new.

DURING NORMAL MARKET CONDITIONS, THE ASSETS OF EACH SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Fund's investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a Series may hold more than 20% of its net assets in
cash, cash equivalents or investment grade taxable obligations, including
obligations that are generally exempt from state, but not federal, taxation.
Each Series may invest in municipal cash equivalents, such as floating rate
demand notes, municipal commercial paper and general obligation and revenue
notes, or in taxable cash equivalents, such as certificates of deposit, bankers'
acceptances and time deposits or other short-term taxable investments, such as
repurchase agreements. Each Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and
Policies--Other Investments and Policies" in the Statement of Additional
Information.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

Each Series may purchase municipal obligations on a "when-issued" or "delayed
delivery" basis and may from time to time sell obligations on a delayed delivery
basis, in each case without limit. When municipal obligations are offered on a
when-issued or delayed delivery basis, the price and coupon rate are fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of purchase. During the period between purchase and
settlement, no interest accrues to the purchaser. In the case of purchases by a
Series, the price that the Series is required to pay on the settlement date may
be in excess of the market value of the municipal obligations on that date.
While securities may be sold prior to the settlement date, each Series intends
to purchase these securities with the purpose of actually acquiring them unless
a sale would be desirable for investment reasons. At the time a Series makes the
commitment to purchase a municipal obligation on a when-issued basis, it will
record the transaction and reflect the value of the obligation, each day, in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. Each Series will establish a segregated
account with its Custodian in which it will maintain cash and/or liquid,
high-grade debt obligations equal in value to its commitments for when-issued or
delayed delivery securities.

As in the case of purchases, the price of the municipal obligations sold on a
delayed delivery basis is determined at the time of the commitment. The price
that a Series may be required to accept on the settlement date may be less than
the market value of the obligation on that date.

19
<PAGE>
Each Series may also purchase municipal forward contracts. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. The investment
adviser will monitor the liquidity, value, credit quality and delivery of the
security under the supervision of the Trustees.

MUNICIPAL LEASE OBLIGATIONS

Each Series may invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities financed
by the issue. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. See "Illiquid Securities" below.

LIQUIDITY PUTS

Each Series may purchase and exercise puts on municipal bonds and notes
without limit. Puts give the Series the right to sell the securities at a
specified exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Series. See
"Investment Objectives and Policies" in the Statement of Additional Information.

REPURCHASE AGREEMENTS

Each Series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily, and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. Each Series participates in a joint repurchase account
with other investment companies managed by PMF pursuant to an order of the
Securities and Exchange Commission (SEC).

BORROWING

Each Series may borrow an amount equal to no more than 20% of the value of its
total assets (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes and to take advantage of investment
opportunities or for the clearance of transactions. Each Series may pledge up to
20% of the value of its total assets to secure these borrowings. If a Series
borrows to invest in securities, any investment gains made on the securities in
excess of interest paid on the borrowing will cause the net asset value of the
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on the money borrowed) to the Series,
the net asset value of the Series' shares will decrease faster than would
otherwise be the case. This is the speculative factor known as "leverage."

ILLIQUID SECURITIES

Each Series may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for purposes of this limitation. Each Series intends to
comply with any applicable state Blue Sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. The investment adviser will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.

20
<PAGE>
Municipal lease obligations will not be considered illiquid for purposes of
the Fund's 15% limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of nonappropriation); (v) the
legal recourse in the event of failure to appropriate; and (4) any other factors
unique to municipal lease obligations as determined by the investment adviser.

SECURITIES LENDING

The Fund is permitted to lend its portfolio securities. See "Investment
Objectives and Policies--Municipal Securities-- Lending of Securities" in the
Statement of Additional Information.

PORTFOLIO TURNOVER

The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 100%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of a Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less.

INVESTMENT RESTRICTIONS

Each Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of each
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.

HOW THE FUND IS MANAGED

THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.

For the fiscal year ended April 30, 1995, the total expenses as a percentage
of average net assets were 0.69%, 1.09% and 1.34% (annualized) of the Class A,
Class B and Class C shares, respectively, of the High Yield Series, 0.74%, 1.14%
and 1.39% (annualized) of the Class A, Class B and Class C shares, respectively,
of the Insured Series, and 1.05%, 1.45% and 1.81% (annualized) of the Class A,
Class B and Class C shares, respectively, of the Intermediate Series. See
"Financial Highlights."

MANAGER

PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF EACH SERIES UP TO $1 BILLION AND .45 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
EACH SERIES IN EXCESS OF

21
<PAGE>

$1 BILLION. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended April 30, 1995, PMF received a management
fee of .48%, .48% and .48% of average daily net assets on behalf of the High
Yield Series, Insured Series and Intermediate Series, respectively. See
"Manager" in the Statement of Additional Information.

PMF may from time to time waive its management fee and subsidize operating
expenses of a Series. Effective January 1, 1995, PMF agreed to waive 10% of its
management fee (.05 of 1% of average net assets, as annualized.) See "Fund
Expenses." The Fund is not required to reimburse PMF for such fee waiver. Fee
waivers and expense subsidies will increase a Series' yield and total return.
See "How the Fund Calculates Performance."

As of May 31, 1995, PMF served as the manager to 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $49 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.

UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.

The current portfolio manager of the High Yield Series is Peter J. Allegrini,
a Managing Director of Prudential Investment Advisors (PIA), a unit of PIC. Mr.
Allegrini has managed the Series' portfolio since July 1994. From 1982 to 1986,
he was employed by Fidelity Investments as a senior bond analyst and, from 1986
to 1994, he was a portfolio manager, most recently of Fidelity Advisor High
Income Municipal Fund. Mr. Allegrini has responsibility for the day-to-day
management of the Series' portfolio. The current portfolio manager of the
Insured Series is Patricia Dolan, a Managing Director of PIA. Ms. Dolan has
responsibility for the day-to-day management of the Series' portfolio. Ms. Dolan
has managed the Series' portfolio since 1992 and has been employed by PIC as a
portfolio manager since October 1991. She was formerly a Vice President and
Portfolio Manager in the Municipal Trust Department of Citibank Private Banking
Division where she was employed from 1981 to 1991. Ms. Dolan also serves as the
portfolio manager of Prudential National Municipals Fund. The current portfolio
manager of the Intermediate Series is Marie Conti, an Investment Associate of
PIA. Ms. Conti has responsibility for the day-to-day management of the Series'
portfolio. Ms. Conti has managed the Series' portfolio since 1990 and has been
employed by PIC as a portfolio manager since September 1989 and prior thereto
was employed in an administrative capacity at PIC since August 1988.

PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.

DISTRIBUTOR

PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF EACH SERIES OF
THE FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.

PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF EACH SERIES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES. These expenses include commissions and account servicing fees paid to,
or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential

22
<PAGE>
Securities and Prusec associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses. The State of Texas
requires that shares of the Fund may be sold in that state only by dealers or
other financial institutions which are registered there as broker-dealers.

Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.

UNDER THE CLASS A PLAN, EACH SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of up to .25 of 1%) may not exceed .30 of 1% of the average
daily net assets of the Class A shares. PMFD has agreed to limit its
distribution-related fees payable under the Class A Plan to .10 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending April
30, 1996.

UNDER THE CLASS B AND CLASS C PLANS, EACH SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholders accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending April 30, 1996. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares-- Contingent Deferred Sales
Charges."

For the fiscal year ended April 30,1995, each Series paid distribution
expenses of .10%, .50% and .75% (annualized) of the average daily net assets of
the Class A, Class B and Class C shares, respectively. The Series record all
payments made under the Plans as expenses in the calculation of net investment
income. Prior to August 1, 1994, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.

Distribution expenses attributable to the sale of shares of each Series will
be allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Series other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.

Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Series at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of the
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.

23
<PAGE>
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers and other persons who distribute
shares of the Fund. Such payments may be calculated by reference to the net
asset value of shares sold by such persons or otherwise.

The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.

Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.

In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can elect to pursue these charges. Under the terms of the agreement,
PSI agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain PSI
limited partnership interests.

For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.

The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.

PORTFOLIO TRANSACTIONS

Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities and cash
of each Series and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.

24
<PAGE>
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.

HOW THE FUND VALUES ITS SHARES

EACH SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE SERIES'
NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.

Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. Securities may also be valued based on
values provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.

Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of Class A, Class B and
Class C shares of each Series will generally be the same. It is expected,
however, that the Series' dividends will differ by approximately the amount of
the distribution-related expense accrual differential among the classes.

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF A SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX
EQUIVALENT YIELD AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B
AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the income
generated by an investment in a Series over a one-month or 30-day period. This
income is then "annualized;" that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The "tax equivalent yield" is calculated similarly to
the "yield," except that the yield is increased using a stated income tax rate
to demonstrate the taxable yield necessary to produce an after-tax yield
equivalent to a Series. The "total return" shows how much an investment in a
Series would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Series) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither "average annual" total return nor
"aggregate" total return takes into account any federal or state income taxes
which may be payable upon redemption. The Fund also may include comparative
performance information in advertising or marketing the

25
<PAGE>
shares of each Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. A Series will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

EACH SERIES OF THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED
AS A REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY,
EACH SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET TAXABLE
INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. TO THE EXTENT NOT DISTRIBUTED BY A SERIES, NET TAXABLE INVESTMENT
INCOME AND CAPITAL GAINS AND LOSSES ARE TAXABLE TO THE SERIES. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.

To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Capital gain or loss may also
arise upon the sale of municipal securities. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.

Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.

TAXATION OF SHAREHOLDERS

In general, the character of tax-exempt interest distributed by each Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of each Series' net assets will be
invested in such obligations. See "How the Fund Invests--Other Investments and
Policies."

Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested

26
<PAGE>
and regardless of the length of time a shareholder has owned his or her shares.
The maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.

Any gain or loss realized upon a sale or redemption of a Series' shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held six months or
less.

CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by a Series which has invested in
such municipal obligations will be attributed to the Series' shareholders,
although some portion of such items could be allocated to the Series itself.
Depending upon each shareholder's individual circumstances, the attribution of
items of tax preference incurred by a Series could result in liability for the
shareholder for the alternative minimum tax. Similarly, a Series could be liable
for the alternative minimum tax for items of tax preference attributed to it.

With the exception of the High Yield Series, the Fund intends to minimize the
investment of each Series in municipal obligations of the type that will produce
items of tax preference. With respect to the High Yield Series, however, it is
anticipated that a substantial portion of the Series' assets will be invested in
such obligations.

Corporate shareholders in any of the Series may incur a preference item known
as the "adjustment for current earnings." Corporate shareholders should consult
with their tax advisers with respect to this potential preference item.

The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.

Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of redemption proceeds payable to individuals and certain
noncorporate shareholders who fail to furnish correct tax identification numbers
on IRS Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders).
Withholding is also required on taxable dividends and capital gains
distributions made by a Series unless the Series reasonably expects that at
least 95% of the distributions of the Series are composed of tax-exempt
dividends.

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by each Series with respect to each class of shares, to
the extent dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
will bear its own distribution charges, generally resulting in lower dividends
for Class B and Class C shares. Distributions of net capital gains, if any, will
be paid in the same amount for each class of shares. See "How the Fund Values
its Shares."

27
<PAGE>
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF A SERIES
BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.

Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the per share net
asset value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of a Series, an investor should carefully consider the impact
of taxable dividends and capital gains distributions which are expected to be or
have been announced.

GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A,
CLASS B AND CLASS C. Each class of shares represents an interest in the same
assets of the Fund and is identical in all respects except that (i) each class
bears different distribution expenses, (ii) each class has exclusive voting
rights with respect to its distribution and service plan (except that the Fund
has agreed with the SEC in connection with the offering of a conversion feature
on Class B shares to submit any amendment of the Class A Plan to both Class A
and Class B shareholders), (iii) each class has a different exchange privilege
and (iv) only Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Fund is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes of shares within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.

Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
each Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest in each
Series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.

THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED

28
<PAGE>
ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN
RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.

The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.

ADDITIONAL INFORMATION

This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.

SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF EACH SERIES OF THE FUND THROUGH PRUDENTIAL
SECURITIES, PRUSEC OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT,
PRUDENTIAL MUTUAL FUND SERVICES, INC. (PMFS OR THE TRANSFER AGENT) ATTENTION:
INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The
minimum initial investment for Class A and Class B shares is $1,000 per class
and $5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. The minimum initial
investment requirement is waived for purchases of Class A shares effected
through an exchange of Class B shares of The BlackRock Government Income Trust.
See "Shareholder Services" below.

An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.

THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATIVE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."

Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.

The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.

29
<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.

Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Municipal Bond Fund, specifying on the wire the account number assigned by PMFS
and your name and identifying the sales charge alternative (Class A, Class B or
Class C shares) and the name of the Series.

If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of a Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Bond
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE LENGTH OF
TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>

The three classes of shares represent an interest in the same portfolio of
investments of each Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares") and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.

30
<PAGE>
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.

IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).

The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:

If you intend to hold your investment in a Series for less than 5 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 3% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for more than 5 years and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in net
asset value, the effect of the return on the investment over this period of time
or redemptions during the period in which the CDSC is applicable.

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.

CLASS A SHARES

The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:

<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>

31
<PAGE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.

OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Trustees and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the families
of such persons who maintain an "employee related" account at Prudential
Securities or the Transfer Agent, (c) employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchase.

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.

CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES OF EACH SERIES OF THE FUND AT ANY TIME FOR CASH AT
THE NAV NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS
SHARES." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below.

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.

32
<PAGE>
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits, provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.

PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.

REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of a
Series, in lieu of cash, in conformity with applicable rules of the SEC.
Securities will be readily marketable and will be valued in the same manner as a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of a Series of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive PRO RATA credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not affect federal income tax treatment
of any gain realized upon redemption. If the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, would generally not be
allowed for federal income tax purposes.

33
<PAGE>
CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares of a Series of the Fund to an amount which is
lower than the amount of all payments by you for shares of the Series during the
preceding six years, in the case of Class B shares, and one year, in the case of
Class C shares. A CDSC will be applied on the lesser of the original purchase
price or the current value of the shares being redeemed. Increases in the value
of your shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any contingent deferred
sales charge will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.

The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."

The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- -------------------------
<S> <C>
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None
</TABLE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.

For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.

For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The

34
<PAGE>
waiver is available for total or partial redemptions of shares owned by a
person, either individually or in joint tenancy (with rights of survivorship),
or a trust at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability. In addition, the
CDSC will be waived on redemptions of shares held by a Trustee of the Fund.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.

A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.

CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.

Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.

Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."

For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.

The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential

35
<PAGE>
dividends" under the Internal Revenue Code and (ii) that the conversion of
shares does not constitute a taxable event. The conversion of Class B shares
into Class A shares may be suspended if such opinions or rulings are no longer
available. If conversions are suspended, Class B shares of the Series will
continue to be subject, possibly indefinitely, to their higher annual
distribution and service fee.

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY,
OF THE OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund. For purposes of calculating the holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded. See "Conversion Feature--Class B Shares"
above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds or two Series next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.

IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts

36
<PAGE>
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.

The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.

SHAREHOLDER SERVICES

In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:

-AUTOMATIC REINVESTMENTS OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.

-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.

-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.

-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.

-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).

For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.

37
<PAGE>
DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE
BOND RATINGS

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

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

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

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

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

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

Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.

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

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

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

SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.

A-1
<PAGE>
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.

P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.

P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.

SHORT-TERM RATINGS

Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.

MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.

MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades.

MIG 4: Loans bearing the designation MIG 4 are of adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS

AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

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

D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.

A-2
<PAGE>
COMMERCIAL PAPER RATINGS

S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.

A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL NOTES

A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.

A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY

Prudential Mutual Fund Management offers a broad range of mutual funds designed
to meet your individual needs. We welcome you to review the investment options
available through our family of funds. For more information on the Prudential
Mutual Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.

TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.

EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-Registered Trademark- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

MONEY MARKET FUNDS

- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

B-1

<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS...................................................... 2
Risk Factors and Special Characteristics........................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 6
HOW THE FUND INVESTS................................................. 12
Investment Objectives and Policies................................. 12
Hedging Strategies................................................. 17
Other Investments and Policies..................................... 18
Investment Restrictions............................................ 21
HOW THE FUND IS MANAGED.............................................. 21
Manager............................................................ 21
Distributor........................................................ 22
Portfolio Transactions............................................. 24
Custodian and Transfer and Dividend Disbursing Agent............... 24
HOW THE FUND VALUES ITS SHARES....................................... 25
HOW THE FUND CALCULATES PERFORMANCE.................................. 25
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 26
GENERAL INFORMATION.................................................. 28
Description of Shares.............................................. 28
Additional Information............................................. 29
SHAREHOLDER GUIDE.................................................... 29
How to Buy Shares of the Fund...................................... 29
Alternative Purchase Plan.......................................... 30
How to Sell Your Shares............................................ 32
Conversion Feature--Class B Shares................................. 35
How to Exchange Your Shares........................................ 36
Shareholder Services............................................... 37
DESCRIPTION OF SECURITY RATINGS...................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... B-1
</TABLE>

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

MF133A 4441470

CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202 Class C:
High Yield Series 74435L707
Class A: 74435L301; Class B: 74435L400 Class C:
Insured Series 74435L806
Class A: 74435L509; Class B: 74435L608 Class C:
Intermediate Series 74435L889

Prudential
Municipal Bond
Fund
- -------------------

JUNE 30,
1995

[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND

Statement of Additional Information
dated June 30, 1995

Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Yield Series, the Insured Series and the Intermediate
Series. The Intermediate Series was formerly called the Modified Term Series.
The investment objectives of the Series are as follows: (i) the objective of the
High Yield Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes, (ii) the objective of the Insured
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes consistent with the preservation of capital and (iii)
the objective of the Intermediate Series is to provide a high level of income
that is eligible for exclusion from federal income taxes consistent with the
preservation of capital. Although each Series will seek income that is eligible
for exclusion from federal income taxes, a portion of the dividends and
distributions paid by each Series (and, in particular, the High Yield Series)
may be treated as a preference item for purposes of the alternative minimum tax.
Each Series seeks to achieve its objective through the separate investment
policies described under "Investment Objectives and Policies." There can be no
assurance that the Series' investment objectives will be achieved.

The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated June 30, 1995, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information.................................. B-2 28
Investment Objectives and Policies................... B-2 12
Investment Restrictions.............................. B-9 21
Trustees and Officers................................ B-11 21
Manager.............................................. B-14 21
Distributor.......................................... B-15 22
Portfolio Transactions and Brokerage................. B-18 24
Purchase and Redemption of Fund Shares............... B-19 29
Shareholder Investment Account....................... B-21 37
Net Asset Value...................................... B-24 25
Taxes, Dividends and Distributions................... B-24 26
Performance Information.............................. B-27 25
Organization and Capitalization...................... B-30 28
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants............................ B-31 24
Financial Statements................................. B-32 --
Independent Auditors' Report......................... B-67 --
Appendix............................................. A-1 --
</TABLE>

<PAGE>
GENERAL INFORMATION

On February 28, 1991, the Trustees approved an amendment to the Declaration
of Trust to change the Fund's name from Prudential-Bache Municipal Bond Fund to
Prudential Municipal Bond Fund. On May 3, 1995, the Trustees approved a change
in the name of the Modified Term Series to the Intermediate Series, effective
June 29, 1995.

INVESTMENT OBJECTIVES AND POLICIES

Prudential Municipal Bond Fund is a diversified, open-end, management
investment company consisting of three separate portfolios: the High Yield
Series, the Insured Series and the Intermediate Series. The investment
objectives of the Series are as follows: (i) the objective of the High Yield
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes, (ii) the objective of the Insured Series is to
provide the maximum amount of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital and (iii) the objective
of the Intermediate Series is to provide a high level of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. There can be no assurance that any Series will achieve its objective.
Although each Series will seek income that is eligible for exclusion from
federal income taxes, a portion of the dividends and distributions paid by each
Series (and, in particular, the High Yield Series) may be treated as a
preference item for purposes of the alternative minimum tax.

The investment objective of each Series may not be changed without the
approval of the holders of a majority of the outstanding voting securities of
such Series. A "majority of the outstanding voting securities" of a Series, when
used in the Prospectus or this Statement of Additional Information, means the
lesser of (i) 67% of the voting shares of a Series represented at a meeting at
which more than 50% of the outstanding voting shares of a Series are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares of a Series.

Each Series will seek to achieve its investment objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is eligible for exclusion from federal income taxation (municipal
obligations or municipal securities). Each Series pursues its investment
objective through the separate investment policies described below and in the
Prospectus. There can be no assurance that the Series' investment objectives
will be achieved.

THE HIGH YIELD SERIES

The High Yield Series invests in municipal obligations rated "B" or better
by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group (S&P)
or a similar nationally recognized statistical rating organization having
maturities generally in excess of ten years. The Series also will invest in
municipal obligations having maturities ranging from one year to ten years. The
Series may invest up to 35% of its total assets in municipal obligations rated
higher than "Baa" or "BBB" by Moody's and S&P, respectively. The weighted
average maturity of the portfolio is expected to range between 20 and 30 years.

THE INSURED SERIES

The Insured Series invests primarily in municipal obligations which are
insured, rated in the highest rating category of Moody's or S&P or a similar
nationally recognized statistical rating organization, or backed by the U.S.
Government. It is anticipated that the Series will offer generally lower yields
and be subject to less credit and market risk than the High Yield Series.

It is anticipated that, under current market conditions, a great majority of
the municipal obligations held by the Insured Series will be insured by the
following entities: Municipal Bond Insurance Association (MBIA), MBIA Insurance
Corporation (MBIA Corp.), AMBAC Indemnity Corporation (AMBAC), Financial
Guaranty Insurance Company (FGIC), Capital Guaranty Insurance Company (CGIC) and
Financial Security Assurance Inc. (FSA). Each of these entities is described
more fully below. The Series will not invest in obligations insured by The
Prudential Insurance Company of America (Prudential), except as may be permitted
by applicable law, nor will it settle any claim under portfolio insurance
provided by an insurer whose insurance obligations are reinsured by Prudential
Reinsurance Company or any other affiliate of Prudential for less than full
payment except in accordance with an exemptive order obtained from the
Securities and Exchange Commission (SEC).

Five major insurance companies, each liable for its proportionate share of
each policy written, formed the Municipal Bond Insurance Association (MBIA).
Each insurance company comprising MBIA is severally and not jointly obligated
under MBIA's insurance policies in the following respective percentages: The
Aetna Casualty and Surety Company (33%), Fireman's Fund Insurance Company (30%),
The Travelers Indemnity Company (15%), CIGNA Property and Casualty Company
(formerly Aetna

B-2
<PAGE>

Insurance Company) (12%) and The Continental Insurance Company (10%). The assets
of any one insurance company are not subject to claims which are an obligation
of another MBIA insurer. The total policyholders' surplus of the five member
companies was approximately $7.033 billion (unaudited) as of March 31, 1995.

MBIA Corp. (formerly known as Municipal Bond Investors Assurance
Corporation) is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. As of March 31, 1995, MBIA Corp. had, on a
statutory basis, total capital and surplus of approximately $1.1 billion
(unaudited), approximately $3.5 billion (unaudited) of admitted assets and
approximately $2.4 billion (unaudited) of liabilities. MBIA Inc. is not
obligated to pay the debts of or claims against MBIA Corp. MBIA Corp. is
domiciled in the state of New York and licensed to do business in all 50 states,
the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
the Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. MBIA Corp. has one European branch in the Republic of France.

FGIC Corporation, the owner of FGIC, is a wholly-owned subsidiary of General
Electric Capital Corporation. Neither FGIC Corporation nor General Electric
Capital Corporation is obligated to pay the debts of or claims against FGIC. As
of March 31, 1995, FGIC's total capital and surplus was approximately $963
million (unaudited).

AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets of approximately $2.204 billion (unaudited)
and statutory capital of approximately $1.237 billion (unaudited) as of March
31, 1995. Statutory capital consists of AMBAC policyholders' surplus and
statutory contingency reserve. AMBAC is a wholly-owned subsidiary of AMBAC,
Inc., a 100% publicly-held company.

CGIC is a wholly-owned subsidiary of Capital Guaranty Corporation which is a
publicly owned company whose shares are traded on the New York Stock Exchange.
The investors in Capital Guaranty Corporation are not obligated to pay the debts
of or claims against CGIC. As of March 31, 1995, CGIC had, on a statutory basis,
admitted total assets of approximately $310 million (unaudited) and total
policyholders surplus of approximately $201 million (unaudited).

FSA is a wholly-owned subsidiary of Financial Security Assurance Holdings,
Ltd. (Holdings), a New York Stock Exchange listed company. Holdings is owned
approximately 61.3% by US West Capital Corporation (US WEST), 9.5% by Fund
American Enterprises Holdings, Inc. (Fund American), and 7.5% by The Tokio
Marine and Fire Insurance Co., Ltd. (Tokio Marine). Neither US WEST, Fund
American, Tokio Marine nor any other shareholder of Holdings is obligated to pay
the debts of or claims against FSA. As of March 31, 1995, FSA had total assets
of approximately $1.096 billion (unaudited) and total shareholder's equity of
approximately $557 million (unaudited).

THE INTERMEDIATE SERIES

The Intermediate Series invests primarily in municipal obligations rated
"Baa" or "BBB" or better by Moody's or S&P, respectively, or a similar
nationally recognized statistical rating organization, with maturities of 3 to
15 years and with a dollar-weighted average portfolio maturity of more than 3
and less than 10 years. Under normal circumstances, at least 60% of the
municipal obligations purchased by the Series will be rated "A" or better by
Moody's or S&P. It is anticipated that this Series will offer generally lower
yields and be subject to less market risk than the High Yield Series or the
Insured Series.

GENERAL

The Prudential Investment Corporation (PIC or the Subadviser) maintains a
municipal credit unit which provides credit analysis and research on tax-exempt
fixed-income securities. The portfolio manager consults routinely with the
credit unit in managing the Fund's portfolios. The municipal credit unit, which
currently maintains a staff of 16 persons including 12 credit analysts, reviews
on an ongoing basis issuers of tax-exempt fixed-income obligations, including
prospective purchases and portfolio holdings of the Series. Credit analysts have
broad access to research and financial reports, data retrieval services and
industry analysts. They review financial and operating statements supplied by
state and local governments and other issuers of municipal securities to
evaluate revenue projections and the financial soundness of municipal issuers.
They study the impact of economic and political developments on state and local
governments, evaluate industry sectors and meet periodically with public
officials and other representatives of state and local governments and other
tax-exempt issuers to discuss such matters as budget projections, debt policy,
the strength of the regional economy and, in the case of revenue bonds, the
demand for facilities. They also make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.

Each Series may invest in municipal securities which are not rated if, based
upon a credit analysis by the Subadviser, the Subadviser believes that the
securities are of comparable quality to other municipal securities that the
Series may purchase. A description of the ratings is set forth under the heading
"Description of Security Ratings" in the Prospectus. The ratings of

B-3
<PAGE>
Moody's and S&P represent the respective opinions of those firms of the quality
of the securities each undertakes to rate. The ratings are general and are not
absolute standards of quality. In determining the suitability for investment in
a particular unrated security, the Subadviser will take into consideration asset
and debt service coverage, the purpose of the financing, the history of the
issuer, the existence of other rated securities of the issuer, any credit
enhancement by virtue of a letter of credit or other financial guaranty deemed
suitable by the investment adviser and other factors as may be relevant,
including comparability to other issuers.

