PRUDENTIAL MUNICIPAL BOND FUND, 485B24E, 1996-06-27

PRUDENTIAL MUNICIPAL BOND FUND
485B24E, 1996-06-27

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<PAGE>

As filed with the Securities and Exchange Commission on June 27, 1996

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. 14 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 / /

AMENDMENT NO. 18 /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):

/ / immediately upon filing pursuant to paragraph (b)

/X/ on June 28, 1996 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....................... 9,030,919 $10.98 $290,000 $100
</TABLE>

* The calculation of the maximum offering price was made pursuant to Rule 24e-2
and was based on the offering price of $10.98 per share equal to the average
of the offering prices of the classes of each series as of the close of
business on June 18, 1996 pursuant to Rule 457(d). The total number of shares
redeemed during the fiscal year ended April 30, 1996 amounted to 29,980,112
shares. Of this number, no shares have been used for reduction pursuant to
paragraph (a) of Rule 24e-2 in all previous filings of post-effective
amendments during the current year and 20,975,604 shares have been used for
reduction pursuant to paragraph (c) of Rule 24f-2 in all previous filings
during the current year. 9,004,508 ($99,462,015) of the redeemed shares for
the fiscal year ended April 30, 1996 are being used for the reductions in the
post-effective amendment being filed herein.

Pursuant to Rule 24f-2 under the Investment Company Act of 1940. Registrant
has previously registered an indefinite number of shares of beneficial
interest, par value $.01 per share. The Registrant filed a notice under such
Rule for its fiscal year ended April 30, 1996 on June 25, 1996.

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- --------------------------------------------------------------------------------
<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

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PROSPECTUS DATED JUNE 28, 1996

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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 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 28, 1996, 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.

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
15.

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 15. 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 20.

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, 1996, PMF served as manager or administrator to 60 investment companies,
including 38 mutual funds, with aggregate assets of approximately $52 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
25.
WHO DISTRIBUTES THE FUND'S SHARES?

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 A, Class B and Class C shares. PSI 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, 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 26.

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 33 and "Shareholder
Guide--Shareholder Services" at page 40.

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 28 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 33.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers three classes of shares through this Prospectus:

<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 34.

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 36.

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 29.

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 (After Reduction):
High Yield Series.................... .10%++ .50% .75%++
Insured Series....................... .10++ .50 .75++
Intermediate Series.................. .10++ .50 .75++
Other Expenses:
High Yield Series.................... .09% .09% .09%
Insured Series....................... .13 .13 .13
Intermediate Series.................. .61 .61 .61
Total Fund Operating Expenses (Before
Waiver and After Reduction):
High Yield Series.................... .69% 1.09% 1.34%
Insured Series....................... .73 1.13 1.38
Intermediate Series.................. 1.21 1.61 1.86
<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, 1996,
without taking into account the management fee waiver. At the current level
of management fee waiver (10%), Management Fees would be .45% for all
classes for each Series and Total Fund Operating Expenses for Class A, B
and C shares would be .64%, 1.04% and 1.29%, respectively, for the High
Yield Series, .68%, 1.08% and 1.33%, respectively, for the Insured Series
and 1.16%, 1.56% and 1.81, 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, 1997. Total Fund
Operating Expenses of the Class A and Class C shares without such
limitation would be .89% and 1.59%, respectively, of the High Yield Series,
.93% and 1.63%, respectively, of the Insured Series and 1.41% and 2.11%,
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 $51 $67 $113
Class B................................................ $61 $65 $70 $116
Class C................................................ $24 $42 $73 $161
Insured Series
Class A................................................ $37 $53 $69 $118
Class B................................................ $62 $66 $72 $121
Class C................................................ $24 $44 $76 $166
Intermediate Series
Class A................................................ $42 $67 $95 $172
Class B................................................ $66 $81 $98 $175
Class C................................................ $29 $58 $101 $218
You would pay the following expenses on the same investment,
assuming no redemption:
High Yield Series
Class A................................................ $37 $51 $67 $113
Class B................................................ $11 $35 $60 $116
Class C................................................ $14 $42 $73 $161
Insured Series
Class A................................................ $37 $53 $69 $118
Class B................................................ $12 $36 $62 $121
Class C................................................ $14 $44 $76 $166
Intermediate Series
Class A................................................ $42 $67 $95 $172
Class B................................................ $16 $51 $88 $175
Class C................................................ $19 $58 $101 $218
The above examples are based on restated data for the Fund's fiscal year ended April 30, 1996. 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)

<TABLE>
<CAPTION>
HIGH YIELD SERIES
-------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------------
JANUARY 22,
1990(A)
YEARS ENDED APRIL 30, THROUGH APRIL
--------------------------------------------------------------------------- 30,
1996 1995 1994 1993 1992 1991 1990
----------- ----------- -------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $10.72 $10.74 $11.14 $10.68 $10.45 $10.33 $10.58
----------- ----------- -------- -------- ----------- ----------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and unrealized
gain (loss) on investment
transactions................. (.02) (.02) (.39) .46 .23 .12 (.25)
----------- ----------- -------- -------- ----------- ----------- ------
Total from investment
operations................. .70 .70 .33 1.23 1.00 .91 (.02)
----------- ----------- -------- -------- ----------- ----------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from capital
gains........................ -- -- (.01) -- -- -- --
----------- ----------- -------- -------- ----------- ----------- ------
Total distributions......... (.72) (.72) (.73) (.77) (.77) (.79) (.23)
----------- ----------- -------- -------- ----------- ----------- ------
Net asset value, end of
period....................... $10.70 $10.72 $10.74 $11.14 $10.68 $10.45 $10.33
----------- ----------- -------- -------- ----------- ----------- ------
----------- ----------- -------- -------- ----------- ----------- ------
TOTAL RETURN (B):............. 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets (000)...... $162,329 $65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average net assets:
Expenses, including
distribution fees.......... 0.64%(d) 0.69%(d) 0.69% 0.74% 0.65%(d) 0.60%(d) 0.60%(c)(d)
Expenses, excluding
distribution fees.......... 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment income....... 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover rate....... 35% 39% 36% 27% 34% 29% 44%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. 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 SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1996, 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 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH YIELD SERIES
----------------------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
-------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.72 $10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56 $ 10.13
-------- ------ ------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .68(e) .68(e) .68 .73 .73(e) .75(e) .79(e) .86(e)
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.03) (.02) (.39) .46 .23 .11 (.17) .45
-------- ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations....... .65 .66 .29 1.19 .96 .86 .62 1.31
-------- ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.68) (.68) (.68) (.73) (.73) (.75) (.79) (.86)
Distributions from
capital gains...... -- -- (.01) -- -- -- (.05) (.02)
-------- ------ ------ ------ ------ ------ ------ ------
Total
distributions.... (.68) (.68) (.69) (.73) (.73) (.75) (.84) (.88)
-------- ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period.......... $10.69 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56
-------- ------ ------ ------ ------ ------ ------ ------
-------- ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (C):... 6.12% 6.37% 2.46% 11.47% 9.40% 8.59% 6.04% 13.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $799,048 $934,725 $1,099,640 $1,028,480 $803,838 $701,483 $622,970 $549,426
Average net assets
(000).............. $900,115 $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............. 1.04%(e) 1.09%(e) 1.09% 1.14% 1.05%(e) 1.00%(e) 0.83%(e) 0.27%(e)
Expenses,
excluding
distribution
fees............. 0.54%(e) 0.59%(e) 0.58% .64% 0.55%(e) 0.50%(e) 0.33%(e) 0.12%(e)
Net investment
income........... 6.19%(e) 6.37%(e) 6.02% 6.66% 6.85%(e) 7.22%(e) 7.24%(e) 7.26%(e)
Portfolio turnover
rate............... 35% 39% 36% 27% 34% 29% 44% 17%

<CAPTION>
HIGH YIELD
SERIES

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

CLASS B

- -----------------
(a) Commencement of offering of Class B shares.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Annualized.
(e) 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 C SHARES)

The following financial highlights 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 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. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
HIGH YIELD SERIES
-------------------------------
CLASS C
-------------------------------
AUGUST 1,
1994(A)
THROUGH APRIL
YEAR ENDED 30,
APRIL 30, 1996 1995
-------------- --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period....................... $ 10.72 $ 10.79
------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .65(d) .49(d)
Net realized and unrealized
gain (loss) on investment
transactions................. (.03) (.07)
------- -------
Total from investment
operations................. .62 .42
------- -------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.65) (.49)
Distributions from capital
gains........................ -- --
------- -------
Total distributions......... (.65) (.49)
------- -------
Net asset value, end of
period....................... $10.69 $10.72
------- -------
------- -------
TOTAL RETURN (B):............. 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $6,471 $3,208
Average net assets (000)...... $5,608 $1,385
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.29%(d) 1.34%(c)(d)
Expenses, excluding
distribution fees.......... 0.54%(d) 0.59%(c)(d)
Net investment income....... 5.93%(d) 6.34%(c)(d)
Portfolio turnover rate....... 35% 39%
<FN>
- -------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. See "Manager" in the Statement of
Additional Information.
</TABLE>

8
<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(A)
YEARS ENDED APRIL 30, THROUGH APRIL
--------------------------------------------------------------------- 30,
1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ----------- ----------- -------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $10.83 $10.71 $11.44 $10.98 $10.76 $10.25 $10.51
-------- -------- -------- -------- ----------- ----------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and unrealized
gain (loss) on investment
transactions................. .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- -------- ----------- ----------- -------------
Total from investment
operations................. .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- -------- ----------- ----------- -------------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions from capital
gains........................ -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- -------- ----------- ----------- -------------
Total distributions......... (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- -------- ----------- ----------- -------------
Net asset value, end of
period....................... $10.94 $10.83 $10.71 $11.44 $10.98 $10.76 $10.25
-------- -------- -------- -------- ----------- ----------- -------------
-------- -------- -------- -------- ----------- ----------- -------------
TOTAL RETURN (B):............. 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $139,548 $75,800 $30,669 $30,098 $19,177 $7,630 $2,700
Average net assets (000)...... $102,456 $39,471 $32,309 $24,589 $12,731 $5,164 $1,280
Ratios to average net assets:
Expenses, including
distribution fees.......... 0.68%(d) 0.74%(d) 0.71% 0.72% 0.62%(d) 0.61%(d) 0.62%(c)(d)
Expenses, excluding
distribution fees.......... 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment income....... 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover rate....... 68% 64% 105% 85% 56% 51% 82%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. See "Manager" in the Statement of
Additional Information.
</TABLE>

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

The following financial highlights, with respect to the five-year period ended
April 30, 1996, 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 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
--------------------------------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- ----------- ------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............. $10.84 $10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54 $ 10.18
-------- -------- -------- ----------- ------ ------ ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .54(e) .54(e) .54 .56 .62(e) .63(e) .67(e) .76(e)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .11 .13 (.43) .72 .25 .54 (.22) .42
-------- -------- -------- ----------- ------ ------ ------ ------
Total from
investment
operations....... .65 .67 .11 1.28 .87 1.17 .45 1.18
-------- -------- -------- ----------- ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.54) (.54) (.54) (.56) (.62) (.63) (.67) (.76)
Distributions from
capital gains...... -- -- (.30) (.27) (.02) (.03) (.07) (.06)
-------- -------- -------- ----------- ------ ------ ------ ------
Total
distributions.... (.54) (.54) (.84) (.83) (.64) (.66) (.74) (.82)
-------- -------- -------- ----------- ------ ------ ------ ------
Net asset value, end
of period.......... $10.95 $10.84 $ 10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54
-------- -------- -------- ----------- ------ ------ ------ ------
-------- -------- -------- ----------- ------ ------ ------ ------
TOTAL RETURN (C):... 6.04% 6.40% 0.63% 12.14% 8.24% 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $443,391 $567,648 $740,447 $770,060 $638,451 $578,412 $497,139 $447,101
Average net assets
(000).............. $524,452 $660,237 $807,794 $705,846 $609,516 $537,275 $446,904 $160,158
Ratios to average net assets:
Expenses,
including
distribution
fees............. 1.08%(e) 1.14%(e) 1.11% 1.12% 1.02%(e) 1.01%(e) 0.85%(e) 0.22%(e)
Expenses,
excluding
distribution
fees............. 0.58%(e) 0.64%(e) 0.61% 0.62% 0.52%(e) 0.51%(e) 0.35%(e) 0.13%(e)
Net investment
income........... 4.80%(e) 4.99%(e) 4.69% 5.06% 5.66%(e) 5.98%(e) 6.07%(e) 6.52%(e)
Portfolio turnover
rate............... 68% 64% 105% 85% 56% 51% 82% 87%

INSURED SERIES

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

CLASS B

--------------
SEPTEMBER 17,
1987(A) TO
APRIL 30,
1988(B)
--------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C>
Net asset value,
beginning of
period............. $ 10.00
------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .42(e)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .18
------
Total from
investment
operations....... .60
------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.42)
Distributions from
capital gains...... --
------
Total
distributions.... (.42)
------
Net asset value, end
of period.......... $ 10.18
------
------
TOTAL RETURN (C):... 9.76%
RATIOS/SUPPLEMENTAL
Net assets, end of
period (000)....... $45,058
Average net assets
(000).............. $19,378
Ratios to average ne
Expenses,
including
distribution
fees............. 0%(e)
Expenses,
excluding
distribution
fees............. 0%(e)
Net investment
income........... 6.34%(d)(e)
Portfolio turnover
rate............... 117%
<FN>
- ---------------
(a) Commencement of offering of Class B shares.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Annualized.
(e) 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 C SHARES)

<TABLE>
<CAPTION>
INSURED SERIES
-----------------------------
CLASS C
-----------------------------
AUGUST 1,
1994(A)
YEAR ENDED THROUGH APRIL
APRIL 30, 30,
1996 1995
------------ --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period....................... $ 10.84 $ 10.79
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .51(d) .39(d)
Net realized and unrealized
gain (loss) on investment
transactions................. .11 .05
------ ------
Total from investment
operations................. .62 .44
------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.51) (.39)
Distributions from capital
gains........................ -- --
------ ------
Total distributions......... (.51) (.39)
------ ------
Net asset value, end of
period....................... $10.95 $10.84
------ ------
------ ------
TOTAL RETURN (B):............. 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 1,137 $ 525
Average net assets (000)...... $ 827 $ 224
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.33%(d) 1.39%(c)(d)
Expenses, excluding
distribution fees.......... 0.58%(d) 0.64%(c)(d)
Net investment income....... 4.56%(d) 4.92%(c)(d)
Portfolio turnover rate....... 68% 64%
<FN>
- -------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. See "Manager" in the Statement of
Additional Information.
</TABLE>

11
<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, 1996, 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------------------------------
CLASS A
----------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- ----------- -----------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
-------- -------- -------- -------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .47(d) .51(d) .53 .54(d) .57(d) .59(d)
Net realized and unrealized gain
(loss) on investment
transactions...................... .20 (.03) (.19) .60 .26 .50
-------- -------- -------- -------- ----------- -----------
Total from investment
operations...................... .67 .48 .34 1.14 .83 1.09
-------- -------- -------- -------- ----------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.47) (.51) (.53) (.54) (.57) (.59)
Distributions in excess of net
investment income................. -- (.01) -- -- -- --
Distributions from capital gains... -- (.18) (.22) (.11) (.15) --
-------- -------- -------- -------- ----------- -----------
Total distributions.............. (.47) (.70) (.75) (.65) (.72) (.59)
-------- -------- -------- -------- ----------- -----------
Net asset value, end of period..... $10.65 $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48
-------- -------- -------- -------- ----------- -----------
-------- -------- -------- -------- ----------- -----------
TOTAL RETURN (B):.................. 6.48% 4.52% 2.83% 11.13% 8.14% 11.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $12,552 $10,507 $5,810 $3,594 $1,424 $397
Average net assets (000)........... $12,604 $7,742 $4,981 $1,883 $ 599 $305
Ratios to average net assets:
Expenses, including distribution
fees............................ 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d)
Expenses, excluding distribution
fees............................ 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d)
Net investment income............ 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d)
Portfolio turnover rate............ 35% 30% 55% 22% 78% 128%

JANUARY 22,
1990(A)
THROUGH APRIL
30,
1990
-------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C>
Net asset value, beginning of
period............................ $10.21
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .18(d)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.23)
------
Total from investment
operations...................... (.05)
------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.18)
Distributions in excess of net
investment income................. --
Distributions from capital gains... --
------
Total distributions.............. (.18)
------
Net asset value, end of period..... $ 9.98
------
------
TOTAL RETURN (B):.................. (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $164
Average net assets (000)........... $80
Ratios to average net assets:
Expenses, including distribution
fees............................ 0.63%(c)(d)
Expenses, excluding distribution
fees............................ 0.53%(c)(d)
Net investment income............ 6.26%(c)(d)
Portfolio turnover rate............ 91%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. See "Manager" in the Statement of
Additional Information.
</TABLE>

12
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)

The following financial highlights, with respect to the five-year period ended
April 30, 1996, 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 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. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-----------------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ----------- ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
-------- -------- -------- ----------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .43(e) .45(e) .48 .50(e) .53(e) .56(e) .62(e)
Net realized and unrealized gain
(loss) on investment
transactions...................... .20 (.04) (.19) .60 .27 .50 (.16)
-------- -------- -------- ----------- ------ ------ ------
Total from investment
operations...................... .63 .41 .29 1.10 .80 1.06 .46
-------- -------- -------- ----------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.43) (.45) (.48) (.50) (.53) (.56) (.62)
Distributions in excess of net
investment income................. -- (.01) -- -- -- -- --
Distributions from capital gains... -- (.18) (.22) (.11) (.15) -- (.03)
-------- -------- -------- ----------- ------ ------ ------
Total distributions.............. (.43) (.64) (.70) (.61) (.68) (.56) (.65)
-------- -------- -------- ----------- ------ ------ ------
Net asset value, end of period..... $ 10.65 $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.48 $ 9.98
-------- -------- -------- ----------- ------ ------ ------
-------- -------- -------- ----------- ------ ------ ------
TOTAL RETURN (C):.................. 6.05% 3.99% 2.43% 10.62% 7.68% 10.82% 4.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $40,550 $51,039 $65,215 $57,049 $45,401 $45,401 $47,838
Average net assets (000)........... $46,127 $60,174 $59,811 $50,154 $44,439 $46,521 $46,246
Ratios to average net assets:
Expenses, including distribution
fees............................ 1.56%(e) 1.45%(e) 1.40% 1.46%(e) 1.46%(e) 1.32%(e) 0.83%(e)
Expenses, excluding distribution
fees............................ 1.06%(e) 0.95%(e) 0.90% 0.96%(e) 0.96%(e) 0.82%(e) 0.33%(e)
Net investment income............ 3.96%(e) 4.35%(e) 4.23% 4.69%(e) 5.01%(e) 5.52%(e) 6.03%(e)
Portfolio turnover rate............ 35% 30% 55% 22% 78% 128% 91%

<CAPTION>
INTERMEDIATE
SERIES

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

CLASS B

--------------
SEPTEMBER 17,
1987(A) TO
APRIL 30,
1989 1988(B)
------------ --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period............................ $ 10.14 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .70(e) .43(e)
Net realized and unrealized gain
(loss) on investment
transactions...................... .09 .14
------ ------
Total from investment
operations...................... .79 .57
------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.70) (.43)
Distributions in excess of net
investment income................. -- --
Distributions from capital gains... (.06) --
------ ------
Total distributions.............. (.76) (.43)
------ ------
Net asset value, end of period..... $ 10.17 $ 10.14
------ ------
------ ------
TOTAL RETURN (C):.................. 8.21% 9.07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $45,362 $17,102
Average net assets (000)........... $30,515 $6,298
Ratios to average net assets:
Expenses, including distribution
fees............................ 0.15%(e) 0%(e)
Expenses, excluding distribution
fees............................ 0.05%(e) 0%(e)
Net investment income............ 6.59%(e) 6.16%(d)(e)
Portfolio turnover rate............ 135% 54%
<FN>
- ---------------
(a) Commencement of offering of Class B shares.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Annualized.
(e) Net of expense subsidy, fee waivers and distribution fee deferrals. See
"Manager" in the Statement of Additional Information.
</TABLE>

13
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)

<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-----------------------------
CLASS C
-----------------------------
AUGUST 1,
YEAR ENDED 1994(A)
APRIL 30, THROUGH APRIL
1996 30, 1995
------------ --------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of
period....................... $ 10.45 $10.54
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .40(d) .35(d)
Net realized and unrealized
gain (loss) on investment
transactions................. .20 (.08)
------ ------
Total from investment
operations................. .60 .27
------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.40) (.35)
Distributions in excess of net
investment income............ -- (.01)
Distributions from capital
gains........................ -- --
------ ------
Total distributions......... (.40) (.36)
------ ------
Net asset value, end of
period....................... $10.65 $10.45
------ ------
------ ------
TOTAL RETURN (B):............. 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 225 $ 167
Average net assets (000)...... $ 197 $ 28
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.81%(d) 1.81%(c)(d)
Expenses, excluding
distribution fees.......... 1.06%(d) 1.06%(c)(d)
Net investment income....... 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate....... 35% 30%
<FN>
- -------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of expense subsidy and fee waivers. See "Manager" in the Statement of
Additional Information.
</TABLE>

14
<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--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 PRIMARILY 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 (NRSRO) 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

15
<PAGE>
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, 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. From time to time, for temporary defensive purposes, the High
Yield Series may invest more than 35% of its 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 RATED
MUNICIPAL SECURITIES IN WHICH THE SERIES MAY INVEST. 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.

The Series may also invest up to 10% of its total assets in debt securities of
financially troubled and operationally troubled obligors (distressed
securities). Financially troubled obligors include obligors involved in
bankruptcy or reorganization proceedings or financial restructurings or
otherwise in default on their obligations. Operationally troubled obligors are
ones experiencing poor operating results that may have severely depressed
earnings or have special competitive or product obsolescence problems.

The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. These lower rated securities are "junk bonds." See "Risk Factors
Relating to Investing in High Yield Securities" below and the "Description of
Security Ratings" in the Appendix. Such lower-quality debt securities are
considered to have speculative characteristics, and involve greater risk of
default or price changes due to changes in the obligor's creditworthiness, or
they may already be in default. The market prices of these securities may
fluctuate more than higher-quality securities and may decline significantly in
periods of general or regional economic difficulty.

The Subadviser maintains a fixed income research group which the Series'
portfolio manager may consult in managing the portfolio and in researching
financially troubled and operationally troubled obligors. The Series' portfolio
manager reviews on an ongoing basis financially troubled and operationally
troubled obligors, including prospective purchases and portfolio holdings of the
Series. The portfolio manager has broad access to research and financial
reports, data retrieval services and industry analysts.

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

16
<PAGE>
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. If the investment adviser becomes involved in
activities such as reorganizations of obligors of troubled investments held by
the Series, this may prevent the Series from disposing of the securities, due to
its possession of material, non-public information concerning the obligor.

Debt rated BB, B, CCC, CC and C by S&P, and debt rated Ba, B, Caa, Ca and C by
Moody's is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB/Ba indicates the
lowest degree of speculation and D/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. Similarly, debt rated Ba or BB and below is regarded by the relevant
rating agency as speculative. Debt rated C by S&P is the lowest rated debt that
is not in default as to principal or interest and such issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Appendix.

Ratings of fixed income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicated.

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.

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.

17
<PAGE>
During the year ended April 30, 1996, 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 20.3%
AA/Aa 4.5%
A/A 5.5%
BBB/Baa 9.0%
BB/Ba 3.1%
B/B 1.0%
CCC/Caa 0.1%
Unrated
AAA/Aaa 1.9%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 2.4%
BB/Ba 20.5%
B/B 28.7%
CCC/Caa 1.9%
D 0.8%
</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 NRSRO, 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 NRSRO (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. The Series may also invest up to 5% of its total assets
in municipal obligations which are rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. 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, 1996, APPROXIMATELY 90% 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 or (ii) under a
"secondary market" insurance policy on a particular bond or note purchased
either by the Series or a previous bondholder or noteholder. 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.

18
<PAGE>
INSURANCE. 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: MBIA Insurance Corporation, AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company and Financial Security Assurance Inc. 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 secondary insurance may, on the
other hand, be paid by the Series. Premiums paid 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.

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 NRSRO 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 NRSRO. 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

19
<PAGE>
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 60-90 basis points
(.60%-.90%) 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 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 ATTEMPTING TO HEDGE ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST
FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND
ATTEMPTING TO HEDGE 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

20
<PAGE>
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 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

21
<PAGE>
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
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.

Each Series may purchase a rating from an NRSRO for non-rated securities. The
purchase of a rating is expected to enhance the value of the security for which
the rating is purchased. The cost of purchasing a rating is an expense of the
Series.

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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 purchase commitments.

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.

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.

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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 resale price. 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 hold 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. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. A Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. 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. Repurchase agreements
subject to demand are deemed to have a maturity equal to the applicable notice
period.

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

24
<PAGE>
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, 1996, the total expenses as a percentage
of average net assets were 0.64%, 1.04% and 1.29% of the Class A, Class B and
Class C shares, respectively, of the High Yield Series, 0.68%, 1.08% and 1.33%
of the Class A, Class B and Class C shares, respectively, of the Insured Series,
and 1.16%, 1.56% and 1.81% 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 $1 BILLION. It was incorporated in May 1987 under the
laws of the State of Delaware. For the fiscal year ended April 30, 1996, PMF
received a management fee of .45%, .45% and .45% 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. PMF has 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, 1996, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $52 billion.

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<PAGE>
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 Mutual Fund Investment Management (PMFIM), 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
managers of the Insured Series are Peter J. Allegrini and Marie Conti, who share
responsibility for the day-to-day management of the Series' portfolio. They have
managed the Series' portfolio since March 1996. Ms. Conti, an Investment Manager
of PMFIM, also has responsibility for the day-to-day management of the
Intermediate 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 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 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 A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS 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 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 PRUDENTIAL SECURITIES 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. Prudential
Securities 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, 1997.

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<PAGE>

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, 1997. 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 30,1996, each Series paid distribution
expenses of .10%, .50% and .75% 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. 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.

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.

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<PAGE>
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.

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.

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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 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. 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

29
<PAGE>
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 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 with respect to
shares that are held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain distributions received
by the shareholder. 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.

30
<PAGE>

Corporate shareholders in any of the Series will also have to take into
account the adjustment for current earnings for alternative minimum tax
purposes. Corporate shareholders should consult with their tax advisers with
respect to this potential adjustment.

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 on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholders' status under the federal
income tax law. 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."

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.

31
<PAGE>
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 FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. 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
is subject to different sales charges and distribution and/or service fees which
may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (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." 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. Currently, the Fund is offering three classes,
designated Class A, Class B and Class C shares.

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 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.

32
<PAGE>
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
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."

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 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. See
"Shareholder Services" below.

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.

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 third 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.

33
<PAGE>
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 THROUGH THIS PROSPECTUS 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.

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:

34
<PAGE>
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 when 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>

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) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (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

35
<PAGE>

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 180 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 fund sponsored by
the financial adviser's previous employer (other than a money market or other
no-load 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 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.

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

36
<PAGE>
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 such 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. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a PRO RATA basis. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.

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.

37
<PAGE>
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 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.

38
<PAGE>
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 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

39
<PAGE>
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. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE 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
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.

40
<PAGE>
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.

41
<PAGE>
DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE
BOND RATINGS

AAA: Bonds that 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
edge." 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 that 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 the best 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 that make the
long-term risks appear somewhat larger than in Aaa securities.

A: Bonds that 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 that
suggest a susceptibility to impairment some time in the future.

BAA: Bonds that are rated Baa are considered as medium grade obligations 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 that 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 that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or 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 that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.

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

C: Bonds that 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. There is
present 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. Margins of
protection are ample although not so large as in the preceding group.

MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is 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 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. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.

D: Debt rated D is in payment default. The D rating category 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.

A-3: Issues with the A-3 designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

MUNICIPAL NOTES

A municipal note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. 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 characteristics are given a
plus (+) 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.

EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies 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, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
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................................................. 15
Investment Objectives and Policies................................. 15
Hedging Strategies................................................. 20
Other Investments and Policies..................................... 22
Investment Restrictions............................................ 25
HOW THE FUND IS MANAGED.............................................. 25
Manager............................................................ 25
Distributor........................................................ 26
Portfolio Transactions............................................. 28
Custodian and Transfer and Dividend Disbursing Agent............... 28
HOW THE FUND VALUES ITS SHARES....................................... 28
HOW THE FUND CALCULATES PERFORMANCE.................................. 29
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 29
GENERAL INFORMATION.................................................. 32
Description of Shares.............................................. 32
Additional Information............................................. 33
SHAREHOLDER GUIDE.................................................... 33
How to Buy Shares of the Fund...................................... 33
Alternative Purchase Plan.......................................... 34
How to Sell Your Shares............................................ 36
Conversion Feature--Class B Shares................................. 39
How to Exchange Your Shares........................................ 39
Shareholder Services............................................... 40
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 28,
1996

HIGH YIELD SERIES
INSURED SERIES
INTERMEDIATE SERIES

[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND

Statement of Additional Information
dated June 28, 1996

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 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 28, 1996, 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 32
Investment Objectives and Policies................... B-2 15
Investment Restrictions.............................. B-9 25
Trustees and Officers................................ B-11 25
Manager.............................................. B-14 25
Distributor.......................................... B-15 26
Portfolio Transactions and Brokerage................. B-18 28
Purchase and Redemption of Fund Shares............... B-19 33
Shareholder Investment Account....................... B-22 40
Net Asset Value...................................... B-25 28
Taxes, Dividends and Distributions................... B-25 29
Performance Information.............................. B-28 29
Organization and Capitalization...................... B-31 32
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants............................ B-33 28
Financial Statements................................. B-34 --
Independent Auditors' Report......................... B-75 --
Appendix I -- Historical Performance Data............ I-1 --
Appendix II -- General Investment Information........ II-1 --
Appendix III -- Information Relating to The
Prudential......................................... III-1 --
</TABLE>

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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 primarily 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 (NRSRO)
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.
Under normal circumstances, 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. From time to time, for temporary, defensive purposes, the High
Yield Series may invest more than 35% of its total assets in such obligations.
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
NRSRO, or backed by the U.S. Government. The Series may also invest up to 5% of
its total assets in municipal obligations rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. 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: MBIA Insurance Corporation (MBIA Corp.), AMBAC Indemnity
Corporation (AMBAC), Financial Guaranty Insurance Company (FGIC) 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).

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, 1996, MBIA Corp. had, on a
statutory basis, total capital and surplus of approximately $1.3 billion
(unaudited), approximately $4.0 billion (unaudited) of admitted assets and
approximately $2.7 billion (unaudited) of liabilities. MBIA Inc. is not
obligated to pay the debts of or claims against MBIA Corp. MBIA Corp. is

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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, 1996, FGIC's total capital and surplus was approximately $1.032
billion (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 $2.440 billion (unaudited)
and statutory capital of approximately $1.387 billion (unaudited) as of March
31, 1996. 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.

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, 1996, FSA had total assets
of approximately $1.532 billion (unaudited) and total shareholder's equity of
approximately $779 million (unaudited). The company formerly known as Capital
Guaranty Insurance Company is now a subsidiary of FSA.

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
fixed income research group which provides credit analysis and research on
fixed-income securities. The portfolio manager consults routinely with the
research group in managing the Fund's portfolios. The fixed income research
group, which currently maintains a staff of 22 persons including 17 credit
analysts, reviews on an ongoing basis issuers of 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 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.

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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.

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; solid waste and resource recovery; ports and airports;
colleges, universities and other educational facilities; state and local housing
finance programs; obligations of municipal utilities systems; or other
industrial development and pollution control facilities. 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,

B-4
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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.

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.

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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
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

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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 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

B-7
<PAGE>
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 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.

B-8
<PAGE>
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.

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).

B-9
<PAGE>
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.

Subject to shareholder approval, the Trustees have approved certain
modifications of each Series' investment restrictions and policies, including
(i) amendment of the borrowing policy, as reflected in Investment Restriction
number 3, to permit the Series to borrow up to 33 1/3% of its total assets for
temporary, extraordinary or emergency purposes, (ii) modification of Investment
Restriction number 9 so as to permit the Series to invest up to 10% of its total
assets in the securities of other registered

B-10
<PAGE>

investment companies and (iii) deletion of Investment Restriction number 10 and
replacement of such restriction with a non-fundamental policy which can be
changed by the Trustees. Such proposals will be submitted to shareholders at a
special meeting to be held in or about October 1996.

TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------------- --------------- -------------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (71) 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.
Donald D. Lennox (77) 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. and The High Yield
Income Fund, Inc.
Douglas H. McCorkindale (57) Trustee Vice Chairman, Gannett Co. Inc. (publishing and media) (since March
c/o Prudential Mutual Fund 1984); Director, Continental Airlines, Inc., Gannett Co., Inc. and
Management, Inc. Frontier Corporation.
One Seaport Plaza
New York, NY
Thomas T. Mooney (54) Trustee President of the Greater Rochester Metro Chamber of Commerce; former
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, The Business Council of New York State, First Financial
Fund, Inc. and The High Yield Plus Fund, Inc.
*Richard A. Redeker (52) 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 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 High Yield Income 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>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------------- --------------- -------------------------------------------------------------------------
<S> <C> <C>
Louis A. Weil, III (55) Trustee Publisher and Chief Executive Officer (since January 1996) and Director
c/o Prudential Mutual Fund (since September 1991) of Central Newspapers, Inc.; Chairman of the
Management, Inc. Board (since January 1996), Publisher and Chief Executive Officer
One Seaport Plaza (August 1991 - December 1995) of Phoenix Newspapers, Inc.; prior
New York, NY thereto, Publisher of Time Magazine (May 1989-March 1991); formerly
President, Publisher and CEO of The Detroit News (February 1986-August
1989); formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester.
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director (since January
One Seaport Plaza 1989), Executive Vice President, Treasurer and Chief Financial Officer
New York, NY (since June 1987) of PMF; Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President, Treasurer, Comptroller
and Director (since March 1991) of PMFD; Director (since June 1987) of
PMFS; Vice President and Director of The Asia Pacific Fund, Inc. (since
May 1989).
S. Jane Rose (50) Secretary Senior Vice President (since January 1991), Senior Counsel (since June
One Seaport Plaza 1987) and First Vice President (June 1987-December 1990) of PMF; Senior
New York, NY Vice President and Senior Counsel of Prudential Securities (since July
1992); formerly Vice President and Associate General Counsel of
Prudential Securities.
Susan C. Cote (41) Treasurer and Managing Director, Prudential Investment Advisors, and Vice President,
751 Broad Street Principal The Prudential Investment Corporation (since February 1995); Senior
Newark, NJ Financial and Vice President (January 1989-January 1995) and First Vice President
Accounting (June 1987-December 1988) of PMF; Senior Vice President (January
Officer 1992-January 1995) and Vice President (January 1986-December 1991) of
Prudential Securities.
Stephen M. Ungerman (43) Assistant First Vice President of PMF (since February 1993); prior thereto, Senior
One Seaport Plaza Treasurer Tax Manager of Price Waterhouse (1981-January 1993).
New York, NY
Marguerite E.H. Morrison Assistant Vice President and Associate General Counsel (since June 1991) of PMF;
(40) Secretary Vice President and Associate General Counsel of Prudential Securities.
One Seaport Plaza
New York, NY
</TABLE>

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.

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.

The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72, except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach and Lennox are
scheduled to retire on December 31, 1999 and December 31, 1997, respectively.

The Trustees have nominated a new slate of Trustees for the Fund which will
be submitted to shareholders at a special meeting scheduled to be held in or
about October 1996.

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.

B-12
<PAGE>

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 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, 1996 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, 1995.

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 $ 183,500 (22/43)*
Donald D. Lennox--Trustee 9,000 None N/A 86,250 (10/22)*
Douglas H. McCorkindale--Trustee 9,000 None N/A 63,750 (7/10)*
Thomas T. Mooney--Trustee 9,000 None N/A 125,625 (14/19)*
Louis A. Weil, III--Trustee 9,000 None N/A 93,750 (11/16)*
<FN>
- ------------------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
</TABLE>

As of June 7, 1996, 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 7, 1996, Prudential Securities was record holder for other
beneficial owners of 15,080,673 Class A shares (or 73.3% of the outstanding
Class A shares) of the High Yield Series, 6,930,793 Class A shares (or 55.0% of
the outstanding Class A shares) of the Insured Series and 781,153 Class A shares
(or 68.4% of the outstanding Class A shares) of the Intermediate Series;
55,995,212 Class B shares (or 75.2% of the outstanding Class B shares) of the
High Yield Series, 15,572,775 Class B shares (or 38.9% of the outstanding Class
B shares) of the Insured Series and 1,869,779 Class B shares (or 50.2% of the
outstanding Class B shares) of the Intermediate Series, and 626,941 Class C
shares (or 96.0% of the outstanding Class C shares) of the High Yield Series,
58,863 Class C shares (or 60.1% of the outstanding Class C shares) of the
Insured Series and 15,651 Class C shares (or 72.2% 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 7, 1996, 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 (5.9%); Frank R. Grabenhofer, Loretta M. Grabenhofer
JTTEN, 15606 Plum Tree Drive, Orlando Park, IL 60462-5987, who held 3,563 Class
C shares of the Intermediate Series (16.4%); Michael B Wilde & Christine Wilde
JTTEN, 11375 Pepper Circle, Sandy, UT 84092-4972, who held 14,245 Class C shares
of the Intermediate Series (65.7%); Marie A. Lambert, Louise M. Dean JT Ten DOD
Elizabeth Marie Dean, subject to state TOD rules NJ, 400 W 76 M Ave, Anchorage,
AK 99518-2550, who held 2,434 Class C shares of the Intermediate Series (11.2%);
Charles A. Gash & Margaret Gash JTTEN, 1137 Damico Drive, Chicago Heights, IL
60411-2451, who held 9,686 Class C shares of the Insured Series (9.8%); Margaret
Gash & Robert Roseland, Philip Roseland & Steven Roseland JTTEN, 1137 Damico
Drive, Chicago Heights, IL 60411-2451, who held 7,439 Class C shares of the
Insured Series (7.5%); Valerie J. Ragland, 701 North James, Sparta, IL
62286-1152, who held 5,038 Class C shares of the Insured Series (5.1%); Jessie
L. Jerkatis & Robert L. Jerkatis & Julia A. Mankus JTWROS, 18215 Springfield
Ave., Homewood, IL 60430-2625, who held 6,599 Class C shares of the Insured
Series (6.7%); Belvia R. Gordon TTee Belvia R. Gordon Living Tr UA DTD 6/11/86,
4 Meadow Pass, Huntington, IN 46750-1314, James Rohde and Rose Marie Rhode
JTTEN, 333 Heights Blvd. Houston, TX 77007-2517, who held 84,999 Class C shares
of the High Yield Series (13%); 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 (7%).

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, 1996, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $52 billion and, according to the Investment Company Institute,
as of December 31, 1995, the Prudential Mutual Funds were the 13th largest
family of mutual funds in the United States.

PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.