After its purchase by a Series of the Fund, an issue of municipal bonds or
notes may cease to be rated or its rating(s) may be reduced. Neither event
requires the elimination of that obligation from the portfolio of the Series,
but each event will be a factor in determining whether the Series should
continue to hold that issue in its portfolio.

Each Series will attempt to invest substantially all of its net assets in
municipal securities. Under normal market conditions, each Series anticipates
that its assets will be invested so that at least 80% of its net assets will be
invested in municipal securities. Each Series will continuously monitor its
portfolio to ensure that the asset investment test is met at all times, except
for temporary defensive positions during abnormal market conditions.

A Series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax: (i) pending the investment or reinvestment in municipal securities
of the proceeds from the sale of shares of the Series or sales of portfolio
securities, (ii) in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors, or (iii) where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing. Investments in taxable securities may include: obligations
of the U.S. Government, its agencies or instrumentalities; commercial paper
rated in the two highest grades by either Moody's or S&P (A-1 and A-2, or P-1
and P-2, respectively), except that the Insured Series may invest only in
commercial paper rated A-1 or P-1; certificates of deposit and bankers'
acceptances; other debt securities rated within the three highest grades by
either Moody's or S&P or, if unrated, judged by the Subadviser to possess
comparable creditworthiness; and repurchase agreements with respect to any of
the foregoing investments. Each Series does not intend to invest more than 5% of
its assets in any one category of the foregoing taxable securities. A Series may
also hold its assets in other cash equivalents or in cash.

The Fund, as well as each Series of the Fund, is classified as "diversified"
under the Investment Company Act of 1940, as amended (the Investment Company
Act). This means that with respect to 75% of the assets of a Series, (i) the
Series may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. Government obligations) and (ii) the Series may not own
more than 10% of the outstanding voting securities of any one issuer. For
purposes of diversification and concentration under the Investment Company Act,
the identification of the issuer of the municipal obligation depends upon the
terms and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, the subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the non-governmental user, the non-governmental user is regarded
as the sole issuer. If, in either case, the creating government or another
entity guarantees an obligation, the guaranty may be regarded as a separate
security and treated as an issue of the guarantor.

Each Series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and premiums on the refunded bonds and a verification report
prepared by a party acceptable to a nationally recognized statistical rating
agency, or counsel to the holders of the refunded bonds, so verifies, (iv) the
escrow agreement provides that the issuer of the refunded bonds grants and
assigns to the escrow agent, for the equal and ratable benefit of the holders of
the refunded bonds, an express first lien on, pledge of and perfected security
interest in the escrowed securities and the interest income thereon, (v) the
escrow agent had no lien of any type with respect to the escrowed securities for
payment of its fees and expenses except to the extent there are excess
securities, as described in (ii) above, and (vi) the Series will not invest more
than 25% of its total assets in pre-refunded bonds of the same municipal issuer.

Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a Series may own so long as, with respect to 75% of its assets,
it does not invest more than 5% of its total assets in the securities of that
issuer (except obligations issued or guaranteed by the U.S. Government). As for
the other 25% of the assets of a Series not subject to the limitation described
above, there is no minimum limitation as to the number of issuers in whose
securities these assets may be invested.

B-4
<PAGE>
The Fund expects that normally a Series will not invest more than 25% of its
total assets in any one sector of the municipal obligations market, including:
hospitals, nursing homes, retirement facilities and other health facilities;
turnpikes and toll roads; ports and airports; colleges and universities; state
and local housing finance authorities; obligations of municipal utilities
systems; or industrial development and pollution control bonds. However,
depending upon prevailing market conditions, a Series may have more than 25% of
its total assets invested in any one sector of the municipal obligations market.
Each of the foregoing types of investments might be subject to particular risks
which, to the extent that a Series is concentrated in such investments, could
affect the value or liquidity of the Series' portfolio.

A portion of the dividends and distributions paid on the shares of each
Series of the Fund may be treated as a preference item for purposes of the
alternate minimum tax for individuals and corporations. Such treatment may cause
certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. The Fund's Subadviser
intends (except with respect to the High Yield Series) to invest in securities
so as to minimize the portion of such dividends or distributions that are
treated as a tax preference item. In addition, corporations are subject to an
alternative minimum tax which treats as a tax preference item 75% of a
corporation's adjusted current earnings. A corporation's adjusted current
earnings would include interest paid on municipal obligations and dividends paid
on shares of the Fund. See "Taxes, Dividends and Distributions."

As in the past, proposals may be submitted to Congress in the future with
the intended effect of eliminating or further restricting the issuance of
municipal obligations or the federal tax exemption for interest paid on
municipal obligations. In that event, the Fund may re-evaluate its investment
objectives.

Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agents for their customers on securities
exchanges, municipal obligations are customarily purchased from or sold to
dealers who are selling or buying for their own account. Most municipal
obligations are not required to be registered with or qualified for sale by
federal or state securities regulators. Since there are large numbers of
municipal obligation issues of many different issuers, most issues do not trade
on any single day. On the other hand, most issues are always marketable, since a
major dealer will normally, on request, bid for any issue, other than obscure
ones. Regional municipal securities dealers are frequently more willing to bid
on issues of municipalities in their geographic area.

Although almost all municipal obligations are marketable, the structure of
the market introduces its own element of risk; a seller may find, on occasion,
that dealers are unwilling to make bids for certain issues that the seller
considers reasonable. If the seller is forced to sell, he or she may realize a
capital loss that would not have been necessary in different circumstances.
Because the net asset value of a Series' shares reflects the degree of
willingness of dealers to bid for municipal obligations, the price of a Series'
shares may be subject to greater fluctuation than shares of other investment
companies with different investment policies. See "Net Asset Value."

MUNICIPAL SECURITIES

Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market.

MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works and gas and electric utilities.
Municipal bonds also may be issued in connection with the refunding of
outstanding obligations and obtaining funds to lend to other public institutions
or for general operating expenses.

The two principal classifications of municipal bonds are "general
obligation" and "revenue." General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.

Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for the payment.

B-5
<PAGE>
MUNICIPAL NOTES. Municipal notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include:

1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.

2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.

3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.

4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association (GNMA) to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.

TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.

FLOATING RATE AND VARIABLE RATE SECURITIES. Each Series may invest more than
5% of its assets in floating rate and variable rate securities, including
participation interests therein and inverse floaters. Floating or variable rate
securities often have a rate of interest that is set as a specific percentage of
a designated base rate, such as the rate on Treasury Bonds or Bills or the prime
rate at a major commercial bank. These securities also allow the holder to
demand payment of the obligation on short notice at par plus accrued interest,
which amount may be more or less than the amount the holder paid for them.
Variable rate securities provide for a specified periodic adjustment in the
interest rate. The interest rate on floating rate securities changes whenever
there is a change in the designated base interest rate. Floating rate and
variable rate securities typically have long maturities but afford the holder
the right to demand payment at earlier dates. Such floating rate and variable
rate securities will be treated as having maturities equal to the period of
adjustment of the interest rate.

An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.

LIQUIDITY PUTS. Each Series may purchase and exercise puts on municipal
bonds and notes. Puts give the Series the right to sell securities held in the
portfolio at a specified exercise price on a specified date. Puts may be
acquired to reduce the volatility of the market value of securities subject to
puts. The acquisition of a put may involve an additional cost to the Series
compared to the cost of securities with similar credit ratings, stated
maturities and interest coupons but without applicable puts. This increased cost
may be paid either by way of an initial or periodic premium for the put or by
way of a higher purchase price for securities to which the put is attached. In
addition, there is a credit risk associated with the purchase of puts in that
the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, each Series will acquire a put only under the
following circumstances: (i) the put is written by the issuer of the underlying
security and the security is rated within the quality grades in which the Series
is permitted to invest; (ii) the put is written by a person other than the
issuer of the underlying security and that person has securities outstanding
which are rated within the quality grades in which the Series is permitted to
invest; or (iii) the put is backed by a letter of credit or similar financial
guaranty issued by a person having securities outstanding which are rated within
the quality grades in which the Series is permitted to invest.

Puts will be valued at an amount equal to the difference between the value
of the underlying security taking the put into consideration and the value of
the same or a comparable security without taking the put into consideration.

LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Series may lend its portfolio securities to brokers, dealers and financial
institutions, provided that outstanding loans do not exceed in the aggregate 33%
of the value of the Series' total assets and provided that such loans are
callable at any time by the Series and are at all times secured by cash or

B-6
<PAGE>
equivalent collateral that is equal to at least the market value, determined
daily, of the loaned securities. The advantage of such loans is that the Series
continues to receive payments in lieu of the interest and dividends on the
loaned securities, while at the same time earning interest either directly from
the borrower or on the collateral which will be invested in short-term
obligations.

A loan may be terminated by the borrower on one business day's notice or by
the Series any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Series can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Fund's Trustees. On
termination of the loan, the borrower is required to return the securities to
the Series, and any gain or loss in the market price during the loan would inure
to the Series.

Since voting or consent rights which accompany loaned securities pass to the
borrower, the Series will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Series' investment in the
securities which are the subject of the loan. The Series will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.

FUTURES CONTRACTS. Each Series may engage in transactions in financial
futures contracts as a hedge against interest rate related fluctuations in the
value of securities which are held in the investment portfolio or which the
Series intends to purchase. A clearing corporation associated with the
commodities exchange on which a futures contract trades assumes responsibility
for the completion of transactions and guarantees that open futures contracts
will be closed. Although interest rate futures contracts call for actual
delivery or acceptance of debt securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.

When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin." Subsequent payments to and from the broker, called
"variation margin," will be made on a daily basis as the price of the underlying
security or index fluctuates, making the long and short positions in the futures
contracts more or less valuable, a process known as "marking to market." In the
case of options on futures contracts, the holder of the option pays a premium
and receives the right, upon exercise of the option at a specified price during
the option period, to assume a position in the futures contract (a long position
if the option is a call and a short position if the option is a put). If the
option is exercised by the holder before the last trading day during the option
period, the option writer delivers the futures position, as well as any balance
in the writer's futures margin account. If it is exercised on the last trading
day, the option writer delivers to the option holder cash in an amount equal to
the difference between the option exercise price and the closing level of the
relevant index on the date the option expires.

When a Series purchases a futures contract, it will maintain an amount of
cash, cash equivalents (E.G., commercial paper and daily tender adjustable rate
notes) or liquid, high-grade, fixed-income securities in a segregated account
with the Fund's Custodian, so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the market
value of the futures contract, thereby ensuring that the use of such futures
contract is unleveraged. A Series that has sold a futures contract may "cover"
that position by owning the instruments underlying the futures contract or by
holding a call option on such futures contract. A Series will not sell futures
contracts if the value of such futures contracts exceeds the total market value
of the securities of the Series. It is not anticipated that transactions in
futures contracts will have the effect of increasing portfolio turnover.

OPTIONS ON FINANCIAL FUTURES. Each Series may purchase call options and
write put and call options on futures contracts and enter into closing
transactions with respect to such options to terminate an existing position.
Each Series will use options on futures in connection with hedging strategies.

An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently options can be
purchased or written with

B-7
<PAGE>
respect to futures contracts on U.S. Treasury Bonds, among other fixed-income
securities, and on municipal bond indices on the Chicago Board of Trade. As with
options on debt securities, the holder or writer of an option may terminate his
or her position by selling or purchasing an option of the same series. There is
no guaranty that such closing transactions can be effected.

When a Series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
Series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option. In instances involving the purchase of a call
option on a futures contract, the Fund will deposit in a segregated account with
the Fund's Custodian an amount in cash, cash equivalents or liquid, high-grade,
fixed-income securities equal to the market value of the obligation underlying
the futures contract, less any amount held in the initial and variation margin
accounts.

LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator," subject to
compliance with certain conditions. The exemption is conditioned upon a Series'
purchasing and selling futures contracts and options thereon for BONA FIDE
hedging transactions, except that a Series may purchase and sell futures
contracts and options thereon for any other purpose, to the extent that the
aggregate initial margin and option premiums do not exceed 5% of the liquidation
value of the Series' total assets. Each Series will use financial futures in a
manner consistent with these requirements. Each Series will continue to invest
at least 80% of its net assets in municipal bonds and municipal notes except in
certain circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objectives and Policies." A Series may not enter into
futures contracts if, immediately thereafter, the sum of the amount of initial
and net cumulative variation margin on outstanding futures contracts, together
with premiums paid on options thereon, would exceed 20% of the total assets of
the Series.

RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Hedging and Income Enhancement Strategies--Futures Contracts
and Options Thereon" in the Prospectus, there are a number of other risks
associated with the use of financial futures for hedging purposes.

Each Series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the Series would continue to be required to make daily
cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.

The hours of trading of interest rate futures contracts may not conform to
the hours during which the Series may trade municipal securities. To the extent
that the futures markets close before the municipal securities market,
significant price and rate movements can take place that cannot be reflected in
the futures markets on a day-to-day basis.

RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a Series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a Series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options
with the result that a Series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the

B-8
<PAGE>
facilities of an exchange may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange could continue to
be exercisable in accordance with their terms.

There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.

REPURCHASE AGREEMENTS

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties, under the
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.

The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the Fund
may be aggregated with those of such investment companies and invested in one or
more repurchase agreements. Each fund participates in the income earned or
accrued in the joint account based on the percentage of its investment.

PORTFOLIO TURNOVER

A Series may engage in short-term trading consistent with its investment
objective. Portfolio transactions will be undertaken in response to anticipated
movements in the general level of interest rates. Municipal securities or
futures contracts may be sold in anticipation of a market decline (resulting
from a rise in interest rates) or purchased in anticipation of a market rise
(resulting from a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the investment adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, due to factors
such as changes in the overall demand for or supply of various types of
municipal securities or changes in the investment objectives of investors.

Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities.

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Series' outstanding voting securities. A "majority of the
outstanding voting securities" of a Series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.

Each Series may not:

1. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions and for margin
payments in connection with transactions in financial futures contracts and
options thereon).

2. Make short sales of securities or maintain a short position.

3. Issue senior securities, borrow money or pledge its assets, except that
each Series may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes and to
take advantage of investment opportunities or for the clearance of transactions.
The Series may pledge up to 20% of the value of its total assets to secure such
borrowings. For purposes of this restriction, the preference as to shares of a
Series in liquidation and as to dividends over all other Series of the Fund with
respect to assets specifically allocated to that Series, the purchase or sale of
securities on a when-issued or delayed delivery basis, the purchase and sale of
financial futures contracts and collateral arrangements with respect thereto and
obligations of the Series to Trustees, pursuant to deferred compensation
arrangements, are not deemed to be the issuance of a senior security or a pledge
of assets.

B-9
<PAGE>
4. Purchase any security if as a result, with respect to 75% of the total
assets of the Series, more than 5% of the total assets of the Series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and interest
by the U.S. Government or its agencies or instrumentalities).

5. Purchase securities (other than municipal obligations and obligations
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities) if, as a result of such purchase, 25% or more of the total
assets of the Series (taken at current market value) would be invested in any
one industry. (For purposes of this restriction, industrial development bonds,
where the payment of the principal and interest is the ultimate responsibility
of companies within the same industry, are grouped together as an "industry.")

6. Buy or sell commodities or commodity contracts, except financial futures
contracts and options thereon.

7. Buy or sell real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and securities of
companies which invest or deal in real estate.

8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.

9. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.

10. Purchase any security if as a result the Series would then have more
than 5% of its total assets (taken at current value) invested in industrial
development revenue bonds where the private entity on whose credit the security
is based, directly or indirectly, is less than three years old (including
predecessors), unless the security purchased by the Series is rated by a
nationally recognized rating service.

11. Invest in interests in oil, gas or other mineral exploration or
development programs.

12. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Series' total assets).

13. Purchase or write puts, calls or combinations thereof except as
described in the Prospectus and this Statement of Additional Information with
respect to puts and options on futures contracts.

14. Invest for the purpose of exercising control or management of another
company.

In order to comply with certain state "Blue Sky" restrictions, the Fund will
not as a matter of operating policy:

1. Purchase securities which are secured by real estate or securities of
companies which invest or deal in real estate unless such securities are readily
marketable; and invest in oil, gas and mineral leases;

2. Purchase warrants if as a result a Series would then have more than 5%
of its total assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of a Series' total assets (determined at the time
of investment). For the purpose of this limitation, warrants acquired in units
or attached to securities are deemed to be without value;

3. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer or Trustee of the Fund or officer or director of the Manager or
Subadviser owns more than 1/2 of 1% of the outstanding securities of the issuer,
and such officers, Trustees and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of the issuer; and

4. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Series' assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.

B-10
<PAGE>
TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------------- --------------- -------------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (70) Trustee President and Director of BMC Fund, Inc., a closed-end investment
c/o Prudential Mutual Fund company; prior thereto, Vice Chairman of Broyhill Furniture Industries,
Management, Inc. Inc.; Certified Public Accountant; Secretary and Treasurer of Broyhill
One Seaport Plaza Family Foundation, Inc.; Member of the Board of Trustees of Mars Hill
New York, NY College; President, Treasurer and Director of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.; President and Director of
Global Utility Fund, Inc.; Director of The Global Government Plus Fund,
Inc. and The Global Total Return Fund, Inc.
Donald D. Lennox (76) Trustee Chairman (since February 1990) and Director (since April 1989) of
c/o Prudential Mutual Fund International Imaging Materials, Inc.; Retired Chairman, Chief
Management, Inc. Executive Officer and Director of Schlegel Corporation (industrial
One Seaport Plaza manufacturing) (March 1987-February 1989); Director of Gleason
New York, NY Corporation, Personal Sound Technologies, Inc., The Global Government
Plus Fund, Inc. and The High Yield Income Fund, Inc.
Douglas H. McCorkindale (56) Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since March
c/o Prudential Mutual Fund 1984); Director, Continental Airlines, Inc., Gannett Co., Inc.,
Management, Inc. Frontier Corporation and The Global Government Plus Fund, Inc.
One Seaport Plaza
New York, NY
Thomas T. Mooney (53) Trustee President of the Greater Rochester Metro Chamber of Commerce; formerly
c/o Prudential Mutual Fund Rochester City Manager; Trustee of Center for Governmental Research,
Management, Inc. Inc.; Director of Blue Cross of Rochester, Monroe County Water
One Seaport Plaza Authority, Rochester Jobs, Inc., Executive Service Corps of Rochester,
New York, NY Monroe County Industrial Development Corporation, Northeast Midwest
Institute, First Financial Fund, Inc., The Global Government Plus Fund,
Inc., The Global Total Return Fund, Inc. and The High Yield Plus Fund,
Inc.
*Richard A. Redeker (51) President and President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza Trustee Prudential Mutual Fund Management, Inc. (PMF); Executive Vice
New York, NY President, Director and Member of Operating Committee (since October
1993), Prudential Securities Incorporated (Prudential Securities);
Director (since October 1993), Prudential Securities Group, Inc.;
Executive Vice President (since January 1994), The Prudential
Investment Corporation; Director (since January 1994), Prudential
Mutual Fund Distributors, Inc. (PMFD) and Director (since January
1994), Prudential Mutual Fund Services, Inc. (PMFS); formerly Senior
Executive Vice President and Director of Kemper Financial Services,
Inc. (September 1978-September 1993); President and Director of The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc.
and The High Yield Income Fund, Inc.
Louis A. Weil, III (54) Trustee Publisher and Chief Executive Officer, Phoenix Newspapers, Inc. (since
c/o Prudential Mutual Fund August 1991); Director of Central Newspapers, Inc. (since September
Management, Inc. 1991); prior thereto, Publisher of Time Magazine (May 1989-March 1991);
One Seaport Plaza formerly President, Publisher and CEO of The Detroit News (February
New York, NY 1986-August 1989); formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The Global Government Plus
Fund, Inc.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential
Securities or PMF.
</TABLE>

B-11
<PAGE>

Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors Inc.

The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.

Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the Manager.

The Fund pays each of its Trustees who is not an affiliated person of PMF
annual compensation of $9,000, in addition to certain out-of-pocket expenses.

Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Trustee's fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.

The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended April 30, 1995 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1994.

B-12
<PAGE>
COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- ----------------------------------- ------------ ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee $ 9,000 None N/A $ 159,000 (20)*
Donald D. Lennox--Trustee 9,000 None N/A 90,000 (10)*
Douglas H. McCorkindale--Trustee 9,000 None N/A 60,000 (7)*
Thomas T. Mooney--Trustee 9,000 None N/A 126,000 (17)*
Louis A. Weil III--Trustee 9,000 None N/A 97,500 (12)*
<FN>
- ------------------------
* Indicates number of funds in Fund Complex to which aggregate compensation
relates.
</TABLE>

As of June 16, 1995, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of the Fund.

As of June 16, 1995, Prudential Securities was record holder for other
beneficial owners of 8,810,084 Class A shares (or 75% of the outstanding Class A
shares) of the High Yield Series, 4,230,357 Class A shares (or 55% of the
outstanding Class A shares) of the Insured Series and 766,278 Class A shares (or
71% of the outstanding Class A shares) of the Intermediate Series; 64,202,536
Class B shares (or 75% of the outstanding Class B shares) of the High Yield
Series, 21,376,409 Class B shares (or 42% of the outstanding Class B shares) of
the Insured Series and 2,443,934 Class B shares (or 52% of the outstanding Class
B shares) of the Intermediate Series, and 358,021 Class C shares (or 98% of the
outstanding Class C shares) of the High Yield Series, 30,591 Class C shares (or
63% of the outstanding Class C shares) of the Insured Series and 14,410 Class C
shares (or 90% of the outstanding Class C shares) of the Intermediate Series. In
the event of any meetings of shareholders, Prudential Securities will forward,
or cause the forwarding of, proxy material to the beneficial owners for which it
is the record holder.

As of June 16, 1995, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Gary Oliver, Patricia Oliver CONS, Property of Laura Lee Oliver,
43553 SE Marmot Road, Sandy, OR 97055-9701, who held 67,390 Class A shares of
the Intermediate Series (6.2%); Harold L. Corwin & Barbara D. Corwin JTWROS, P O
Box 119, Vancouver, WA 98666-0119, who held 112,830 Class A shares of the
Intermediate Series (10.4%); Frank R. Grabenhofer, Loretta M. Grabenhofer JTTEN,
15606 Plum Tree Drive, Orlando Park, IL 60462-5987, who held 1,613 Class C
shares of the Intermediate Series (10%); Michael B Wilde & Christine Wilde
JTTEN, 11375 Pepper Circle, Sandy, UT 84092-4972, who held 14,410 Class C shares
of the Intermediate Series (90%); Octavio Miranti C/F, Michael Artie Miranti,
Under the NY UGMA, 67-38 Selfridge Street, Forest Hills, NY 11375-5739, who held
2,904 Class C shares of the Insured Series (6%); Laurel A. Makowski, 24
MacDonald Drive, Nashua NH 03062-1854, who held 2,886 Class C shares of the
Insured Series (6%); Norville W. Jackson, Charlotte W. Jackson JT TEN, RR1 Box
121, Saint Mary's WV 26170-9601, who held 2,443 Class C shares of the Insured
Series (5%); Pamela Chase Wickstrom, General Delivery, Fruitland, UT 84027-9999,
who held 2,934 Class C shares of the Insured Series (6%); Jessie L. Jerkatis &
Robert L. Jerkatis & Julia A. Mankus JTWROS, 18215 Springfield Ave., Homewood,
IL 60430-2625, who held 4,649 Class C shares of the Insured Series (9.5%);
Robert R. Reis & Linda M. Reis JTTEN, 2659 S Trenton Ave, Tulsa, OK 74114-2727,
who held 6,412 Class C shares of the Insured Series (13%); Keith M. Benedict,
Rose Benedict CO-TTEES, Benedict Family Trust, UA DTD 11/17/93, 7939 Neva Ave,
Burbank, IL 60459-1614, who held 3,776 Class C shares of the Insured Series
(7.7%); William R. Keeler TTEE of the William R. Keeler 1991 Trust, DTD 1/28/91,
1531 Foster Drive, Reno, NV 89509-1211, who held 46,850 Class C shares of the
High Yield Series (12.8%); James Rohde, 333 Heights Blvd. Houston, TX
77007-2517, who held 62,444 Class C shares of the High Yield Series (17.1%);
Martha P. Hughes TTEE, UW Alphonse Pellegrini RES, 2358 Magnolia Court E,
Buffalo Grove, IL 60089-6610, who held 18,868 Class C shares of the High Yield
Series (5.1%) and Darrell L. Uher, 14024 Wind Mountain Road NE, Albuquerque, NM
87112-6561, who held 46,296 Class C shares of the High Yield Series (12.6%).

B-13
<PAGE>
MANAGER

The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is
Managed--Manager" in the Prospectus. As of May 31, 1995, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $49 billion and, according to the Investment Company Institute,
as of December 31, 1994, the Prudential Mutual Funds were the 12th largest
family of mutual funds in the United States.

Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each Series and the composition of each Series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's transfer and
dividend disbursing agent. The management services of PMF for the Fund are not
exclusive under the terms of the Management Agreement and PMF is free to, and
does, render management services to others.

For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each Series up
to $1 billion and .45 of 1% of the average daily net assets in excess of $1
billion. Effective January 1, 1995, PMF has agreed to waive 10% of its
management fee (.05 of 1% of average net assets, as annualized). Prior to June
1, 1995, the fee was at an annual rate of .50 of 1% of the average daily net
assets of each Series. The fee is computed daily and payable monthly. The
Management Agreement also provides that, in the event the expenses of the Fund
(including the fees of PMF, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
April 30, 1995. Currently, the Fund believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of a Series' average daily
net assets up to $30 million, 2% of the next $70 million of such assets and
1 1/2% of such assets in excess of $100 million.

In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:

(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;

(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and

(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.

B-14
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to such contract or interested persons of such
parties as defined in the Investment Company Act, on May 3, 1995 and by the
shareholders of each Series on February 19, 1988.

For the fiscal year ended April 30, 1995, PMF received a management fee of
$5,279,570 (net of waiver of $172,278), $3,392,455 (net of waiver of $106,923)
and $329,452 (net of waiver of $10,233) on behalf of the High Yield Series,
Insured Series and Intermediate Series, respectively. For the fiscal year ended
April 30, 1994, PMF received a management fee of $5,928,174, $4,200,554 and
$323,960 on behalf of the High Yield Series, Insured Series and Intermediate
Series, respectively. For the fiscal year ended April 30, 1993, PMF received a
management fee of $4,624,309, $3,652,176 and $239,872 on behalf of the High
Yield Series, Insured Series and Intermediate Series, respectively, and waived
management fees of $20,291 for the Intermediate Series.

PMF has entered into a Subadvisory Agreement with PIC (the Subadviser). The
Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services.

Peter J. Allegrini oversees the municipal bond team at PIC. The portfolio
manager analyzes the risks and negotiates credit terms for high yield municipal
bonds to build a well-diversified portfolio of bonds that, in his opinion, have
low prices and good potential to appreciate. Then, the portfolio manager and a
credit team monitor each issuer's ability to pay interest and principal on a
timely basis, under various economic conditions. The portfolio manager seeks to
avoid making short-term gains based on interest rate movements and will shift
maturities to capture good relative returns.

The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 3,
1995, and by the shareholders of each Series on February 19, 1988.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.

The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1994, is one of the
largest financial institutions in the world and the largest insurance company in
North America. Prudential has been engaged in the insurance business since 1875.
In July 1994, INSTITUTIONAL INVESTOR ranked Prudential the second largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1993.

DISTRIBUTOR

Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of each
Series of the Fund. Prudential Securities Incorporated (Prudential Securities or
PSI), One Seaport Plaza, New York, New York 10292, acts as the distributor of
the Class B and Class C shares of the Fund.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed--Distributor"
in the Prospectus.

Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect

B-15
<PAGE>
financial interest in the operation of the Class A or Class B Plan or in any
agreement related to either Plan (the Rule 12b-1 Trustees), at a meeting called
for the purpose of voting on each Plan, adopted a new plan of distribution for
the Class A shares of the Fund (the Class A Plan) and approved an amended and
restated plan of distribution with respect to the Class B shares of the Fund
(the Class B Plan). On February 9, 1993, the Trustees, including a majority of
the Rule 12b-1 Trustees, at a meeting called for the purpose of voting on each
Plan, approved the continuance of the Plans and Distribution Agreements and
approved modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .50 of 1% (including the service fee) of the average daily net assets
of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. On May 4,
1993, the Trustees, including a majority of the Rule 12b-1Trustees, at a meeting
called for the purpose of voting on each Plan, adopted a plan of distribution
for the Class C shares of the Fund and approved further amendments to the plans
of distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Trustees, including a majority of the Rule 12b-1 Trustees, on
May 3, 1995. The Class A Plan, as amended, was approved by the Class A and Class
B shareholders of each Series of the Fund and the Class B Plan, as amended, was
approved by the Class B shareholders of each Series on July 19, 1994. The Class
C Plan was approved by the sole shareholder of Class C shares of each Series on
August 1, 1994.

CLASS A PLAN. For the fiscal year ended April 30, 1995, PMFD received
payments of $65,207, $39,472 and $7,742 on behalf of the High Yield Series,
Insured Series and Intermediate Series, respectively, under the Class A Plan.
These amounts were primarily for payment of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
April 30, 1995, PMFD also received approximately $164,400, $56,600 and $40,200
on behalf of the High Yield Series, Insured Series and Intermediate Series,
respectively, in initial sales charges.

CLASS B PLAN. For the fiscal year ended April 30, 1995, the Distributor
received $5,120,663, $3,301,184 and $300,869 on behalf of the High Yield Series,
Insured Series and Intermediate Series, respectively, under the Class B Plan.
For the fiscal year ended April 30, 1995, the Distributor spent approximately
the following amounts on behalf of each Series of the Fund:

<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
COMMISSION PRUSEC FOR TOTAL
PAYMENTS TO COMMISSION AMOUNT
FINANCIAL PAYMENTS TO SPENT BY
ADVISERS OF OVERHEAD COSTS REPRESENTATIVES DISTRIBUTOR
PRUDENTIAL OF PRUDENTIAL AND ON BEHALF OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- ---------------------- ---------------- -------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
High Yield Series $ 21,000 $ 1,853,800 $1,393,100 $ 295,700 $ 3,563,600
Insured Series $ 22,200 $ 766,000 $ 267,000 $ 464,700 $ 1,519,900
Intermediate Series $ 6,000 $ 98,000 $ 82,800 $ 85,600 $ 272,400
<FN>
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by shareholders upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended April 30, 1995, Prudential
Securities received approximately $2,350,000, $1,588,400 and $234,600 on behalf
of the High Yield Series, Insured Series and Intermediate Series, respectively,
in contingent deferred sales charges attributable to Class B shares.

CLASS C PLAN. For the fiscal period ended April 30, 1995, the Distributor
received $7,743, $1,254 and $158 on behalf of the High Yield Series, Insured
Series and Intermediate Series, respectively, under the Class C Plan.

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by shareholders upon certain redemptions of Class C shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. These amounts were primarily for payment of
commissions to financial advisers and other persons who sell Class C shares. For
the fiscal period ended April 30, 1995, Prudential Securities received
approximately $1,730, $61 and $80 on behalf of the High Yield Series, Insured
Series and Intermediate Series, respectively, in contingent deferred sales
charges attributable to Class C shares.

B-16
<PAGE>
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan) and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.

Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report will include an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 3, 1995.

NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a Series may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of each Series of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 3, 1990. Without
admitting or denying the allegations, PSI consented to a reprimand, agreed to
cease and desist from future violations, and to provide voluntary donations to
the State of Texas in the aggregate of $1,500,000. The firm agreed to suspend
the creation of new customer accounts, the general solicitation of new accounts,
and the offer for sale of securities in or from PSI's North Dallas office to new
customers during a period of twenty consecutive business days, and agreed that
its other Texas offices would be subject to the same restrictions for a period
of five consecutive business days. PSI also agreed to institute training
programs for its securities salesmen in Texas.

On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI

B-17
<PAGE>
agreed to add the sum of $330,000,000 to the fund established by the SEC and
executed a stipulation providing for a reversion of such funds to the United
States Postal Inspection Service. PSI further agreed to obtain a mutually
acceptable outside director to sit on the Board of Directors of PSG and the
Compliance Committee of PSI. The new director will also serve as an independent
"ombudsman" whom PSI employees can call anonymously with complaints about ethics
and compliance. Prudential Securities shall report any allegations or instances
of criminal conduct and material improprieties to the new director. The new
director will submit compliance reports which shall identify all such
allegations or instances of criminal conduct and material improprieties every
three months for a three-year period.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities and
financial futures for each Series of the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. The term "Manager" as used in this section
includes the Subadviser. Purchases and sales of securities on a securities
exchange, which are not expected to be a significant portion of the portfolio
securities of any Series, are effected through brokers who charge a commission
for their services. Orders may be directed to any broker or futures commission
merchant including, to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.

In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in over-the-counter securities with Prudential Securities
acting as a market-maker, and it will not execute a negotiated trade with
Prudential Securities if the execution involves Prudential Securities' acting as
principal with respect to any part of the Fund's order.

In placing orders for portfolio securities for the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. These research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. These services are used by the
Manager in connection with all of its investment activities, and some of these
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing these services may be selected for
the execution of transactions of these other accounts, whose aggregate assets
may be far larger than the Fund, and the services furnished by the brokers,
dealers or futures commission merchants may be used by the Manager in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The policy of the Manager is to pay higher
commissions to brokers, other than Prudential Securities, for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, the Manager is authorized to
pay higher commissions on brokerage transactions for the Fund to brokers other
than Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Trustees from time to time as
to the extent and continuation of this practice. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Trustees. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the Series
ability to pursue their present investment objectives. However, in the future in
other circumstances, the Series may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must not exceed certain rates set forth in the
Investment Company Act and must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased

B-18
<PAGE>
or sold on an exchange during a comparable period of time. This standard would
allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the non-
interested Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable law.

During the fiscal years ended April 30, 1995, 1994 and 1993 the Fund paid
$34,125, $8,925 and $23,012, respectively, in brokerage commissions on certain
options and/or futures transactions. No such brokerage commissions were paid to
Prudential Securities.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of each Series of the Fund may be purchased at a price equal to the
next determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.

Each class of shares represents an interest in the same portfolio of
investments of a Series and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
Distribution and Service Plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at April 30, 1995, the maximum offering price of the Fund's shares is as
follows:

<TABLE>
<CAPTION>
HIGH YIELD INSURED INTERMEDIATE
CLASS A SERIES SERIES SERIES
----------- --------- ------------
<S> <C> <C> <C>
Net asset value and redemption price per
Class A share.............................. $10.72 $ 10.83 $10.45
Maximum sales charge (3% of offering
price)..................................... .33 .33 .32
----------- --------- ------
Offering price to public..................... $11.05 $ 11.16 $10.77
----------- --------- ------
----------- --------- ------

CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $10.72 $ 10.84 $10.45
----------- --------- ------
----------- --------- ------

CLASS C
Net asset value, redemption price and
offering price to public per Class C
share*..................................... $10.72 $ 10.84 $10.45
----------- --------- ------
----------- --------- ------
<FN>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
</TABLE>

REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charge applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.

B-19
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:

(a) an individual;

(b) the individual's spouse, their children and their parents;

(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);

(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and

(g) one or more employee benefit plans of a company controlled by an
individual.

In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
shareholder is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investors' holdings.

LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of a
Series of the Fund and shares of other Prudential Mutual Funds. All shares of
the Fund and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) which were
previously purchased and are still owned are also included in determining the
applicable reduction. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The Distributor must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charge will be granted subject to confirmation
of the investor's holdings. Letters of Intent are not available to individual
participants in any retirement or group plans.

A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.

The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the sales charge actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.

B-20
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.

<CAPTION>
The Transfer Agent reserves the right to request such additional documents as it may deem
appropriate.
</TABLE>

QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of a Series of the Fund owned by you in a
single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of the Fund and the following year purchased an additional
$450,000 of Class B shares with the result that the aggregate cost of your Class
B shares of the Fund following the second purchase was $550,000, the quantity
discount would be available for the second purchase of $450,000 but not for the
first purchase of $100,000. The quantity discount will be imposed at the
following rates depending on whether the aggregate value exceeded $500,000 or $1
million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR REDEMPTION
PROCEEDS
--------------------------------------------
YEAR SINCE PURCHASE PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- --------------------------------------------- ----------------------- -----------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such dividend or
distribution at net asset value by returning the check or the proceeds to the
Transfer Agent within 30 days after the payment date. Such investment will be
made at the net asset value per share next determined after receipt of the check
or proceeds by the Transfer Agent. Such shareholder will receive credit for any
contingent deferred sales charge paid in connection with the amount of proceeds
being reinvested.

B-21
<PAGE>
EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws.

It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.

Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.

At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund,

B-22
<PAGE>

respectively, without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B or Class C Exchange Privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class B
or Class C shares, respectively, of other funds without being subject to any
CDSC.

Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)

The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 years.............................. $ 110 $ 165 $ 220 $ 275
20 years.............................. 176 264 352 440
15 years.............................. 296 444 592 740
10 years.............................. 555 833 1,110 1,388
5 years.............................. 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- ------------------------------
(1)Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Series of the Fund monthly by authorizing his or her
bank account or Prudential Securities account (including a Command Account) to
be debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to ASAP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."

B-23
<PAGE>
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.

NET ASSET VALUE

The net asset value per share is the net worth of a Series (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities of each Series of the Fund. The
Trustees have fixed the specific time of day for the computation of each Series'
net asset value to be at 4:15 P.M., New York time. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Series' shares shall be determined at a time between such closing and 4:15 P.M.,
New York time.

Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Futures contracts are valued daily at 4:15 P.M.,
New York time, at market quotations provided by the Chicago Board of Trade.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities and other assets of the Fund for
which market quotations are not readily available. Securities for which market
quotations are not readily available are valued at fair value in accordance with
procedures adopted by the Trustees. Under these procedures, the Manager values
municipal securities on the basis of valuations provided by a pricing service
which uses information with respect to transactions in securities, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining value. This service is furnished
by Kenny-S&P, a division of J.J. Kenny Information Systems. Reliable market
quotations generally are not readily available for purposes of valuing municipal
securities. As a result, depending on the particular municipal securities owned
by the Fund, it is likely that most of the valuations for such securities will
be based upon fair value determined under the foregoing procedures. Short-term
investments are valued at amortized cost if their original term to maturity was
less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this valuation is determined not to represent fair value by
the Trustees.

TAXES, DIVIDENDS AND DISTRIBUTIONS

Each Series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. In general, such election relieves each Series (but
not its shareholders) from paying federal income tax on income which is
distributed to shareholders, provided that it distributes at least 90% of its
net investment income and short-term capital gains, and permits net capital
gains of the Series (I.E., the excess of net long-term capital gains over net
short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Series are held.

Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any Series of the
Fund for the taxable year are generally not subject to federal income tax (see
the discussion of the alternative minimum tax below). Distributions of taxable
net investment income and of the excess of net short-term capital gain over net
long-term capital loss are taxable to shareholders as ordinary income.

The federal alternative minimum tax may affect corporations and other
shareholders in the Fund. Interest on certain categories of tax-exempt
obligations (I.E., most private activity bonds issued after August 7, 1986) will
constitute a preference item for purposes of the alternative minimum tax. The
Fund has invested in such obligations and, therefore, receives interest that
will be treated as a preference item. Preference items received by a Series will
be allocated between the Series and its

B-24
<PAGE>
shareholders. It is possible that a Series will incur some liability under the
alternative minimum tax to the extent preference items are allocated to it.
Corporate shareholders in any of the Series will also have to take into account
the adjustment for current earnings for minimum tax purposes.

The alternative minimum tax is a tax equal to 20% of a corporation's
so-called alternative minimum taxable income and 26% of a non-corporate
taxpayer's so-called alternative minimum taxable income up to $175,000 and 28%
of such income in excess of $175,000. Individual taxpayers may reduce their
alternative minimum taxable income by a standard exemption amount of $45,000
($33,750 if filing singly), although the exemption amount is reduced for
taxpayers with adjusted gross incomes of more than $150,000 ($112,500 if filing
singly). Alternative minimum taxable income is determined by adding to the
taxpayer's regularly-computed taxable income items of tax preference and certain
other adjustments. All shareholders should consult their tax advisers to
determine whether their investment in the Fund will cause them to incur
liability for the alternative minimum tax.

Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the annual gross income of each Series, without
offset for losses from the sale or other disposition of securities, be derived
from payments with respect to securities loans, interest, dividends and gains
from the sale or other disposition of securities or foreign currencies, or other
income (including but not limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such securities
or currencies; (b) each Series derive less than 30% of its annual gross income
from gains (without offset for losses) from the sale or other disposition of
securities, futures contracts, foreign currencies or options on any of them held
for less than three months (except for foreign currencies directly related to
the Fund's business of investing in foreign securities); and (c) each Series
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the assets of the Series is represented
by cash, U.S. Government securities and other securities limited in respect of
any one issuer to an amount not greater than 5% of the assets of the Series and
10% of the outstanding voting securities of the issuer, and (ii) not more than
25% of the value of the assets of the Series is invested in the securities of
any one issuer (other than U.S. Government securities).

Qualification as a regulated investment company will be determined at the
level of each Series and not at the level of the Fund. Accordingly, the
determination of whether any particular Series qualifies as a regulated
investment company will be based on the activities of that Series, including the
purchases and sales of securities and the income received and expenses incurred
in that Series. Net capital gains of a Series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the Series.

The High Yield Series has a net capital loss carryforward for federal income
tax purposes as of April 30,1995 of approximately $7,385,000, of which
$2,024,000 expires in 2002 and $5,361,000 expires in 2003. The Insured Series
has a net capital loss carryforward for federal income tax purposes as of April
30, 1995 of approximately $11,614,000, which expires in 2003.

Special rules will apply to futures contracts and options thereon in which
the Series invest. See "Investment Objectives and Policies." These investments
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of each Series'
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.

The Fund's hedging activities may be affected by the requirement under the
Internal Revenue Code that no more than 30% of the Fund's income be derived from
securities, futures contracts and other instruments held for less than three
months. From time to time, this requirement may cause the Fund to limit its
acquisitions of futures contracts to those that will not expire for at least
three months. At the present time, there is only a limited market for futures
contracts on the municipal bond index that will not expire within three months.
Therefore, to meet the 30%/three month requirement, the Fund may choose to use
futures contracts based on fixed-income securities that will not expire within
three months.

Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the Series have been held
by the shareholders.

If any net long-term capital gains in excess of net short-term capital
losses are retained by a Series for investment, requiring federal income taxes
to be paid thereon by the Series, the Series will elect to treat these capital
gains as having been distributed to shareholders. As a result, these amounts
will be taxed to shareholders as long-term capital gains, and shareholders will
be able to claim their proportionate share of the federal income taxes paid by
the Series on the gains as a credit against their own federal income tax
liabilities and will be entitled to increase the adjusted tax basis of their
shares in that Series by the difference between their PRO RATA share of such
gains and their tax credit.

B-25
<PAGE>
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share of the applicable Series of the Fund on
the distribution date.

Any short-term capital loss realized upon the sale or redemption of shares
within six months (or such shorter period as may be established by Treasury
regulations) from the date of purchase of such shares and following receipt of
an exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within 6 months from
the date of purchase of the shares and following receipt of a long-term capital
gain distribution will be treated as long-term capital loss to the extent of the
long-term capital gain distribution.

Interest on indebtedness and other expenses incurred by shareholders to
purchase or carry shares of the Fund will generally not be deductible for
federal income tax purposes under Section 265 of the Internal Revenue Code. In
addition, under rules used by the Internal Revenue Service for determining when
borrowed funds are considered to be used for the purpose of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares.

Persons holding certain municipal obligations who are also "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by municipal
obligations in the portfolios of the Series has been made by the Fund. Potential
investors should consult their tax advisers with respect to this matter before
purchasing shares of the Fund.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of state or municipal obligations for investment by
each Series of the Fund and the value of portfolio securities held by the Series
would be affected. In addition, each Series of the Fund would reevaluate its
investment objective and policies.

All distributions of taxable net investment income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. In addition, each shareholder must
disclose on his or her return the amount of tax-exempt dividends received from
the Fund. Under federal income tax law, each Series of the Fund will be required
to report to the Internal Revenue Service all distributions of taxable income
and capital gains as well as gross proceeds from the redemption or exchange of
shares of such Series, except in the case of certain exempt shareholders.
Further, all such distributions and proceeds from the redemption or exchange of
shares may be subject to withholding of federal income tax at the rate of 31% in
the case of nonexempt shareholders who fail to furnish the appropriate Series of
the Fund with their taxpayer identification numbers on IRS Form W-9 and with
required certifications regarding their status under the federal income tax law.
If the withholding provisions are applicable, any such distributions and
proceeds, whether taken in cash or reinvested in shares, will be reduced by the
amounts required to be withheld. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.

Each Series is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. Each Series
is also required to distribute during the calendar year 98% of the capital gain
net income it earned during the twelve months ending on October 31 of such
calendar year. In addition, the Series must distribute during the calendar year
any undistributed ordinary income and undistributed capital gain net income from
the prior year or the 12 month period ending on October 31 of such calendar
year, respectively. To the extent it does not meet these distribution
requirements, a Series will be subject to non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Series pays income tax is treated as distributed.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend or distribution will
constitute a replacement of shares.

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares.

B-26
<PAGE>
PERFORMANCE INFORMATION

YIELD. Each Series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. This yield will be computed by dividing a Series' net investment
income per share earned during this 30-day period by the maximum offering price
per share on the last day of this period. Yield is calculated according to the
following formula:

a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.

The yield for the 30 days ended April 30, 1995 was 6.4%, 4.9% and 4.2% for
Class A shares of the High Yield Series, the Insured Series and the Intermediate
Series, respectively. The yield for the 30 days ended April 30, 1995 was 6.2%,
4.7% and 3.9% for Class B shares of the High Yield Series, the Insured Series
and the Intermediate Series, respectively. The yield for the 30 days ended April
30, 1995 was 5.9%, 4.4% and 3.7% for Class C shares of the High Yield Series,
the Insured Series and the Intermediate Series, respectively.

Each Series may also calculate the tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the yield
as discussed above. The Series will then determine what portion of that yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to alternative
minimum tax) and then added to the portion of the yield that is attributable to
other securities. For the 30 days ended April 30, 1995, the tax equivalent yield
for the Class A shares of the High Yield Series, the Insured Series and the
Intermediate Series was 10.6%, 8.2% and 7.0%, respectively. For the 30 days
ended April 30, 1995, the tax equivalent yield for the Class B shares of the
High Yield Series, the Insured Series and the Intermediate Series was 10.3%,
7.8% and 6.5%, respectively. For the 30 days ended April 30, 1995, the tax
equivalent yield for the Class C shares of the High Yield Series, the Insured
Series and the Intermediate Series was 9.9%, 7.4% and 6.2%, respectively.

The following chart shows the tax-equivalent yield of an investment at
varying rates:
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C>
3.5% 4.0% 4.5% 5.0% 5.5% 6% 6.5%

<CAPTION>
FEDERAL
TAX RATE IS EQUIVALENT TO A TAXABLE RATE OF:
<S> <C> <C> <C> <C> <C> <C> <C>
28 % 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31 % 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>

Income earned on this portfolio could be subject to the federal alternative
minimum tax. The above information is for illustrative purposes only and is not
intended to imply actual performance.

AVERAGE ANNUAL TOTAL RETURN. Each Series may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.

Average annual total return is computed according to the following formula:

P(1+T)to the power of n = ERV

Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.

B-27
<PAGE>
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.

Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.

The average annual total return and subsidy/waiver adjusted average annual
total return from the inception of the Class A shares (January 22, 1990) and for
the one year and five year periods ended April 30, 1995 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
---------------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1995 1995 INCEPTION 1995 1995
- ---------------------- ----------- ----------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 6.96 % 7.43% 3.69% 6.92% 7.39% 3.69%
Insured Series 6.91 % 7.49% 3.52% 6.85% 7.43% 3.52%
Intermediate Series 6.38 % 6.87% 1.39% 6.26% 6.79% 1.39%
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class B shares (September 17, 1987), for the
five year period ended April 30, 1995 and for the one year ended April 30, 1995
were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1995 1995 INCEPTION 1995 1995
- ---------------------- ------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 8.39% 7.47% 1.37% 8.33% 7.43% 1.37%
Insured Series 7.99% 7.59% 1.40% 7.84% 7.53% 1.40%
Intermediate Series 7.06% 6.94% -1.01% 6.81% 6.86% -1.01%
</TABLE>

The average annual total return for Class C shares for the period since
inception (August 1, 1994) through April 30, 1995 was 3.95%, 4.12% and 1.55% for
the High Yield Series, Insured Series and Intermediate Series, respectively.

AGGREGATE TOTAL RETURN. Each Series may also advertise its aggregate total
return. Aggregate annual total return is determined separately for Class A,
Class B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.

Aggregate total return represents the cumulative change in the value of an
investment in a Series and is computed according to the following formula:

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charge.

B-28
<PAGE>
The aggregate total return and subsidy/waiver adjusted aggregate total
return from the inception of the Class A shares (January 22, 1990) and for the
one year and five year periods ended April 30, 1995 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
--------------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1995 1995 INCEPTION 1995 1995
- ---------------------- ------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 42.46% 43.03% 3.69% 42.19% 42.76 % 3.69 %
Insured Series 42.13% 43.43% 3.52% 41.74% 43.03% 3.52%
Intermediate Series 38.43% 39.47% 1.39% 37.64% 38.83% 1.39%
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class B shares (September 17, 1987) and for the
five and one year periods ended April 30, 1995 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1995 1995 INCEPTION 1995 1995
- ---------------------- ------------- ----------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 84.93% 43.30% 1.37% 84.07% 43.03% 1.37%
Insured Series 79.74% 44.08% 1.40% 77.83% 43.68% 1.40%
Intermediate Series 68.23% 39.83% -1.01% 65.33% 39.29% -1.01%
</TABLE>

The aggregate total returns from inception of the Class C shares (August 1,
1994) through April 30, 1995 were as follows: 2.91% for the High Yield Series,
3.03% for the Insured Series and 1.14% for the Intermediate Series.

From time to time, the performance of the Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

ART

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

(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's
500 Stock Index, a market-weighted, unmanaged index of 500 common
stocks in a variety of industry sectors. It is a commonly used
indicator of broad stock price movements. This chart is for
illustrative purposes only, and is not intended to represent the
performance of any particular investment or fund.

B-29
<PAGE>
ORGANIZATION AND CAPITALIZATION

The Fund is a Massachusetts business trust established under a Declaration
of Trust dated November 3, 1986. The Declaration of Trust and the By-Laws of the
Fund are designed to make the Fund similar in certain respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability. Under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the fund, which is not the case with a
corporation. The Declaration of Trust of the Fund provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument or undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not individually bound thereunder.

Massachusetts counsel for the Fund has advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such a provision when adequate notice of the
provision is given, except possibly in a few jurisdictions. With respect to all
types of claims in the latter jurisdictions and with respect to tort claims,
contract claims where the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities, shareholders may be held
personally liable to the extent that claims are not satisfied by the Fund.
However, upon payment of any such liability, shareholders will be entitled to
reimbursement from the general assets of the appropriate Series of the Fund. The
Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, to the extent possible, ultimate liability of the shareholders for
liabilities of the Fund.

The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as this liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Series of the Fund for
satisfaction of claims arising in connection with the affairs of the Fund or of
the particular Series of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.

The Fund does not intend to issue share certificates or hold annual meetings
of shareholders.

The Fund and all Series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.

The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in three classes in separate
Series. Each Series of the Fund, for federal income tax and Massachusetts state
law purposes, will constitute a separate trust which will be governed by the
provisions of the Declaration of Trust. All shares of any Series issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each Series represents an equal proportionate interest in that Series with each
other share of that Series. The assets of the Fund received for the issue or
sale of the shares of each Series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors of that Series, are specially
allocated to the Series and constitute the underlying assets of the Series. The
underlying assets of each Series are segregated on the books of account and are
to be charged with the liabilities in respect to the Series and with a share of
the general liabilities of the Fund. Under no circumstances would the assets of
a Series be used to meet liabilities that are not otherwise properly chargeable
to it. Expenses with respect to any two or more Series are to be allocated in
proportion to the asset value of the respective Series except where allocations
of direct expenses can otherwise be fairly made. The officers of the Fund,
subject to the general supervision of the Trustees, have the power to determine
which liabilities are allocable to a given Series or which are general or
allocable to two or more Series. Upon redemption of shares of a Series of the
Fund, the shareholder will receive proceeds solely of the assets of such Series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any Series are entitled to receive as a class the underlying assets of
that Series available for distribution to shareholders.

Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each class of each Series
separately, except to the extent otherwise provided in the Investment Company
Act. A change in the investment objective or investment restrictions for a
Series would be voted upon only by shareholders of the Series involved. In
addition, approval of any investment advisory agreement is a matter to be
determined separately by each Series. Approval by the shareholders of one Series
is effective as to that Series whether or not enough votes are received from the
shareholders of the other Series to approve the proposal as to those Series.

Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend

B-30
<PAGE>
rights as the Trustees may determine. All consideration received by the Fund for
shares of any additional series, and all assets in which such consideration is
invested, would belong to that series (subject only to the rights of creditors
of such series) and would be subject to the liabilities related thereto.

Pursuant to the Investment Company Act, shareholders of any additional
series of shares would normally have to approve the adoption of any advisory
contract relating to such series and of any changes in the investment objective
or investment restrictions related thereto. The Trustees have the power to alter
the number and the terms of office of the Trustees, and they may at any time
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
have been elected by the shareholders of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent. It is a
wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services
to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended April 30, 1995, the Fund incurred fees of approximately $763,000
($410,000-High Yield Series, $315,000-Insured Series and $38,000-Intermediate
Series) for the services of PMFS.

Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.