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 PMFS, 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. PMF has agreed to waive 10% of its management fee (.05 of 1% of average
net assets, as annualized). 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, 1996. 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

B-14
<PAGE>
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.

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 8, 1996 and by the
shareholders of each Series on February 19, 1988.

For the fiscal year ended April 30, 1996, PMF received a management fee of
$4,774,952 (net of waiver of $534,026), $2,824,806 (net of waiver of $313,867)
and $265,175 (net of waiver of $29,464) on behalf of the High Yield Series,
Insured Series and Intermediate Series, respectively. 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.

PMF has entered into a Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. 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. Investment advisory
services are provided to the Fund by a unit of the Subadviser known as
Prudential Mutual Fund Investment Management.

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 8,
1996, 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.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, served as the distributor
of the Class A 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 a distribution agreement
(the Distribution Agreement), Prudential Securities (the Distributor) incurs 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.

B-15
<PAGE>

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 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 8, 1996. 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, 1996, PMFD and PSI
received payments of $162,329, $102,456 and $12,604 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, 1996, PMFD and PSI also received approximately $282,500,
$59,200 and $4,600 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, 1996, the Distributor
received $4,500,574, $2,622,259 and $230,633 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, 1996, 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 $ 14,500 $ 1,776,500 $1,696,400 $ 539,200 $ 4,026,600
Insured Series $ 57,900 $ 646,700 $ 258,300 $ 457,100 $ 1,420,000
Intermediate Series $ 14,300 $ 69,400 $ 62,900 $ 35,500 $ 182,100
<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, 1996, Prudential
Securities received approximately $1,553,000, $978,600 and $137,500 on behalf of
the High Yield Series, Insured Series and Intermediate Series, respectively, in
contingent deferred sales charges attributable to Class B shares.

B-16
<PAGE>

CLASS C PLAN. For the fiscal year ended April 30, 1996, the Distributor
received $42,063, $6,203 and $1,481 on behalf of the High Yield Series, Insured
Series and Intermediate Series, respectively, under the Class C Plan. For the
fiscal year ended April 30, 1996, 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 $ 1,100 $ 20,700 $ 21,600 $ 2,800 $ 46,200
Insured Series $ 2,000 $ 2,600 $ 2,000 $ 1,600 $ 8,200
Intermediate Series $ 1,200 $ 1,000 $ 1,300 $ 10 $ 3,510
<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 C shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended April 30, 1996, Prudential
Securities received approximately $3,000, $100 and $100 on behalf of the High
Yield Series, Insured Series and Intermediate Series, respectively, in
contingent deferred sales charges attributable to Class C shares.

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 the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The amended
Distribution Agreement was approved by the Trustees, including a majority of the
Rule 12b-1 Trustees, on May 8, 1996. On November 3, 1995, the Trustees approved
the transfer of the Distribution Agreement for Class A shares with PMFD to
Prudential Securities.

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.

B-17
<PAGE>
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 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.

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.

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

B-18
<PAGE>
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 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, 1996, 1995 and 1994 the Fund paid
$263,800, $34,125 and $8,925, 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 is
subject to different sales charges and distribution and/or service fees, which
may affect performance, (ii) each class has exclusive voting rights with respect
to any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege and (iv) only Class B shares have
a conversion feature. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."

B-19
<PAGE>
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, 1996, 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.............................. $10.70 $ 10.94 $10.65
Maximum sales charge (3% of offering
price)..................................... .33 .34 .33
----------- --------- ------
Offering price to public..................... $11.03 $ 11.28 $10.98
----------- --------- ------
----------- --------- ------

CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $10.69 $ 10.95 $10.65
----------- --------- ------
----------- --------- ------

CLASS C
Net asset value, redemption price and
offering price to public per Class C
share*..................................... $10.69 $ 10.95 $10.65
----------- --------- ------
----------- --------- ------
</TABLE>

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

* 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.

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.

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 retirement or group
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

B-20
<PAGE>
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. Rights of
accumulation are not available to individual participants in any retirement or
group plans.

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 (Investment
Letter of Intent). Retirement and group plans may also qualify to purchase Class
A shares at net asset value by entering into a Letter of Intent whereby they
agree to enroll within a thirteen-month period, a specified number of eligible
employees or participants (Participant Letter of Intent).

For purposes of the Investment Letter of Intent, 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.

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. 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
an Investment Letter of Intent (except in the case of retirement and group
plans) 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 Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) 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.

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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.

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>

B-21
<PAGE>
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.

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 (Short-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.

B-22
<PAGE>
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, Inc.
Prudential Tax-Free Money Fund, Inc.

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,
Inc., 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, Inc. 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, 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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been

B-23
<PAGE>

projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 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 and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees and
room and board for the 1993-1994 academic year.
(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."

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.

MUTUAL FUND PROGRAM

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an

B-24
<PAGE>

investment theme, E.G., to seek greater diversification, protection from
interest rate movements or access to different management styles. In the event
such a program is instituted, there may be a minimum investment requirement for
the program as a whole. The Fund may waive or reduce the minimum initial
investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blends of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.

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, 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 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 alternative 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

B-25
<PAGE>
$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
reduction 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 options thereof 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 reduction for losses) from the
sale or other disposition of securities, options thereon, futures contracts,
options thereon, forward contracts and foreign currencies held for less than
three months (except for foreign currencies directly related to the Fund's
business of investing in securities); (c) each Series diversify its holdings so
that, at the end of each quarter of the taxable year, (i) at least 50% of the
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 market value 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); and (d) each Series
distribute to its shareholders at least 90% of its net investment income and net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) in each year.

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, 1996 of approximately $13,815,000, of which
$2,024,000 expires in 2002, $5,361,000 expires in 2003 and $6,430,000 expires in
2004. The Insured Series has a net capital loss carryforward for federal income
tax purposes as of April 30, 1996 of approximately $630,700, which expires in
2003. The Intermediate Series has a net capital loss carryforward for federal
income tax purposes as of April 30, 1996 of approximately $337,600, which
expires in 2004.

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 less 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 net capital gains 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 capital gains 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-26
<PAGE>

Distributions of taxable net investment income and net 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 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 prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, a Series will be subject to a 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 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-27
<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, 1996 was 6.16%, 4.75% and 3.94%
for Class A shares of the High Yield Series, Insured Series and Intermediate
Series, respectively. The yield for the 30 days ended April 30, 1996 was 5.95%,
4.50% and 3.67% for Class B shares of the High Yield Series, Insured Series and
Intermediate Series, respectively. The yield for the 30 days ended April 30,
1996 was 5.70%, 4.25% and 3.42% for Class C shares of the High Yield Series,
Insured Series and 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, 1996, the tax equivalent yield
for the Class A shares of the High Yield Series, Insured Series and Intermediate
Series was 10.20%, 7.86% and 6.52%, respectively. For the 30 days ended April
30, 1996, the tax equivalent yield for the Class B shares of the High Yield
Series, Insured Series and Intermediate Series was 9.85%, 7.45% and 6.08%,
respectively. For the 30 days ended April 30, 1996, the tax equivalent yield for
the Class C shares of the High Yield Series, Insured Series and Intermediate
Series was 9.44%, 7.04% and 5.66%, 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.
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.

B-28
<PAGE>
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, 1996 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 1996 1996 INCEPTION 1996 1996
- ---------------------- ----------- ----------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 6.88 % 6.91% 3.35% 6.83% 6.87% 3.25%
Insured Series 6.83 % 6.38% 3.27% 6.77% 6.32% 3.18%
Intermediate Series 6.38 % 5.94% 3.28% 6.24% 5.84% 3.18%
</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, 1996 and for the one year ended April 30, 1996
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 1996 1996 INCEPTION 1996 1996
- ---------------------- ------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 8.12% 6.96% 1.12% 8.04% 6.92% 1.03%
Insured Series 7.76% 6.47% 1.04% 7.66% 6.41% 0.95%
Intermediate Series 6.93% 5.99% 1.05% 6.55% 5.89% 0.96%
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class C shares (August 1, 1994) and for the
one year ended April 30, 1996 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR ---------------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1996 INCEPTION 1996
- ---------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
High Yield Series 5.61% 4.86% 5.55% 4.76%
Insured Series 5.63% 4.78% 5.57% 4.68%
Intermediate Series 4.54% 4.79% 4.48% 4.69%
</TABLE>

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-29
<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, 1996 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 1996 1996 INCEPTION 1996 1996
- ---------------------- ------------- ---------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 56.48% 43.98% 6.55% 56.41% 43.93% 6.45%
Insured Series 56.00% 40.46% 6.47% 55.91% 40.38% 6.37%
Intermediate Series 51.96% 37.56% 6.48% 51.75% 37.43% 6.38%
</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, 1996 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 1996 1996 INCEPTION 1996 1996
- ---------------------- ------------- ----------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Yield Series 96.26% 41.00% 6.12% 96.11% 40.95% 6.02%
Insured Series 90.59% 37.81% 6.04% 90.41% 37.73% 5.94%
Intermediate Series 78.41% 34.80% 6.05% 77.78% 34.67% 5.95%
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class C shares (August 1, 1994) and for the one
year ended April 30, 1996 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
---------------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1996 INCEPTION 1996
- ---------------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
High Yield Series 10.00% 5.86% 9.94% 5.76%
Insured Series 10.04% 5.78% 9.98% 5.68%
Intermediate Series 8.06% 5.79% 8.00% 5.69%
</TABLE>

B-30
<PAGE>
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)

CHART

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

(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield).Used with permission. All rights reserved. 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. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

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.

B-31
<PAGE>
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 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.

B-32
<PAGE>
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, 1996, the Fund incurred fees of approximately $697,100
($384,800-High Yield Series, $278,400 Insured Series and $33,900 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-33
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.5%
Ft. Payne Ind. Dev. Brd. Rev., Gametime Inc. NR 10.25% 8/01/09 $ 4,269 $ 4,613,295
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--1.0%
Ft. Mojave Indian Tribe Wtr. & Swr. Rev. NR 10.25 9/01/19 3,000(c) 1,531,560
Pima Cnty. Ind. Dev. Auth., Multifam. Mtge. Rev., La
Cholla Proj. NR 8.50 7/01/20 9,960 8,602,552
--------------
10,134,112
- ------------------------------------------------------------------------------------------------------------------------------
California--11.9%
Alameda Cmnty. Facs. Dist. Spec. Tax Rev. No. 1, Harbor
Bay NR 7.75 9/01/19 8,175 8,464,967
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G Aa 8.15 8/01/19 1,010 1,053,309
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000 9,786,200
Delano Ctfs. of Part., Regl. Med. Ctr., Ser. 92A NR 9.25 1/01/22 6,820 7,614,939
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130 3,219,424
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.80 9/01/13 3,805 3,072,690
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195 4,906,254
Los Angeles Cnty. Valencia/Newhall Area, Spec. Tax NR 7.125 9/01/20 3,000 2,890,770
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease NR 9.25 8/01/24 10,345 11,626,228
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs Aa 6.20 2/14/11 7,000 7,038,920
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 9/01/23 10,000 9,838,800
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/08 1,660 836,740
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 818,757
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 776,242
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 751,936
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 1,768,525
Sacramento Cnty. Spec. Tax Rev.,
Dist. No. 1, Elliot Ranch NR 8.20 8/01/21 3,750 3,935,475
Dist. No. 1, Laguna Creek Ranch NR 8.25 12/01/20 4,500 4,757,220
San Francisco Int'l. Arpt. Rev., Second Ser. Issue 10 A,
M.B.I.A. Aaa 5.625 5/01/21 5,150 4,813,242
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. NR Zero 1/01/11 12,900 4,368,069
Toll Rd. Rev. NR Zero 1/01/14 8,000 2,496,720
Toll Rd. Rev. NR Zero 1/01/22 25,000 4,481,250
Toll Rd. Rev. NR Zero 1/01/25 15,700 2,301,934
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-34 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Santa Margarita/Dana Point Auth., Impvt. Dist.
Ser. A, M.B.I.A. Aaa 7.25% 8/01/13 $ 1,990 $ 2,337,792
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000 3,523,320
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa Zero 7/01/14 8,500 2,827,780
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,449,908
South Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795 5,795,000
Victor Valley Union H.S. Dist.,
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,378,948
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 1,597,570
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,173,339
--------------
122,702,268
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--2.7%
Eagle Cnty. Co., Lake Creek Affordable Hsg., Ser. A NR 8.00 12/01/23 11,610 11,933,919
San Miguel Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 3,200 3,522,176
Superior Met. Dist. No. 1, Wtr. & Swr.,
Rev. NR 7.50 12/01/98 2,400 2,500,248
Rev. NR 8.50 12/01/13 8,900 9,718,533
--------------
27,674,876
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--0.8%
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 8,000 8,187,520
- ------------------------------------------------------------------------------------------------------------------------------
District Of Columbia--1.5%
Dist. of Columbia Rev.,
America Geophysical Union, Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000 6,594,900
Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,212,720
--------------
15,807,620
- ------------------------------------------------------------------------------------------------------------------------------
Florida--5.8%
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 8,000 8,534,720
Escambia Cnty. Hlth. Facs. Auth. Rev.,
Azalea Trace NR 9.25 1/01/06 2,605 2,789,043
Baptist Hosp. Ref., Ser. A BBB+(d) 8.60 10/01/02 4,385 4,810,696
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev. NR 10.00 1/01/20 9,448(c) 6,519,459
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20 5/01/24 1,980 2,096,582
Ser. A NR 8.30 5/01/24 1,740 1,855,014
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Florida (cont'd.)
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa 6.75% 10/01/17 $ 2,000 $ 2,249,740
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,580 4,840,648
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. NR 10.00 7/01/22 6,950(g) 8,779,101
Seminole Cnty. Ind. Dev. Auth. Rev., Fern Park NR 9.25 4/01/12 6,175 6,624,293
Tampa Rev., Aquarium Proj. NR 7.75 5/01/27 7,500 7,612,200
Tampa Sports Auth. Rev., Tampa Bay Arena Proj., M.B.I.A. Aaa 5.75 10/01/15 2,500 2,508,600
--------------
59,220,096
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.3%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,625(g) 5,442,978
Effingham Cnty. Dev. Auth., Ft. Howard Corp. B1 7.90 10/01/05 10,000 10,505,700
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 6,000 6,432,840
Mun. Elec. Auth., Spec. Oblig., Proj. 1 A 6.50 1/01/12 1,500 1,592,640
--------------
23,974,158
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--0.7%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,995 7,376,297
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--8.1%
Chicago Brd. Edl., Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 14,000 14,033,880
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj, Ser. B Baa2 8.20 12/01/24 1,000 1,147,200
United Airlines, Ser. B Baa2 8.45 5/01/07 6,000 6,589,140
United Airlines, Ser. B Baa2 8.50 5/01/18 6,500 7,136,285
United Airlines, Ser. B Baa2 8.85 5/01/18 2,755 3,118,081
United Airlines, Ser. B Baa2 8.95 5/01/18 2,360 2,665,195
Hennepin Ind. Dev. Rev.,
Exolon-Esk Co. Proj. NR 8.875 1/01/18 8,000 8,304,480
Methchem. Corp. Proj., Ser. 89 NR 10.25 1/01/05 4,420(c) 75,140
Illinois, Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245(c) 179,564
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,331 7,895,634
Midwest Physician Group Ltd. Proj. BBB-(d) 8.10 11/15/14 3,135 3,298,208
Midwest Physician Group Ltd. Proj. BBB-(d) 8.125 11/15/19 3,285 3,461,963
Illinois, Series K, A.M.B.A.C. Aaa 6.25 1/01/13 6,825 7,157,173
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-36 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Kane & De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 $ 3,360 $ 1,317,053
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,389,051
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec., LP Proj. NR 9.25% 10/15/14 16,000 11,200,000
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 4,281 4,432,861
--------------
83,400,908
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.0%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Ba2 7.85 8/01/15 7,500 8,154,975
Indianapolis Loc. Pub. Impvt. Bond Bank Ref., Ser. A,
F.S.A. Aaa 6.50 1/01/13 4,200 4,558,050
Wabash Econ. Dev. Rev. Bonds, Connell Ltd. NR 8.50 11/24/17 7,250 7,779,178
--------------
20,492,203
- ------------------------------------------------------------------------------------------------------------------------------
Iowa--2.0%
City of Cedar Rapids Rev., 1st Mtge., Cottage Grove
Place Proj. NR 9.00 7/01/18 9,375 9,665,906
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.95 7/01/25 10,000 10,620,800
--------------
20,286,706
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--0.7%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 3,765,960
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000 1,738,200
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650 2,037,161
--------------
7,541,321
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.6%
Hodge Util. Rev., Stone Container Corp. NR 9.00 3/01/10 9,000 9,747,450
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A,
G.N.M.A. Aaa 8.60 12/01/19 1,670 1,756,957
New Orleans Ind. Dev. Rev. BB(d) 8.75 10/01/19 3,600 4,090,608
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 781,739
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. NR 8.25 6/01/14 10,000 10,953,300
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,851,540
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,877,480
--------------
37,059,074
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--1.1%
Anne Arundel Cnty. 1st Mtge. Rev., Pleasant Living Conv. NR 8.50% 7/01/13 $ 3,410 $ 3,616,475
NE Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 4,582 4,675,977
Sludge Comp. Fac. NR 8.50 7/01/07 3,300 3,428,403
--------------
11,720,855
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--4.8%
Boston Ind. Dev. Fin. Auth. Ind. Rev., 1st Mtge.
Springhouse Proj. NR 9.25 7/01/15 8,000 8,378,560
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00 3/01/21 7,500 8,643,150
Mass. St. Coll. Bldg. Proj. and Ref. Bonds A 7.50 5/01/14 1,750 2,077,495
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 8,025,375
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,735(g) 6,501,655
Mass. St. Hsg. Fin. Agcy. Rev., Res. Hsg., Ser. B BBB+(d) 8.10 8/01/23 335 348,973
Mass. St. Ind. Fin. Agcy. Rev.,
Glenmeadow Proj. NR 7.00 2/15/06 3,700 3,644,278
Glenmeadow Proj. NR 8.625 2/15/26 2,720 2,726,365
Mass. St. Ind. Fin. Agcy. Cont. Res., Ser. A NR 9.50 2/01/00 2,200 2,308,548
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 6,015 6,191,179
--------------
48,845,578
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--5.3%
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,304,580
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,285,804
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,141,140
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,320,064
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 2,950 814,908
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 1,680,250
Meridian Econ. Dev. Corp. Rev., Burcham Hills Retirement
Facs. NR 9.625 7/01/19 2,850 3,026,614
Michigan St. Hosp. Fin. Auth. Rev., Saratoga Cmnty.
Hosp. NR 8.75 6/01/10 6,900 7,236,375
Michigan Strategic Fund Ltd. Oblig. Rev.,
Great Lakes Pulp & Fibre Proj. NR 10.25 12/01/16 20,000 18,622,600
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station NR 7.50 1/01/21 10,000 10,018,900
Wayne Cnty. Bldg. Auth., Ser. A Baa 8.00 3/01/17 3,500(g) 4,091,535
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 1,523,349
F.G.I.C. Aaa Zero 5/01/18 3,215 846,124
--------------
54,912,243
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-38 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--1.1%
Minneapolis St. Paul Hsg. Fin. Brd., Multifam. Mtge.
Rev., Riverside Plaza, G.N.M.A. AAA(d) 8.25% 12/20/30 $ 4,000 $ 4,212,400
So. Minnesota Mun. Pwr. Agcy. Supply Sys.,
Ser. A, M.B.I.A. Aaa Zero 1/01/19 25,875 6,578,719
Ser. A, M.B.I.A. Aaa Zero 1/01/20 1,500 358,695
--------------
11,149,814
- ------------------------------------------------------------------------------------------------------------------------------
Mississippi--1.8%
Claiborne Cnty. Poll. Ctrl. Rev.,
Mid. So. Engy. Sys. NR 9.875 12/01/14 6,100 6,882,752
Mid. So. Engy. Sys., Ser. A NR 9.50 12/01/13 10,350 11,592,311
--------------
18,475,063
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--1.6%
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 9,580,687
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 2,350 2,386,002
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C NR 7.90 8/15/21 4,250 4,589,533
--------------
16,556,222
- ------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.2%
Nebraska Invest. Fin. Auth., G.N.M.A., Sngl. Fam. Mtge.
Rev., Ser. I,
M.B.I.A. Aaa 8.125 8/15/38 2,350 2,449,852
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.5%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875 12/01/22 5,470 5,939,599
Havenwood/Heritage Heights NR 9.75 12/01/19 7,685(g) 9,105,880
--------------
15,045,479
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--5.3%
New Jersey Econ. Dev. Corp. Rev., Ref. Newark Arpt.
Marriot Hotel NR 7.00 10/01/14 3,800 3,778,720
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Vlge., Proj. A NR 9.25 1/01/25 11,500 12,505,330
Keswick Pines Proj. NR 7.75 1/01/01 3,095 3,167,423
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey (cont'd.)
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50% 1/01/16 $ 16,000 $ 17,400,960
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 15,500 17,110,140
--------------
53,962,573
- ------------------------------------------------------------------------------------------------------------------------------
New York--4.4%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 8,340 3,114,490
New York City Ind. Dev. Agcy.,
Amer. Airlines Inc. Baa2 8.00 7/01/20 3,320 3,520,760
Mesorah Pub. Ltd. NR 10.25 3/01/19 1,909 2,132,811
Visy Paper Inc. Proj. NR 7.95 1/01/28 6,000 6,051,120
New York City,
Ser. B Baa1 7.25 8/15/07 3,500 3,881,080
Ser. G Baa1 6.75 2/01/09 5,000 5,176,800
New York Hosp. Rev., Newark Wayne Cmnty. Hosp. Inc.,
Ser. A NR 7.60 9/01/15 3,305 3,247,427
New York St. Dorm. Auth. Rev.,
City Univ., Ser. A Baa1 5.625 7/01/16 5,000 4,682,050
Colgate Univ., M.B.I.A. Aaa 6.00 7/01/21 2,500 2,568,875
New York St. Engy. Res. & Dev. Auth. Rev., Brooklyn
Union Gas Co. Ser. D, M.B.I.A. Aaa 7.489 7/08/26 2,000(f) 1,697,500
Port Auth. of New York & New Jersey, USAir LaGuardia
Arpt. B2 9.125 12/01/15 4,000 4,404,680
Triborough Brdg. & Tunnel Auth. Rev., Genl. Purpose,
Ser. A Aa 6.00 1/01/10 5,000 5,227,800
--------------
45,705,393
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.1%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C. Aaa 7.20 6/30/13 10,000 11,688,100
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--3.4%
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 388,880
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 548,325
1st Mtge., Ser. A, M.B.I.A. Aaa Zero 11/15/09 3,000 1,414,470
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,486,400
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton,
Proj. B NR 9.25 2/01/16 4,500 4,737,870
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison Ba2 8.00 10/01/23 5,500 5,707,955
Ohio St. Wtr. Dev. Auth. Rev., Mid. Amer. Wste. Sys.
Inc. NR 7.75 9/01/07 8,390 7,076,965
Stark Cnty. Hlthcare Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135 6,577,763
--------------
34,938,628
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-40 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.0%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25% 6/01/11 $ 7,500 $ 8,087,175
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 2,500 2,565,275
--------------
10,652,450
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--5.8%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,800 3,062,332
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367(c) 29,397
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,513,266
Chartiers Valley Ind. & Coml. Dev. Auth. Rev.,
Friendship
Vlge./So. Hills NR 9.50 8/15/18 3,750 3,886,912
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(d) 8.625 10/15/13 6,640 7,310,109
Lancaster Cnty. Solid Wste. Mgmt., Res. Rec. Auth. Sys.
Rev.,
Ser. A A 8.50 12/15/10 5,965 6,330,595
Penn. St. Higher Edl. Facs. Auth. Rev., Med. Coll. of
Pennsylvania,
Ser. A Baa 8.375 3/01/11 5,200 5,585,216
Pennsylvania Econ. Dev. Fin. Auth. Recyc. Rev. NR 9.25 1/01/22 7,000 6,982,710
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,193,300
Philadelphia Hosp. Auth. & Higher Ed., Grad. Hlth. Sys. Baa1 7.25 7/01/18 2,000 2,009,480
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/08 3,250 3,528,395
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,688,450
M.B.I.A. Aaa 6.25 8/01/12 3,000 3,199,350
Wilkes Barre Gen. Mun. Auth. Coll. Rev.,
Misericordia Coll., Ser. A NR 7.75 12/01/12 1,245 1,310,126
Misericordia Coll., Ser. B NR 7.75 12/01/12 2,400 2,463,168
--------------
59,092,806
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--1.9%
Puerto Rico Elec. Pwr. Auth., Ref. Bonds, Ser. S Baa1 6.125 7/01/09 7,375 7,689,691
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.87 1/25/07 6,500(f) 6,256,250
Ser. I, M.B.I.A. Aaa 7.036 1/16/15 6,150(f) 5,511,938
--------------
19,457,879
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island--1.7%
Rhode Island Hsg. & Mtge. Fin. Corp., Homeownership
Opport., Ser. 1A A1 8.20 10/01/17 6,000 6,315,300
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,835 11,353,021
--------------
17,668,321
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.4%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge. Aa 7.75% 7/01/22 $ 4,345 $ 4,552,691
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--0.5%
So. Dakota Econ. Dev. Fin. Auth., Dakota Park NR 10.25 1/01/19 5,060 5,008,084
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.5%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp. NR 8.50 4/15/04 6,515 6,928,312
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 7,939,626
--------------
14,867,938
- ------------------------------------------------------------------------------------------------------------------------------
Texas--4.3%
Alliance Arpt. Auth. Inc. Spec. Facs., Fed. Ex. Corp.
Proj. Baa2 6.375 4/01/21 6,000 5,896,740
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A 9.20 3/01/12 1,795 1,959,386
Bell Cnty. Hlth. Facs. Dev. Corp.,
Adventist Living Tech. Proj., Ser. A NR 10.50 6/15/18 2,390 1,959,800
Adventist Living Tech. Proj., Ser. A NR 10.50 6/15/18 2,905 2,382,100
Brownsville Util. Sys. Rev. Ref., A.M.B.A.C. Aaa 6.25 9/01/10 4,085 4,402,609
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,110,950
Keller Ind. Sch. Dist., Cap Apprec., Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,117,446
New Braunfels Ind. Sch. Dist.,
Cap. Apprec. Aaa Zero 2/01/08 2,365 1,221,688
Cap. Apprec. Aaa Zero 2/01/09 2,365 1,140,687
Cap. Apprec. Aaa Zero 2/01/12 2,365 924,833
Cap. Apprec. Aaa Zero 2/01/13 1,365 498,826
Port Corpus Christi Ind. Dev. Corp., Valero Ref. & Mfg.
Co.,
Ser. A Baa3 10.25 6/01/17 1,300 1,405,846
Retama Dev. Corp., Spec. Fac., Retama Park Racetrack NR 8.75 12/15/18 7,255(c) 1,668,631(h)
Round Rock Ind. Sch. Dist., M.B.I.A. Aaa Zero 8/15/11 4,385 1,762,551
San Antonio Elec. & Gas Rev.,
F.G.I.C. Aaa Zero 2/01/09 5,000 2,411,600
Ser. B, F.G.I.C. Aaa Zero 2/01/12 7,500 2,932,875
Tarrant Cnty. Hlth. Facs. Dev. Corp. Rev., Foundation
Proj. NR 10.25 9/01/19 5,000 5,193,050
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 5,046,969
--------------
44,036,587
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-42 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--1.6%
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.45% 1/01/09 $ 3,500 $ 3,713,815
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.55 1/01/19 12,000 12,729,480
--------------
16,443,295
- ------------------------------------------------------------------------------------------------------------------------------
Washington--2.2%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 388,438
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 498,084
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 504,491
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 468,476
Thurston Cnty. Sch. Dist. 333,
F.G.I.C., Ser. B Aaa Zero 12/01/11 6,415 2,514,551
F.G.I.C. Aaa Zero 12/01/12 6,830 2,500,873
Washington St. Pub. Pwr. Sup. Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa 7.25 7/01/09 5,000 5,631,100
Nuclear Proj. No. 3 Aa Zero 7/01/16 10,000 2,757,600
Nuclear Proj. No. 3 Aa Zero 7/01/17 5,000 1,285,600
Nuclear Proj. No. 3, Ser. B Aa 7.125 7/01/16 5,000 5,521,500
--------------
22,070,713
- ------------------------------------------------------------------------------------------------------------------------------
West Virginia--1.6%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co. Baa2 8.00 8/01/20 2,450 2,617,164
Weirton Poll. Ctrl. Rev., Weirton Steel Proj. B2 8.625 11/01/14 4,000 4,164,360
West Virginia St. Hsg. Dev. Fund Hsg. Fin., Ser. A A1 7.95 5/01/17 6,760 7,084,074
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C. Aaa 7.585 5/16/19 3,250(f) 3,034,687
--------------
16,900,285
--------------
Total long-term investments (cost $991,101,696) 1,004,671,303
--------------
SHORT-TERM INVESTMENTS--0.3%
- ------------------------------------------------------------------------------------------------------------------------------
Kansas--0.1%
Butler Cnty., Texaco, Ser. B, F.R.D.D. P1 4.45 5/01/96 1,000 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--0.2%
Gulf Coast Wste. Disp., Amoco Corp., Ser. 94, F.R.D.D. VMIG1 4.25 5/01/96 2,000 2,000,000
--------------
Total short-term investments (cost $3,000,000) 3,000,000
--------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43 -----