B-31

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND Portfolio of Investments
HIGH YIELD SERIES April 30, 1995

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>
LONG TERM INVESTMENTS--97.9%
Alabama--0.7%
Alabama Agric. & Mechanic Univ., M.B.I.A.................... Aaa 5.50 % 11/01/20 $ 1,500 $ 1,384,305
Cullman Med. Clinic Brd. Rev., Regl. Med. Ctr., Ser. 93A.... Baa 6.50 2/15/23 2,000 1,823,580
Ft. Payne, Ind. Dev. Brd. Rev., Gametime Expansion Proj..... NR 10.25 8/01/09 4,405 4,663,353
--------------
7,871,238
--------------
Alaska--0.4%
No. Slope Boro., Gen. Oblig., Ser. B, C.G.I.C............... Aaa Zero 6/30/04 8,000 4,697,280
--------------
Arizona--1.6%
Ft. Mojave Indian Tribe, Wtr. & Swr. Rev.................... NR 10.25 9/01/19 3,000DD 1,800,000
Pima Cnty. Ind. Dev. Auth., Multifamily Mtge. Rev., Cntry.
Club La Cholla Proj....................................... NR 8.50 7/01/20 10,000 9,502,200
Scottsdale Ind. Dev. Auth. Rev., 1st Mtge., Westminster Vlg.
Inc. Proj................................................. NR 9.50 6/01/97 5,000 5,123,150
--------------
16,425,350
--------------
California--12.7%
Alameda Cmnty. Facs. Spec. Tax Rev. No. 1, Harbor Bay....... NR 7.75 9/01/19 8,175 8,449,680
California Hsg. Fin. Agcy. Rev., Ser. G..................... Aa 8.15 8/01/19 1,120 1,188,432
Chula Vista Cmnty. Redev. Agcy., Bayfront Tax Alloc......... BBB+* 7.625 9/01/24 5,000 5,327,200
Delano, Cert. of Part., Regl. Med. Ctr., Ser. 92A........... NR 9.25 1/01/22 6,865 7,478,044
Folsom Spec. Tax Dist. No. 2................................ NR 7.70 12/01/19 3,130 3,209,001
Long Beach Redev. Agcy. Hsg.,
Multifamily Hsg. Rev., Pacific Court Apts.,............... NR 6.80 9/01/13 3,805 3,613,799
Multifamily Hsg. Rev., Pacific Court Apts.,............... NR 6.95 9/01/23 6,195 5,782,475
Los Angeles Regional Arpts. Improv. Corp. Lease Rev......... NR 9.25 8/01/24 15,345 16,142,019
Orange Cnty. Cmnty. Facs. Dist. Spec. Tax Rev., No. 87-4,
Foothill Ranch, Ser. A.................................... NR 7.375 8/15/18 7,500 8,631,825
Orange Cnty. Cmnty. Loc. Trans. Auth., Tax Reg. Linked Savrs
& Ribs.................................................... Aa 6.20 2/14/11 7,000 6,854,470
Richmond Redev. Agcy. Rev., Multifamily Bridge Affordable
Hsg....................................................... NR 7.50 6/01/23 10,000 9,814,300
Sacramento City Fin. Auth. Rev., Comb. Project B,
M.B.I.A................................................... Aaa Zero 11/01/15 5,695 1,595,967
Sacramento Cnty. Spec. Tax Rev., Dist. No. 1,
Elliot Ranch,............................................. NR 8.20 8/01/21 3,750 3,963,075
Laguna Creek Ranch,....................................... NR 8.25 12/01/20 4,500 4,755,960
San Bernardino Cnty., Cert. of Part.,
Medical Cent. Fin. Proj.,................................. Baa1 6.00 8/01/09 2,500 2,257,625
Medical Cent. Fin. Proj.,................................. Baa1 5.50 8/01/24 4,900 3,834,593
San Joaquin Hills Trans. Corridor Agcy., Toll Road Rev.,
Toll Road Rev............................................. NR Zero 1/01/24 50,000 6,398,000
Toll Road Rev............................................. NR Zero 1/01/25 15,700 1,870,027
Toll Road Rev., Orange Co................................. NR Zero 1/01/11 12,900 3,578,460
</TABLE>

B-32 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>
California--cont'd
Santa Margarita/Dana Point Auth. M.B.I.A.,
Impvt. Dists 1-2-2A-8, Ser. A............................. Aaa 7.25 8/01/13 $ 1,990D $ 2,287,565
Impvt. Dists 3-3A-4A, Ser. B.............................. Aaa 7.25 8/01/12 3,000D 3,448,530
So. San Francisco Redev., Agcy., Tax Alloc., Gateway Redev.
Proj...................................................... NR 7.60 9/01/18 2,375 2,428,699
Southern California Home Fin. Auth., Sngl. Fam. Mtge. Rev.,
G.N.M.A., Ser. 89A........................................ AAA* 7.625 10/01/22 7,945# 8,364,178
Southern California Pub. Pwr. Auth., Proj. Rev.............. A 6.75 7/01/10 6,000 6,296,640
Southern California Pub. Pwr. Auth. Tran.................... Aa Zero 7/01/14 8,500 2,539,800
Victor Valley California Union High School District,
M.B.I.A................................................... Aaa Zero 9/01/12 3,605 1,250,394
M.B.I.A................................................... Aaa Zero 9/01/14 4,740 1,428,020
M.B.I.A................................................... Aaa Zero 9/01/16 3,990 1,050,886
--------------
133,839,664
--------------
Colorado--3.2%
Colorado Health Facilities Auth. Rev., Rocky Mountain
Adventist................................................. Baa 6.625 2/01/13 6,450 6,080,544
Eagle Cnty. Hsg. Proj., Lake Creek Affordable Hsg. Corp.,
Ser. A.................................................... NR 8.00 12/01/23 11,610 11,518,281
Miguel Cnty., Mountain Vlg. Met. Dist. Colo. San Miguel
Cnty...................................................... NR 8.10 12/01/11 3,200 3,394,368
Superior Met. Dist. No. 1 Colorado Wtr. & Swr.,
Rev....................................................... NR 7.50 12/01/98 3,300 3,303,729
Rev....................................................... NR 8.50 12/01/13 8,900 9,062,870
--------------
33,359,792
--------------
District Of Columbia--1.4%
Dist. of Columbia Rev.,
America Geophysical Union, M.B.I.A........................ Aaa 6.50 6/01/10 6,000# 6,168,300
National Public Radio..................................... NR 7.625 1/01/18 8,800 8,867,232
--------------
15,035,532
--------------
Florida--5.9%
Escambia Cnty. Hlth. Facs. Auth. Rev., L.P. South,
Azalea Trace, Ref......................................... NR 9.25 1/01/06 2,605 2,848,854
Baptist Hosp., Ref., Ser. A............................... BBB+* 8.60 10/01/02 4,385 4,781,755
Fleming Island Cmnty. Dev. Dist., Clay Cnty................. NR 8.25 5/01/16 8,000 7,984,000
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifamily Hsg.
Rev....................................................... NR 10.00 1/01/20 9,921D 6,647,465
No. Springs Imprt. Dist. Water Mgt.,
Series A.................................................. NR 8.20 5/01/24 2,000 2,114,360
Series B.................................................. NR 8.30 5/01/24 1,755 1,857,580
Osceola Cnty. Ind. Dev. Auth. Rev.,......................... NR 7.75 7/01/17 9,000 9,531,090
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts., Ser. A...... NR 7.75 3/01/23 4,630 4,850,666
Sarasota Hlth. Facs., Kobernick House Meadow Park Proj...... NR 10.00 7/01/22 7,000 7,371,770
Seminole Cnty. Ind. Dev. Auth. Rev., Ind. Dev. Fern Park.... NR 9.25 4/01/12 6,345 6,629,763
Tampa Rev., Tampa Aquarium Proj............................. NR 7.75 5/01/27 7,500 7,711,800
--------------
62,329,103
--------------
</TABLE>

B-33 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Georgia--2.9%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj...................................................... NR 9.25 6/01/10 $ 4,810 $ 5,835,588
Effingham Cnty. Dev. Auth., Ft. Howard Corp................. B1 7.90 10/01/05 10,000 10,312,100
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C...................... Aaa 6.375 1/01/14 6,000D 6,319,320
Georgia St, Gen. Oblig., Ser. C............................. Aaa 5.00 7/01/10 5,475D 5,046,855
Savannah Econ. Dev. Auth., Stone Container.................. NR 8.125 7/01/15 3,160 3,285,041
--------------
30,798,904
--------------
Hawaii--0.7%
Hawaii Cnty. Impvt., Dist. No. 17........................... NR 9.50 8/01/11 7,175 7,031,500
--------------
Illinois--9.1%
Chicago O'Hare Int'l. Arpt., Spec. Fac. Rev.,
Amer. Airlines, Ser. A.................................... Baa2 7.875 11/01/25 4,000 4,163,800
United Airlines, Ser. B................................... Baa2 8.45 5/01/07 6,000 6,407,880
United Airlines, Ser. B................................... Baa3 8.50 5/01/18 6,500 6,955,325
United Airlines, Ser. B................................... Baa2 8.85 5/01/18 2,805 3,108,669
United Airlines, Ser. B................................... Baa2 8.95 5/01/18 2,400 2,642,712
United Airlines, Ser. B................................... Baa2 8.20 12/01/24 1,000 1,104,160
Hennepin Ind. Dev. Rev.,
Exolon Esk. Co. Proj...................................... NR 8.875 1/01/18 8,000 8,179,840
Methchem Corp. Proj., Ser. 89............................. NR 10.25 1/01/05 4,420DD 397,800
Illinois Dev. Fin. Auth. Rev., Multifamily Hsg. Town &
Garden Apts............................................... BBB+* 7.20 9/01/08 9,460 9,619,117
Illinois Hlth. Facs. Auth. Rev.,
Adventist Living Ctr...................................... NR 11.00 12/01/15 2,245DD 538,693
Beacon Hill Proj., Ser. A................................. NR 9.00 8/15/19 7,422 7,976,572
Midwest Physician Group Limited Project................... BBB-* 8.125 11/15/19 3,285 3,360,062
Midwest Physician Group Limited Project................... BBB-* 8.10 11/15/14 3,135 3,200,741
Kane & De Kalb Cntys. Illinois Cmnty. Unit School, A.M.B.A.C.
District Number 301....................................... Aaa Zero 12/01/11 3,360 1,202,477
District Number 301....................................... Aaa Zero 12/01/13 4,065 1,276,085
Kankakee Ind. Dev. Rev., Kroger Co. Proj.................... Ba2 7.85 9/01/15 2,500 2,632,450
Metro Pier & Exposition Auth. Rev., McCormick Place,
F.G.I.C................................................... Aaa Zero 6/15/14 15,000D 4,469,550
Village of Robbins, Cook City, Robbins Res. Rec............. NR 9.25 10/15/14 22,000 23,711,380
Winnebago Cnty. Hsg. Fin. Corp., Park Tower Assoc. Sec. 8... NR 8.125 1/01/11 4,437 4,545,244
--------------
95,492,557
--------------
Indiana--1.5%
Bluffton Econ. Dev. Rev., Kroger Co. Proj................... Ba2 7.85 8/01/15 7,500 7,849,050
Wabash Econ. Dev. Rev. Bonds, Connell....................... NR 8.50 11/24/17 7,250 7,713,493
--------------
15,562,543
--------------
Iowa--1.0%
Iowa Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives............................................... NR 9.95 7/01/19 10,000 10,561,900
--------------
</TABLE>

B-34 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>
Kentucky--0.3%
Owensboro Kentucky Elec. Lt. & Pwr. Rev. Ser. B,
A.M.B.A.C................................................. Aaa Zero 1/01/14 $ 5,000D $ 1,575,650
Owensboro Kentucky Elec. Lt. & Pwr. Rev. Ser. B,
A.M.B.A.C................................................. Aaa Zero 1/01/16 6,650D 1,840,720
--------------
3,416,370
--------------
Louisiana--4.0%
Hodge Util. Rev., IDB Stone Container Corp.................. NR 9.00 3/01/10 10,000 10,501,100
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
G.N.M.A.,
Ser. A.................................................... Aaa 8.60 12/01/19 1,670# 1,804,301
New Orleans Ind. Dev. Rev................................... BB* 8.75 10/01/19 3,600 3,766,356
New Orleans Louisiana, Cap. Apprec, A.M.B.A.C............... Aaa Zero 9/01/18 3,090 719,816
Port of New Orleans Ind. Dev. Rev., Continental Grain Co.
Proj...................................................... BB-* 7.50 7/01/13 5,000 5,038,050
St. Charles Parish, Poll. Ctrl. Rev.,
Louisiana Pwr. & Lt. Co................................... NR 8.25 6/01/14 10,000 10,800,900
Louisiana Pwr. & Lt. Co., Ser. 1989....................... Baa3 8.00 12/01/14 3,500 3,768,940
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util. Co.
Proj...................................................... NR 9.00 5/01/15 5,250 5,898,480
--------------
42,297,943
--------------
Maryland--1.9%
Anne Arundel Cnty. First Mtge. Rev., Pleasant Living
Conv...................................................... NR 8.50 7/01/13 3,490 3,643,525
Maryland St. Hlth. & Higher Ed. Facs., Auth. Rev., Doctors
Cmnty. Hosp............................................... Baa 5.50 7/01/24 11,100 8,579,856
Northeast Waste Disp. Auth.,
Baltimore City Sludge Compositing Fac..................... NR 7.25 7/01/07 4,582 4,607,018
Baltimore City Sludge Compositing Fac..................... NR 8.50 7/01/07 3,400 3,487,448
--------------
20,317,847
--------------
Massachusetts--3.6%
Mass. St. Coll. Bldg. Project and Refunding Bonds........... A 7.50 5/01/14 1,750 2,062,935
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp................................ NR 8.875 7/01/18 7,500 7,840,950
St. Josephs Hosp., Ser. C................................. NR 9.50 10/01/20 5,740 6,787,952
Valley Regl. Hlth. Sys., Ser. B........................... Baa 8.00 7/01/18 3,950 4,539,340
Mass. St. Hsg. Fin. Agcy. Rev., Residential, Hsg., Ser. B... BBB+* 8.10 8/01/23 335 347,867
Mass. St. Ind. Fin. Agcy. & Hlth. Care Fac. Rev., Hampden
Nursing Home Proj. A...................................... NR 9.75 10/01/17 3,810 3,429,000
Mass. St. Ind. Fin. Agcy. Rev.,
Continental Res., Ser. A.................................. NR 9.50 2/01/00 2,750 2,912,580
Merrimack College......................................... BBB-* 7.125 7/01/12 3,140 3,238,627
Randolph Hsg. Auth., Multifamily Hsg., Liberty Place Proj.
A, Ser. A................................................. NR 9.00 12/01/21 6,075 6,254,638
--------------
37,413,889
--------------
Michigan--6.5%
Grand Rapids Michigan Dev. Auth.
Cap. Apprec., M.B.I.A..................................... Aaa Zero 6/01/10 3,000 1,193,790
Cap. Apprec., M.B.I.A..................................... Aaa Zero 6/01/11 3,160 1,179,280
</TABLE>

B-35 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Michigan--(cont'd)
Cap. Apprec., M.B.I.A..................................... Aaa Zero 6/01/12 $ 3,000 $ 1,049,580
Gratiot Cnty. Econ. Dev. Corp. Ltd., Oblig. Econ. Dev. Rev.,
Danley Die Proj. Connell.................................. NR 7.625 4/01/07 3,200 3,280,160
Holland Sch. Dist., Sch. Dist. Cap. Apprec., A.M.B.A.C...... Aaa Zero 5/01/17 2,950 750,038
Lowell Area Sch., F.G.I.C................................... Aaa Zero 5/01/14 5,000 1,543,500
Meridian Econ. Dev. Corp. Rev., Burcham Hills Retirement
Fac....................................................... NR 9.625 7/01/19 2,875 3,134,584
Michigan St Strategic Fund Ltd. Oblig. Rev., Great Lakes
Pulp & Fibre Project...................................... NR 10.25 12/01/16 20,000 21,297,600
Michigan St. Hosp. Fin. Auth. Rev., Saratoga Cmnty. Hosp.,
Ser. A.................................................... NR 8.75 6/01/10 7,100 7,355,103
Michigan Stragitic Fund, Gennese Pwr. Station............... NR 7.50 1/01/21 12,000 11,691,840
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Proj.,
Ser. A.................................................... Baa1 7.75 12/01/19 8,000 8,566,400
Romulus Michigan Cmnty. Sch., F.G.I.C....................... Aaa Zero 5/01/21 5,000 973,850
Wayne Cnty. Bldg. Auth., Ser. A............................. Baa 8.00 3/01/17 3,500 4,084,955
West Ottawa Pub. Sch. Dist.,
F.G.I.C................................................... Aaa Zero 5/01/15 4,825 1,394,762
F.G.I.C................................................... Aaa Zero 5/01/18 3,215 764,688
--------------
68,260,130
--------------
Minnesota--1.0%
Minneapolis St. Paul Hsg. Fin. Brd., Multifamily Rev.,
Riverside Plaza, G.N.M.A.................................. AAA* 8.25 12/20/30 4,000D 4,281,320
Southern Minnesota Mun. Pwr. Agcy. Supply Sys.,
Ser. A, M.B.I.A........................................... Aaa Zero 1/01/19 25,875# 6,166,789
Ser. A, M.B.I.A........................................... Aaa Zero 1/01/20 1,500 336,480
--------------
10,784,589
--------------
Mississippi--1.8%
Claiborne Cnty. Poll. Ctrl. Rev., Middle So. Energy Sys.,
Ser. A.................................................... NR 9.50 12/01/13 10,350 11,758,428
Ser. C.................................................... NR 9.875 12/01/14 6,100 7,003,044
--------------
18,761,472
--------------
Missouri--0.7%
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Conv. & Sports Complex, Ser. C............................ NR 7.90 8/15/21 4,250 4,533,687
Soemm Proj................................................ NR 10.25 7/01/08 2,435 2,504,398
--------------
7,038,085
--------------
Nebraska--0.3%
Nebraska Invest. Fin. Auth., G.N.M.A., Sngl. Fam. Mtge.
Rev., Ser. I, M.B.I.A..................................... Aaa 8.125 8/15/38 2,695# 2,839,236
--------------
New Hampshire--3.0%
New Hampshire Higher Edl. & Hlth. Facs. Auth.,
Antioch College........................................... NR 7.875 12/01/22 5,530 5,859,698
Havenwood/Heritage Heights................................ NR 9.75 12/01/19 7,765 8,461,909
</TABLE>

B-36 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

New Hampshire--cont'd
New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Ser. A.................................................... Baa3 8.00 12/01/14 $ 4,125 $ 4,292,970
Proj. A................................................... Baa3 7.65 5/01/21 12,000 12,517,800
--------------
31,132,377
--------------
New Jersey--3.0%
Hudson Cnty. Impvt. Auth., Solid Waste Sys.................. BBB-* 7.10 1/01/20 10,000 9,339,900
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Village Project A.............................. NR 9.25 1/01/25 11,500 11,652,720
Keswick Pines Proj.......................................... NR 7.75 1/01/01 10,845 10,880,789
--------------
31,873,409
--------------
New York--4.2%
Met. Trans. Auth. Facs. Rev., F.G.I.C., Ser. N.............. Aaa Zero 7/01/13 8,340D 2,822,923
Nassau Cnty. Ind. Dev. Agcy. Rev., S&S Incinerator Jt.
Venture Proj.............................................. NR 9.00 1/01/07 8,000DD 4,640,000
New York City Ind. Dev. Agcy., Mesorah Publications Ltd..... NR 10.25 3/01/19 1,950 2,168,459
New York City Ind. Dev. Agcy., Spec. Fac. Rev., Amer.
Airlines Inc.............................................. Baa2 8.00 7/01/20 3,320 3,482,215
New York Hosp. Rev., Newark Wayne Cmnty. Hosp., Inc., Ser.
A......................................................... NR 7.60 9/01/15 5,380 5,398,238
New York St. Dorm. Auth. Rev., City Univ., Ser. A........... Baa1 5.75 7/01/13 7,000 6,465,060
New York St. Energy Resh. & Dev. Auth. Rev., Brooklyn Union
Gas Co.,
Ser. D, M.B.I.A........................................... Aaa 6.78 7/08/26 2,000@ 1,710,000
New York St. Mtge. Agcy. Rev., Homeowner Mtge., Ser. GG..... Aa 8.125 4/01/20 3,505# 3,712,461
Port Auth. of New York & New Jersey Spec. Oblig., U.S. Air,
La Guardia Airport........................................ B2 9.125 12/01/15 4,000 4,431,920
Triborough Bridge & Tunnel Auth. Rev.
General Purpose, Series A................................. Aa 6.00 1/01/10 5,000 5,077,600
General Purpose, Series Y................................. Aa 5.50 1/01/17 5,170 4,834,519
--------------
44,743,395
--------------
Ohio--2.8%
Cleveland Ohio Public Pwr. Sys. Rev.
First Mortgage Series A, M.B.I.A.......................... Aaa Zero 11/15/09 3,000 1,285,710
First Mortgage Series A, M.B.I.A.......................... Aaa Zero 11/15/12 1,000 345,450
First Mortgage Series A, M.B.I.A.......................... Aaa Zero 11/15/13 1,500 487,725
Mahoning Valley Ohio San Dist. Wtr. Rev..................... NR 7.75 5/15/19 8,000 8,318,480
Montgomery Cnty. Hlth. Care Facs. Rev., Friendship Vlg.
Dayton, Proj. B........................................... NR 9.25 2/01/16 4,500 4,646,475
Ohio St Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mrtge.
Cleveland Elec............................................ Ba2 8.00 10/01/23 3,000 3,078,750
Toledo Edison............................................. Ba2 8.00 10/01/23 7,000 7,183,750
Ohio St Wtr. Dev. Auth. Rev., Mid America Waste Systems
Inc....................................................... NR 7.75 9/01/07 3,850 3,918,222
--------------
29,264,562
--------------
</TABLE>

B-37 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Pennsylvania--7.0%
Allegheny Cnty. Hosp. Dev. Auth. Rev., West Penn. Hosp.
Hlth. Proj................................................ NR 8.50 1/01/20 $ 2,800 $ 3,091,676
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj............................... NR 11.00 12/01/15 367DD 88,191
Alvernia Coll. Proj....................................... NR 7.75 11/15/16 5,240 5,626,922
Chartiers Valley Ind. & Coml. Dev. Auth. Rev., Friendship
Village/South Hills....................................... NR 9.50 8/15/18 3,750 4,040,063
Dauphin County Gen. Auth. Hosp. Rev., Northwest Med. Center
Project................................................... NR 8.625 10/15/13 6,675 6,598,771
Lancaster Cnty. Solid Waste Mgmt., Res. Rec. Auth. Sys.
Rev., Ser. A.............................................. A 8.50 12/15/10 5,965 6,292,479
North Umberland Cnty. Ind. Dev. Auth. Rev., Roaring Creek
Wtr....................................................... NR 6.375 10/15/23 3,700 3,308,022
Penn. Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Rev...................................... Aa 7.604 4/01/25 1,050@ 939,750
Sngl. Fam. Mtge. Rev., Ser. 27............................ Aa 8.15 10/01/21 3,460 3,685,973
Penn. St. Higher Edl. Facs. Auth. Rev., Med. Coll. of
Pennsylvania, Ser. A...................................... Baa 8.375 3/01/11 5,200 5,496,452
Pennsylvania Econ. Dev. Fin. Auth. Rev., Ponderosa Fibres
Project, Ser. A........................................... NR 9.25 1/01/22 10,000 10,047,000
Philadelphia Wtr. & Waste Auth. Rev.,
M.B.I.A................................................... Aaa 6.25 8/01/08 3,250 3,448,607
M.B.I.A................................................... Aaa 6.25 8/01/10 2,500 2,607,450
M.B.I.A................................................... Aaa 6.25 8/01/12 3,000 3,118,980
M.B.I.A................................................... Aaa 5.00 6/15/18 5,005D 4,310,256
M.B.I.A................................................... Aaa 5.00 6/15/19 2,200D/# 1,888,744
Shenango Valley Hosp. Auth. Rev., Osteopathic Hosp. Med.
Ctr....................................................... BBB+* 7.875 4/01/10 4,600 4,734,044
Wilkes Barre Gen. Mun. Auth. Coll. Rev.,
Misericordia Coll., Ser. A................................ NR 7.75 12/01/12 1,245 1,329,013
Misericordia Coll., Ser. B................................ NR 7.75 12/01/12 2,545 2,716,736
--------------
73,369,129
--------------
Puerto Rico--1.8%
Puerto Rico Elec. Pwr. Auth., Pwr. Rev. Refunding Bonds,
Ser. S.................................................... Baa1 6.125 7/01/09 7,375 7,447,349
Puerto Rico Tel. Auth. Rev.,
M.B.I.A., Ser. I.......................................... Aaa 5.967 1/25/07 6,500@ 6,215,625
M.B.I.A., Ser. I.......................................... Aaa 6.389 1/16/15 6,150@ 5,519,625
--------------
19,182,599
--------------
Rhode Island--2.2%
Rhode Island Depositors Econ. Protn. Corp., Sub. Gen.
Oblig., Ser. B............................................ NR 10.00 7/01/07 4,903 5,405,179
Rhode Island Hsg. & Mtge. Fin. Corp., Homeownership
Opportunity, Ser. 1A...................................... A1 8.20 10/01/17 6,000 6,379,800
Rhode Island Redev. Agcy., Ser. A........................... NR 8.00 9/01/24 11,000 11,286,660
--------------
23,071,639
--------------
South Carolina--0.9%
Lee Cnty. Ind. Dev. Rev., Mid American Waste System......... NR 7.00 9/15/13 5,450 5,164,256
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge...................................................... Aa 7.75 7/01/22 4,345# 4,560,599
--------------
9,724,855
--------------
</TABLE>

B-38 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

South Dakota--0.6%
So. Dakota Econ. Dev. Fin. Auth.,
Dakota Park............................................... NR 10.25 1/01/19 $ 5,115 $ 4,705,800
Lomar Dev. Co. Proj....................................... NR 10.25 8/01/08 1,300 1,355,367
--------------
6,061,167
--------------
Tennessee--1.4%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp...... NR 8.50 4/15/04 7,055 7,570,932
Rutherford Cnty. Hlth. & Edl. Facs. Rev., 1st Mtg........... NR 9.50 12/01/19 7,300 7,547,543
--------------
15,118,475
--------------
Texas--4.7%
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev.............. A 9.20 3/01/12 2,080 2,320,386
Bell Cnty. Hlth. Facs. Dev. Corp.,
Adventist Living Tech., Inc., Ser. A...................... NR 10.50 6/15/18 5,540 5,207,600
Harris Cnty. Texas Cultural Ed. Facs. Fin. Corp. Rev. Space
Ctr., Houston Proj........................................ NR 9.25 8/15/15 7,000 5,670,000
Houston Texas Wtr. & Swr. Sys. Rev., Ser. C................. Aaa Zero 12/01/10 5,000 1,929,800
New Braunfels Texas Independent School District
Cap. Apprec............................................... Aaa Zero 2/01/08 2,365 1,109,658
Cap. Apprec............................................... Aaa Zero 2/01/09 2,365 1,033,268
Cap. Apprec............................................... Aaa Zero 2/01/12 2,365 844,542
Cap. Apprec............................................... Aaa Zero 2/01/13 1,365 456,811
Port Corpus Christi Ind. Dev. Corp., Valero Refining & Mfg.
Co., Ser. A............................................... Baa3 10.25 6/01/17 1,300 1,452,360
Retama Dev. Corp., Spec. Fac., Retama Park Racetrack........ NR 8.75 12/15/18 7,500 7,462,500
Round Rock Texas Independent School District................ Aaa Zero 8/15/11 4,385 1,615,960
San Antonio Texas Electric & Gas Rev., Ser. B, F.G.I.C...... Aaa Zero 2/01/09 5,000 2,184,500
San Antonio Texas Electric & Gas Rev., Cap. Apprec., Ser. B,
F.G.I.C................................................... Aaa Zero 2/01/12 7,500 2,678,250
Tarrant Cnty. Hlth. Facs. Dev. Corp., Rev., Fndtn. Proj..... NR 10.25 9/01/19 5,000 5,351,450
Texas Mun. Pwr. Agcy. Rev., M.B.I.A......................... Aaa Zero 9/01/15 15,000 4,247,250
Texas St. Water Development,
Series A.................................................. Aa 5.25 8/01/20 3,135 2,771,591
Series C.................................................. Aa 5.75 8/01/18 2,600 2,499,874
--------------
48,835,800
--------------
U. S. Virgin Islands--0.2%
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser.
91........................................................ NR 7.75 10/01/06 2,195 2,350,604
--------------
Virginia--1.7%
Pittsylvania Cnty. Virginia Ind. Dev. Auth. Rev.
Multitrade................................................ NR 7.45 1/01/09 5,500 5,619,515
Pittsylvania Cnty. Virginia Ind. Dev. Auth., Rev.
Multitrade................................................ NR 7.55 1/01/19 12,000 12,174,600
--------------
17,794,115
--------------
Washington--1.5%
Bellevue Washington Conv. Ctr. Auth.
Obligation Revenue........................................ Aaa Zero 2/01/10 870 349,792
Obligation Revenue........................................ Aaa Zero 2/01/11 1,200 452,208
Obligation Revenue........................................ Aaa Zero 2/01/12 1,300 458,978
Obligation Revenue........................................ Aaa Zero 2/01/14 1,385 428,727
</TABLE>

B-39 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Washington--cont'd
Washington St. Pub. Pwr. Sup. Sys. Rev.,
Nuclear Proj. No. 1, Ser. B............................... Aa 7.25 7/01/09 $ 5,000D $ 5,474,800
Nuclear Proj. No. 3....................................... Aa Zero 7/01/16 10,000 2,363,100
Nuclear Proj. No. 3....................................... Aa Zero 7/01/17 5,000 1,101,400
Nuclear Proj. No. 3, Ser. B............................... Aa 7.125 7/01/16 5,000D 5,410,400
--------------
16,039,405
--------------
West Virginia--1.7%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co............................................... Baa2 8.00 8/01/20 2,450 2,609,960
Weirton Poll. Ctrl. Rev., Weirton Steel Proj................ B2 8.625 11/01/14 4,000 4,146,080
West Virginia St. Hsg. Dev. Auth., Fund Hsg. Fin., Ser. A... Aa1 7.95 5/01/17 8,030 8,522,400
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C................................................... Aaa 7.068 5/16/19 3,250@ 2,981,875
--------------
18,260,315
--------------
Total Long Term Investments (cost $1,007,878,109)....................................................... 1,030,956,770
--------------
SHORT TERM INVESTMENTS--0.9%
Kentucky--0.1%
Daviess Cnty. Solid Wst. Disp. Fac. Rev., Scott Paper Co.
Proj. Ser. 94b, F.R.D.D................................... P1 5.10 5/24/95 800 800,000
--------------
Louisiana--0.4%
Plaquemines Parish Envir. Rev.,
Exploration & Oil Incorporated Project, Ser. 94,
F.R.D.D................................................... P1 5.10 10/24/95 1,600 1,600,000
West Baton Rouge Parish Ind. Dist. Rev., Dow Chemical Co.
Proj., F.R.D.D.,
Ser. 93................................................... P1 5.10 12/23/95 3,100 3,100,000
--------------
4,700,000
--------------
Tennessee--0.2%
Maury County Ind. Dev. Brd., Sewage Disposal Facility,
F.R.W.D................................................... VMIG2 4.85 6/27/95 2,000 2,000,000
--------------
Texas--0.1%
Brazos River Harbor Nav. Dist. Harbor Rev., Dow Chemical Co.
Proj., F.R.D.D., Ser. 93.................................. A1 5.10 5/23/95 600 600,000
--------------
Virginia--0.1%
King George Cnty. Ind. Dev. Auth., Birchwood Pur. Project
Ser. 94B, F.R.D.D......................................... A1+* 5.10 10/14/95 1,400 1,400,000
--------------
Total Short Term Investments (cost $9,500,000).......................................................... 9,500,000
--------------
Total Investments--98.8% (cost $1,017,378,109; Note 4).................................................. 1,040,456,770
Other assets in excess of liabilities--1.2%............................................................. 12,976,954
--------------
Net Assets--100%........................................................................................ $1,053,433,724
--------------
--------------
</TABLE>

B-40 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES

(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
C.G.I.C.--Capital Guaranty Insurance Corporation
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note**
F.R.W.D.--Floating Rate (Weekly) Demand Note**
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
D Portion of or entire principal amount pledged as initial margin on financial
futures contracts.
DD Issuer in default, non-income producing security.
* Standard & Poor's Rating.
** 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.
# Indicates a when-issued security.
@ Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
B-41 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Assets and Liabilities

Assets April 30, 1995
-----------------
<S> <C>
Investments, at value (cost $1,017,378,109)............................................ $ 1,040,456,770
Cash................................................................................... 81,850
Accrued interest receivable............................................................ 21,398,702
Receivable for investments sold........................................................ 11,108,980
Receivable for Fund shares sold........................................................ 2,427,397
Due from broker-variation margin....................................................... 62,500
Deferred expenses...................................................................... 33,454
-----------------
Total assets......................................................................... 1,075,569,653
-----------------
Liabilities
Payable for investments purchased...................................................... 17,241,836
Payable for Fund shares reacquired..................................................... 2,083,016
Dividends payable...................................................................... 1,935,000
Distribution fee payable............................................................... 399,061
Management fee payable................................................................. 393,178
Accrued expenses....................................................................... 83,838
-----------------
Total liabilities.................................................................... 22,135,929
-----------------
Net Assets............................................................................. $ 1,053,433,724
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 982,659
Paid-in capital in excess of par..................................................... 1,051,068,176
-----------------
1,052,050,835
Accumulated net realized loss on investments......................................... (21,832,397)
Net unrealized appreciation on investments........................................... 23,215,286
-----------------
Net assets, April 30, 1995........................................................... $ 1,053,433,724
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($115,500,580 / 10,770,920 shares of
beneficial interest issued and outstanding)........................................ $10.72
Maximum sales charge (3% of offering price).......................................... .33
-----------------
Maximum offering price to public..................................................... $11.05
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($934,724,978 /
87,195,815 shares of beneficial interest issued and outstanding)................... $10.72
-----------------
-----------------
Class C:
Net asset value, offer price and redemption price per share ($3,208,166 / 299,208
shares of beneficial interest issued and outstanding).............................. $10.72
-----------------
-----------------
</TABLE>

See Notes to Financial Statements.
B-42

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Operations

<TABLE>
<CAPTION>
Year Ended
April 30,
Net Investment Income 1995
------------
<S> <C>
Income
Interest............................ $ 81,396,363
------------
Expenses
Management fee, net of waiver of
$172,278.......................... 5,279,570
Distribution fee--Class A........... 65,207
Distribution fee--Class B........... 5,120,663
Distribution fee--Class C........... 7,743
Transfer agent's fees and
expenses.......................... 530,000
Reports to shareholders............. 260,000
Custodian's fees and expenses....... 216,000
Registration fees................... 50,000
Legal fees.......................... 40,000
Insurance expense................... 37,000
Audit fee........................... 16,500
Trustees' fees...................... 15,000
Miscellaneous....................... 7,161
------------
Total expenses.................... 11,644,844
------------
Net investment income................. 69,751,519
------------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. (18,935,337)
Financial futures contract
transactions...................... 3,451,285
------------
(15,484,052)
------------
Net change in unrealized
appreciation/(depreciation) on:
Investments......................... 11,824,913
Financial futures contracts......... (966,500)
------------
10,858,413
------------
Net loss on investments............... (4,625,639)
------------
Net Increase in Net Assets Resulting
from Operations....................... $ 65,125,880
------------
------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended April 30,
Increase (Decrease) -------------------------------
in Net Assets 1995 1994
-------------- --------------
<S> <C> <C>
Operations
Net investment
income............. $ 69,751,519 $ 71,607,244
Net realized loss on
investment
transactions....... (15,484,052) (5,680,677)
Net change in
unrealized
appreciation/depreciation
of investments..... 10,858,413 (39,373,092)
-------------- --------------
Net increase in net
assets resulting
from operations.... 65,125,880 26,553,475
-------------- --------------
Dividends and
distributions:
Dividends to
shareholders from
net investment
income
Class A............ (4,456,405) (3,401,705)
Class B............ (65,229,614) (68,205,539)
Class C............ (65,500) --
-------------- --------------
(69,751,519) (71,607,244)
-------------- --------------
Distributions to
shareholders in
excess of net
investment income
Class A............ (2,229) --
Class B............ (47,585) --
Class C............ (60) --
-------------- --------------
(49,874) --
-------------- --------------
Distributions to
shareholders from
net realized gains
Class A............ -- (35,027)
Class B............ -- (724,132)
Class C............ -- --
-------------- --------------
-- (759,159)
-------------- --------------
Series share transactions (net
of share conversions) (Note 5)
Net proceeds from
shares sold........ 135,404,221 307,757,433
Net asset value of
shares issued in
reinvestment of
dividends and
distributions...... 31,059,195 32,076,014
Cost of shares
reacquired......... (262,484,590) (211,899,598)
-------------- --------------
Net increase
(decrease) in net
assets from Series
share
transactions....... (96,021,174) 127,933,849
-------------- --------------
Total increase
(decrease)........... (100,696,687) 82,120,921
Net Assets
Beginning of year...... 1,154,130,411 1,072,009,490
-------------- --------------
End of year............ $1,053,433,724 $1,154,130,411
-------------- --------------
-------------- --------------
</TABLE>

See Notes to Financial Statements. See Notes to Financial Statements.

B-43

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND Portfolio of Investments
INSURED SERIES April 30, 1995

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

LONG TERM INVESTMENTS--95.7%
Alabama--1.3%
Huntsville Solid Waste Disp. Auth., F.G.I.C.................. Aaa 7.00 % 10/01/08 $ 2,000 $ 2,137,600
Mobile Wtr. & Swr. Rev., A.M.B.A.C........................... Aaa 5.00 1/01/13 4,840 4,292,499
Univ. Alabama Rev., Birmingham Hosp., M.B.I.A................ Aaa 5.00 10/01/14 2,500 2,199,700
------------
8,629,799
------------
Alaska--1.5%
Alaska St. Energy Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C............................................ Aaa 7.25 7/01/16 2,000 2,143,580
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C....... Aaa 7.125 10/01/05 5,000 5,527,950
North Slope Boro. Cap. Apprec., Ser. B, C.G.I.C.............. Aaa Zero 6/30/05 4,000 2,198,760
------------
9,870,290
------------
Arizona--4.4%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Fac., John C. Lincoln Hosp., F.S.A................... Aaa 7.00 12/01/00 2,740 2,938,075
Hosp. Fac., John C. Lincoln Hosp., F.S.A................... Aaa 7.50 12/01/13 2,250 2,490,232
Maricopa Cnty. Unified Sch. Dist., No.69, Paradise Valley,
Ser. E, F.G.I.C............................................ Aaa 6.80 7/01/12 3,700 4,120,024
Pima Cnty. Ind. Dev. Auth. Rev., Tucson Elec. Pwr. Co.,
F.S.A...................................................... Aaa 7.25 7/15/10 14,000# 15,325,800
Tucson, Gen. Oblig., Ser. 1984, F.G.I.C...................... Aaa 7.625 7/01/14 3,140 3,776,949
------------
28,651,080
------------
California--10.4%
Brea Redev. Agncy., Proj. AB, M.B.I.A........................ Aaa 5.75 8/01/23 2,000 1,877,940
California St. Gen. Oblig.,
M.B.I.A.................................................... Aaa 6.30 9/01/08 6,000 6,338,340
F.G.I.C.................................................... Aaa 6.60 2/01/11 8,510 9,132,847
Victor Valley Union H.S. Dist.,
Gen. Oblig., M.B.I.A....................................... Aaa Zero 9/01/10 2,635 1,048,150
Gen. Oblig., M.B.I.A....................................... Aaa Zero 9/01/11 3,780 1,404,724
Gen. Oblig., M.B.I.A....................................... Aaa Zero 9/01/13 4,450 1,439,175
Gen. Oblig., M.B.I.A....................................... Aaa Zero 9/01/18 4,240 974,394
California St. Hlth. Facs. Fin. Auth. Rev., Catholic Hlth.
Facs., A.M.B.A.C........................................... Aaa 5.00 7/01/14 5,000 4,362,300
Contra Costa Wtr. Dist., Wtr. Rev., Ser. E, A.M.B.A.C........ Aaa 6.25 10/01/12 1,455 1,517,972
San Diego Cnty. Wtr. Auth. Wtr. Rev., Cert. of Part.,
F.G.I.C.................................................... Aaa 5.56 4/26/06 11,600@ 11,562,068
San Jose Redev.,
Rev. Ref. Tax Alloc., M.B.I.A.............................. Aaa 6.00 8/01/07 3,050 3,154,066
Rev. Ref. Tax Alloc., M.B.I.A.............................. Aaa 6.00 8/01/08 4,340 4,455,444
Rev. Ref. Tax Alloc., M.B.I.A.............................. Aaa 6.00 8/01/09 3,250 3,318,445
San Pablo Redev. Agncy., Tax Alloc., F.G.I.C................. Aaa 5.25 12/01/23 3,000 2,613,120
Santa Margarita/Dana Point Auth., Impt. Dist.,
M.B.I.A.................................................... Aaa 7.25 8/01/10 2,180 2,494,509
M.B.I.A.................................................... Aaa 7.25 8/01/11 1,750 2,002,560
</TABLE>

B-44 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

California--cont'd
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C............................... Aaa 8.00 8/15/08 $ 2,500D $ 3,009,725
Foothill Area Proj., F.G.I.C............................... Aaa 6.50 8/15/10 2,725 2,893,568
West & Central Basin Fin. Auth. Rev., Central Basin Proj.,
F.G.I.C.................................................... Aaa 5.00 8/01/13 3,840 3,347,712
------------
66,947,059
------------
Colorado--0.2%
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A....... Aaa 8.875 10/01/13 970 1,044,787
------------
Delaware--0.8%
Delaware St. Econ. Dev. Auth. Rev., Delmarva Pwr. & Lt., Ser.
A, M.B.I.A................................................. Aaa 7.60 3/01/20 5,000 5,439,350
------------
District Of Columbia--2.3%
Dist. of Columbia Met. Area Transit Auth.,
Gross Rev., F.G.I.C........................................ Aaa 6.00 7/01/09 2,400 2,450,352
Gross Rev., F.G.I.C........................................ Aaa 6.00 7/01/10 1,500 1,526,805
Gross Rev., F.G.I.C........................................ Aaa 5.25 7/01/14 5,000 4,502,050
Dist. of Columbia Rev., Ser. A, M.B.I.A...................... Aaa 6.50 6/01/10 6,000 6,168,300
------------
14,647,507
------------
Florida--1.1%
Gulf Breeze Local Gov't. Loan Proj., Ser. 85B, F.G.I.C....... Aaa 8.00 12/01/15 1,500 1,674,420
Univ. Cmnty. Hosp. Inc., Hosp. Rev., F.S.A................... Aaa 7.375 9/01/07 5,000 5,639,550
------------
7,313,970
------------
Georgia--5.4%
Atlanta Arpt. Facs. Rev., A.M.B.A.C.......................... Aaa 6.50 1/01/09 2,000 2,138,540
Atlanta Arpt. Facs. Rev., A.M.B.A.C.......................... Aaa 6.50 1/01/10 2,000 2,134,800
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Corp., 1st Mtg.,
M.B.I.A.................................................... Aaa 8.00 1/01/22 11,000 12,767,920
De Kalb Cnty. Hsg. Auth., Sngl. Fam. Mtge. Rev., G.N.M.A..... AAA* 7.70 2/01/24 3,075# 3,261,099
Fulton Cnty. Hosp. Auth. Rev., Northside Hosp., M.B.I.A...... Aaa 5.375 10/01/12 2,790 2,571,794
Georgia St., Gen. Oblig.,
Ser. D..................................................... Aaa 6.75 8/01/07 3,750 4,224,375
Ser. F..................................................... Aaa 6.50 12/01/09 7,000 7,673,400
------------
34,771,928
------------
Illinois--2.6%
Chicago Residential Mtge. Rev., Ser. B, M.B.I.A.............. Aaa Zero 10/01/09 9,000 3,430,170
City of Chicago, Cook Cnty., Gen. Oblig., F.G.I.C............ Aaa 5.375 1/01/13 3,400 3,090,804
Kane and De Kalb Cntys. Comnty. Unit Sch.,
District No. 301, A.M.B.A.C................................ Aaa Zero 12/01/07 2,265 1,075,921
District No. 301, A.M.B.A.C................................ Aaa Zero 12/01/09 1,740 715,888
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A............................................ Aaa 7.00 7/01/12 1,575 1,625,305
Ser. A, M.B.I.A............................................ Aaa 7.05 7/01/27 6,400 6,608,896
------------
16,546,984
------------
</TABLE>

B-45 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Indiana--2.9%
Indianapolis Arpt. Auth. Rev., M.B.I.A....................... Aaa 9.00 7/01/15 $ 2,450# $ 2,625,151
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C............... Aaa 8.625 10/01/12 8,500# 9,667,475
Rockport Poll. Ctrl. Rev., Ind. & Mich. Elec. Co., Ser. A,
B.I.G...................................................... Aaa 9.25 8/01/14 6,000D 6,194,760
------------
18,487,386
------------
Kansas--0.4%
Sedgwick Cnty. Mtge. Loan Rev., Ser. B, A.M.B.A.C............ Aaa 7.80 6/01/22 2,505 2,650,716
------------
Kentucky--1.7%
Kentucky St. Tpk. Auth. Econ. Dev. Revit. Projs.,
A.M.B.A.C.................................................. Aaa 6.50 7/01/08 8,000 8,671,600
Louisville & Jefferson Cnty. Regl. Arpt. Auth., Ser A,
M.B.I.A.................................................... Aaa 8.375 7/01/07 2,000 2,173,580
------------
10,845,180
------------
Louisiana--2.6%
Jefferson Parish Sales Tax Dist., Ser. A, F.G.I.C............ Aaa 6.75 12/01/06 5,000 5,351,300
Louisiana Hsg. Fin. Agncy., Sngl. Fam. Mtge., Ser. A.,
G.N.M.A.................................................... Aaa 7.80 12/01/26 8,000 8,715,040
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C............ Aaa Zero 9/01/09 4,000 1,687,280
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C............ Aaa Zero 9/01/18 3,000 698,850
------------
16,452,470
------------
Massachusetts--1.6%
Mass. Bay Trans. Auth., Gen. Trans., Ser. A, M.B.I.A......... Aaa 5.50 3/01/09 4,000 3,890,200
Mass. Hlth. & Edl. Facs. Auth. Rev., Mass. Gen. Hosp, Ser.
F., A.M.B.A.C.............................................. Aaa 6.25 7/01/12 1,500 1,546,200
Mass. St. Hsg. Fin. Agcy., Hsg. Rev., Ser. A, B.I.G.......... Aaa 7.75 12/01/19 1,500 1,557,750
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Fallon Hlthcare,
Ser. A, C.G.I.C............................................ Aaa 6.875 6/01/11 3,000 3,189,780
------------
10,183,930
------------
Michigan--4.4%
Michigan St. Bldg. Auth. Rev., A.M.B.A.C..................... Aaa 5.20 10/01/09 8,050 7,492,457
Michigan St. Hosp. Fin. Auth. Rev., Mid Michigan, M.B.I.A.... Aaa 7.50 6/01/15 2,350 2,576,352
Michigan St. Hsg. Dev. Auth., Ser. A, F.G.I.C................ Aaa 7.70 7/01/18 1,500 1,581,090
Monroe Cnty. Poll. Ctrl. Rev.,
Detroit Edison Co. Proj., Ser. I, A.M.B.A.C................ Aaa 7.30 9/01/19 3,250 3,540,615
Detroit Edison Co., Proj. 1, F.G.I.C....................... Aaa 7.65 9/01/20 8,000 8,772,960
Saginaw Hosp. Fin. Auth. Hosp. Rev., St. Luke's Hosp., Ser.
C, M.B.I.A................................................. Aaa 6.50 7/01/11 4,000 4,156,040
------------
28,119,514
------------
Minnesota--1.4%
St. Louis Park Hlth. Facs., Hlthsys. Oblig. Group, Ser. C,
A.M.B.A.C.................................................. Aaa 5.20 7/01/16 10,000 8,958,900
------------
Mississippi--1.9%
Harrison Cnty. Wastewater Mgmt. Dist. Rev., F.G.I.C.......... Aaa 6.50 2/01/06 2,400 2,534,136
Mississippi Hosp. Equip. & Facs. Auth. Rev., Baptist Med.
Ctr., M.B.I.A.............................................. Aaa 7.40 5/01/07 2,000 2,241,560
Mississippi Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev., F.G.I.C.,
Ser. A..................................................... Aaa 7.80 10/15/16 2,210 2,285,737
Mississippi St. Hwy. Ref. Bd................................. Aaa 6.20 2/01/08 5,000 5,256,300
------------
12,317,733
------------
</TABLE>

B-46 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Missouri--1.1%
Missouri St. Hlth. & Edl. Facs. Auth. Rev., M.B.I.A.,
SSM Healthcare, Ser. AA.................................... Aaa 6.25 6/01/16 $ 3,750 $ 3,791,138
St. Lukes Hlth. Sys........................................ Aaa 5.10 11/15/13 4,000 3,571,480
------------
7,362,618
------------
Montana--1.7%
Forsyth Poll. Ctrl. Rev.,
Puget Sound Pwr. & Lt. Co., Ser. A, A.M.B.A.C.............. Aaa 7.05 8/01/21 2,000 2,152,980
Washington Wtr. Pwr. Proj., M.B.I.A........................ Aaa 7.125 12/01/13 8,000D 8,567,840
------------
10,720,820
------------
Nebraska--1.0%
Nebraska Invest. Fin. Auth., G.N.M.A.,
Sngl. Fam. Mtge. Rev., Ser. B, F.G.I.C..................... Aaa 8.00 7/15/17 1,980 2,076,327
Sngl. Fam. Mtge. Rev., Ser. I, M.B.I.A..................... Aaa 8.125 8/15/38 3,900# 4,108,728
------------
6,185,055
------------
New Jersey--6.2%
Garfield Sch. Dist., Cert. of Part., Wtr. Impvt. Dist. No.
31, B.I.G.................................................. Aaa 7.65 6/01/08 3,150D 3,462,165
Jersey City Swr. Auth.,
A.M.B.A.C.................................................. Aaa 6.00 1/01/10 2,585 2,645,618
A.M.B.A.C.................................................. Aaa 6.25 1/01/14 4,255 4,426,604
New Jersey Hlth. Care Facs. Fin. Auth. Rev.,
Allegany Hlth., Our Lady of Lourdes, M.B.I.A............... Aaa 5.125 7/01/13 1,500 1,361,970
Hackensack Med. Ctr., F.G.I.C.............................. Aaa 6.625 7/01/17 5,000 5,205,500
Irvington Gen. Hosp., M.B.I.A.............................. Aaa 9.625 8/01/25 2,500 2,597,800
New Jersey St. Hsg. & Mtge. Fin. Agcy. Rev., Ser. B,
M.B.I.A.................................................... Aaa 7.90 10/01/22 3,385# 3,566,673
New Jersey St. Tpke. Auth.
Ser. C, F.S.A.............................................. Aaa 6.50 1/01/16 4,000 4,274,080
Ser. C, M.B.I.A............................................ Aaa 6.50 1/01/16 11,730 12,533,740
------------
40,074,150
------------
New Mexico--0.9%
Socorro Hosp. Sys. Rev., Cmnty. Hlth. Svcs., Ser. A,
M.B.I.A.................................................... Aaa 9.25 8/01/12 5,315D 5,515,163
------------
New York--6.2%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C........................ Aaa Zero 12/01/17 770 151,359
Islip Res. Rec., Ser. B, A.M.B.A.C........................... Aaa 7.20 7/01/10 1,750 1,990,975
New York City, Ser. D, M.B.I.A............................... Aaa 6.20 2/01/07 8,520 8,947,534
New York St. Dorm. Auth. Rev., Univ. Edl. Facs.,
A.M.B.A.C.................................................. Aaa 5.50 5/15/09 5,000 4,866,400
New York St. Energy Res. & Dev. Auth., Poll. Ctrl. Rev.,
F.G.I.C.................................................... Aaa 7.375 10/01/14 4,000 4,370,200
New York St. Thrwy. Auth. Gen. Rev., Ser. B, M.B.I.A......... Aaa 5.00 1/01/14 10,420 9,172,830
Suffolk Cnty. Ind. Dev. Agcy., SW Swr. Sys. Rev., F.G.I.C.... Aaa 6.00 2/01/08 5,000 5,125,000
Suffolk Cnty. Wtr. Auth. Wtrwks. Rev., M.B.I.A............... Aaa 6.00 6/01/14 5,165 5,199,760
------------
39,824,058
------------
</TABLE>

B-47 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

North Carolina--1.2%
North Carolina Mun. Pwr. Agcy. Elec. Rev., No. 1 Catawba,
M.B.I.A.................................................... Aaa 6.00 1/01/11 $ 7,500 $ 7,644,525
------------
Ohio--0.9%
Cleveland Pub. Pwr. Sys. Rev., Ser. A, M.B.I.A............... Aaa Zero 11/15/11 2,685 993,396
Hamilton Elec. Rev., Ser. A, F.G.I.C......................... Aaa 6.00 10/15/12 5,085 5,088,407
------------
6,081,803
------------
Oklahoma--0.6%
Oklahoma St.Tpke. Auth. Rev., Ser. C, M.B.I.A................ Aaa 6.25 1/01/22 3,950 4,007,315
------------
Pennsylvania--6.8%
Allegheny Cnty. Arpt. Rev., Pittsburgh Int'l. Arpt., Ser. C,
M.B.I.A.................................................... Aaa 8.25 1/01/16 4,800D 5,274,672
North Umberland Cnty. Lease Auth. Rev., Correctional Facs.,
M.B.I.A.................................................... Aaa Zero 10/15/10 7,500 3,033,450
Pennsylvania Intergov't. Coop. Auth. Spec. Tax Rev.,
M.B.I.A.................................................... Aaa 5.625 6/15/23 8,790 8,197,466
Pennsylvania St. Cert. Part., Ser. A, A.M.B.A.C.............. Aaa 5.00 7/01/15 8,740 7,631,943
Philadelphia Arpt. Sys. Rev., A.M.B.A.C...................... Aaa 9.00 6/15/15 6,750# 7,016,557
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser. A,
M.B.I.A.................................................... Aaa 6.90 11/15/03 3,000 3,322,710
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A................ Aaa 5.50 6/15/15 4,500 4,184,055
Pittsburgh Gen. Oblig., Ser. B, F.G.I.C...................... Aaa 7.00 3/01/06 5,000 5,271,900
------------
43,932,753
------------
Puerto Rico--2.4%
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A............................................ Aaa 5.25 1/25/07 8,200@ 8,023,864
Ser. I, M.B.I.A............................................ Aaa 5.45 1/16/15 7,600@ 7,214,300
------------
15,238,164
------------
Rhode Island--1.1%
Rhode Island Hsg. & Mtge. Fin. Corp., M.B.I.A................ Aaa 7.875 10/01/22 6,500# 6,847,880
------------
South Carolina--0.4%
Berkeley Cnty. Wtr. & Swr. Rev., M.B.I.A..................... Aaa 6.50 6/01/06 2,500 2,651,300
------------
Tennessee--2.0%
Knox Cnty. Hlth Edl. Hosp. Facs. Rev., Ser. A, M.B.I.A....... Aaa 5.75 1/01/14 4,840 4,688,798
Tennessee Hsg. Dev. Agcy., B.I.G............................. Aaa 7.65 7/01/20 7,950 8,378,187
------------
13,066,985
------------
Texas--9.3%
Austin Util. Sys. Rev.,
A.M.B.A.C.................................................. Aaa 6.50 5/15/11 5,000 5,189,800
Ser. B, F.G.I.C............................................ Aaa 7.25 11/15/03 3,250 3,577,340
Brazos River Auth. Rev.,
Houston Lt. & Pwr., Ser. A, A.M.B.A.C...................... Aaa 6.70 3/01/17 5,000 5,240,350
Houston Lt. & Pwr., Ser. B, F.G.I.C........................ Aaa 7.20 12/01/18 1,000 1,090,050
</TABLE>