- ---------------
(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.R.D.D.--Floating Rate (Daily) Demand Note(e)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Non-income producing security.
(c) Issuer in default of interest payment (b).
(d) Standard & Poor's Rating.
(e) The maturity date shown is 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.
(f) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(g) Prerefunded issues are secured by escrowed cash and direct U.S.
guaranteed obligations.
(h) Fair valued security.

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-44 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets April 30, 1996
Investments, at value (cost $994,820,207)................................................................... $1,008,135,990
Cash........................................................................................................ 55,775
Interest receivable......................................................................................... 21,373,116
Receivable for investments sold............................................................................. 8,474,767
Receivable for Fund shares sold............................................................................. 1,211,925
Deferred expenses........................................................................................... 11,382
--------------
Total assets............................................................................................. 1,039,262,955
--------------
Liabilities
Payable for investments purchased........................................................................... 6,027,499
Payable for Fund shares reacquired.......................................................................... 2,126,649
Dividends payable........................................................................................... 1,610,155
Management fee payable...................................................................................... 381,480
Distribution fee payable.................................................................................... 352,692
Accrued expenses............................................................................................ 173,033
--------------
Total liabilities........................................................................................ 10,671,508
--------------
Net Assets.................................................................................................. $1,028,591,447
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 961,755
Paid-in capital in excess of par......................................................................... 1,028,397,860
--------------
1,029,359,615
Accumulated net realized loss on investments............................................................. (14,083,951)
Net unrealized appreciation of investments............................................................... 13,315,783
--------------
Net assets, April 30, 1996.................................................................................. $1,028,591,447
--------------
--------------
Class A:
Net asset value and redemption price per share
($223,072,757 / 20,854,307 shares of beneficial interest issued and outstanding)...................... $10.70
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $11.03
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($799,047,793 / 74,716,080 shares of beneficial interest issued and outstanding)...................... $10.69
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($6,470,897 / 605,084 shares of beneficial interest issued and outstanding)........................... $10.69
--------------
--------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1996
<S> <C>
Income
Interest.................................. $ 77,192,819
--------------
Expenses
Management fee............................ 5,308,978
Distribution fee--Class A................. 162,329
Distribution fee--Class B................. 4,500,574
Distribution fee--Class C................. 42,063
Transfer agent's fees and expenses........ 470,000
Reports to shareholders................... 170,000
Custodian's fees and expenses............. 160,000
Registration fees......................... 83,000
Legal fees and expenses................... 48,500
Insurance expense......................... 29,503
Audit fees and expenses................... 19,500
Trustees' fees and expenses............... 16,000
Miscellaneous............................. 8,300
--------------
Total expenses......................... 11,018,747
Less: Management fee waiver............... (534,026)
Custodian fee credit................... (16,486)
--------------
Net expenses........................... 10,468,235
--------------
Net investment income........................ 66,724,584
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions................... 5,632,109
Financial futures contract transactions... 2,242,223
--------------
7,874,332
--------------
Net change in unrealized depreciation of:
Investments............................... (9,762,878)
Financial futures contracts............... (136,625)
--------------
(9,899,503)
--------------
Net loss on investments...................... (2,025,171)
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 64,699,413
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income....... $ 66,724,584 $ 69,751,519
Net realized gain (loss) on
investment
transactions............. 7,874,332 (15,484,052)
Net change in unrealized
appreciation
(depreciation) of
investments.............. (9,899,503) 10,858,413
-------------- --------------
Net increase in net assets
resulting from
operations............... 64,699,413 65,125,880
-------------- --------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A.................. (10,686,945) (4,456,405)
Class B.................. (55,704,885) (65,229,614)
Class C.................. (332,754) (65,500)
-------------- --------------
(66,724,584) (69,751,519)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. (21,756) (2,229)
Class B.................. (103,384) (47,585)
Class C.................. (746) (60)
-------------- --------------
(125,886) (49,874)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 125,110,592 135,404,221
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 30,125,436 31,059,195
Cost of shares reacquired... (177,927,248) (262,484,590)
-------------- --------------
Net decrease in net assets
from Series share
transactions............. (22,691,220) (96,021,174)
-------------- --------------
Total decrease................. (24,842,277) (100,696,687)
Net Assets
Beginning of year.............. 1,053,433,724 1,154,130,411
-------------- --------------
End of year.................... $1,028,591,447 $1,053,433,724
-------------- --------------
-------------- --------------
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-46 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.6%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.4%
Huntsville Solid Wste. Disp. Auth., F.G.I.C. Aaa 7.00% 10/01/08 $ 2,000 $ 2,147,640
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--4.4%
Alaska St. Engy. Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C. Aaa 7.25 7/01/16 2,000 2,168,080
Alaska St. Hsg. Fin. Corp., Ser. A, M.B.I.A. Aaa 5.875 12/01/30 15,950 15,170,683
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,524,950
No. Slope Boro., Cap. Appr., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 2,865,900
------------
25,729,613
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--4.9%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Fac., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 2,740 3,004,218
Hosp. Fac., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 2,250 2,488,343
Maricopa Cnty. Unified Sch. Dist. No.69, Paradise Valley,
Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700 4,197,613
Pima Cnty. Ind. Dev. Auth. Rev., Tucson Elec. Pwr. Co.,
F.S.A. Aaa 7.25 7/15/10 14,000 15,333,360
Tucson, Gen. Oblig., Ser. 1984, F.G.I.C. Aaa 7.625 7/01/14 3,140 3,858,840
------------
28,882,374
- ------------------------------------------------------------------------------------------------------------------------------
California--9.4%
California St. Gen. Oblig.,
M.B.I.A. Aaa 6.30 9/01/08 6,000 6,589,200
F.G.I.C. Aaa 6.60 2/01/11 8,510 9,464,907
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,555,599
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 724,211
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C. Aaa 7.088 4/26/06 5,800(b) 5,865,250
San Jose Redev.,
Tax Alloc., M.B.I.A. Aaa 6.00 8/01/07 3,050 3,252,917
Tax Alloc., M.B.I.A. Aaa 6.00 8/01/08 5,340 5,678,182
Tax Alloc., M.B.I.A. Aaa 6.00 8/01/09 4,250 4,497,010
Santa Margarita/Dana Point Auth.,
Impvt. Dist., M.B.I.A. Aaa 7.25 8/01/10 2,180 2,558,012
Impvt. Dist., M.B.I.A. Aaa 7.25 8/01/11 1,750 2,053,240
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C. Aaa 8.00% 8/15/08 $ 2,500 $ 3,108,875
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725 2,997,691
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 3,550 990,556
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 4,050 1,056,888
Victor Valley Union H.S. Dist.,
Gen. Oblig., 1994 Elec., M.B.I.A. Aaa Zero 9/01/10 2,635 1,149,650
Gen. Oblig., 1994 Elec., M.B.I.A. Aaa Zero 9/01/11 3,780 1,544,962
Gen. Oblig., 1994 Elec., M.B.I.A. Aaa Zero 9/01/13 4,450 1,591,498
------------
54,678,648
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--1.0%
Denver City and Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 6.125 11/15/25 5,195 5,163,206
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 755 812,418
------------
5,975,624
- ------------------------------------------------------------------------------------------------------------------------------
Delaware--0.9%
Delaware St. Econ. Dev. Auth. Rev., Delmarva Pwr. & Lt.,
1st Mtge., Ser. A, M.B.I.A. Aaa 7.60 3/01/20 5,000 5,430,300
- ------------------------------------------------------------------------------------------------------------------------------
District Of Columbia--4.2%
Dist. of Columbia Hosp. Rev., Medlantic Hlthcare. Grp.,
M.B.I.A Aaa 5.875 8/15/19 3,500(e) 3,391,815
M.B.I.A. Aaa 5.75 8/15/26 3,000(e) 2,847,510
Dist. of Columbia Met. Area Transit Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,527,296
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,568,490
Dist. of Columbia Ref., Ser. B, F.S.A Aaa 5.50 6/01/10 7,565 7,506,069
Dist. of Columbia Rev., Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000 6,594,900
------------
24,436,080
- ------------------------------------------------------------------------------------------------------------------------------
Florida--5.9%
Alachua Cnty. Hlth. Facs. Auth., Shands Teaching Hosp. and
Clinics, Ser A, M.B.I.A. Aaa 5.80 12/01/26 6,750 6,607,710
Dade Cnty. Aviation Dept., Ser. A, M.B.I.A. Aaa 5.75 10/01/26 2,750 2,646,792
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-48 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Florida (cont'd.)
Florida St. Dept. Trans., Right of Way, M.B.I.A. Aaa 5.875% 7/01/24 $10,000 $ 9,883,700
Florida St. Div. Bond Fin. Dept., Genl. Serv., Envirn.
Pres., M.B.I.A. Aaa 5.50 7/01/13 11,515 11,263,858
So. Miami Hlth. Facs. Auth., Baptist Hlth. Sys. Oblig.
Grp., M.B.I.A. Aaa 5.50 10/01/20 4,435 4,168,634
------------
34,570,694
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--4.9%
Atlanta Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50 1/01/10 2,000 2,208,520
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Corp., 1st Mtge.,
M.B.I.A. Aaa 8.00 1/01/22 11,000 13,005,300
Georgia Mun. Elec. Auth. Pwr. Rev.,
F.S.A. Aaa 6.375 1/01/16 9,200 9,826,152
M.B.I.A. Aaa 6.20 1/01/10 3,495 3,759,012
------------
28,798,984
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--4.2%
Chicago, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 6,800 7,130,956
Chicago Brd. of Ed., Chicago Schl. Reform, M.B.I.A. Aaa 6.00 12/01/26 10,000 9,807,200
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,663,531
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400 5,671,728
------------
24,273,415
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--1.7%
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C. Aaa 8.625 10/01/12 8,500(d) 9,754,090
- ------------------------------------------------------------------------------------------------------------------------------
Kansas--0.4%
Sedgwick Cnty. Mtge. Loan Rev., Ser. B, A.M.B.A.C. Aaa 7.80 6/01/22 2,245 2,350,784
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--1.2%
Jefferson Parish Sales Tax Dist., Ser. A, F.G.I.C. Aaa 6.75 12/01/06 5,000 5,447,600
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 4,000 1,842,000
------------
7,289,600
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--1.4%
Mass. St. Wtr. Res. Auth., Ser. B, M.B.I.A. Aaa 6.25% 12/01/13 $ 2,905 $ 3,114,363
Mass. Hlth. & Edl. Facs. Auth. Rev.,
Fallon Hlthcare., Ser. A, C.G.I.C. AAA(c) 6.875 6/01/11 3,000 3,224,820
Mass. Gen. Hosp., Ser. F, A.M.B.A.C. Aaa 6.25 7/01/12 1,500 1,601,025
------------
7,940,208
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--5.4%
Detroit Swr. Disp. Rev., Ser. 1993 A, F.G.I.C. Aaa 7.44 7/01/23 6,500(b) 5,825,625
Michigan St. Hosp. Fin. Auth. Rev.,
Mid. Michigan Oblig., M.B.I.A. Aaa 7.50 6/01/15 2,350 2,577,339
Sisters Of Mercy, M.B.I.A. Aaa 5.25 8/15/21 4,500 4,041,675
Monroe Cnty. Poll. Ctrl. Rev.,
Detroit Edison Co., Proj. 1, F.G.I.C. Aaa 7.65 9/01/20 8,000 8,797,440
Detroit Edison Co., Proj. 1, Ser. I, A.M.B.A.C. Aaa 7.30 9/01/19 3,250 3,539,445
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,195,360
Three Rivers Cmnty. Sch., M.B.I.A. Aaa 6.00 5/01/23 2,400(e) 2,374,680
------------
31,351,564
- ------------------------------------------------------------------------------------------------------------------------------
Mississippi--0.4%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wstewtr.
Treatmt. Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,585,160
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--0.3%
Missouri St. Hlth. & Edl. Facs. Auth. Rev., SSM Hlthcare.,
Ser. AA, M.B.I.A. Aaa 6.25 6/01/16 1,500 1,535,220
- ------------------------------------------------------------------------------------------------------------------------------
Montana--1.9%
Forsyth Poll. Ctrl. Rev.,
Puget Sound Pwr. & Lt. Co., 1st Mtge., Ser. A,
A.M.B.A.C. Aaa 7.05 8/01/21 2,000 2,197,520
Washington Wtr. Pwr. Proj., 1st Mtge., M.B.I.A. Aaa 7.125 12/01/13 8,000 8,679,840
------------
10,877,360
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-50 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.5%
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 $ 2,585 $ 2,730,794
A.M.B.A.C. Aaa 6.25 1/01/14 4,255 4,498,429
Mkt. Transition Fac. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,422,197
New Jersey Hlthcare. Facs. Fin. Auth. Rev., Hackensack
Med. Ctr., F.G.I.C. Aaa 6.625 7/01/17 5,000 5,265,600
New Jersey St. Ed. Facs. Auth., Montclair St. Univ.,
A.M.B.A.C. Aaa 5.40 7/01/12 3,330 3,232,598
New Jersey St. Trans. Trust Fund Auth., Ser. A, A.M.B.A.C. Aaa 5.25 6/15/08 3,750 3,719,925
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 14,000(g) 15,225,840
------------
38,095,383
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.8%
Santa Fe Util. Rev., Ser. A, A.M.B.A.C. Aaa 8.00 6/01/07 3,695 4,565,247
- ------------------------------------------------------------------------------------------------------------------------------
New York--5.0%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C. Aaa Zero 12/01/17 770 161,769
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,024,925
New York City, Ser. D, M.B.I.A. Aaa 6.20 2/01/07 8,520 9,206,882
New York St. Dorm. Auth. Rev., City Univ., M.B.I.A. Aaa 6.25 7/01/19 3,000 3,051,450
New York St. Engy. Res. & Dev. Auth., Poll. Ctrl. Rev.,
F.G.I.C. Aaa 7.375 10/01/14 4,000 4,403,000
Suffolk Cnty. Ind. Dev. Agcy., SW Swr. Sys. Rev., F.G.I.C. Aaa 6.00 2/01/08 5,000 5,325,350
Suffolk Cnty. Wtr. Auth. Wtrwks. Rev., M.B.I.A. Aaa 6.00 6/01/14 5,165 5,326,355
------------
29,499,731
- ------------------------------------------------------------------------------------------------------------------------------
North Carolina--1.3%
North Carolina Mun. Pwr. Agcy. Elec. Rev., No. 1 Catawba,
M.B.I.A. Aaa 6.00 1/01/11 7,500 7,835,025
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--2.0%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C. Aaa 7.20 6/30/13 10,000 11,688,100
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--0.2%
Franklin Cnty. Childrens Hosp. Proj. Aa 5.875 11/01/25 1,000 969,380
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.1%
Grand Rvr. Dam Auth., A.M.B.A.C. Aaa 6.25% 6/01/11 $ 6,000 $ 6,469,740
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.3%
Delaware Rvr. Port Auth., PA & NJ Rev., F.G.I.C. Aaa 5.50 1/01/26 5,000 4,714,300
North Umberland Cnty. Lease Auth. Rev., Correctional
Facs., M.B.I.A. Aaa Zero 10/15/10 7,500(d) 3,226,500
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000 3,340,410
Philadelphia Wtr. & Wstewtr., F.S.A. Aaa 5.625 6/15/08 7,570 7,760,234
------------
19,041,444
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--2.0%
Puerto Rico Gen. Oblig., M.B.I.A. Aaa 6.25 7/01/13 1,250 1,345,950