B-48 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Texas--cont'd
Corpus Christi Hsg. Fin. Corp., Sngl. Fam. Mtge., Ser. A,
M.B.I.A.................................................... Aaa 7.70 7/01/11 $ 2,310 $ 2,490,573
Harris Cnty. Toll Rd., Ser. A, F.G.I.C....................... Aaa 8.00 8/15/11 10,290D 12,654,436
Houston Arpt. Sys. Rev....................................... Aaa 7.20 7/01/13 3,900 4,517,487
Matagorda Cnty. Navigation Poll. Ctrl. Rev., Dist. No. 1,
A.M.B.A.C.................................................. Aaa 7.50 12/15/14 2,300 2,538,234
New Braunfels Ind. Sch. Dist. Gen. Oblig..................... Aaa Zero 2/01/07 2,000 1,006,020
Round Rock Ind. Sch. Dist. Gen. Oblig., M.B.I.A.............. Aaa Zero 8/15/11 4,300 1,584,636
Texas St. Mun. Pwr. Agcy. Rev.,
A.M.B.A.C.................................................. Aaa 6.75 9/01/12 3,960 4,189,521
F.G.I.C.................................................... Aaa 5.00 9/01/14 5,000 4,405,750
M.B.I.A.................................................... Aaa Zero 9/01/13 12,300 3,970,932
M.B.I.A.................................................... Aaa Zero 9/01/14 10,000 3,024,000
Texas St. Pub. Fin. Auth. Bldg. Rev., M.B.I.A................ Aaa Zero 2/01/14 6,900 2,163,219
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C................... Aaa 7.50 8/15/13 2,000 2,107,260
------------
59,749,608
------------
Utah--1.3%
Intermountain Pwr. Agcy. Pwr. Supply Rev., Ser. A,
M.B.I.A.................................................... Aaa 5.00 7/01/12 9,250 8,184,308
------------
Virginia--1.2%
Arlington Cnty., Gen Oblig................................... Aaa 6.00 6/01/11 2,000 2,068,920
Southeastern Pub. Svc. Auth. Rev., Regl. Waste Sys.,
B.I.G...................................................... Aaa 7.00 7/01/13 3,000 3,280,410
Virginia Beach Auth. Hosp. Fac., A.M.B.A.C................... Aaa 6.00 2/15/10 1,220 1,236,604
Virginia Beach Auth. Hosp. Fac., A.M.B.A.C................... Aaa 6.00 2/15/13 1,455 1,464,356
------------
8,050,290
------------
Washington--4.5%
Washington Hlth. Care Facs. Auth., Tacoma Multicare Med.
Ctr., F.G.I.C.............................................. Aaa 7.875 8/15/11 5,000 5,477,850
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, B.I.G......................... Aaa 7.00 7/01/04 5,000 5,414,050
Nuclear Proj. No. 2, Ser. A, M.B.I.A....................... Aaa Zero 7/01/11 5,210 1,854,239
Nuclear Proj. No. 2, Ser. B, F.G.I.C....................... Aaa 7.25 7/01/03 3,000 3,324,450
Nuclear Proj. No. 3, Ser. B, F.G.I.C....................... Aaa 7.00 7/01/05 2,000 2,155,580
Nuclear Proj. No. 3, F.G.I.C............................... Aaa Zero 7/01/08 4,500 1,989,990
Nuclear Proj. No. 3, Ser. C, F.S.A......................... Aaa 5.375 7/01/15 10,000 8,919,400
------------
29,135,559
------------
Total Long Term Investments (cost $592,542,884).......................................................... 616,150,937
------------
SHORT TERM INVESTMENTS--1.7%
California--0.6%
California St. Poll. Ctrl. Fin. Auth. Rev., Delano Proj.,
Ser. 91, F.R.D.D........................................... P1 5.20 5/01/95 3,600 3,600,000
------------
Florida--0.8%
Dade Cnty. Ind. Dev. Auth., Pwr. & Lt. Co., Ser. 95,
F.R.D.D.................................................... P1 5.00 5/01/95 3,900 3,900,000
Hillsborough Cnty. Poll. Ctrl. Rev., Tampa Elec. Co. Proj.,
Ser. 93, F.R.D.D........................................... VMIG 5.00 5/01/95 1,500 1,500,000
------------
5,400,000
------------
</TABLE>

B-49 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Texas--0.3%
Brazos River Harbor Nav. Dist. Harbor Rev., Dow Chemical Co.
Proj., Ser. 93, F.R.D.D.................................... P1 5.10 5/01/95 $ 1,900 $ 1,900,000
------------
Total Short Term Investments (cost $10,900,000).......................................................... 10,900,000
------------
Total Investments--97.4% (cost $603,442,884; Note 4)..................................................... 627,050,937
Other assets in excess of liabilities--2.6%.............................................................. 16,922,059
------------
Net Assets--100%......................................................................................... $643,972,996
------------
------------
</TABLE>

(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
B.I.G.--Bond Investors Guaranty Insurance Company
C.G.I.C.--Capital Guaranty Insurance Corporation
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note**
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
@ Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
D Portion of or entire principal amount pledged as initial margin on financial
futures contracts.
# Indicates a when-issued security.
* Standard & Poor's rating.
** 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.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
B-50 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Assets and Liabilities

Assets April 30, 1995
--------------
<S> <C>
Investments, at value (cost $603,442,884)................................................. $ 627,050,937
Cash...................................................................................... 27,657
Receivable for investments sold........................................................... 23,580,252
Interest receivable....................................................................... 10,251,538
Receivable for Fund shares sold........................................................... 539,107
Due from broker-variation margin.......................................................... 31,250
Deferred expenses......................................................................... 22,833
--------------
Total assets.......................................................................... 661,503,574
--------------
Liabilities
Payable for investments purchased......................................................... 14,456,616
Payable for Fund shares reacquired........................................................ 1,505,841
Dividends payable......................................................................... 899,073
Distribution fee payable.................................................................. 243,659
Management fee payable.................................................................... 241,947
Accrued expenses.......................................................................... 183,442
--------------
Total liabilities..................................................................... 17,530,578
--------------
Net Assets................................................................................ $ 643,972,996
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 594,308
Paid-in capital in excess of par........................................................ 634,714,541
--------------
635,308,849
Accumulated net realized losses......................................................... (15,065,062)
Net unrealized appreciation............................................................. 23,729,209
--------------
Net assets, April 30, 1995.............................................................. $ 643,972,996
--------------
--------------
Class A:
Net asset value and redemption price per share
($75,799,616 / 7,000,662 shares of beneficial interest issued and outstanding)........ $10.83
Maximum sales charge (3.0% of offering price)........................................... .33
--------------
Maximum offering price to public........................................................ $11.16
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($567,647,970 / 52,381,685 shares of beneficial interest issued and outstanding)...... $10.84
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($525,410 / 48,483 shares of beneficial interest issued and outstanding).............. $10.84
--------------
--------------
</TABLE>

See Notes to Financial Statements.
B-51

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations

<TABLE>
<CAPTION>
Year Ended
April 30,
Net Investment Income 1995
------------
<S> <C>
Income
Interest........................... $ 42,883,847
------------
Expenses
Management fee, net of waiver of
$106,923........................... 3,392,455
Distribution fee--Class A.......... 39,472
Distribution fee--Class B.......... 3,301,184
Distribution fee--Class C.......... 1,254
Transfer agent's fees and
expenses........................... 570,000
Reports to shareholders............ 208,000
Custodian's fees and expenses...... 104,000
Registration fees.................. 68,000
Legal fees......................... 36,000
Insurance expense.................. 20,000
Trustees' fees..................... 16,000
Audit fees......................... 15,500
Miscellaneous...................... 14,688
------------
Total expenses................... 7,786,553
------------
Net investment income................ 35,097,294
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions............ (10,038,501)
Financial futures contracts........ (68,632)
------------
(10,107,133)
------------
Net change in unrealized
appreciation/(depreciation) of:
Investments........................ 15,575,283
Financial futures contracts........ (1,211,032)
------------
14,364,251
------------
Net gain on investments.............. 4,257,118
------------
Net Increase in Net Assets
Resulting from Operations............ $ 39,354,412
------------
------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended April 30,
Increase (Decrease) -----------------------------
in Net Assets 1995 1994
------------- -------------
<S> <C> <C>
Operations
Net investment
income................. $ 35,097,294 $ 39,499,561
Net realized gain
(loss) on
investment
transactions......... (10,107,133) 8,935,788
Net change in
unrealized
appreciation/(depreciation)
of investments....... 14,364,251 (42,237,908)
------------- -------------
Net increase in net
assets resulting from
operations........... 39,354,412 6,197,441
------------- -------------
Dividends and
distributions (Note 1)
Dividends to
shareholders
from net investment
income
Class A.............. (2,149,982) (1,643,190)
Class B.............. (32,939,088) (37,856,371)
Class C.............. (8,224) --
------------- -------------
(35,097,294) (39,499,561)
------------- -------------
Distributions to
shareholders in
excess of net
investment income
Class A.............. (2,529) --
Class B.............. (60,060) --
Class C.............. (20) --
------------- -------------
(62,609) --
------------- -------------
Distributions to
shareholders from net
realized gains on
investments
Class A.............. -- (834,417)
Class B.............. -- (20,909,142)
Class C.............. -- --
------------- -------------
-- (21,743,559)
------------- -------------
Series share transactions
(net of share
conversions) (Note 5)
Net proceeds from
shares subscribed.... 46,070,613 189,769,487
Net asset value of
shares
issued to
shareholders in
reinvestment of
dividends............ 19,337,321 35,730,676
Cost of shares
reacquired............. (196,745,726) (199,496,131)
------------- -------------
Increase (decrease) in
net assets from
Series share
transactions......... (131,337,792) 26,004,032
------------- -------------
Total decrease........... (127,143,283) (29,041,647)
Net Assets
Beginning of year........ 771,116,279 800,157,926
------------- -------------
End of year.............. $ 643,972,996 $ 771,116,279
------------- -------------
------------- -------------
</TABLE>

See Notes to Financial Statements. See Notes to Financial Statements.

B-52

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND Portfolio of Investments
MODIFIED YIELD SERIES April 30, 1995

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

LONG TERM INVESTMENTS--96.2%
Alabama--2.2%
Univ. So. Alabama Hosp. & Auxiliary Rev., A.M.B.A.C.......... Aaa 7.00 % 5/15/04 $ 1,250#/DD $ 1,360,263
-----------
Alaska--4.9%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund.......... A 5.40 4/01/01 1,005 984,538
Alaska St. Hsg. Fin. Corp. Collat. Mtge. Oblig............... Aaa 5.70 12/01/11 1,000 925,160
No. Slope Boro., Gen. Oblig., Ser. C......................... Baa1 8.35 6/30/98 1,000 1,090,590
-----------
3,000,288
-----------
Arizona--4.7%
Maricopa Cnty., Cmnty. Coll.................................. Aa 6.00 7/01/06 1,500 1,555,515
Univ. Arizona Rev............................................ A1 4.60 6/01/05 1,515 1,376,423
-----------
2,931,938
-----------
California--8.4%
Oxnard Fin. Auth. Lease Rev., F.S.A.......................... Aaa 5.375 6/01/08 2,000 1,898,020
San Jose Redev.,
Rev. Ref. Tax Alloc., M.B.I.A.............................. Aaa 6.00 8/01/08 500 513,300
Tax Allocation, M.B.I.A.................................... Aaa 6.00 8/01/06 500 520,725
Statewide Cmntys. Dev. Corp.,
Cedars Sinai Med. Ctr...................................... A1 4.80 11/01/04 1,000 928,380
J. Paul Getty Trust........................................ Aaa 4.80 10/01/08 1,500 1,340,685
-----------
5,201,110
-----------
Colorado--6.1%
Colorado Student Oblig. Bond Auth., Student Loan Rev., Ser.
A3......................................................... A 7.25 9/01/05 1,480# 1,550,241
Denver City & Cnty. Arprt. Rev., Ser. A...................... Baa 7.30 11/15/03 1,250 1,297,312
Jefferson Cnty. Sch. Dst. R-001.............................. AA* 4.50 12/15/03 1,000 923,520
-----------
3,771,073
-----------
Connecticut--1.8%
Connecticut Spec. Tax Oblig. Rev., Ser. A.................... A1 7.00 6/01/03 1,000 1,095,820
-----------
District Of Columbia--1.1%
Dist. Columbia Rev., America Geophysical Union, Ser. 199..... BBB-* 5.50 9/01/03 700 656,684
-----------
Florida--1.5%
Dade Cnty. Pub. Facs. Rev., Jackson Mem. Hosp., M.B.I.A.,
Ser. A..................................................... Aaa 4.75 6/01/08 1,000 905,390
-----------
Georgia--1.8%
Burke Cnty. Dev. Auth. Poll. Ref. Oglethorpe Pwr. Co. Vogtle,
M.B.I.A.................................................... Aaa 7.50 1/01/03 1,000 1,098,780
-----------
Guam--1.5%
Guam Pwr. Auth. Rev., Ser. A................................. BBB* 5.25 10/01/05 1,000 953,610
-----------
</TABLE>

B-53 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Hawaii--1.8%
Hawaii Cnty., Gen. Oblig., F.G.I.C., Ser. A#................. Aaa 7.20 6/01/05 $ 1,000D $ 1,105,530
-----------
Illinois--0.7%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A........ A 5.75 2/15/09 450 424,391
-----------
Indiana--2.4%
Indiana Univ. Student Fee, Ser. G............................ A1 6.90 8/01/03 500 540,240
Indianapolis Gas Util. Rev., F.G.I.C., Ser. B................ Aaa 5.00 6/01/06 1,000 948,890
-----------
1,489,130
-----------
Maryland--3.6%
Maryland St. Stadium Auth. Lease Rev. Conv. Ctr. Expansion,
A.M.B.A.C.................................................. Aaa 5.375 12/15/00 1,000 1,012,750
Northeast Maryland Waste Disp. Auth., Mont. Co. Res. Rec..... A 5.90 7/01/05 1,250 1,236,700
-----------
2,249,450
-----------
Massachusetts--1.8%
Mass. Gen. Oblig., Ser. C#................................... A 6.75 8/01/06 1,000 1,104,780
-----------
Michigan--4.0%
Greenville Pub. Sch., M.B.I.A................................ Aaa 5.75 5/01/09 1,000 992,400
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj.,
M.B.I.A.#.................................................. Aaa 7.40 12/01/02 500 566,890
Michigan St. Hosp. Fin. Auth. Rev., Sisters Of Mercy,
M.B.I.A.................................................... Aaa 4.70 8/15/03 1,000 939,250
-----------
2,498,540
-----------
Minnesota--1.8%
Minneapolis-St. Paul Hsg., Redev. Auth., Hlth. Care Sys.
Rev., M.B.I.A., Ser. A..................................... Aaa 7.20 8/15/00 1,000# 1,097,760
-----------
Missouri--0.8%
New Madrid Elec. Pwr. Place Rev. Ref., A.M.B.A.C............. Aaa 5.35 12/01/00 500 504,775
-----------
New Jersey--3.2%
New Jersey Econ. Dev. Auth.,
Mkt. Transition Fac. Rev., M.B.I.A......................... Aaa 5.75 7/01/06 950 952,233
Mkt. Transition Fac. Rev., M.B.I.A......................... Aaa 5.80 7/01/07 1,000 998,170
-----------
1,950,403
-----------
New York--5.1%
Met.Transportation Auth. Trans. Facs. Rev., M.B.I.A.......... Aaa 4.30 7/01/01 1,150 1,081,357
Nassau Cnty. Swr. Gen. Oblig., F.G.I.C., Ser. B.............. Aaa 4.75 5/01/06 1,075 995,654
New York City Gen. Oblig., Ser. B............................ Baa1 7.50 2/01/01 1,000 1,070,990
-----------
3,148,001
-----------
</TABLE>

B-54 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Ohio--0.8%
Ohio St. Bldg. Auth., Admin. Bldg. Fund Projs., M.B.I.A...... Aaa 5.60 10/01/06 $ 500 $ 505,020
-----------
Oregon--3.0%
Multnomah Cnty. Sch. Dist. No. 3, Park Rose, F.G.I.C......... Aaa 5.60 12/01/07 1,000 1,002,310
Oregon St., Dept. Trans. Rev., M.B.I.A....................... Aaa 7.00 6/01/03 750 840,825
-----------
1,843,135
-----------
Pennsylvania--7.2%
Allegheny Cnty. Ind. Dev. Rev., USX Proj..................... Baa3 5.30 12/01/96 1,000 991,690
Montgomery Cnty. Redev. Auth., Multifamily Hsg. Rev., Ser.
A.......................................................... NR 5.75 7/01/99 780 758,534
Pennsylvania Hsg. Fin. Agcy., Sngl. Fam. Mtge. Rev........... AAA* 6.20 7/01/25 1,000 1,022,360
Pennsylvania St. Gen. Oblig., F.S.A., Ser. A................. Aaa 6.25 11/01/06 600 623,226
Philadelphia Hosp. Auth. & Higher Ed. Auth., Childrens
Seashore House, Ser. A..................................... A-* 7.00 8/15/03 1,000 1,033,480
-----------
4,429,290
-----------
Puerto Rico--10.3%
Puerto Rico Comnwlth., M.B.I.A., Ser. A...................... Aaa 6.25 7/01/10 750 775,830
Puerto Rico Elec. Pwr. Auth. Rev., Ser. S.................... Baa1 6.00 7/01/04 1,500 1,541,355
Puerto Rico Hsg. Bank & Fin. Agcy............................ Baa 5.125 12/01/05 1,000 936,540
Puerto Rico Hwy. & Trans. Auth. Rev.,
Ser. Q..................................................... Baa1 7.50 7/01/01 330 363,756
Ser. Q..................................................... Baa1 7.60 7/01/02 975 1,086,579
Ser. X..................................................... Baa1 4.90 7/01/01 750 725,497
Puerto Rico Ind. Med. & Environ. Fac. Fin. Auth. Rev......... A3 4.00 9/01/13 1,000@ 952,370
-----------
6,381,927
-----------
Texas--9.3%
Carrollton Farmers Indpt. Sch. Dist.......................... Aa 8.375 2/15/99 1,300 1,456,546
Dallas Ft. Worth Int'l. Arpt., Ser. A........................ NR 5.875 11/01/06 1,000 1,013,720
Harris Cnty., Toll Rd........................................ Aa 7.20 8/01/98 500 537,460
Harris Cnty., Toll Rd., A.M.B.A.C............................ Aaa 5.125 8/15/08 1,500 1,398,990
San Antonio Elec. & Gas Rev., F.G.I.C., Ser. A............... Aaa Zero 2/01/05 1,000 575,110
Texas Gen. Oblig., Veterans Hsg. Asst., F.H.A................ Aa 6.05 12/01/12 750# 741,952
-----------
5,723,778
-----------
Utah--1.7%
Utah St. Brd. of Regents, Student Loan Rev., A.M.B.A.C., Ser.
F.......................................................... Aaa 7.00 11/01/01 1,000D/# 1,069,850
-----------
</TABLE>

B-55 See Notes to Financial Statements.

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED SERIES

<TABLE>
<CAPTION>
Moody's Par
Rating Interest Maturity Value Market
Description (Unaudited) Rate Date (000) Value
<S> <C> <C> <C> <C> <C>

Washington--4.7%
Washington St. Pub. Pwr. Supp. Sys.,
Nuclear Proj. No. 2, Ser. A................................ Aa 4.90 7/01/05 $ 2,000 $ 1,819,860
Nuclear Proj. No.3, Ser. B................................. Aa 7.00 7/01/99 1,000 1,063,200
-----------
2,883,060
-----------
Total Investments--96.2% (cost $ 58,808,272; Note 4)..................................................... 59,383,776
Other assets in excess of liabilities--3.8%.............................................................. 2,329,701
-----------
Net Assets--100%......................................................................................... $61,713,477
-----------
-----------
</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.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association

D Portion of or entire principal amount pledged as initial margin on financial
futures contracts.
DD Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
# Indicates a when-issued security.
@ Indicates a variable rate security.
* Standard & Poor's Rating.

NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
B-56 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED TERM SERIES
Statement of Assets and Liabilities

Assets April 30, 1995
--------------
<S> <C>
Investments, at value (cost $58,808,272).................................................. $ 59,383,776
Cash...................................................................................... 53,385
Interest receivable....................................................................... 1,126,512
Receivable for investments sold........................................................... 1,081,758
Receivable for Fund shares sold........................................................... 229,281
Due from broker-variation margin.......................................................... 1,562
Deferred expenses......................................................................... 2,077
--------------
Total assets.......................................................................... 61,878,351
--------------
Liabilities
Dividends payable......................................................................... 75,213
Payable for Fund shares reacquired........................................................ 38,212
Management fee payable.................................................................... 23,001
Distribution fee payable.................................................................. 22,079
Accrued expenses.......................................................................... 6,369
--------------
Total liabilities..................................................................... 164,874
--------------
Net Assets................................................................................ $ 61,713,477
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 59,055
Paid-in capital in excess of par........................................................ 62,049,545
--------------
62,108,600
Accumulated net realized loss on investments............................................ (929,782)
Net unrealized appreciation on investments.............................................. 534,659
--------------
Net assets, April 30, 1995.............................................................. $ 61,713,477
--------------
--------------
Class A:
Net asset value and redemption price per share
($10,507,353 / 1,005,718 shares of beneficial interest issued and outstanding)........ $10.45
Maximum sales charge (3.0% of offering price)........................................... .32
--------------
Maximum offering price to public........................................................ $10.77
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($51,039,018 / 4,883,778 shares of beneficial interest issued and outstanding)........ $10.45
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($167,106 / 15,989 shares of beneficial interest issued and outstanding).............. $10.45
--------------
--------------
</TABLE>

See Notes to Financial Statements.
B-57

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED TERM SERIES
Statement of Operations

<TABLE>
<CAPTION>
Year Ended
April 30,
Net Investment Income 1995
----------
<S> <C>
Income
Interest............................. $3,927,905
----------
Expenses
Management fee, net of waiver of
$10,233.............................. 329,452
Distribution fee--Class A............ 7,742
Distribution fee--Class B............ 300,869
Distribution fee--Class C............ 158
Custodian's fees and expenses........ 93,000
Reports to shareholders.............. 89,200
Transfer agent's fees and expenses... 54,000
Legal fees........................... 23,000
Registration Fees.................... 17,000
Trustees' fees....................... 16,500
Audit fees........................... 10,500
Miscellaneous........................ 6,979
----------
Total expenses..................... 948,400
----------
Net investment income.................. 2,979,505
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions.............. (485,302)
Financial futures contracts.......... (173,569)
----------
(658,871)
----------
Net change in unrealized
appreciation (depreciation) of:
Investments.......................... 290,262
Financial futures contracts.......... (261,563)
----------
28,699
----------
Net loss on investments................ (630,172)
----------
Net Increase in Net Assets
Resulting from Operations.............. $2,349,333
----------
----------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED TERM SERIES
Statement of Changes in Net Assets

<TABLE>
<CAPTION>
Years Ended April 30,
Increase (Decrease) ---------------------------
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income.... $ 2,979,505 $ 2,760,661
Net realized gain (loss)
on investment
transactions........... (658,871) 2,063,495
Net change in unrealized
appreciation
(depreciation) of
investments............ 28,699 (3,673,322)
------------ ------------
Net increase in net
assets
resulting from
operations............. 2,349,333 1,150,834
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment
income
Class A................ (368,417) (230,644)
Class B................ (2,610,175) (2,530,017)
Class C................ (913) --
------------ ------------
(2,979,505) (2,760,661)
------------ ------------
Distributions to
shareholders in
excess of net
investment income
Class A................ (4,934) --
Class B................ (34,699) --
Class C................ (9) --
------------ ------------
(39,642) --
------------ ------------
Distributions to
shareholders from net
realized gains
Class A................ (102,830) (104,832)
Class B................ (1,139,663) (1,198,718)
Class C................ -- --
------------ ------------
(1,242,493) (1,303,550)
------------ ------------
Series share transactions
(net of share conversions)
(Note 5)
Net proceeds from shares
issued 13,939,416 28,144,358
Net asset value of shares
issued to shareholders
in
reinvestment of
dividends and
distributions.......... 2,761,015 2,666,224
Cost of shares
reacquired............... (24,099,780) (17,514,873)
------------ ------------
Increase (decrease) in
net assets from Fund
share transactions..... (7,399,349) 13,295,709
------------ ------------
Total increase
(decrease)................. (9,311,656) 10,382,332
------------ ------------
Net Assets
Beginning of year.......... 71,025,133 60,642,801
------------ ------------
End of year................ $ 61,713,477 $ 71,025,133
------------ ------------
------------ ------------
</TABLE>

See Notes to Financial Statements. See Notes to Financial Statements.

B-58

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Notes to Financial Statements

Prudential Municipal Bond Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was organized as an unincorporated business trust in
Massachusetts on November 3, 1986 and consists of three series: the High Yield
Series, the Insured Series and the Modified Term Series. The Fund had no
operations until July 27, 1987 when 10,005 shares of beneficial interest (3,335
shares of each of the series) were sold at $10.00 per share to Prudential
Securities Incorporated (``PSI''). The monies of each series are invested in
separate, independently managed portfolios. Investment operations for Class A,
Class B and Class C shares commenced on January 22, 1990, September 17, 1987 and
August 1, 1994, respectively.
The investment objectives of the series are as follows: (i) the objective of
the High Yield Series is to provide the maximum amount of income that is
eligible for exclusion from federal income taxes, (ii) the objective of the
Insured and Modified Term Series is to provide the maximum amount of income that
is eligible for exclusion from federal income taxes consistent with the
preservation of capital. The ability of issuers of debt securities held by the
Fund to meet their obligations may be affected by economic and political
developments in a specific state, region or industry.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

Note 1. Accounting Securities Valuation:
Policies Municipal securities (includ-
ing commitments to purchase such securities on a
``when-issued'' basis) are valued 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.
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 Fund 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 Fund 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 Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities or securities the Fund intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly the Fund 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 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. Premiums paid on purchases of portfolio securities are amortized
as adjustments to interest income. Net investment income, other than
distribution fees, and realized and unrealized 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 tax paying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all net income to shareholders.
For this reason and because substantially all of the Fund's gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
B-59

<PAGE>
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. For
the fiscal year ended April 30, 1995, the effect of applying this statement was
to increase undistributed net investment income and increase accumulated
realized losses by $49,874, $62,609 and $39,642 for the High Yield Series,
Insured Series and Modified Term Series, respectively. Net investment income,
net realized gains and net assets were not affected by this change.

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 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 each series.
Effective January 1, 1995, PMF has agreed to voluntarily waive a portion of each
Series' management fee, which amounted to $172,278, $106,923, and $10,233 for
the High Yield Series, Insured Series, and Modified Series, respectively. Such
amounts represented .05 of 1% of average daily net assets, as annualized, for
each Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as the distributor of the Class B and Class C shares of the Fund
(collectively the ``Distributors''). The Fund compensates the Distributors 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
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 April 30, 1995.
PMFD has advised the Fund that it received approximately $261,200
($164,400-High Yield Series; $56,600-Insured Series; $40,200-Modified Term
Series) in front-end sales charges resulting from sales of Class A shares during
the year ended April 30, 1995. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons and incurred other
distribution costs.
PSI has advised the Fund that for the year ended April 30, 1995, it received
approximately $4,173,000 ($2,350,000-High Yield Series; $1,588,400-Insured
Series; $234,600-Modified Term Series) in contingent deferred sales charges
imposed upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PIC and PMF are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.

Note 3. Other Prudential Mutual Fund Ser-
Transactions With vices, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended April 30, 1995, the Fund incurred fees of approximately $763,000
($410,000--High Yield Series; $315,000--Insured Series; $38,000--Modified Term
Series) for the services of PMFS. As of April 30, 1995, approximately $61,900
($33,700--High Yield Series; $25,100--Insured Series; $3,100--Modified Term
Series) of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations also include certain out of pocket expenses paid to
non-affiliates.
B-60

<PAGE>

Note 4. Portfolio Purchases and sales of port-
Securities folio securities, excluding
short-term investments, for the year ended April
30, 1995, were as follows:

Series Purchases Sales
- --------------------------- ------------ ------------
<S> <C> <C>
High Yield................. $408,920,993 $502,349,941
Insured.................... 418,558,042 543,026,752
Modified Term.............. 19,658,214 26,832,624
</TABLE>

At April 30, 1995, the Modified Term Series bought 30 financial futures
contracts of U.S. Treasury Bonds expiring in June, 1995. In addition, the High
Yield Series, Insured Series and Modified Term Series sold 200, 100, and 5
financial futures contracts, respectively, on the Municipal Bond Index expiring
in June, 1995.
The values of these financial futures contracts at April 30, 1995 were as
follows:

<TABLE>
<CAPTION>
Financial Futures
Contracts Bought/Sold
-----------------------------------------
High Yield Insured Modified
Series Series Series
------------ ----------- ----------
<S> <C> <C> <C>
Value at
disposi-
tion......... $ 17,955,375 $ 9,030,531 $3,564,936
Value at April
30, 1995..... 17,818,750 8,909,375 3,605,781
------------ ----------- ----------
Unrealized gain
(loss)....... $ 136,625 $ 121,156 $ (40,845)
------------ ----------- ----------
------------ ----------- ----------
</TABLE>

The federal income tax basis of the Fund's investments, at April 30, 1995 was
$1,017,378,109-High Yield Series; $603,444,184-Insured Series; and
$58,808,272-Modified Term Series and, accordingly, net unrealized appreciation
of investments for federal income tax purposes was as follows:

<TABLE>
<CAPTION>
Net
unrealized Gross Gross
appreciation unrealized unrealized
Series (depreciation) appreciation depreciation
- ------------ ------------ ----------- ------------
<S> <C> <C> <C>
High
Yield..... $ 23,078,661 $46,457,947 $(23,379,286)
Insured..... 23,606,753 28,071,538 (4,464,785)
Modified.... 575,504 1,779,939 (1,204,435)
</TABLE>

The High Yield Series has a net capital loss carryforward as of April 30,
1995 of approximately $7,385,000, of which $2,024,000 expires in 2002 and
$5,361,000 expires in 2003. The Insured Series has a net capital loss
carryforward of $11,614,000, which expires in 2003. In addition, the High Yield
Series, Insured Series and Modified Term Series elected to treat net realized
capital losses of approximately $13,718,000, $3,357,000, and $971, 000,
respectively incurred in the six month period ended April 30, 1995, as having
been incurred in the following year.

Note 5. Capital Each 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 3.0%. 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. Commencing
in February 1995, 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. Classes of shares have equal rights as to earnings,
assets and voting privileges except that each class bears different distribution
expenses and has exclusive voting rights with respect to its distribution plan.

B-61

<PAGE>
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 were as follows:

<TABLE>
<CAPTION>
High Yield Series Insured Series Modified Term Series
Class A Class A Class A
---------------------------- ---------------------------- --------------------------
Year Ended April 30, 1995 Shares Amount Shares Amount Shares Amount
- ----------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................ 1,722,172 $ 18,074,186 578,436 $ 6,194,773 386,371 $ 4,053,460
Shares issued in reinvestment
of dividends and
distributions.............. 191,061 2,032,345 117,327 1,252,497 28,292 294,023
Shares reacquired............ (2,449,412) (25,729,145) (1,161,102) (12,310,078) (528,916) (5,396,007)
----------- ------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
shares outstanding before
conversion................. (536,179) (5,622,614) (465,339) (4,862,808) (114,253) (1,048,524)
Shares issued upon conversion
from Class B............... 6,231,397 65,928,185 4,601,490 49,190,670 575,671 5,946,716
----------- ------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
shares outstanding......... 5,695,218 $ 60,305,571 4,136,151 $ 44,327,862 461,418 $ 4,898,192
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
Year Ended April 30, 1994
- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................ 2,534,562 $ 28,590,668 781,363 $ 9,004,329 299,213 $ 3,353,193
Shares issued in reinvestment
of dividends and
distributions.............. 139,629 1,569,710 136,891 1,570,343 20,276 226,541
Shares reacquired............ (1,507,559) (16,901,433) (685,468) (7,770,170) (99,485) (1,103,936)
----------- ------------- ----------- ------------- ---------- ------------
Increase in shares
outstanding................ 1,166,632 $ 13,258,945 232,786 $ 2,804,502 220,004 $ 2,475,798
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
Class B Class B Class B
---------------------------- ---------------------------- --------------------------
Year Ended April 30, 1995 Shares Amount Shares Amount Shares Amount
- ----------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................ 10,730,386 $ 113,885,074 3,705,037 $ 39,356,337 933,582 $ 9,719,753
Shares issued in reinvestment
of dividends and
distributions.............. 2,736,532 28,982,453 1,703,306 18,078,117 236,331 2,466,290
Shares reacquired............ (22,442,732) (236,469,222) (17,535,273) (184,427,038) (1,817,018) (18,703,768)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares out-
standing before
conversion................. (8,975,814) (93,601,695) (12,126,930) (126,992,584) (647,105) (6,517,725)
Shares reacquired upon
conversion into Class A.... (6,231,397) (65,928,185) (4,597,262) (49,190,670) (575,671) (5,946,716)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares out-
standing................... (15,207,211) $(159,529,880) (16,724,192) $(176,183,254) (1,222,776) $(12,464,441)
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
Year Ended April 30, 1994
- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................ 24,747,145 $ 279,166,765 15,666,431 $ 180,765,158 2,220,623 $ 24,791,165
Shares issued in reinvestment
of dividends and
distributions.............. 2,712,412 30,506,304 2,973,210 34,160,333 218,375 2,439,638
Shares reacquired............ (17,392,980) (194,998,165) (16,827,416) (191,725,961) (1,478,665) (16,410,937)
----------- ------------- ----------- ------------- ---------- ------------
Increase in shares
outstanding................ 10,066,577 $ 114,674,904 1,812,225 $ 23,199,530 960,333 $ 10,819,866
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
Class C Class C Class C
August 1, 1994* through April ---------------------------- ---------------------------- --------------------------
30, 1995 Shares Amount Shares Amount Shares Amount
- ----------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................ 322,757 $ 3,444,961 48,655 $ 519,503 15,922 $ 166,203
Shares issued in reinvestment
of dividends and
distributions.............. 4,207 44,397 631 6,707 67 702
Shares reacquired............ (27,756) (286,223) (803) (8,610) -- (5)
----------- ------------- ----------- ------------- ---------- ------------
Increase in shares
outstanding................ 299,208 $ 3,203,135 48,483 $ 517,600 15,989 $ 166,900
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-62

<PAGE>

Note 6. Subsequent The Board of Trustees of the
Event Prudential Municipal Bond
Fund has approved a name change for the Modified
Term Series to the Intermediate Series, effective June 29, 1995.

B-63

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Financial Highlights

<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- --------------------------------------
Years Ended April 30, Years Ended April 30,
PER SHARE OPERATING ---------------------------------------------------- --------------------------------------
PERFORMANCE: 1995 1994 1993 1992 1991 1995 1994 1993
-------- ------- ------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period......................... $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.33 $ 10.74 $ 11.14 $ 10.68
-------- ------- ------- ------- ------- ---------- ---------- ----------
Income from investment
operations
Net investment income........... .72D .72 .77 .77D .79D .68D .68 .73
Net realized and unrealized gain
(loss) on investment
transactions................... (.02) (.39) .46 .23 .12 (.02) (.39) .46
-------- ------- ------- ------- ------- ---------- ---------- ----------
Total from investment
operations................... .70 .33 1.23 1.00 .91 .66 .29 1.19
-------- ------- ------- ------- ------- ---------- ---------- ----------
Less distributions
Dividends from net investment
income......................... (.72) (.72) (.77) (.77) (.79) (.68) (.68) (.73)
Distributions from capital
gains.......................... -- (.01) -- -- -- -- (.01) --
-------- ------- ------- ------- ------- ---------- ---------- ----------
Total distributions............ (.72) (.73) (.77) (.77) (.79) (.68) (.69) (.73)
-------- ------- ------- ------- ------- ---------- ---------- ----------
Net asset value, end of
period......................... $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.72 $ 10.74 $ 11.14
-------- ------- ------- ------- ------- ---------- ---------- ----------
-------- ------- ------- ------- ------- ---------- ---------- ----------
TOTAL RETURN#: 6.90% 2.88% 11.90% 9.82% 9.14% 6.37% 2.46% 11.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $115,501 $54,491 $43,529 $24,725 $15,089 $934,725 $1,099,640 $1,028,480
Average net assets (000)........ $65,207 $52,982 $31,658 $19,702 $11,594 $1,024,132 $1,132,653 $893,203
Ratios to average net assets:##
Expenses, including
distribution fees............ 0.69%D 0.69% 0.74% 0.65%D 0.60%D 1.09%D 1.09% 1.14%
Expenses, excluding
distribution fees............ 0.59%D 0.59% 0.64% 0.55%D 0.50%D 0.59%D 0.58% .64%
Net investment income.......... 6.83%D 6.42% 7.04% 7.25%D 7.62%D 6.37%D 6.02% 6.66%
Portfolio turnover rate......... 39% 36% 27% 34% 29% 39% 36% 27%
<CAPTION>
Class C
----------
August 1,
1994@
Through
PER SHARE OPERATING April 30,
PERFORMANCE: 1992 1991 1995
-------- -------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period......................... $ 10.45 $ 10.34 $10.79
-------- -------- -----

Income from investment
operations
Net investment income........... .73D .75D .49D
Net realized and unrealized gain
(loss) on investment
transactions................... .23 .11 (.07)
-------- -------- -----

Total from investment
operations................... .96 .86 .42
-------- -------- -----

Less distributions
Dividends from net investment
income......................... (.73) (.75) (.49)
Distributions from capital
gains.......................... -- -- --
-------- -------- -----

Total distributions............ (.73) (.75) (.49)
-------- -------- -----

Net asset value, end of
period......................... $ 10.68 $ 10.45 $10.72
-------- -------- -----
-------- -------- -----
TOTAL RETURN#: 9.40% 8.59% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $803,838 $701,483 $3,208
Average net assets (000)........ $759,779 $667,751 $1,385
Ratios to average net assets:##
Expenses, including
distribution fees............ 1.05%D 1.00%D 1.34%D*
Expenses, excluding
distribution fees............ 0.55%D 0.50%D 0.59%D*
Net investment income.......... 6.85%D 7.22%D 6.34%D*
Portfolio turnover rate......... 34% 29% 39%
</TABLE>

- ---------------
@ Commencement of offering of Class C shares.
* Annualized.
# 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 reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the event referred to in @ and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A
or B shares and are not necessarily indicative of future ratios.
D Net of expense subsidy, fee waivers and distribution fee deferrals.

See Notes to Financial Statements.

B-64

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Financial Highlights

<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------- --------------------------------
Years Ended April 30, Years Ended April 30,
PER SHARE OPERATING -------------------------------------------------- --------------------------------
PERFORMANCE: 1995 1994 1993 1992 1991 1995 1994 1993
------- ------- ------- ------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 10.71 $ 11.44 $ 10.98 $ 10.76 $10.25 $ 10.71 $ 11.44 $ 10.99
------- ------- ------- ------- ------ -------- -------- --------
Income from investment operations
Net investment income................. .58D .58 .61 .66D .67D .54D .54 .56
Net realized and unrealized
gain (loss) on investment
transactions......................... .12 (.43) .73 .24 .54 .13 (.43) .72
------- ------- ------- ------- ------ -------- -------- --------
Total from investment operations..... .70 .15 1.34 .90 1.21 .67 .11 1.28
------- ------- ------- ------- ------ -------- -------- --------
Less distributions
Dividends from net investment
income............................... (.58) (.58) (.61) (.66) (.67) (.54) (.54) (.56)
Distributions from capital gains...... -- (.30) (.27) (.02) (.03) -- (.30) (.27)
------- ------- ------- ------- ------ -------- -------- --------
Total distributions.................. (.58) (.88) (.88) (.68) (.70) (.54) (.84) (.83)
------- ------- ------- ------- ------ -------- -------- --------
Net asset value, end of period........ $ 10.83 $ 10.71 $ 11.44 $ 10.98 $10.76 $ 10.84 $ 10.71 $ 11.44
------- ------- ------- ------- ------ -------- -------- --------
------- ------- ------- ------- ------ -------- -------- --------
TOTAL RETURN#: 6.73% 1.04% 12.68% 8.59% 11.86% 6.40% 0.63% 12.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $75,800 $30,669 $30,098 $19,177 $7,630 $567,648 $740,447 $770,060
Average net assets (000).............. $39,471 $32,309 $24,589 $12,731 $5,164 $660,237 $807,794 $705,846
Ratios to average net assets:##
Expenses, including distribution
fees............................... .74%D 0.71% 0.72% 0.62%D 0.61%D 1.14%D 1.11% 1.12%
Expenses, excluding distribution
fees............................... .64%D 0.61% 0.62% 0.52%D 0.51%D .64%D 0.61% 0.62%
Net investment income................ 5.45%D 5.09% 5.46% 6.06%D 6.38%D 4.99%D 4.69% 5.06%
Portfolio turnover rate............... 64% 105% 85% 56% 51% 64% 105% 85%
<CAPTION>
Class C
----------
August 1,
1994@
Through
PER SHARE OPERATING April 30,
PERFORMANCE: 1992 1991 1995
-------- -------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period............................... $ 10.76 $ 10.25 $10.79
-------- -------- -----

Income from investment operations
Net investment income................. .62D .63D .39D
Net realized and unrealized
gain (loss) on investment
transactions......................... .25 .54 .05
-------- -------- -----
Total from investment operations..... .87 1.17 .44
-------- -------- -----
Less distributions
Dividends from net investment
income............................... (.62) (.63) (.39)
Distributions from capital gains...... (.02) (.03) --
-------- -------- -----
Total distributions.................. (.64) (.66) (.39)
-------- -------- -----
Net asset value, end of period........ $ 10.99 $ 10.76 $10.84
-------- -------- -----
-------- -------- -----
TOTAL RETURN#: 8.24% 11.43% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $638,451 $578,412 $ 525
Average net assets (000).............. $609,516 $537,275 $ 224
Ratios to average net assets:##
Expenses, including distribution
fees............................... 1.02%D 1.01%D 1.39%*D
Expenses, excluding distribution
fees............................... 0.52%D 0.51%D .64%*D
Net investment income................ 5.66%D 5.98%D 4.92%*D
Portfolio turnover rate............... 56% 51% 64%
</TABLE>

- ---------------
@ Commencement of offering of Class C shares.
* Annualized.
# 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.
## Because of the event referred to in @ and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A
or B shares and are not necessarily indicative of future ratios.
D Net of expense subsidy, fee waivers and distribution fee deferrals.

See Notes to Financial Statements.
B-65

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
MODIFIED TERM SERIES
Financial Highlights

Class A Class B
-------------------------------------------------- --------------------------------
Years Ended April 30, Years Ended April 30,
PER SHARE OPERATING -------------------------------------------------- --------------------------------
PERFORMANCE: 1995 1994 1993 1992 1991 1995 1994 1995
------- ------- ------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period........................... $ 10.67 $11.08 $10.59 $10.48 $ 9.98 $ 10.68 $ 11.09 $ 10.60
------- ------ ------ ------ ------ ------- ------- -------
Income from investment operations
Net investment income.................. .51D .53 .54D .57D .59D .45D .48 .50D
Net realized and unrealized gain
(loss) on investment transactions..... (.03) (.19) .60 .26 .50 (.04) (.19) .60
------- ------ ------ ------ ------ ------- ------- -------
Total from investment
operations........................... .48 .34 1.14 .83 1.09 .41 .29 1.10
------- ------ ------ ------ ------ ------- ------- -------
Less distributions
Dividends from net investment income.. (.51) (.53) (.54) (.57) (.59) (.45) (.48) (.50)
Distributions in excess of net
investment income.................... (.01) -- -- -- -- (.01) -- --
Distributions from capital gains...... (.18) (.22) (.11) (.15) -- (.18) (.22) (.11)
------- ------ ------ ------ ------ ------- ------- -------
Total distributions.................. (.70) (.75) (.65) (.72) (.59) (.64) (.70) (.61)
------- ------ ------ ------ ------ ------- ------- -------
Net asset value, end of period......... $ 10.45 $10.67 $11.08 $10.59 $10.48 $ 10.45 $ 10.68 $11.09
------- ------ ------ ------ ------ ------- ------- -------
------- ------ ------ ------ ------ ------- ------- -------
TOTAL RETURN#: 4.52% 2.83% 11.13% 8.14% 11.20% 3.99% 2.43% 10.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $10,507 $5,810 $3,594 $1,424 $397 $51,039 $65,215 $57,049
Average net assets (000)............... $7,742 $4,981 $1,883 $599 $305 $60,174 $59,811 $50,154
Ratios to average net assets:##
Expenses, including distribution
fees................................. 1.05%D 1.00% 1.06%D 1.06%D 0.92%D 1.45%D 1.40% 1.46%D
Expenses, excluding distribution
fees................................. .95%D 0.90% 0.96%D 0.96%D 0.82%D .95%D 0.90% 0.96%D
Net investment income................ 4.75%D 4.63% 5.09%D 5.41%D 5.92%D 4.35%D 4.23% 4.69%D
Portfolio turnover rate............... 30% 55% 22% 78% 128% 30% 55% 22%
<CAPTION>

Class C
----------
August 1,
1994@
Through
PER SHARE OPERATING April 30,
PERFORMANCE: 1992 1991 1995
-------- -------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period............................. $ 10.48 $ 9.98 $10.54
------- ------- -------
Income from investment operations
Net investment income................. .53D .56D .35D
Net realized and unrealized gain
(loss) on investment transactions.... .27 .50 (.08)
------- ------- -------
Total from investment operations..... .80 1.06 .27
------- ------- -------
Less distributions
Dividends from net investment income.. (.53) (.56) (.35)
Distributions in excess of net
investment income.................... -- -- (.01)
Distributions from capital gains...... (.15) -- --
------- ------- -------
Total distributions.................. (.68) (.56) (.36)
------- ------- -------
Net asset value, end of period........ $ 10.60 $ 10.48 $10.45
------- ------- -------
------- ------- -------
TOTAL RETURN#: 10.62% 7.68% 10.82% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $45,440 $45,401 $167
Average net assets (000).............. $44,439 $46,521 $28
Ratios to average net assets:##
Expenses, including distribution
fees................................ 1.46%D 1.32%D 1.81%*D
Expenses, excluding distribution
fees................................ 0.96%D 0.82%D 1.06%*D
Net investment income................ 5.01%D 5.52%D 4.34%*D
Portfolio turnover rate............... 78% 128% 30%
</TABLE>
- ---------------
@ Commencement of offering of Class C shares.
* Annualized.
# 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 reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the event referred to in @ and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A
or B shares and are not necessarily indicative of future ratios.
D Net of expense subsidy, fee waivers and distribution fee deferrals.

See Notes to Financial Statements.
B-66

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Shareholders and Trustees
Prudential Municipal Bond Fund

We have audited the accompanying statements of assets and liabilities of
Prudential Municipal Bond Fund (consisting of the High Yield Series, Insured
Series and Modified Term Series), including the portfolios of investments, as of
April 30, 1995, 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
April 30, 1995, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. 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 each of the
portfolios constituting the Prudential Municipal Bond Fund as of April 30, 1995,
the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP
New York, New York
June 15, 1995

B-67
<PAGE>

APPENDIX--HISTORICAL PERFORMANCE DATA

The historical performance information contained in this Appendix relies on
data obtained from statistical services, reports and other services believed by
the Manager to be reliable. The information has not been independently verified
by the Manager.

[ART]

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

(1)Source: "Stocks, Bonds, Bills and Inflation--1994 Yearbook" Ibbotson
Associates, annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield. This chart is for illustrative purposes only, and is not
indicative of the past, present or future performance of any
particular portfolio.

<TABLE>
<S> <C>
Generally, stock returns are attributable to capital Common stock returns are based on the S&P Composite Index, a
appreciation and the reinvestment of distributions. Bond market- weighted, unmanaged index of 500 common stocks
returns are attributable mainly to the reinvestment of (currently) in a variety of industries. It is often used as
distributions. Also, stock prices are generally more a broad measure of stock market performance.
volatile than bond prices over the long term.
Small stock returns for 1928-1980 are those stocks Long term government bond returns are represented by a
comprising the 5th quintile of the New York Stock Exchange. portfolio that contains only one bond with a maturity of
Thereafter, returns are those of the Dimensional Fund roughly 20 years. At the beginning of each year a new bond
Advisors (DFA) Small Company Fund. with a then-current coupon replaces the old bond.
Treasury bill returns are for a one-month bill. Treasuries
are guaranteed by the government as to the timely payment of
principal and interest; equities are not.
Inflation is measured by the consumer price index (CPI).
</TABLE>

A-1
<PAGE>

HISTORICAL PERFORMANCE DATA--FIXED-INCOME SECURITIES

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <C> <C>
YTD
YEAR '87 '88 '89 '90 '91 '92 '93 '94 5/95
- --------------------------------------------------------------------------
U.S.
GOVERNMENT
TREASURY
BONDS1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 10.3%
- --------------------------------------------------------------------------
U.S.
GOVERNMENT
MORTGAGE
SECURITIES2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 10.1%
- --------------------------------------------------------------------------
U.S.
INVESTMENT
GRADE
CORPORATE
BONDS3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 12.8%
- --------------------------------------------------------------------------
U.S.
HIGH
YIELD
CORPORATE
BONDS4 5.0% 12.5% 0.8% (9.6)% 48.2% 15.8% 17.1% (1.0)% 11.7%
- --------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS5 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.4%
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
DIFFERENCE
BETWEEN
HIGHEST
AND
LOWEST
RETURN
IN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 9.3
</TABLE>

1_LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.

2_LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

3_LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.

4_LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

5_SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

A-2
<PAGE>
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

(1) Financial statements included in the Prospectus constituting Part A
of this Post-Effective Amendment to the Registration Statement:

Financial Highlights

(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Post-Effective Amendment
to the Registration Statement:

Portfolios of Investments at April 30, 1995

Statements of Assets and Liabilities at April 30, 1995

Statements of Operations for the year ended April 30, 1995

Statements of Changes in Net Assets for the years ended April 30,
1995 and April 30, 1994

Notes to Financial Statements

Financial Highlights

Independent Auditor's Report

(B) EXHIBITS:

1. (a) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

(b) Amended and Restated Certificate of Designation. Incorporated by
reference to Exhibit No. 1(b) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

2. By-Laws, incorporated by reference to Exhibit No. 2(b) to
Post-Effective Amendment No.11 to the Registration Statement on Form
N-1A filed via EDGAR on July 6, 1994 (File No. 33-10649).

4. (a) Specimen receipt for shares of beneficial interest for Class B
shares of each Series, incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 3 to the Registration Statement on Form
N-1A filed on August 28, 1989 (File No. 33-10649).

(b) Specimen receipt for shares of beneficial interest for Class A
shares of each Series, incorporated by reference to Exhibit No. 4(b)
to Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A filed on August 28, 1990 (File No. 33-10649).

5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A filed on December 28, 1989 (File No.
33-10649).

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 5 to
the Registration Statement on Form N-1A filed on December 28, 1989
(File No. 33-10649).

6. (a) Distribution Agreement for Class A shares. Incorporated by
reference to Exhibit No. 6(a) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

(b) Distribution Agreement for Class B shares. Incorporated by
reference to Exhibit No. 6(b) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

(c) Distribution Agreement for Class C shares. Incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

8. (a) Custodian Contract between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit No. 8(a) to
Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).

C-1
<PAGE>
(b) Subcustodian Agreement between State Street Bank and Trust
Company and Morgan Guaranty Trust Co., incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A filed on August 28, 1990 (File
No. 33-10649).

(c) Subcustodian Agreement between State Street Bank and Trust
Company and Bankers Trust Company, incorporated by reference to
Exhibit No. 8(c) to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A filed on August 28, 1990 (File
No. 33-10649).

(d) Subcustodian Agreement between State Street Bank and Trust
Company and Bankers Trust Company, incorporated by reference to
Exhibit No. 8(d) to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A filed on August 28, 1990 (File
No. 33-10649).

(e) Subcustodian Agreement between State Street Bank and Trust
Company and Chemical Bank, incorporated by reference to Exhibit No.
8(e) to Post-Effective Amendment No. 6 to the Registration Statement
on Form N-1A filed on August 28, 1990 (File No. 33-10649).

(f) Subcustodian Agreement between State Street Bank and Trust
Company and Irving Bank, incorporated by reference to Exhibit No.
8(f) to Post-Effective Amendment No. 6 to the Registration Statement
on Form N-1A filed on August 28, 1990 (File No. 33-10649).

9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A filed on August 28, 1990 (File No. 33-10649).

10. (a) Opinion of Counsel, incorporated by reference to Exhibit No. 10
to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-1A filed on July 24, 1987 (File No. 33-10649).

(b)_Opinion of Counsel.*

11. Consent of Independent Auditors.*

13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on July 24, 1987 (File No. 33-10649).

15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).

16. (a) Schedule of Computation of Performance Quotations for Class B
shares, incorporated by reference to Exhibit No. 16 to
Post-Effective Amendment No. 3 to the Registration Statement on Form
N-1A filed on August 28, 1989 (File No. 33-10649).

(b) Schedule of Computation of Performance Quotations for Class A
shares, incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).

27. Financial Data Schedule.*

Other Exhibits

Powers of Attorney for: Edward D. Beach, Donald D. Lennox, Douglas H.
McCorkindale, Thomas T. Mooney and Louis A. Weil, III. Executed copies filed
under Other Exhibits to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No. 33-10649) filed on August 28, 1989.
- --------------
*Filed herewith.

C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of June 16, 1995 there were 5,468, 3,645 and 479 record holders of Class A
shares of beneficial interest of the High Yield Series, Insured Series and
Modified Term Series, respectively; 30,882, 22,402 and 2,276 record holders of
Class B shares of beneficial interest of the High Yield Series, Insured Series
and Modified Term Series, respectively; and 95, 32 and 4 record holders of Class
C shares of beneficial interest of the High Yield Series, Insured Series and
Modified Term Series, respectively.

ITEM 27. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VII of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 or 10 of
each Distribution Agreement (Exhibit 6 to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 (Securities Act) may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such Trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.

The Registrant maintains an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.

Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.

The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

(i) Prudential Mutual Fund Management, Inc. (PMF)

See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.

The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1995).