Puerto Rico Elec. Pwr. Auth. Rev., M.B.I.A. Aaa Zero 7/01/04 2,000 1,332,840
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,830,492
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.87 1/25/07 4,100(b) 3,946,250
Ser. I, M.B.I.A. Aaa 7.036 1/16/15 3,800(b) 3,405,750
------------
11,861,282
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.0%
Berkeley Cnty. Wtr. & Swr. Rev., M.B.I.A. Aaa 6.50 6/01/06 2,500 2,700,650
Piedmont Mun. Pwr. Agcy. Elec. Rev., F.G.I.C. Aaa 5.00 1/01/22 3,800 3,256,600
------------
5,957,250
- ------------------------------------------------------------------------------------------------------------------------------
Texas--11.3%
Austin Util. Sys. Rev.,
M.B.I.A. Aaa Zero 5/15/03 8,000 5,554,000
A.M.B.A.C. Aaa 6.50 5/15/11 5,000 5,270,650
Brazos River Auth. Rev.,
Houston Lt. & Pwr., Ser. A, 1st Mtge., A.M.B.A.C. Aaa 6.70 3/01/17 5,000 5,360,650
Houston Lt. & Pwr., Ser. B, 1st Mtge., F.G.I.C. Aaa 7.20 12/01/18 1,000 1,090,520
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-52 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Harris Cnty. Toll Rd.,
F.G.I.C. Aaa 5.00% 8/15/16 $ 6,930 $ 6,219,814
M.B.I.A. Aaa 8.00 8/15/11 10,290 12,950,376
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900(d) 4,445,883
Keller Ind. Schl. Dist. P.S.F.G. Aaa Zero 8/15/15 4,945 1,535,522
Matagorda Cnty. Nav. Poll. Ctrl. Rev., Dist. No. 1, 1st
Mtge., A.M.B.A.C. Aaa 7.50 12/15/14 2,300 2,550,861
New Braunfels Ind. Sch. Dist. Gen. Oblig., P.S.F.G. Aaa Zero 2/01/07 2,000 1,110,160
Round Rock Ind. Sch. Dist. Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,300 1,728,385
Texas St. Mun. Pwr. Agcy. Rev.,
A.M.B.A.C. Aaa 6.75 9/01/12 3,960 4,245,120
M.B.I.A. Aaa Zero 9/01/13 12,300 4,303,770
M.B.I.A. Aaa Zero 9/01/14 10,000 3,293,300
Texas St. Pub. Fin. Auth. Bldg. Rev., M.B.I.A. Aaa Zero 2/01/14 6,900 2,354,142
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50 8/15/13 2,000 2,130,460
Ysleta Ind. Schl. Dist., El Paso Cnty., P.S.F.G. Aaa Zero 8/15/09 4,065 1,864,697
------------
66,008,310
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--2.0%
Arlington Cnty., Gen. Oblig. Aaa 6.00 6/01/11 2,000 2,118,400
Riverside Regl. Jail Auth. Rev., M.B.I.A. Aaa 6.00 7/01/25 6,750 6,820,470
Virginia Beach Auth. Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,283,135
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,512,836
------------
11,734,841
- ------------------------------------------------------------------------------------------------------------------------------
Washington--2.2%
Clark Cnty. Pub. Util. Dist., F.G.I.C. Aaa 6.00% 1/01/08 3,000 3,154,080
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,078,634
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000 3,294,990
Nuclear Proj. No. 3, Ser. B, F.G.I.C., Aaa 7.00 7/01/05 2,000 2,162,260
Nuclear Proj. No. 3, F.G.I.C. Aaa Zero 7/01/08 4,500 2,217,690
------------
12,907,654
------------
Total long-term investments (cost $518,168,431) 535,240,745
------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--8.8%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.6%
Decatur Ind. Dev. Brd., Amoco Corp., Ser. 95, F.R.D.D. P-1 4.25% 5/01/96 $ 3,800 $ 3,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--0.8%
Sw. Ill. Dev. Auth., Shell Oil Co., Wood Rvr. Proj., Ser.
95, F.R.D.D. VMIG1 4.25 5/01/96 4,500 4,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.5%
Plaquemines Parish, British Petroleum Co., Ser. 94,
F.R.D.D. P-1 4.30 5/01/96 2,700 2,700,000
- ------------------------------------------------------------------------------------------------------------------------------
Mississippi--1.5%
Jackson Cnty. Ind. Swr., Chevron USA, Ser. 94, F.R.D.D. P-1 4.25 5/01/96 8,500 8,500,000
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.7%
Farmington Pub. Serv., Ser. 94C, F.R.D.D. P-1 4.25 5/01/96 4,000 4,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--3.9%
Brazos River Auth., Tx. Utils. Elec. Co.
Ser. 95C, F.R.D.D. VMIG1 4.25 5/01/96 5,000 5,000,000
Ser. 96A, F.R.D.D. VMIG1 4.25 5/01/96 11,700 11,700,000
Gulf Coast Wste. Disp., Amoco Corp., Ser. 94, F.R.D.D. VMIG1 4.25 5/01/96 5,800 5,800,000
Trinity Rvr. Auth., Tx. Util. Elec., Ser. 96A, F.R.D.D. VMIG1 4.25 5/01/96 600 600,000
------------
23,100,000
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--0.3%
King George Co. Ind. Dev. Auth., Birchwood Pwr. Proj.,
Ser. 94, F.R.D.D. A-1 4.30 5/01/96 1,900 1,900,000
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-54 See Notes to Financial Statements.

- ---------------
(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)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(c) Standard & Poor's rating.
(d) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(e) Indicates a when-issued or extended settlement security.
(f) The maturity date shown is 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.
(g) Portion of or entire principal amount pledged as initial margin on financial
futures contracts.

The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets April 30, 1996
Investments, at value (cost $569,468,431)................................................................... $ 586,540,745
Cash........................................................................................................ 2,915,908
Interest receivable......................................................................................... 8,628,993
Receivable for investments sold............................................................................. 361,150
Receivable for Fund shares sold............................................................................. 324,441
Due from broker - variation margin.......................................................................... 68,750
Deferred expenses........................................................................................... 8,865
--------------
Total assets............................................................................................. 598,848,852
--------------
Liabilities
Payable for investments purchased........................................................................... 12,920,256
Dividends payable........................................................................................... 698,412
Payable for Fund shares reacquired.......................................................................... 479,369
Accrued expenses............................................................................................ 261,377
Management fee payable...................................................................................... 217,452
Distribution fee payable.................................................................................... 195,493
--------------
Total liabilities........................................................................................ 14,772,359
--------------
Net Assets.................................................................................................. $ 584,076,493
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 533,433
Paid-in capital in excess of par......................................................................... 566,821,334
--------------
567,354,767
Accumulated net realized loss on investments............................................................. (625,588)
Net unrealized appreciation of investments............................................................... 17,347,314
--------------
Net assets, April 30, 1996............................................................................... $ 584,076,493
--------------
--------------
Class A:
Net asset value and redemption price per share
($139,548,425 / 12,755,223 shares of beneficial interest issued and outstanding)...................... $10.94
Maximum sales charge (3.0% of offering price)............................................................ .34
--------------
Maximum offering price to public......................................................................... $11.28
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($443,390,971 / 40,484,236 shares of beneficial interest issued and outstanding)...................... $10.95
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($1,137,097 / 103,826 shares of beneficial interest issued and outstanding)........................... $10.95
--------------
--------------
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-56 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1996
<S> <C>
Income
Interest.................................. $ 36,855,590
--------------
Expenses
Management fee............................ 3,138,673
Distribution fee--Class A................. 102,456
Distribution fee--Class B................. 2,622,259
Distribution fee--Class C................. 6,203
Transfer agent's fees and expenses........ 391,000
Custodian's fees and expenses............. 144,500
Reports to shareholders................... 137,000
Registration fees......................... 53,000
Audit fees and expenses................... 18,000
Insurance expense......................... 18,000
Trustees' fees and expenses............... 16,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 5,381
--------------
Total expenses......................... 6,663,472
Less: Management fee waiver............... (313,867)
Custodian fee credit................... (32,100)
--------------
Net expenses........................... 6,317,505
--------------
Net investment income........................ 30,538,085
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 14,823,756
Financial futures contract transactions... (196,156)
--------------
14,627,600
--------------
Net change in unrealized
appreciation (depreciation) of:
Investments............................... (6,535,739)
Financial futures contracts............... 153,844
--------------
(6,381,895)
--------------
Net gain on investments...................... 8,245,705
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 38,783,790
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income......... $ 30,538,085 $ 35,097,294
Net realized gain (loss) on
investment transactions.... 14,627,600 (10,107,133)
Net change in unrealized
appreciation (depreciation)
of investments............. (6,381,895) 14,364,251
------------ -------------
Net increase in net assets
resulting from
operations................. 38,783,790 39,354,412
------------ -------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.................... (5,328,224) (2,149,982)
Class B.................... (25,172,135) (32,939,088)
Class C.................... (37,726) (8,224)
------------ -------------
(30,538,085) (35,097,294)
------------ -------------
Distributions in excess of net
investment income
Class A.................... (34,680) (2,529)
Class B.................... (153,181) (60,060)
Class C.................... (265) (20)
------------ -------------
(188,126) (62,609)
------------ -------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed................. 50,187,534 46,070,613
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 17,105,830 19,337,321
Cost of shares reacquired..... (135,247,446) (196,745,726)
------------ -------------
Net decrease in net assets
from Series share
transactions............... (67,954,082) (131,337,792)
------------ -------------
Total decrease................... (59,896,503) (127,143,283)
Net Assets
Beginning of year................ 643,972,996 771,116,279
------------ -------------
End of year...................... $584,076,493 $ 643,972,996
------------ -------------
------------ -------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.2%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--2.5%
Univ. So. Alabama Hosp. & Aux. Rev., A.M.B.A.C. Aaa 7.00% 5/15/04 $ 1,250(b) $ 1,360,913
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--3.9%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund A 5.40 4/01/01 1,005 1,011,844
No. Slope Boro., Gen. Oblig., Ser. C Baa1 8.35 6/30/98 1,000 1,075,750
------------
2,087,594
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--3.0%
Maricopa Cnty., Cmnty. Coll. Aa 6.00 7/01/06 1,500 1,588,125
- ------------------------------------------------------------------------------------------------------------------------------
California--3.8%
San Jose Redev.,
Tax Alloc., M.B.I.A. Aaa 6.00 8/01/06 500 537,190
Tax Alloc., M.B.I.A. Aaa 6.00 8/01/08 500 531,665
Statewide Cmntys. Dev. Corp.,
Cedars Sinai Med. Ctr. A1 4.80 11/01/04 1,000 968,790
------------
2,037,645
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--7.4%
Colorado Student Oblig. Bond Auth., Student Loan Rev.,
Ser. A3 A 7.25 9/01/05 1,480 1,550,122
Denver City & Cnty. Arprt. Rev., Ser. A, M.B.I.A. Aaa 7.30 11/15/03 1,250 1,409,100
Jefferson Cnty. Sch. Dist. R-001 Baa1 4.50 12/15/03 1,000 967,950
------------
3,927,172
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.1%
Connecticut Spec. Tax Oblig. Rev., Ser. A A1 7.00 6/01/03 1,000(b) 1,109,860
- ------------------------------------------------------------------------------------------------------------------------------
District Of Columbia--1.3%
Dist. of Columbia Rev., America Geophysical Union, Ser.
199 BBB-(c) 5.50 9/01/03 700 684,026
- ------------------------------------------------------------------------------------------------------------------------------
Florida--4.8%
Dade Cnty. Pub. Facs. Rev., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.75 6/01/08 1,000 932,690
Dade Cnty. Sch. Dist., M.B.I.A. Aaa 6.00 7/15/06 1,500 1,605,030
------------
2,537,720
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-58 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.1%
Burke Cnty. Dev. Auth. Poll. Ref., Oglethorpe Pwr. Co.,
M.B.I.A. Aaa 7.50% 1/01/03 $ 1,000 $ 1,105,250
- ------------------------------------------------------------------------------------------------------------------------------
Guam--1.8%
Guam Pwr. Auth. Rev., Ser. A BBB(c) 5.25 10/01/05 1,000 986,820
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--0.8%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A A 5.75 2/15/09 450 434,943
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--1.8%
Indianapolis Gas Util. Rev., Ser. B, F.G.I.C. Aaa 5.00 6/01/06 1,000 981,340
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--5.8%
Maryland St. Stadium Auth. Lease Rev., Conv. Ctr.
Expansion, A.M.B.A.C. Aaa 5.375 12/15/00 1,000 1,033,580
NE Maryland Wste. Disp. Auth., Mont. Co. Res. Rec. A 5.90 7/01/05 1,250 1,279,013
Ocean City Maryland, M.B.I.A. Aaa 5.10 10/01/08 825 801,545
------------
3,114,138
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.1%
Mass. Gen. Oblig., Ser. C Aaa 6.75 8/01/06 1,000(b) 1,111,010
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--4.6%
Battle Creek Wtr. Supp. Sys. Rev., Ref., A.M.B.A.C. Aaa 4.75 9/01/10 1,000 899,550
Greenville Pub. Sch., M.B.I.A. Aaa 5.75 5/01/09 1,000 1,021,350
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., M.B.I.A. Aaa 7.40 12/01/02 500(b) 549,085
------------
2,469,985
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--2.0%
Minneapolis & St. Paul Hsg. Redev. Auth., Hlthcare Sys.
Rev.,
Ser. A, M.B.I.A. Aaa 7.20 8/15/00 1,000 1,097,270
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--1.0%
New Madrid Elec. Pwr. Ctr. Pwr. Plant, A.M.B.A.C. Aaa 5.35 12/01/00 500 516,370
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1996 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--10.5%
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Fac. Rev., M.B.I.A. Aaa 5.75% 7/01/06 $ 950 $ 992,313
Mkt. Trans. Fac. Rev., M.B.I.A. Aaa 5.80 7/01/07 1,000 1,041,390
New Jersey St. Trans. Trust Fund Auth., Ser. A. M.B.I.A. Aaa 5.50 6/15/11 1,500 1,480,215
So. Rvr. Sch. Dist., F.G.I.C. Aaa 5.00 12/01/06 1,050 1,045,684
West Windsor Plainsboro Sch., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,018,810
------------
5,578,412
- ------------------------------------------------------------------------------------------------------------------------------
New York--2.5%
New York St. Urban Dev. Corp. Rev., Baa1 5.25 1/01/11 1,500 1,347,855
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--1.0%
Ohio St. Bldg. Auth., Admin. Bldg. Fund Proj., M.B.I.A. Aaa 5.60 10/01/06 500 522,045
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--4.4%
Oklahoma St. Ind. Auth. Rev. Hlth. Sys., Integris Bapt.,
A.M.B.A.C. Aaa 6.00 8/15/09 2,240 2,344,406
- ------------------------------------------------------------------------------------------------------------------------------
Oregon--3.5%
Multnomah Cnty. Sch. Dist. No. 3, Park Rose, F.G.I.C. Aaa 5.60 12/01/07 1,000 1,030,910
Oregon St. Dept. Trans. Rev., Reg. Lt. Rail Westside
Proj., M.B.I.A. Aaa 7.00 6/01/03 750 844,725
------------
1,875,635
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--6.6%
Allegheny Cnty. Ind. Dev. Rev., USX Proj. Baa3 5.30 12/01/96 1,000 997,290
Montgomery Cnty. Redev. Auth., Multifam. Hsg. Rev., Ser. A NR 5.75 7/01/99 780 778,370
Pennsylvania St. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 600 639,108
Philadelphia Hosp. Auth. & Higher Edl. Auth., Childrens
Seashore House, Ser. A A-(c) 7.00 8/15/03 1,000 1,089,620
------------
3,504,388
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-60 See Notes to Financial Statements.

- ---------------
(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
(b) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(c) Standard & Poor's Rating.
(d) Portion of or entire principal amount pledged as initial margin on
financial futures contracts.

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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets April 30, 1996
Investments, at value (cost $50,695,167).................................................................... $ 51,843,918
Cash........................................................................................................ 806,752
Interest receivable......................................................................................... 1,014,020
Receivable for Fund shares sold............................................................................. 24,409
Due from broker - variation margin.......................................................................... 10,312
Deferred expenses........................................................................................... 713
--------------
Total assets............................................................................................. 53,700,124
--------------
Liabilities
Payable for Fund shares reacquired.......................................................................... 205,173
Accrued expenses............................................................................................ 77,179
Dividends payable........................................................................................... 52,527
Management fee payable...................................................................................... 20,188
Distribution fee payable.................................................................................... 17,989
--------------
Total liabilities........................................................................................ 373,056
--------------
Net Assets.................................................................................................. $ 53,327,068
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 50,071
Paid-in capital in excess of par......................................................................... 52,422,684
--------------
52,472,755
Accumulated net realized loss on investments............................................................. (293,501)
Net unrealized appreciation of investments............................................................... 1,147,814
--------------
Net assets, April 30, 1996.................................................................................. $ 53,327,068
--------------
--------------
Class A:
Net asset value and redemption price per share
($12,551,774 / 1,178,773 shares of beneficial interest issued and outstanding)........................ $10.65
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $10.98
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($40,550,143 / 3,807,175 shares of beneficial interest issued and outstanding)........................ $10.65
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($225,151 / 21,139 shares of beneficial interest issued and outstanding).............................. $10.65
--------------
--------------
</TABLE>

- --------------------------------------------------------------------------------
- ----- B-62 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
<S> <C>
Net Investment Income April 30, 1996
Income
Interest.................................. $3,254,289
--------------
Expenses
Management fee............................ 294,639
Distribution fee--Class A................. 12,604
Distribution fee--Class B................. 230,633
Distribution fee--Class C................. 1,481
Registration Fees......................... 90,000
Reports to shareholders................... 80,000
Custodian's fees and expenses............. 76,500
Transfer agent's fees and expenses........ 64,000
Legal fees and expenses................... 16,000
Trustees' fees and expenses............... 16,000
Audit fees and expenses................... 12,500
Miscellaneous............................. 6,266
--------------
Total expenses......................... 900,623
Less: Management fee waiver............... (29,464)
Custodian fee credit................... (1,242)
--------------
Net expenses........................... 869,917
--------------
Net investment income........................ 2,384,372
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 904,706
Financial futures contracts............... (268,425)
--------------
636,281
--------------
Net change in unrealized appreciation of:
Investments............................... 573,247
Financial futures contracts............... 39,908
--------------
613,155
--------------
Net gain on investments...................... 1,249,436
--------------
Net Increase in Net Assets
Resulting from Operations.................... $3,633,808
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 2,384,372 $ 2,979,505
Net realized gain (loss) on
investment transactions..... 636,281 (658,871)
Net change in unrealized
appreciation of
investments................. 613,155 28,699
------------ ------------
Net increase in net assets
resulting from operations... 3,633,808 2,349,333
------------ ------------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A..................... (549,044) (368,417)
Class B..................... (1,828,010) (2,610,175)
Class C..................... (7,318) (913)
------------ ------------
(2,384,372) (2,979,505)
------------ ------------
Distributions in excess of
net investment income
Class A..................... -- (4,934)
Class B..................... -- (34,699)
Class C..................... -- (9)
------------ ------------
-- (39,642)
------------ ------------
Distributions from net realized
gains
Class A..................... -- (102,830)
Class B..................... -- (1,139,663)
------------ ------------
-- (1,242,493)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed.................. 5,139,324 13,939,416
Net asset value of shares
issued in reinvestment of
dividends................... 1,485,489 2,761,015
Cost of shares reacquired...... (16,260,658) (24,099,780)
------------ ------------
Net decrease in net assets from
Series share transactions... (9,635,845) (7,399,349)
------------ ------------
Total decrease.................... (8,386,409) (9,311,656)
Net Assets
Beginning of year................. 61,713,477 71,025,133
------------ ------------
End of year....................... $ 53,327,068 $ 61,713,477
------------ ------------
------------ ------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63 -----

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
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 Intermediate Series (formerly, the Modified Term Series).
Investment operations for Class A, Class B and Class C shares of each series
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
Intermediate 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 Policies
Securities Valuation: Municipal securities (including 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. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.

The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions.

The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. 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
- --------------------------------------------------------------------------------
- ----- B-64

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
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. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.

Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate 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.

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, 1996, the effect of applying this statement was
to increase undistributed net investment income and increase accumulated
realized losses by $125,886 and $188,126 for the High Yield Series and Insured
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 up to $1
billion and .45 of 1% of the average daily net asets of each series in excess of
$1 billion. PMF has agreed to voluntarily waive a portion of each Series'
management fee, which amounted to $534,026, $313,867, and $29,464 for the High
Yield Series, Insured Series, and Intermediate Series, respectively for the year
ended April 30, 1996. Such amounts represented .05 of 1% of average daily net
assets for each Series or $.006 per share.

The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI''), became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates 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, 1996.

PMFD and PSI have advised the Fund that it received approximately $346,300
($282,500-High Yield Series; $59,200-Insured Series; $4,600-Intermediate Series)
in front-end sales charges resulting from sales of Class A shares during the
year ended April 30, 1996. From these fees, PMFD and PSI paid such sales charges
to Pruco Securities Corporation, affiliated broker-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, 1996, it received
approximately $2,672,200 ($1,556,000-High Yield Series; $978,700-Insured Series;
$137,500-Intermediate Series) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C 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.
- --------------------------------------------------------------------------------
B-65 -----

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended April 30, 1996,
the Fund incurred fees of approximately $697,100 ($384,800--High Yield Series;
$278,400--Insured Series; $33,900--Intermediate Series) for the services of
PMFS. As of April 30, 1996, approximately $57,500 ($32,000--High Yield Series;
$22,700--Insured Series; $2,800--Intermediate 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.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended April 30, 1996, were as follows:
<TABLE>
<CAPTION>
Series Purchases Sales
- -------------------------------- ------------ ------------
<S> <C> <C>
High Yield...................... $365,016,526 $391,464,842
Insured......................... 406,430,083 497,459,796
Intermediate.................... 19,398,026 28,410,168
</TABLE>

At April 30, 1996, the Insured Series and the Intermediate Series bought 1,850
and 10 financial futures contracts, respectively of U.S. Treasury Bonds expiring
in June, 1996. In addition, the Insured Series and the Intermediate Series sold
1,850 and 30 financial futures contracts, respectively, of U.S. Treasury Bonds
expiring in June, 1996.

The values of these financial futures contracts at April 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Financial Futures
Contracts Bought/Sold
--------------------------
Insured Intermediate
Series Series
----------- ------------
<S> <C> <C>
Value at disposition................ $11,190,625 $1,636,406
Value at April 30, 1996............. 10,915,625 1,637,343
----------- ------------
Unrealized gain (loss).............. $ 275,000 $ (937)
----------- ------------
----------- ------------
</TABLE>

The federal income tax basis of the Fund's investments, at April 30, 1996 was
$994,566,383-High Yield Series; $569,469,731-Insured Series; and
$50,695,167-Intermediate 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.......... $ 13,569,607 $46,464,457 $32,894,850
Insured............. 17,071,014 22,549,334 5,478,320
Intermediate........ 1,148,751 1,750,242 601,491
</TABLE>

The High Yield Series has a net capital loss carryforward as of April 30, 1996
of approximately $13,768,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003 and $6,383,000 expires in 2004. The Insured Series has a net
capital loss carryforward of $630,700, which expires in 2003. The Intermediate
Series has a net capital loss carryforward of $337,600, which expires in 2004.
- ------------------------------------------------------------
Note 5. Capital
Each series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares 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-66

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
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 Intermediate Series
Class A Class A Class A
---------------------------- ---------------------------- --------------------------
Year Ended April 30, 1996 Shares Amount Shares Amount Shares Amount
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 2,842,337 $ 31,224,578 2,115,326 $ 23,453,210 101,764 $ 1,079,376
Shares issued in reinvestment of
dividends and
distributions................ 474,421 5,188,074 266,368 2,962,597 31,524 338,680
Shares reacquired............... (3,287,941) (36,026,405) (3,699,272) (41,190,146) (466,658) (4,985,578)
----------- ------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
shares outstanding before
conversion................... 28,817 386,247 (1,317,578) (14,774,339) (333,370) (3,567,522)
Shares issued upon conversion
from Class B................. 10,054,570 110,522,327 7,072,139 78,989,223 506,425 5,415,903
----------- ------------- ----------- ------------- ---------- ------------
Net increase in shares
outstanding.................. 10,083,387 $ 110,908,574 5,754,561 $ 64,214,884 173,055 $ 1,848,381
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
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 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 in shares
outstanding.................. 5,695,218 $ 60,305,571 4,136,151 $ 44,327,862 461,418 $ 4,898,192
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<CAPTION>
Class B Class B Class B
---------------------------- ---------------------------- --------------------------
Year Ended April 30, 1996 Shares Amount Shares Amount Shares Amount
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 8,170,060 $ 89,622,344 2,338,885 $ 26,086,324 371,018 $ 4,000,248
Shares issued in reinvestment of
dividends and
distributions................ 2,260,660 24,711,652 1,268,212 14,112,201 106,165 1,139,952
Shares reacquired............... (12,855,885) (140,769,139) (8,438,736) (93,993,036) (1,047,502) (11,264,240)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares
outstanding before
conversion................... (2,425,165) (26,435,143) (4,831,639) (53,794,511) (570,319) (6,124,040)
Shares reacquired upon
conversion into Class A...... (10,054,570) (110,522,327) (7,065,810) (78,989,223) (506,284) (5,415,903)
----------- ------------- ----------- ------------- ---------- ------------
Net decrease in shares
outstanding.................. (12,479,735) $(136,957,470) (11,897,449) $(132,783,734) (1,076,603) $(11,539,943)
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<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
outstanding 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
outstanding.................. (15,207,211) $(159,529,880) (16,724,192) $(176,183,254) (1,222,776) $(12,464,441)
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-67 -----

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class C Class C Class C
---------------------------- ---------------------------- --------------------------
Year Ended April 30, 1996 Shares Amount Shares Amount Shares Amount
- -------------------------------- ----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued................... 389,662 $ 4,263,670 58,297 $ 648,000 5,515 $ 59,700
Shares issued in reinvestment of
dividends and
distributions................ 20,619 225,710 2,784 31,032 638 6,857
Shares reacquired............... (104,405) (1,131,704) (5,738) (64,264) (1,003) (10,840)
----------- ------------- ----------- ------------- ---------- ------------
Net increase in shares
outstanding.................. 305,876 $ 3,357,676 55,343 $ 614,768 5,150 $ 55,717
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
<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)
----------- ------------- ----------- ------------- ---------- ------------
Net increase in shares
outstanding.................. 299,208 $ 3,203,135 48,483 $ 517,600 15,989 $ 166,900
----------- ------------- ----------- ------------- ---------- ------------
----------- ------------- ----------- ------------- ---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- -------------------------------------------------------------------------------
- ----- B-68

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
Years Ended April 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year............ $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45
-------- -------- ------- ------- -------
Income from investment operations
Net investment income......................... .72(b) .72(b) .72 .77 .77(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (.02) (.02) (.39) .46 .23
-------- -------- ------- ------- -------
Total from investment operations........... .70 .70 .33 1.23 1.00
-------- -------- ------- ------- -------
Less distributions
Dividends from net investment income.......... (.72) (.72) (.72) (.77) (.77)
Distributions from capital gains.............. -- -- (.01) -- --
-------- -------- ------- ------- -------
Total distributions........................ (.72) (.72) (.73) (.77) (.77)
-------- -------- ------- ------- -------
Net asset value, end of year.................. $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
TOTAL RETURN(a):.............................. 6.55% 6.90% 2.88% 11.90% 9.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $223,073 $115,501 $54,491 $43,529 $24,725
Average net assets (000)...................... $162,329 $65,207 $52,982 $31,658 $19,702
Ratios to average net assets:
Expenses, including distribution fees...... 0.64%(b) 0.69%(b) 0.69% 0.74% 0.65%(b)
Expenses, excluding distribution fees...... 0.54%(b) 0.59%(b) 0.59% 0.64% 0.55%(b)
Net investment income...................... 6.58%(b) 6.83%(b) 6.42% 7.04% 7.25%(b)
Portfolio turnover rate....................... 35% 39% 36% 27% 34%
</TABLE>

- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and reinvestment of dividends and
distributions.
(b) Net of expense subsidy and fee waivers.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------------ ---------
Year
Years Ended April 30, Ended
------------------------------------------------------------------ April 30,
1996 1995 1994 1993 1992 1996
-------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......... $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.72
-------- ---------- ---------- ---------- -------- ---------
Income from investment operations
Net investment income......................... .68(b) .68(b) .68 .73 .73(b) .65(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (.03) (.02) (.39) .46 .23 (.03)
-------- ---------- ---------- ---------- -------- ---------
Total from investment operations........... .65 .66 .29 1.19 .96 .62
-------- ---------- ---------- ---------- -------- ---------
Less distributions
Dividends from net investment income.......... (.68) (.68) (.68) (.73) (.73) (.65)
Distributions from capital gains.............. -- -- (.01) -- -- --
-------- ---------- ---------- ---------- -------- ---------
Total distributions........................ (.68) (.68) (.69) (.73) (.73) (.65)
-------- ---------- ---------- ---------- -------- ---------
Net asset value, end of period................ $ 10.69 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.69
-------- ---------- ---------- ---------- -------- ---------
-------- ---------- ---------- ---------- -------- ---------
TOTAL RETURN(a):.............................. 6.12% 6.37% 2.46% 11.47% 9.40% 5.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $799,048 $934,725 $1,099,640 $1,028,480 $803,838 $6,471
Average net assets (000)...................... $900,115 $1,024,132 $1,132,653 $893,203 $759,779 $5,608
Ratios to average net assets:
Expenses, including distribution fees...... 1.04%(b) 1.09%(b) 1.09% 1.14% 1.05%(b) 1.29%(b)
Expenses, excluding distribution fees...... 0.54%(b) 0.59%(b) 0.58% 0.64% 0.55%(b) 0.54%(b)
Net investment income...................... 6.19%(b) 6.37%(b) 6.02% 6.66% 6.85%(b) 5.93%(b)
Portfolio turnover rate....................... 35% 39% 36% 27% 34% 35%

<S> <C>
August 1,
1994(c)
Through
April 30,
1995
----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......... $10.79
-----

Income from investment operations
Net investment income......................... .49(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (.07)
-----

Total from investment operations........... .42
-----

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

Total distributions........................ (.49)
-----

Net asset value, end of period................ $10.72
-----
-----

TOTAL RETURN(a):.............................. 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,208
Average net assets (000)...................... $1,385
Ratios to average net assets:
Expenses, including distribution fees...... 1.34%(d)
Expenses, excluding distribution fees...... 0.59%(d)
Net investment income...................... 6.34%(d)
Portfolio turnover rate....................... 39%
</TABLE>

- ---------------
(a) 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.
(b) Net of expense subsidy and fee waivers.
(c) Commencement of offering of Class C shares.
(d) Annualized.
- --------------------------------------------------------------------------------
- ----- B-70 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Years Ended April 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year............ $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76
-------- ------- ------- ------- -------
Income from investment operations
Net investment income......................... .58(b) .58(b) .58 .61 .66(b)
Net realized and unrealized gain (loss) on
investment transactions.................... .11 .12 (.43) .73 .24
-------- ------- ------- ------- -------
Total from investment operations........... .69 .70 .15 1.34 .90
-------- ------- ------- ------- -------
Less distributions
Dividends from net investment income.......... (.58) (.58) (.58) (.61) (.66)
Distributions from capital gains.............. -- -- (.30) (.27) (.02)
-------- ------- ------- ------- -------
Total distributions........................ (.58) (.58) (.88) (.88) (.68)
-------- ------- ------- ------- -------
Net asset value, end of year.................. $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(a):.............................. 6.47% 6.73% 1.04% 12.68% 8.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $139,548 $75,800 $30,669 $30,098 $19,177
Average net assets (000)...................... $102,456 $39,471 $32,309 $24,589 $12,731
Ratios to average net assets:
Expenses, including distribution fees...... 0.68%(b) 0.74%(b) 0.71% 0.72% 0.62%(b)
Expenses, excluding distribution fees...... 0.58%(b) 0.64%(b) 0.61% 0.62% 0.52%(b)
Net investment income...................... 5.20%(b) 5.45%(b) 5.09% 5.46% 6.06%(b)
Portfolio turnover rate....................... 68% 64% 105% 85% 56%
</TABLE>

- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of expense subsidy and fee waivers.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-71 -----

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ---------
Year
Years Ended April 30, Ended
------------------------------------------------------------ April 30,
1996 1995 1994 1993 1992 1996
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......... $ 10.84 $ 10.71 $ 11.44 $ 10.99 $ 10.76 $ 10.84
-------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income......................... .54(b) .54(b) .54 .56 .62(b) .51(b)
Net realized and unrealized gain (loss) on
investment transactions.................... .11 .13 (.43) .72 .25 .11
-------- -------- -------- -------- -------- ---------
Total from investment operations........... .65 .67 .11 1.28 .87 .62
-------- -------- -------- -------- -------- ---------
Less distributions
Dividends from net investment income.......... (.54) (.54) (.54) (.56) (.62) (.51)
Distributions from capital gains.............. -- -- (.30) (.27) (.02) --
-------- -------- -------- -------- -------- ---------
Total distributions........................ (.54) (.54) (.84) (.83) (.64) (.51)
-------- -------- -------- -------- -------- ---------
Net asset value, end of period................ $ 10.95 $ 10.84 $ 10.71 $ 11.44 $ 10.99 $ 10.95
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
TOTAL RETURN(a):.............................. 6.04% 6.40% 0.63% 12.14% 8.24% 5.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $443,391 $567,648 $740,447 $770,060 $638,451 $ 1,137
Average net assets (000)...................... $524,452 $660,237 $807,794 $705,846 $609,516 $ 827
Ratios to average net assets:
Expenses, including distribution fees...... 1.08%(b) 1.14%(b) 1.11% 1.12% 1.02%(b) 1.33%(b)
Expenses, excluding distribution fees...... 0.58%(b) 0.64%(b) 0.61% 0.62% 0.52%(b) 0.58%(b)
Net investment income...................... 4.80%(b) 4.99%(b) 4.69% 5.06% 5.66%(b) 4.56%(b)
Portfolio turnover rate....................... 68% 64% 105% 85% 56% 68%

<S> <C>
August 1,
1994(c)
Through
April 30,
1995
----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......... $10.79
-----

Income from investment operations
Net investment income......................... .39(b)
Net realized and unrealized gain (loss) on
investment transactions.................... .05
-----

Total from investment operations........... .44
-----

Less distributions
Dividends from net investment income.......... (.39)
Distributions from capital gains.............. --
-----

Total distributions........................ (.39)
-----

Net asset value, end of period................ $10.84
-----
-----

TOTAL RETURN(a):.............................. 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 525
Average net assets (000)...................... $ 224
Ratios to average net assets:
Expenses, including distribution fees...... 1.39%(d)
Expenses, excluding distribution fees...... 0.64%(d)
Net investment income...................... 4.92%(d)
Portfolio turnover rate....................... 64%
</TABLE>

- ---------------
(a) 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.
(b) Net of expense subsidy and fee waivers.
(c) Commencement of offering of Class C shares.
(d) Annualized.
- --------------------------------------------------------------------------------
- ----- B-72 See Notes to Financial Statements.