C-3
<PAGE>
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is One Seaport Plaza, New York, NY 10292.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President, Director of Marketing and Director, PMF;
President, Director Senior Vice President, Prudential Securities Incorporated
of Marketing and (Prudential Securities); Chairman and Director, Prudential Mutual
Director Fund Distributors, Inc. (PMFD)
Stephen P. Fisher Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities; Vice President, PMFD
Frank W. Giordano Executive Vice Executive Vice President, General Counsel, Secretary and Director,
President, General PMF; Senior Vice President, Prudential Securities; Director, PMFD;
Counsel, Secretary Director, Prudential Mutual Fund Services, Inc. (PMFS)
and Director
Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and Administrative
President, Chief Officer, Treasurer and Director, PMF; Senior Vice President,
Financial and Prudential Securities; Executive Vice President, Treasurer,
Administrative Comptroller and Director, PMFD; Director, PMFS
Officer, Treasurer
and Director
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer and
Director, PMFD; Chief Executive Officer and Director, PMFS;
Director, PMF
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive Vice
Executive Officer President, Director and Member of Operating Committee, Prudential
and Director Securities; Director, Prudential Securities Group, Inc. (PSG);
Executive Vice President, PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel and Assistant Secretary, PMF;
President, Senior Senior Vice President and Senior Counsel, Prudential Securities
Counsel and
Assistant Secretary
</TABLE>

(ii) The Prudential Investment Corporation (PIC)

C-4
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.

<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Senior Vice President and Chief Financial and Compliance Officer,
President and Chief PIC; Vice President, The Prudential Insurance Company of America
Financial and (Prudential)
Compliance Officer

William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark NJ 07102

John D. Brookmeyer, Jr. Senior Vice Senior Vice President, Prudential; Senior Vice President and
51 JFK Parkway President and Director, PIC
Short Hills, NJ 07078 Director

Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC

Harry E. Knapp, Jr. President, Chief President, Chief Exeuctive Officer and Director, PIC; Vice
Executive Officer President, Prudential
and Director

William P. Link Senior Vice Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center President
Newark, NJ 07102

Richard A. Redeker Executive Vice President, Chief Executive Officer and Director, PMF; Executive Vice
President President, Director and Member of Operating Committee, Prudential
Securities; Director, PSG; Executive Vice President, PIC;
Director, PMFD; Director, PMFS

Arthur F. Ryan Director Chairman of the Board, President and Chief Executive Officer,
Prudential; Director, PIC; Chairman of the Board and Director, PSG

Eric A. Simonson Vice President and President and Chief Executive Officer, Prudential Asset Management
Director Group; Vice President and Director, PIC; Executive Vice President,
Prudential

Claude J. Zinngrabe, Executive Vice Vice President, Prudential; Executive Vice President, PIC
Jr. President
</TABLE>

C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS

(a)(i) Prudential Securities Incorporated

Prudential Securities Incorporated is distributor for Prudential Government
Securities Trust (Intermediate Term Series) and The Target Portfolio Trust, for
Class B shares of Prudential Adjustable Rate Securities Fund, Inc., and for
Class B and Class C shares of The BlackRock Government Income Trust, Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal Fund
(California Income Series and California Series), Prudential Diversified Bond
Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
IncomeVertible-Registered Trademark- Fund, Inc., Prudential Intermediate Global
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond
Fund, Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential National Municipals Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc.,
Prudential Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential U.S. Government Fund and Prudential Utility Fund, Inc. Prudential
Securities is also a depositor for the following unit investment trusts:

Corporate Income Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust

(ii) Prudential Mutual Fund Distributors, Inc.

Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
MoneyMart Assets Inc. (d/b/a Prudential MoneyMart Assets), Prudential Municipal
Series Fund (Connecticut Money Market Series, Massachusetts Money Market Series,
New York Money Market Series and New Jersey Money Market Series),
Prudential-Bache Special Money Market Fund, Inc. (d/b/a Prudential Special Money
Market Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential
Tax-Free Money Fund), and for Class A shares of The BlackRock Government Income
Trust, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Adjustable Rate Securities
Fund, Inc., Prudential Allocation Fund, Prudential California Municipal Fund
(California Income Series and California Series), Prudential Diversified Bond
Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
IncomeVertible-Registered Trademark- Fund, Inc., Prudential Intermediate Global
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond
Fund, Prudential Municipal Series Fund (Class A shares of all other series not
mentioned above), Prudential National Municipals Fund, Inc., Prudential Pacific
Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential
Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential
U.S. Government Fund and Prudential Utility Fund, Inc.

(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Robert Golden......... Executive Vice President and Director None

Alan D. Hogan......... Executive Vice President, Chief None
Administrative Officer and Director

George A. Murray...... Executive Vice President and Director None

Leland B. Paton....... Executive Vice President and Director None
</TABLE>

C-6
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Vincent T. Pica II.... Executive Vice President and Director None

Richard A. Redeker.... Director President and
Trustee

Gregory W. Scott...... Executive Vice President, Chief None
Financial Officer and Director

Hardwick Simmons...... Chief Executive Officer, President and None
Director

Lee B. Spencer, Jr.... General Counsel, Executive Vice None
President and Director
</TABLE>

(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.

<TABLE>
<S> <C> <C>
Joanne Accurso-Soto... Vice President None
Dennis Annarumma...... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman..... Vice President None

Brendan D. Boyle...... Chairman and Director None
Stephen P. Fisher..... Vice President None
Frank W. Giordano..... Executive Vice President, General None
Counsel, Secretary and Director
Robert F. Gunia....... Executive Vice President, Treasurer, Vice
Comptroller and Director President
Timothy J. O'Brien.... President, Chief Executive Officer, None
Chief Operating Officer and Director
Richard A. Redeker.... Director President and
Trustee
Andrew J. Varley...... Vice President None
Anita L. Whelan....... Vice President and Assistant Secretary None
<FN>
- --------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102; the Registrant, One Seaport Plaza,
New York, New York 10292; and Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway Center,
Newark, New Jersey 07102, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services, Inc.

ITEM 31. MANAGEMENT SERVICES

Other than as set forth under the captions "How the Fund is Managed--Manager"
and "How the Fund is Managed--Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS

The Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.

C-7
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, in the
City of New York, and State of New York, on the 28th day of June, 1995.

PRUDENTIAL MUNICIPAL BOND FUND

By: /s/ Richard A. Redeker
------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Susan C. Cote Treasurer and Principal Financial and June 28, 1995
- ------------------------------ Accounting Officer
SUSAN C. COTE

/s/ Edward D. Beach Trustee June 28, 1995
- ------------------------------
EDWARD D. BEACH

/s/ Donald D. Lennox Trustee June 28, 1995
- ------------------------------
DONALD D. LENNOX

/s/ Douglas H. McCorkindale Trustee June 28, 1995
- ------------------------------
DOUGLAS H. MCCORKINDALE

/s/ Thomas T. Mooney Trustee June 28, 1995
- ------------------------------
THOMAS T. MOONEY

/s/ Richard A. Redeker President and Trustee June 28, 1995
- ------------------------------
RICHARD A. REDEKER

/s/ Louis A. Weil, III Trustee June 28, 1995
- ------------------------------
LOUIS A. WEIL, III
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- -------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
1. (a) Amended and Restated Declaration of Trust. Incorporated by reference to Exhibit No. 1(a) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Amended and Restated Certificate of Designation. Incorporated by reference to Exhibit No. 1(b) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
2. By-Laws, incorporated by reference to Exhibit No. 2(b) to Post-Effective Amendment No.11 to the
Registration Statement on Form N-1A filed via EDGAR on July 6, 1994 (File No. 33-10649).
4. (a) Specimen receipt for shares of beneficial interest for Class B shares of each Series, incorporated
by reference to Exhibit No. 4 to Post-Effective Amendment No. 3 to the Registration Statement on Form
N-1A filed on August 28, 1989 (File No. 33-10649).
(b) Specimen receipt for shares of beneficial interest for Class A shares of each Series, incorporated
by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund Management, Inc.,
incorporated by reference to Exhibit No. 5(a) to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A filed on December 28, 1989 (File No. 33-10649).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment
Corporation, incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A filed on December 28, 1989 (File No. 33-10649).
6. (a) Distribution Agreement for Class A shares. Incorporated by reference to Exhibit No. 6(a) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Distribution Agreement for Class B shares. Incorporated by reference to Exhibit No. 6(b) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Distribution Agreement for Class C shares. Incorporated by reference to Exhibit No. 6(c) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust Company, incorporated by
reference to Exhibit No. 8(a) to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).
(b) Subcustodian Agreement between State Street Bank and Trust Company and Morgan Guaranty Trust Co.,
incorporated by reference to Exhibit No. 8(b) to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A filed on August 28, 1990 (File No. 33-10649).
(c) Subcustodian Agreement between State Street Bank and Trust Company and Bankers Trust Company,
incorporated by reference to Exhibit No. 8(c) to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A filed on August 28, 1990 (File No. 33-10649).
(d) Subcustodian Agreement between State Street Bank and Trust Company and Bankers Trust Company,
incorporated by reference to Exhibit No. 8(d) to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A filed on August 28, 1990 (File No. 33-10649).
(e) Subcustodian Agreement between State Street Bank and Trust Company and Chemical Bank, incorporated
by reference to Exhibit No. 8(e) to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).
(f) Subcustodian Agreement between State Street Bank and Trust Company and Irving Bank, incorporated by
reference to Exhibit No. 8(f) to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A filed on August 28, 1990 (File No. 33-10649).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- --------- -------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, Inc.,
incorporated by reference to Exhibit No. 9 to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A filed on August 28, 1990 (File No. 33-10649).
10. (a) Opinion of Counsel, incorporated by reference to Exhibit No. 10 to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A filed on July 24, 1987 (File No. 33-10649).
(b) Opinion of Counsel.*
11. Consent of Independent Auditors.*
13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A filed on July 24, 1987 (File No. 33-10649).
15. (a) Distribution and Service Plan for Class A shares. Incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Distribution and Service Plan for Class B shares. Incorporated by reference to Exhibit No. 15(b) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Distribution and Service Plan for Class C shares. Incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
6. (a) Schedule of Computation of Performance Quotations for Class B shares, incorporated by reference to
Exhibit No. 16 to Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A filed on
August 28, 1989 (File No. 33-10649).
(b) Schedule of Computation of Performance Quotations for Class A shares, incorporated by reference to
Exhibit No. 16(b) to Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A filed on
August 28, 1990 (File No. 33-10649).
27. Financial Data Schedule.*
</TABLE>

Other Exhibits

<PAGE>

[SULLIVAN & WORCESTER - Letterhead]

June 27, 1995

Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York 10292

Re: Prudential Municipal Bond Fund -
Post-Effective Amendment to
Registration Statement on Form N-1A
--------------------------------------

Ladies and Gentlemen:

You have requested our opinion as to certain matters of Massachusetts law
in connection with the filing by Prudential Municipal Bond Fund (formerly
"Prudential-Bache Municipal Bond Fund"), a trust with transferable shares (the
"FUND"), established under Massachusetts law pursuant to a Declaration of Trust
dated November 3, 1986, as amended August 21, 1987, December 18, 1989 and March
1, 1991, as further amended and restated by an Amended and Restated Declaration
of Trust dated August 16, 1994, and supplemented by Certificates of Designation
dated March 12, 1987 and December 18, 1989, as amended and restated by Amended
and Restated Certificates of Designation dated July 27, 1994 and May 1, 1995 (as
so amended, restated and supplemented, the "DECLARATION") pursuant to Section
24(e)(1) of the Investment Company Act of 1940, as amended (the "INVESTMENT
COMPANY ACT"), and the rules and regulations of the Securities and Exchange
Commission (the "SEC") thereunder, of Post-Effective Amendment No.13 to the
Fund's Registration Statement on Form N-1A (the "REGISTRATION STATEMENT") under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), Registration No.
33-10649, and Post-Effective Amendment No.17 to its Registration Statement under
the Investment Company Act, Registration No. 811-4930 (collectively, the
"AMENDMENT").

We have acted as Massachusetts counsel to the Fund in connection with the
preparation of the Amendment and the authorization by the Trustees of the Fund
of the issuance and sale of shares of beneficial interest, par value $.01 per
share (the SHARES"). In this connection we have examined and are familiar with
the Declaration and the By-laws of the Fund, and we have reviewed the actions
taken by the Trustees to organize the Fund and to authorize the issuance and
sale of shares of beneficial interest of the Fund ("SHARES") of the three
separate series (the High Yield Series, the Insured Series and the Modified Term
Series) which have been issued by the Fund to date. In

<PAGE>

Prudential Mutual Fund
Management, Inc. -2- June 27, 1995

addition, we have examined the Amendment, substantially in the form in which it
is to be filed with the SEC, the most recent forms of the Prospectus (the
"PROSPECTUS") and the Statement of Additional Information (the "SAI") included
in the Amendment, certificates of officers of the Fund and of public officials
as to other matters of fact, and such questions of law and fact, as we have
considered necessary or appropriate for purposes of the opinions expressed
herein. We have assumed the genuineness of the signatures on, and the
authenticity of, all documents furnished to us, and the conformity to the
originals of documents submitted to us as copies, which we have not
independently verified.

Based upon and subject to the foregoing, we hereby advise you that, in our
opinion, under Massachusetts law:

1. The Fund is validly existing as a trust with transferable
shares of the type commonly called a Massachusetts business trust.

2. The Fund is authorized to issue an unlimited number of Shares;
the Shares of each series subject to the Registration Statement have been
duly and validly authorized by all requisite action of the Trustees of the
Fund, and no action of shareholders of the Fund was required in such
connection.

3. The Shares, when duly sold, issued and paid for as contemplated
by the Prospectus and the SAI, will be validly and legally issued by the
Fund, fully paid and non-assessable by the Fund.

With respect to the opinion stated in paragraph 3 above, we wish to point
out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.

This letter expresses our opinions as to the provisions of the Declaration
and the laws of Massachusetts applying to business trusts generally, but does
not extend to the Massachusetts Securities Act, or to federal securities or
other laws.

We hereby consent to the filing of this opinion with the SEC in connection
with the filing of the Amendment, but we do not thereby concede that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act.

Very truly yours,

/s/ Sullivan & Worcester

SULLIVAN & WORCESTER

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-10649 of Prudential Municipal Bond Fund of our report dated
June 15, 1995, appearing in the Statement of Additional Information, which
is a part of such Registration Statement, and to the references to us under
the headings "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.

/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
June 27, 1995

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - MODIFIED TERM SERIES
<SERIES>
<NUMBER> 011
<NAME> PRU MUNICIPAL BOND FUND - MODIFIED TERM (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 58,808,272
<INVESTMENTS-AT-VALUE> 59,383,776
<RECEIVABLES> 2,437,551
<ASSETS-OTHER> 57,024
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 61,878,351
<PAYABLE-FOR-SECURITIES> 75,213
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,661
<TOTAL-LIABILITIES> 164,874
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,108,600
<SHARES-COMMON-STOCK> 5,905,485
<SHARES-COMMON-PRIOR> 7,573,690
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (929,782)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 534,659
<NET-ASSETS> 61,713,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,927,905
<OTHER-INCOME> 0
<EXPENSES-NET> 948,400
<NET-INVESTMENT-INCOME> 2,979,505
<REALIZED-GAINS-CURRENT> (658,871)
<APPREC-INCREASE-CURRENT> 28,699
<NET-CHANGE-FROM-OPS> 2,349,333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,979,505)
<DISTRIBUTIONS-OF-GAINS> (1,242,493)
<DISTRIBUTIONS-OTHER> (39,642)
<NUMBER-OF-SHARES-SOLD> 13,939,416
<NUMBER-OF-SHARES-REDEEMED> (24,099,780)
<SHARES-REINVESTED> 2,761,015
<NET-CHANGE-IN-ASSETS> (9,311,656)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,011,224
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 329,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 958,633
<AVERAGE-NET-ASSETS> 7,742,000
<PER-SHARE-NAV-BEGIN> 10.67
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> (0.03)
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - MODIFIED TERM SERIES
<SERIES>
<NUMBER> 012
<NAME> PRU MUNICIPAL BOND FUND - MODIFIED TERM (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 58,808,272
<INVESTMENTS-AT-VALUE> 59,383,776
<RECEIVABLES> 2,437,551
<ASSETS-OTHER> 57,024
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 61,878,351
<PAYABLE-FOR-SECURITIES> 75,213
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,661
<TOTAL-LIABILITIES> 164,874
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,108,600
<SHARES-COMMON-STOCK> 5,905,485
<SHARES-COMMON-PRIOR> 7,573,690
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (929,782)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 534,659
<NET-ASSETS> 61,713,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,927,905
<OTHER-INCOME> 0
<EXPENSES-NET> 948,400
<NET-INVESTMENT-INCOME> 2,979,505
<REALIZED-GAINS-CURRENT> (658,871)
<APPREC-INCREASE-CURRENT> 28,699
<NET-CHANGE-FROM-OPS> 2,349,333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,979,505)
<DISTRIBUTIONS-OF-GAINS> (1,242,493)
<DISTRIBUTIONS-OTHER> (39,642)
<NUMBER-OF-SHARES-SOLD> 13,939,416
<NUMBER-OF-SHARES-REDEEMED> (24,099,780)
<SHARES-REINVESTED> 2,761,015
<NET-CHANGE-IN-ASSETS> (9,311,656)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,011,224
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 329,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 958,633
<AVERAGE-NET-ASSETS> 60,174,000
<PER-SHARE-NAV-BEGIN> 10.68
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> (0.04)
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - MODIFIED TERM SERIES
<SERIES>
<NUMBER> 013
<NAME> PRU MUNICIPAL BOND FUND - MODIFIED TERM (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 58,808,272
<INVESTMENTS-AT-VALUE> 59,383,776
<RECEIVABLES> 2,437,551
<ASSETS-OTHER> 57,024
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 61,878,351
<PAYABLE-FOR-SECURITIES> 75,213
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,661
<TOTAL-LIABILITIES> 164,874
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,108,600
<SHARES-COMMON-STOCK> 5,905,485
<SHARES-COMMON-PRIOR> 7,573,690
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (929,782)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 534,659
<NET-ASSETS> 61,713,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,927,905
<OTHER-INCOME> 0
<EXPENSES-NET> 948,400
<NET-INVESTMENT-INCOME> 2,979,505
<REALIZED-GAINS-CURRENT> (658,871)
<APPREC-INCREASE-CURRENT> 28,699
<NET-CHANGE-FROM-OPS> 2,349,333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,979,505)
<DISTRIBUTIONS-OF-GAINS> (1,242,493)
<DISTRIBUTIONS-OTHER> (39,642)
<NUMBER-OF-SHARES-SOLD> 13,939,416
<NUMBER-OF-SHARES-REDEEMED> (24,099,780)
<SHARES-REINVESTED> 2,761,015
<NET-CHANGE-IN-ASSETS> (9,311,656)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,011,224
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 329,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 958,633
<AVERAGE-NET-ASSETS> 28,000
<PER-SHARE-NAV-BEGIN> 10.54
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> (0.09)
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - INSURED SERIES
<SERIES>
<NUMBER> 021
<NAME> PRU MUNICIPAL BOND FUND - INSURED (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 603,442,884
<INVESTMENTS-AT-VALUE> 627,050,937
<RECEIVABLES> 34,370,897
<ASSETS-OTHER> 81,740
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 661,503,574
<PAYABLE-FOR-SECURITIES> 14,456,616
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,073,962
<TOTAL-LIABILITIES> 17,530,578
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 635,308,849
<SHARES-COMMON-STOCK> 59,430,830
<SHARES-COMMON-PRIOR> 71,970,388
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (15,065,062)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,729,209
<NET-ASSETS> 643,972,996
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,883,847
<OTHER-INCOME> 0
<EXPENSES-NET> 7,786,553
<NET-INVESTMENT-INCOME> 35,097,294
<REALIZED-GAINS-CURRENT> (10,107,133)
<APPREC-INCREASE-CURRENT> 14,364,251
<NET-CHANGE-FROM-OPS> 39,354,412
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,097,294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (62,609)
<NUMBER-OF-SHARES-SOLD> 46,070,613
<NUMBER-OF-SHARES-REDEEMED> (196,745,726)
<SHARES-REINVESTED> 19,337,321
<NET-CHANGE-IN-ASSETS> (127,143,283)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,392,455
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,893,476
<AVERAGE-NET-ASSETS> 39,471,000
<PER-SHARE-NAV-BEGIN> 10.71
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> (0.58)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.83
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - INSURED SERIES
<SERIES>
<NUMBER> 022
<NAME> PRU MUNICIPAL BOND FUND - INSURED (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 603,442,884
<INVESTMENTS-AT-VALUE> 627,050,937
<RECEIVABLES> 34,370,897
<ASSETS-OTHER> 81,740
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 661,503,574
<PAYABLE-FOR-SECURITIES> 14,456,616
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,073,962
<TOTAL-LIABILITIES> 17,530,578
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 635,308,849
<SHARES-COMMON-STOCK> 59,430,830
<SHARES-COMMON-PRIOR> 71,970,388
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (15,065,062)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,729,209
<NET-ASSETS> 643,972,996
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,883,847
<OTHER-INCOME> 0
<EXPENSES-NET> 7,786,553
<NET-INVESTMENT-INCOME> 35,097,294
<REALIZED-GAINS-CURRENT> (10,107,133)
<APPREC-INCREASE-CURRENT> 14,364,251
<NET-CHANGE-FROM-OPS> 39,354,412
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,097,294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (62,609)
<NUMBER-OF-SHARES-SOLD> 46,070,613
<NUMBER-OF-SHARES-REDEEMED> (196,745,726)
<SHARES-REINVESTED> 19,337,321
<NET-CHANGE-IN-ASSETS> (127,143,283)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,392,455
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,893,476
<AVERAGE-NET-ASSETS> 660,237,000
<PER-SHARE-NAV-BEGIN> 10.71
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.84
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - INSURED SERIES
<SERIES>
<NUMBER> 023
<NAME> PRU MUNICIPAL BOND FUND - INSURED (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 603,442,884
<INVESTMENTS-AT-VALUE> 627,050,937
<RECEIVABLES> 34,370,897
<ASSETS-OTHER> 81,740
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 661,503,574
<PAYABLE-FOR-SECURITIES> 14,456,616
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,073,962
<TOTAL-LIABILITIES> 17,530,578
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 635,308,849
<SHARES-COMMON-STOCK> 59,430,830
<SHARES-COMMON-PRIOR> 71,970,388
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (15,065,062)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,729,209
<NET-ASSETS> 643,972,996
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,883,847
<OTHER-INCOME> 0
<EXPENSES-NET> 7,786,553
<NET-INVESTMENT-INCOME> 35,097,294
<REALIZED-GAINS-CURRENT> (10,107,133)
<APPREC-INCREASE-CURRENT> 14,364,251
<NET-CHANGE-FROM-OPS> 39,354,412
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,097,294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (62,609)
<NUMBER-OF-SHARES-SOLD> 46,070,613
<NUMBER-OF-SHARES-REDEEMED> (196,745,726)
<SHARES-REINVESTED> 19,337,321
<NET-CHANGE-IN-ASSETS> (127,143,283)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,392,455
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,893,476
<AVERAGE-NET-ASSETS> 224,000
<PER-SHARE-NAV-BEGIN> 10.79
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> (0.39)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.84
<EXPENSE-RATIO> 1.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - HIGH YIELD SERIES
<SERIES>
<NUMBER> 031
<NAME> PRU MUNICIPAL BOND FUND - HIGH YIELD (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 1,017,378,109
<INVESTMENTS-AT-VALUE> 1,040,456,770
<RECEIVABLES> 34,935,079
<ASSETS-OTHER> 177,804
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,075,569,653
<PAYABLE-FOR-SECURITIES> 17,241,836
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,894,093
<TOTAL-LIABILITIES> 22,135,929
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,052,050,835
<SHARES-COMMON-STOCK> 98,265,943
<SHARES-COMMON-PRIOR> 107,478,728
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,832,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,215,286
<NET-ASSETS> 1,053,433,724
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81,396,363
<OTHER-INCOME> 0
<EXPENSES-NET> 11,644,844
<NET-INVESTMENT-INCOME> 69,751,519
<REALIZED-GAINS-CURRENT> (15,484,052)
<APPREC-INCREASE-CURRENT> 10,858,413
<NET-CHANGE-FROM-OPS> 65,125,880
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (69,751,519)
<DISTRIBUTIONS-OF-GAINS> (49,874)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 135,404,221
<NUMBER-OF-SHARES-REDEEMED> (262,484,590)
<SHARES-REINVESTED> 31,059,195
<NET-CHANGE-IN-ASSETS> (100,696,687)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,279,570
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,817,122
<AVERAGE-NET-ASSETS> 65,207,000
<PER-SHARE-NAV-BEGIN> 10.74
<PER-SHARE-NII> 0.72
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.72)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - HIGH YIELD SERIES
<SERIES>
<NUMBER> 032
<NAME> PRU MUNICIPAL BOND FUND - HIGH YIELD (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 1,017,378,109
<INVESTMENTS-AT-VALUE> 1,040,456,770
<RECEIVABLES> 34,935,079
<ASSETS-OTHER> 177,804
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,075,569,653
<PAYABLE-FOR-SECURITIES> 17,241,836
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,894,093
<TOTAL-LIABILITIES> 22,135,929
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,052,050,835
<SHARES-COMMON-STOCK> 98,265,943
<SHARES-COMMON-PRIOR> 107,478,728
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,832,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,215,286
<NET-ASSETS> 1,053,433,724
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81,396,363
<OTHER-INCOME> 0
<EXPENSES-NET> 11,644,844
<NET-INVESTMENT-INCOME> 69,751,519
<REALIZED-GAINS-CURRENT> (15,484,052)
<APPREC-INCREASE-CURRENT> 10,858,413
<NET-CHANGE-FROM-OPS> 65,125,880
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (69,751,519)
<DISTRIBUTIONS-OF-GAINS> (49,874)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 135,404,221
<NUMBER-OF-SHARES-REDEEMED> (262,484,590)
<SHARES-REINVESTED> 31,059,195
<NET-CHANGE-IN-ASSETS> (100,696,687)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,279,570
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,817,122
<AVERAGE-NET-ASSETS> 1,024,132,000
<PER-SHARE-NAV-BEGIN> 10.74
<PER-SHARE-NII> 0.68
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.68)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND - HIGH YIELD SERIES
<SERIES>
<NUMBER> 033
<NAME> PRU MUNICIPAL BOND FUND - HIGH YIELD (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 1,017,378,109
<INVESTMENTS-AT-VALUE> 1,040,456,770
<RECEIVABLES> 34,935,079
<ASSETS-OTHER> 177,804
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,075,569,653
<PAYABLE-FOR-SECURITIES> 17,241,836
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,894,093
<TOTAL-LIABILITIES> 22,135,929
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,052,050,835
<SHARES-COMMON-STOCK> 98,265,943
<SHARES-COMMON-PRIOR> 107,478,728
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,832,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,215,286
<NET-ASSETS> 1,053,433,724
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 81,396,363
<OTHER-INCOME> 0
<EXPENSES-NET> 11,644,844
<NET-INVESTMENT-INCOME> 69,751,519
<REALIZED-GAINS-CURRENT> (15,484,052)
<APPREC-INCREASE-CURRENT> 10,858,413
<NET-CHANGE-FROM-OPS> 65,125,880
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (69,751,519)
<DISTRIBUTIONS-OF-GAINS> (49,874)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 135,404,221
<NUMBER-OF-SHARES-REDEEMED> (262,484,590)
<SHARES-REINVESTED> 31,059,195
<NET-CHANGE-IN-ASSETS> (100,696,687)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,895,320)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,279,570
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,817,122
<AVERAGE-NET-ASSETS> 1,385,000
<PER-SHARE-NAV-BEGIN> 10.79
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> (0.07)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.49)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>