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Years Ended April 30,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year............ $ 10.45 $ 10.67 $11.08 $10.59 $10.48
------- ------- ------ ------ ------
Income from investment operations
Net investment income......................... .47(b) .51(b) .53 .54(b) .57(b)
Net realized and unrealized gain (loss) on
investment transactions.................... .20 (.03) (.19) .60 .26
------- ------- ------ ------ ------
Total from investment operations........... .67 .48 .34 1.14 .83
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income.......... (.47) (.51) (.53) (.54) (.57)
Distributions in excess of net investment
income..................................... -- (.01) -- -- --
Distributions from capital gains.............. -- (.18) (.22) (.11) (.15)
------- ------- ------ ------ ------
Total distributions........................ (.47) (.70) (.75) (.65) (.72)
------- ------- ------ ------ ------
Net asset value, end of year.................. $ 10.65 $ 10.45 $10.67 $11.08 $10.59
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(a):.............................. 6.48% 4.52% 2.83% 11.13% 8.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $12,552 $10,507 $5,810 $3,594 $1,424
Average net assets (000)...................... $12,604 $ 7,742 $4,981 $1,883 $ 599
Ratios to average net assets:
Expenses, including distribution fees...... 1.16%(b) 1.05%(b) 1.00% 1.06%(b) 1.06%(b)
Expenses, excluding distribution fees...... 1.06%(b) 0.95%(b) 0.90% 0.96%(b) 0.96%(b)
Net investment income...................... 4.36%(b) 4.75%(b) 4.63% 5.09%(b) 5.41%(b)
Portfolio turnover rate....................... 35% 30% 55% 22% 78%
</TABLE>

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- ------------------------
August 1,
Year 1994(c)
Years Ended April 30, Ended Through
------------------------------------------------------- April 30, April 30,
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......... $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.48 $ 10.45 $10.54
------- ------- ------- ------- ------- --------- -----
Income from investment operations
Net investment income......................... .43(b) .45(b) .48 .50(b) .53(b) .40(b) .35(b)
Net realized and unrealized gain (loss) on
investment transactions.................... .20 (.04) (.19) .60 .27 .20 (.08)
------- ------- ------- ------- ------- --------- -----
Total from investment operations........... .63 .41 .29 1.10 .80 .60 .27
------- ------- ------- ------- ------- --------- -----
Less distributions
Dividends from net investment income.......... (.43) (.45) (.48) (.50) (.53) (.40) (.35)
Distributions in excess of net investment
income..................................... -- (.01) -- -- -- -- (.01)
Distributions from capital gains.............. -- (.18) (.22) (.11) (.15) -- --
------- ------- ------- ------- ------- --------- -----
Total distributions........................ (.43) (.64) (.70) (.61) (.68) (.40) (.36)
------- ------- ------- ------- ------- --------- -----
Net asset value, end of period................ $ 10.65 $ 10.45 $ 10.68 $ 11.09 $ 10.60 $ 10.65 $10.45
------- ------- ------- ------- ------- --------- -----
------- ------- ------- ------- ------- --------- -----
TOTAL RETURN(a):.............................. 6.05% 3.99% 2.43% 10.62% 7.68% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $40,550 $51,039 $65,215 $57,049 $45,401 $ 225 $ 167
Average net assets (000)...................... $46,127 $60,174 $59,811 $50,154 $44,439 $ 197 $ 28
Ratios to average net assets:
Expenses, including distribution fees...... 1.56%(b) 1.45%(b) 1.40% 1.46%(b) 1.46%(b) 1.81%(b) 1.81%(b)(d)
Expenses, excluding distribution fees...... 1.06%(b) 0.95%(b) 0.90% 0.96%(b) 0.96%(b) 1.06%(b) 1.06%(b)(d)
Net investment income...................... 3.96%(b) 4.35%(b) 4.23% 4.69%(b) 5.01%(b) 3.71%(b) 4.34%(b)(d)
Portfolio turnover rate....................... 35% 30% 55% 22% 78% 35% 30%

</TABLE>

- ---------------
(a) 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.
(b) Net of expense subsidy and fee waivers.
(c) Commencement of offering of Class C shares.
(d) Annualized.
- --------------------------------------------------------------------------------
- ----- B-74 See Notes to Financial Statements.

<PAGE>
Report of Independent Auditors PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Shareholders and Trustees
Prudential Municipal Bond Fund:

We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Prudential Municipal Bond Fund (consisting of
the High Yield Series, Insured Series and Intermediate Series) as of April 30,
1996, the related statements of operations for the year then ended and of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
April 30, 1996, 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, 1996,
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 13, 1996
B-75 -----

<PAGE>

APPENDIX I--HISTORICAL PERFORMANCE DATA

The historical performance data 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.

This chart shows the long-term performance of various asset classes and the
rate of inflation.

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25)

[CHART]

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

Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any portfolio.

Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.

Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond 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).

Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.

I-1
<PAGE>

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
through 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

(CHART)

(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.

I-2
<PAGE>

This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)

(CHART)

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

Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.

(CHART)

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

*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.

I-3
<PAGE>

APPENDIX II--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
payments. Duration is expressed as a measure of time in years--the longer the
duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

II-1

<PAGE>

APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.

MONEY MANAGEMENT. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Money
Management Group (of which Prudential Mutual Funds is a key part) manages over
$190 billion in assets of institutions and individuals.

REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.2

HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.

The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.

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

(1)Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Fund, Inc. and BlackRock Financial Management, Inc. as subadviser to
The BlackRock Government Income Trust. There are multiple subadvisers for The
Target Portfolio Trust.

(2)As of December 31, 1994.

III-1

<PAGE>

EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.

HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.3 Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.

Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.

Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.

Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.

Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).

TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)

Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

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

(3)As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.

(4)Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.

(5)Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.

(6)As of December 31, 1994.

III-2

<PAGE>

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.7

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).

In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.8

In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

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

(7)As of December 31, 1994.

(8)On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.

III-3

<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, 1996

Statements of Assets and Liabilities at April 30, 1996

Statements of Operations for the year ended April 30, 1996

Statements of Changes in Net Assets for the years ended April 30,
1996 and April 30, 1995

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) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc.*

(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. Amended and Restated Distribution Agreement.*

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-1
<PAGE>
(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).

18. Rule 18f-3 Plan.*

27. Financial Data Schedules.*

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 7, 1996, there were 8,581, 5,697 and 595 record holders of Class A
shares of beneficial interest of the High Yield Series, Insured Series and
Intermediate Series, respectively; 26,745, 18,424 and 1,854 record holders of
Class B shares of beneficial interest of the High Yield Series, Insured Series
and Intermediate Series, respectively; and 209, 54 and 8 record holders of Class
C shares of beneficial interest of the High Yield Series, Insured Series and
Intermediate 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 of the
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, 1996).

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>
Stephen P. Fisher Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities Incorporated (Prudential Securities); Vice President,
Prudential Mutual Fund Distributors, Inc. (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
Theresa A. Hamacher Director Director, PMF; Vice President, The Prudential Insurance Company of
751 Broad Street America (Prudential); Vice President, The Prudential Investment
Newark, NJ 07102 Corporation (PIC); President, Prudential Mutual Fund Investment
Management (PMFIM)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer and
Raritan Plaza One Director, PMFD; Chief Executive Officer and Director, PMFS;
Edison, NJ 08837 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
Donald Webber Executive Vice Executive Vice President and Director of Sales, PMF
President and
Director of Sales
</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>
William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark NJ 07102

Barry M. Gillman Director Director, PIC

Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC; Director, PMF;
President, PMFIM

Richard A. Redeker Executive Vice President, Chief Executive Officer and Director, PMF; Executive Vice
One Seaport Plaza President President, Director and Member of Operating Committee, Prudential
New York, NY 10292 Securities; Director, PSG; Executive Vice President, PIC;
Director, PMFD; Director, PMFS

John L. Reeve Senior Vice Managing Director, Prudential Asset Management Group; Senior Vice
President President, PIC

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
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Prudential Securities Incorporated

Prudential Securities Incorporated is distributor for The BlackRock Government
Income Trust, Command Government Fund, Command Money Fund, Command Tax-Free
Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Distressed Securities Fund, Inc.,
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 Limited Maturity
Fund, Inc., Prudential Global Natural Resources Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities Trust, Prudential
Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Jennison Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund, Inc. and The
Target Portfolio Trust. Prudential Securities is also a depositor for the
following unit investment trusts:

Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust

C-5
<PAGE>

(b) 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
One New York Plaza
New York, NY

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
One New York Plaza
New York, NY

Martin Pfinsgraff..... Executive Vice President, Chief None
Financial Officer and Director

Vincent T. Pica II.... Executive Vice President and Director None
One New York Plaza
New York, NY

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

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

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

- ------------------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.

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-6
<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 26th day of June, 1996.

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 26, 1996
- ------------------------------ Accounting Officer
SUSAN C. COTE

/s/ Edward D. Beach Trustee June 26, 1996
- ------------------------------
EDWARD D. BEACH

/s/ Donald D. Lennox Trustee June 26, 1996
- ------------------------------
DONALD D. LENNOX

/s/ Douglas H. McCorkindale Trustee June 26, 1996
- ------------------------------
DOUGLAS H. MCCORKINDALE

/s/ Thomas T. Mooney Trustee June 26, 1996
- ------------------------------
THOMAS T. MOONEY

/s/ Richard A. Redeker President and Trustee June 26, 1996
- ------------------------------
RICHARD A. REDEKER

/s/ Louis A. Weil, III Trustee June 26, 1996
- ------------------------------
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).
(c) Amended Certificate of Designation.*
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) Amended and Restated Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(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. Amended and Restated Distribution Agreement.*
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).
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).
</TABLE>

<PAGE>

Other Exhibits

<PAGE>

AMENDED CERTIFICATE OF DESIGNATION

PRUDENTIAL MUNICIPAL BOND FUND

The undersigned, being the Assistant Secretary of Prudential Municipal Bond
Fund (hereinafter referred to as the "Trust"), a trust with transferable shares
of the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Trustees of the Trust by
Section 6.9 and Section 9.3 of the Declaration of Trust dated November 3, 1986,
as amended to date (hereinafter referred to as the "Declaration of Trust"), and
by the affirmative vote of a majority of the Trustees at a meeting duly called
and held on May 8, 1996, the Establishment and Designation of Series of Shares
of Beneficial Interest, $.01 Par Value, dated March 12, 1987 and filed with the
Secretary of The Commonwealth of Massachusetts on April 7, 1987, as amended by a
Certificate of Amendment of the Declaration of Trust dated August 21, 1987 and
filed with the Secretary of The Commonwealth of Massachusetts on August 26,
1987, and the Certificate of Designation dated December 18, 1989 and filed with
the Secretary of The Commonwealth of Massachusetts on January 18, 1990, as
amended by an Amended and Restated Certificate of Designation dated July 27,
1994 and filed with the Secretary of The Commonwealth of Massachusetts on
July 28, 1994, as amended by an Amended and Restated Certificate of Designation
dated May 1, 1995 and filed with the Secretary of The Commonwealth of
Massachusetts on May 4, 1995, amending the Declaration of Trust are amended and
restated effective as of June 28, 1996, as follows:

The shares of beneficial interest of the Trust are divided into three
separate series, each series to have the following special and relative rights:

(1) The series shall be designated as follows:

High Yield Series
Insured Series
Intermediate Series

(2) Each series shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Trust's
then currently effective registration statement under the Securities Act of
1933. Each share of beneficial interest of each series ("share") shall be
redeemable, shall be entitled to one vote or fraction thereof in respect of a
fractional share on matters on which shares of that series shall be entitled to
vote and shall represent a pro rata beneficial interest in the assets allocated
to that series, and shall be entitled to receive its pro rata share of net
assets of that series upon liquidation of that series, all as provided in the
Declaration of Trust.

<PAGE>

(3) The shares of beneficial interest of each series of the Trust are
classified into four classes, designated "Class A Shares," "Class B Shares,"
"Class C Shares" and "Class Z Shares." An unlimited number of each such class
of each series may be issued. All Class A Shares, Class B Shares and Class C
Shares of each such series outstanding on the date on which the amendments
provided for herein become effective shall be and continue to be Class A Shares,
Class B Shares and Class C Shares, respectively, of such series.

(4) The holders of Class A Shares, Class B Shares, Class C Shares and
Class Z Shares of each series shall be considered Shareholders of such series,
and shall have the relative rights and preferences set forth herein and in the
Declaration of Trust with respect to Shares of such series, and shall also be
considered Shareholders of the Trust for all other purposes (including, without
limitation, for purposes of receiving reports and notices and the right to vote)
and, for matters reserved to the Shareholders of one or more other classes or
series by the Declaration of Trust or by any instrument establishing and
designating a particular class or series, or as required by the Investment
Company Act of 1940 and/or the rules and regulations of the Securities and
Exchange Commission thereunder (collectively, as from time to time in effect,
the "1940 Act") or other applicable laws.

(5) The Class A Shares, Class B Shares, Class C Shares and Class Z Shares
of each series shall represent an equal proportionate interest in the share of
such class in the Trust Property belonging to that series, adjusted for any
liabilities specifically allocable to the Shares of that class, and each Share
of any such class shall have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that the expenses related
directly or indirectly to the distribution of the Shares of a class, and any
service fees to which such class is subject (as determined by the Trustees),
shall be borne solely by such class, and such expenses shall be appropriately
reflected in the determination of net asset value and the dividend, distribution
and liquidation rights of such class.

<PAGE>

(6) (a) Class A Shares of each series shall be subject to (i) a front-end
sales charge and (ii)(A) an asset-based sales charge pursuant to a plan under
Rule 12b-1 of the 1940 Act (a "Plan"), and/or (B) a service fee for the
maintenance of shareholder accounts and personal services, in such amounts as
shall be determined from time to time.

(b) Class B Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii)(A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of shareholder
accounts and personal services, in such amounts as shall be determined from time
to time.

(c) Class C Shares of each series shall be subject to (i) a
contingent deferred sales charge and (ii)(A) an asset-based sales charge
pursuant to a Plan, and/or (B) a service fee for the maintenance of shareholder
accounts and personal services, in such amounts as shall be determined from time
to time.

(d) Class Z Shares of each series shall not be subject to either an
initial or contingent deferred sales charge nor subject to any Rule 12b-1 fee.

(7) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide that holders of Shares of any
series shall have the right to convert said Shares into Shares of one or more
other series of registered investment companies specified for the purpose in
this Trust's Prospectus for the series accorded such right, that holders of any
class of Shares of a series shall have the right to convert such Shares into
Shares of one or more other classes of such series, and that Shares of any class
of a series shall be automatically converted into Shares of another class of
such series, in each case in accordance with such requirements and procedures as
the Trustees may from time to time establish. The requirements and procedures
applicable to such mandatory or optional conversion of Shares of any such class
or series shall be set forth in the Prospectus in effect with respect to such
Shares.

<PAGE>

(8) Shareholders of each series and class shall vote as a separate series
or class, as the case may be, on any matter to the extent required by, and any
matter shall be deemed to have been effectively acted upon with respect to any
series or class as provided in, Rule 18f-2, as from time to time in effect,
under the 1940 Act, or any successor rule and by the Declaration of Trust.
Except as otherwise required by the 1940 Act, the Shareholders of each class of
any series having more than one class of Shares, voting as a separate class,
shall have sole and exclusive voting rights with respect to the provisions of
any Plan applicable to Shares of such class, and shall have no voting rights
with respect to provisions of any Plan applicable solely to any other class of
Shares of such series.

(9) The assets and liabilities of the Trust shall be allocated among the
above-referenced series as set forth in Section 6.9 of the Declaration of Trust,
except as provided below:

(a) Costs incurred and payable by the Trust in connection with its
organization and initial registration and public offering of shares shall be
divided equally among the three series and shall be authorized for each such
series over the period beginning on the date that such costs become payable and
ending sixty months after the commencement of operations of the Trust.

(b) The liabilities, expenses, costs, charges or reserves of the
Trust (other than the organizational expenses paid by the Trust) which are not
readily identifiable as belonging to any particular series shall be allocated
among the series on the basis of their relative average daily net assets, except
when allocations of direct expenses can otherwise be fairly made.

(10) The Trustees (including any successor Trustees) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of any series now or hereafter created, or to otherwise change
the special and relative rights of any such series provided that such change
shall not adversely affect the rights of holders of shares of a series.

<PAGE>

IN WITNESS WHEREOF, the undersigned has set her hand and seal this 18th
day of June, 1996.

/s/ Marguerite E. H. Morrison
-----------------------------
Marguerite E. H. Morrison, Assistant
Secretary

<PAGE>

ACKNOWLEDGMENT

STATE OF NEW YORK )
) SS June 18, 1996
COUNTY OF NEW YORK )

Then personally appeared before me the above named Marguerite E. H.
Morrison, Assistant Secretary, and acknowledged the foregoing instrument to be
her free act and deed.

/s/ Kathleen M. Dietz (Kirchner)
Notary Public

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
AMENDED AND RESTATED
MANAGEMENT AGREEMENT

Agreement, made this 1st day of March, 1988 and amended on this 1st day of
June, 1995 between Prudential Municipal Bond Fund, a Massachusetts business
trust (the "Fund"), and Prudential Mutual Fund Management, Inc., a Delaware
corporation (the "Manager").

W I T N E S S E T H

WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and

WHEREAS, the shares of beneficial interest of the Fund are divided into
separate series, each of which is established pursuant to a written instrument
executed by the Trustees of the Fund, and the Trustees may from time to time
terminate such series or establish and terminate additional series; and

WHEREAS, the Fund desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Fund and the
Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;

NOW, THEREFORE, the parties agree as follows:

1. The Fund hereby appoints the Manager to act as manager of the Fund and
administrator of its business affairs for the period and on the terms set forth
in this Agreement. The Manager accepts

<PAGE>

such appointment and agrees to render the services herein described, for the
compensation herein provided. The Manager will enter into an agreement, dated
the date hereof, with The Prudential Investment Corporation ("PIC") pursuant to
which PIC shall furnish to the Fund the investment advisory services specified
therein in connection with the management of the Fund. Such agreement in the
form attached as Exhibit A is hereinafter referred to as the "Subadvisory
Agreement." The Manager will continue to have responsibility for all investment
advisory services furnished pursuant to the Subadvisory Agreement.

2. Subject to the supervision of the Trustees of the Fund, the Manager
shall administer the Fund's business affairs and, in connection therewith, shall
furnish the Fund with office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities and, subject to Section 1
hereof and the Subadvisory Agreement, the Manager shall manage the investment
operations of the Fund and the composition of the portfolio of each series,
including the purchase, retention and disposition thereof, in accordance with
the investment objectives, policies and restrictions of each such series as
stated in the Prospectus (hereinafter defined) and subject to the following
understandings:

(a) The Manager shall provide supervision of each series'
investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by each series
of the Fund, and what portion of the

2
<PAGE>

assets will be invested or held uninvested as cash.

(b) The Manager, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus (hereinafter defined) of
the Fund and with the instructions and directions of the Trustees of
the Fund and will conform to and comply with the requirements of the
1940 Act and all other applicable federal and state laws and
regulations.

(c) The Manager shall determine the securities and futures
contracts to be purchased or sold by each series of the Fund and will
place orders pursuant to its determinations with or through such
persons, brokers, dealers or futures commission merchants (including
but not limited to Prudential Securities Incorporated) in conformity
with the policy with respect to brokerage as set forth in the Fund's
Registration Statement and Prospectus (hereinafter defined) or as the
Trustees may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Manager will give
primary consideration to securing the most favorable price and
efficient execution. Consistent with this policy, the Manager may
consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the
Manager may be

3
<PAGE>

a party. It is understood that Prudential Securities Incorporated may be
used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction
business. It is also understood that it is desirable for the Fund that the
Manager have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage transactions at a
higher cost to the Fund than may result when allocating brokerage to other
brokers or futures commission merchants on the basis of seeking the most
favorable price and efficient execution. Therefore, the Manager is
authorized to pay higher brokerage commissions for the purchase and sale of
securities and futures contracts for each series of the Fund to brokers or
futures commission merchants who provide such research and analysis,
subject to review by the Fund's Trustees from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission merchant may be
useful to the Manager in connection with its services to other clients.

On occasions when the Manager deems the purchase or sale of a
security or futures contracts to be in the best interest of the Fund
(and each series of the Fund) as well as other clients of the Manager
or the Subadviser, the Manager, to the extent permitted by applicable
laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or

4
<PAGE>

purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund (and each series of the Fund) and to such
other clients.

(d) The Manager shall maintain all books and records with
respect to the Fund's portfolio transactions and shall render to the
Fund's Trustees such periodic and special reports as the Trustees may
reasonably request.

(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Fund (including those being
maintained by the Fund's Custodian).

(f) The Manager shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning
the Fund's assets.

(g) The investment management services of the Manager to the
Fund under this Agreement are not to be deemed exclusive, and the
Manager shall be free to render similar services to others.

5
<PAGE>

3. The Fund has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:

(a) Declaration of Trust of the Fund, as filed with the
Secretary of Commonwealth of Massachusetts (such Declaration of Trust,
as in effect on the date hereof and as amended from time to time, is
herein called the "Declaration of Trust");

(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the
"By-Laws");

(c) Certified resolutions of the Trustees of the Fund
authorizing the appointment of the Manager and approving the form of
this agreement;

(d) Written Instrument to Establish and Designate Separate Series of
Shares;

(e) Registration Statement under the 1940 Act and the Securities
Act of 1933, as amended, on Form N-1A (the "Registration Statement"),
as filed with the Securities and Exchange Commission (the
"Commission") relating to the Fund and shares of beneficial interest
to the Fund and all amendments thereto;

(f) Notification of Registration of the Fund under the 1940 Act
on Form N-8A as filed with the Commission and all amendments thereto;
and
(g) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in

6
<PAGE>

effect and as amended or supplemented from time to time, being herein
called the "Prospectus").

4. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as Trustees or officers of the Fund to serve in
the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.

5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to Paragraph 2 hereof.

6. During the term of this Agreement, the Manager shall pay the following
expenses:
(i) the salaries and expenses of all personnel of the
Fund and the Manager except the fees and expenses of
Trustees who are not affiliated persons of the Manager or
the

7
<PAGE>

Fund's investment adviser,

(ii) all expenses incurred by the Manager or by the
Fund in connection with managing the ordinary course of the
Fund's business other than those assumed by the Fund herein,
and

(iii) the costs and expenses payable to PIC pursuant to
the Subadvisory Agreement.

The Fund assumes and will pay the expenses described below:

(a) the fees and expenses incurred by each series of the Fund in
connection with the management of the investment and reinvestment of
the assets of each series,

(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 expenses of the Custodian that relate to (i)
the custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund
and the providing of any such records to the Manager useful to the
Manager in connection with the Manager's responsibility for the
accounting records of the Fund pursuant to Section 31 of the 1940 Act
and the rules promulgated thereunder, (iii) the pricing of the shares
of each series of the Fund, including the cost of any pricing service
or services which may be retained pursuant to the authorization of the
Trustees of the Fund, and

8
<PAGE>

(iv) for both mail and wire orders, the cashiering function in connection
with the issuance and redemption of the Fund's securities,

(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,

(e) the charges and expenses of legal counsel and independent
accountants for the Fund,

(f) brokers' commissions and any issue or transfer taxes
chargeable to each series of the Fund in connection with its
securities and futures transactions,

(g) all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies,

(h) the fees of any trade associations of which the Fund may be
a member,

(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of each
series of the Fund,

(j) the cost of fidelity, directors and officers and errors and
omissions insurance,

(k) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the
Securities and Exchange Commission, registering the Fund as a broker
or dealer and qualifying its shares under state securities laws,
including the

9
<PAGE>

preparation and printing of the Fund's registration statements,
prospectuses and statements of additional information for filing under
federal and state securities laws for such purposes,

(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and
of preparing, printing and mailing reports to shareholders in the
amount necessary for distribution to the shareholders,

(m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the
Fund's business, and

(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.

7. In the event the expenses of the Fund for any fiscal year (including the
fees payable to the Manager 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) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of any jurisdictions in which
shares of the Fund are then qualified for offer and sale, the compensation due
the Manager will be reduced by the amount of such excess, or, if such reduction
exceeds the

10
<PAGE>

compensation payable to the Manager, the Manager will pay to the Fund the amount
of such reduction which exceeds the amount of such compensation.

8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of .50 of 1% of the average daily net assets of each series up
to and including $1 billion and .45 of 1% of the excess over $1 billion of each
series' average daily net assets. This fee will be computed daily and will be
paid to the Manager monthly. Any reduction in the fee payable and any payment by
the Manager to the Fund pursuant to paragraph 7 shall be made monthly. Any such
reductions or payments are subject to readjustment during the year.

9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its

11
<PAGE>

obligations and duties under this Agreement.

10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually with respect to each series in
conformity with the requirements of the 1940 Act; provided, however, that
this Agreement may be terminated with respect to any series by the Fund at
any time, without the payment of any penalty, by the Trustees of the Fund or
by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of such series, or by the Manager at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written
notice to the other party. This Agreement shall terminate automatically in
the event of its assignment (as defined in the 1940 Act).

11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a Trustee, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.

12
<PAGE>

12. Except as otherwise provided herein or authorized by the Trustees of
the Fund from time to time, the Manager shall for all purposes herein be deemed
to be an independent contractor and shall have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the Fund.

13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.

14. This Agreement may be amended by mutual consent, but the

13
<PAGE>

consent of each series of the Fund must be obtained in conformity with the
requirements of the 1940 Act.

15. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292,
Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y.
10292, Attention: President.

16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.

17. The Fund may use the name "Prudential Municipal Bond Fund" or any name
including the word "Prudential" only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the Manager's
business as Manager or any extension, renewal or amendment thereof remain in
effect. At such time as such an agreement shall no longer be in effect, the Fund
will (to the extent that it lawfully can) cease to use such a name or any other
name indicating that it is advised by, managed by or otherwise connected with
the Manager, or any organization which shall have so succeeded to such
businesses. In no event shall the Fund use the name "Prudential Municipal Bond
Fund" or any name including the word "Prudential" if the Manager's

14
<PAGE>

function is transferred or assigned to a company of which The Prudential
Insurance Company of America does not have control.

18. The name "Prudential Municipal Bond Fund" is the designation of the
Trustees under a Declaration of Trust, dated November 3, 1986, as amended,
and all persons dealing with the Fund must look solely to the property of the
Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.

PRUDENTIAL MUNICIPAL BOND FUND

By /s/ Richard A. Redeker
--------------------------------
Richard A. Redecker
President

PRUDENTIAL MUTUAL FUND MANAGEMENT,
INC.

By /s/ Robert F. Gunia
--------------------------------
Robert F. Gunia
Executive Vice President

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND

DISTRIBUTION AGREEMENT

Agreement made as of May 8, 1996 between Prudential Municipal Bond
Fund, a Massachusetts business trust (the Fund), and Prudential Securities
Incorporated, a Delaware corporation (the Distributor).

WITNESSETH

WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;

WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;

WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;

WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and

WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.

NOW, THEREFORE, the parties agree as follows:

Section 1. APPOINTMENT OF THE DISTRIBUTOR

The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor
<PAGE>

hereby accepts such appointment and agrees to act hereunder. The Fund hereby
agrees during the term of this Agreement to sell Shares of the Fund through the
Distributor on the terms and conditions set forth below.

Section 2. EXCLUSIVE NATURE OF DUTIES

The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:

2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.

2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.

2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.

2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.

Section 3. PURCHASE OF SHARES FROM THE FUND

3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).

3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected

2
<PAGE>

dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.

3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as
may be determined by the Trustees. The Fund shall also have the right to
suspend the sale of any or all classes and/or series of its Shares if a
banking moratorium shall have been declared by federal or New York
authorities.

3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).

Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND

4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so
tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Shares shall be equal to the
net asset value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section 4.2 below.

4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.

3
<PAGE>

4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
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 during any
other period when the Securities and Exchange Commission, by order, so permits.

Section 5. DUTIES OF THE FUND

5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.

5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.

5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action
to fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be
no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.

5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Shares in any state from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Shares.

4
<PAGE>

Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.

Section 6. DUTIES OF THE DISTRIBUTOR

6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.

6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.

6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).

6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. Shares sold to selected dealers shall be
for resale by such dealers only at the offering price determined as set forth in
the Prospectus.

Section 7. PAYMENTS TO THE DISTRIBUTOR

7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.

5
<PAGE>

Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any applicable Plans.

7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.

Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN

8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.

8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees with respect to the relevant class and/or series of Shares to be paid by
the Distributor to account executives of the Distributor and to broker-dealers
and financial institutions which have dealer agreements with the Distributor.
So long as a Plan (or any amendment thereto) is in effect, at the request of
the Trustees or any agent or representative of the Fund, the Distributor shall
provide such additional information as may reasonably be requested concerning
the activities of the Distributor hereunder and the costs incurred in
performing such activities with respect to the relevant class and/or series of
Shares.

Section 9. ALLOCATION OF EXPENSES

The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a

6
<PAGE>

broker or dealer, in such states of the United States or other jurisdictions as
shall be selected by the Fund and the Distributor pursuant to Section 5.4 hereof
and the cost and expense payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5.4 hereof. As set forth in Section 8 above, the Fund shall also bear
the expenses it assumes pursuant to any Plan, so long as such Plan is in effect.

Section 10. INDEMNIFICATION

10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the

7
<PAGE>

commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issue and sale of any Shares.

10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Trustees and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.

Section 11. DURATION AND TERMINATION OF THIS AGREEMENT

11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof
and thereafter, but only so long as such continuance is specifically approved
at least annually by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Trustees who
are not parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this Agreement or in
the operation of any of the Fund's Plans or in any agreement related thereto
(Independent Trustees), cast in person at a meeting called for the purpose of
voting upon such approval.

11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the Independent Trustees or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written

8
<PAGE>

notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.

11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in
this Agreement, shall have the respective meanings specified in the Investment
Company Act.

Section 12. AMENDMENTS TO THIS AGREEMENT

This Agreement may be amended by the parties only if such amendment
is specifically approved by (a) the Trustees of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.

Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES

The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.

Section 14. GOVERNING LAW

The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.

Section 15. LIABILITIES OF THE FUND

The name Prudential Municipal Bond Fund is the designation of the Trustees
under a Declaration of Trust, as restated on August 16, 1994, as thereafter
amended, and all persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.

9
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.

Prudential Securities Incorporated

By: /s/ Robert F. Gunia
------------------------
Robert F. Gunia
Senior Vice President

Prudential Municipal Bond Fund

By: /s/ Richard A. Redeker
------------------------
Richard A. Redeker
President

<PAGE>

[SULLIVAN & WORCESTER LLP LETTERHEAD]

June 21, 1996

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 opinions as to certain matters of
Massachusetts law relating to 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 an
Amended and Restated Certificate of Designation dated July 27, 1994, and further
amended effective June 29, 1995 by an Amended and Restated Certificate of
Designation dated May 1, 1995 (as so amended, restated and supplemented, the
"DECLARATION"). We understand that this letter is to be filed with the
Securities and Exchange Commission (the "SEC") in conjunction with the Fund's
filing, 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 SEC
thereunder, of Post-Effective Amendment No. 14 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. 18 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 (the "TRUSTEES") of the issuance and sale of shares of beneficial
interest, par value $.01 per share ("SHARES"), of the several series to which
the Registration Statement relates (the "SUBJECT SERIES"). 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, to designate series of Shares and to authorize the

<PAGE>

Prudential Mutual Fund
Management, Inc. June 21, 1996
-2-

issuance and sale of Shares of the three series (the High Yield Series, the
Insured Series and the Intermediate Series) which have been issued by the Fund
to date. In addition, we have examined the Amendment, substantially in the form
in which it is to be filed with the SEC, the forms of the Prospectus (the
"PROSPECTUS") and the Statement of Additional Information (the "SAI") included
in the Amendment, certificates of officers of the Fund as to actions of the
Trustees, 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 facts 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 of the Subject Series have been duly and validly authorized
by all requisite action of the Trustees, and no action of shareholders of
the Fund was required in such connection.

3. The Shares subject to the Registration Statement, 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 letter with the SEC in conjunction
with 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 LLP

SULLIVAN & WORCESTER LLP

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in Post-Effective Amendment No. 14 to Registration
Statement No. 33-10649 of Prudential Municipal Bond Fund of our report dated
June 13, 1996, 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 26, 1996

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
(the Fund)

PLAN PURSUANT TO RULE 18F-3

The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares of each series of
the Fund (the Fund). Any material amendment to this plan is subject to prior
approval of the Trustees, including a majority of the independent Trustees.

CLASS CHARACTERISTICS

CLASS A SHARES: Class A shares are subject to a high initial sales charge
and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.

CLASS B SHARES: Class B shares are not subject to an initial sales charge
but are subject to a high contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee of not to exceed 1% per
annum of the average daily net assets of the class. The
contingent deferred sales charge is waived for certain
eligible investors. Class B shares automatically convert
to Class A shares approximately [seven] years after
purchase.

CLASS C SHARES: Class C shares are not subject to an initial sales charge
but are subject to a low contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee not to exceed 1% per annum
of the average daily net assets of the class.

CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge nor are they subject to any
Rule 12b-1 fee.

INCOME AND EXPENSE ALLOCATIONS

Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on the
basis of the net asset value of

<PAGE>
that class in relation to the net asset value of each series of the Fund.

DIVIDENDS AND DISTRIBUTIONS

Dividends and other distributions paid by each series to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class may be different from that paid
by another class because of Rule 12b-1 fees and other expenses borne
exclusively by that class.

EXCHANGE PRIVILEGE

Each class of shares is generally exchangeable for the same class of shares
(or the class of shares with similar characteristics), if any, of the other
Prudential Mutual Funds (subject to certain minimum investment
requirements) at relative net asset value without the imposition of any
sales charge.

Class B and Class C shares (which are not subject to a contingent deferred
sales charge) of shareholders who qualify to purchase Class A shares at net
asset value will be automatically exchanged for Class A shares on a
quarterly basis, unless the shareholder elects otherwise.

CONVERSION FEATURES

GENERAL

A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.

B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor each
series for the existence of any material conflicts among the interests of
its several classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary
to eliminate any such conflicts that may develop. Prudential Mutual Fund
Management, Inc., the Fund's Manager, will be responsible for reporting
any potential or existing conflicts to the Trustees.

<PAGE>

C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of each series' several classes and the
proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American Institute
of Certified Public Accountants.

Dated: May 8, 1996

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 001
<NAME> HIGH YIELD SERIES (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 994,820,207
<INVESTMENTS-AT-VALUE> 1,008,135,990
<RECEIVABLES> 31,059,808
<ASSETS-OTHER> 67,157
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,039,262,955
<PAYABLE-FOR-SECURITIES> 6,027,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,644,009
<TOTAL-LIABILITIES> 10,671,508
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,029,359,615
<SHARES-COMMON-STOCK> 96,175,471
<SHARES-COMMON-PRIOR> 98,265,943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,083,951)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,315,783
<NET-ASSETS> 1,028,591,447
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,192,819
<OTHER-INCOME> 0
<EXPENSES-NET> 10,468,235
<NET-INVESTMENT-INCOME> 66,724,584
<REALIZED-GAINS-CURRENT> 7,874,332
<APPREC-INCREASE-CURRENT> (9,899,503)
<NET-CHANGE-FROM-OPS> 64,699,413
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (66,724,584)
<DISTRIBUTIONS-OF-GAINS> (125,886)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125,110,592
<NUMBER-OF-SHARES-REDEEMED> (177,927,248)
<SHARES-REINVESTED> 30,125,436
<NET-CHANGE-IN-ASSETS> (24,842,277)
<ACCUMULATED-NII-PRIOR> 69,751,519
<ACCUMULATED-GAINS-PRIOR> (4,625,639)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,308,978
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,917,723
<AVERAGE-NET-ASSETS> 162,329,000
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> 0.70
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.72)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.70
<EXPENSE-RATIO> 0.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 002
<NAME> HIGH YIELD SERIES (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 994,820,207
<INVESTMENTS-AT-VALUE> 1,008,135,990
<RECEIVABLES> 31,059,808
<ASSETS-OTHER> 67,157
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,039,262,955
<PAYABLE-FOR-SECURITIES> 6,027,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,644,009
<TOTAL-LIABILITIES> 10,671,508
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,029,359,615
<SHARES-COMMON-STOCK> 96,175,471
<SHARES-COMMON-PRIOR> 98,265,943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,083,951)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,315,783
<NET-ASSETS> 1,028,591,447
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,192,819
<OTHER-INCOME> 0
<EXPENSES-NET> 10,468,235
<NET-INVESTMENT-INCOME> 66,724,584
<REALIZED-GAINS-CURRENT> 7,874,332
<APPREC-INCREASE-CURRENT> (9,899,503)
<NET-CHANGE-FROM-OPS> 64,699,413
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (66,724,584)
<DISTRIBUTIONS-OF-GAINS> (125,886)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125,110,592
<NUMBER-OF-SHARES-REDEEMED> (177,927,248)
<SHARES-REINVESTED> 30,125,436
<NET-CHANGE-IN-ASSETS> (24,842,277)
<ACCUMULATED-NII-PRIOR> 69,751,519
<ACCUMULATED-GAINS-PRIOR> (4,625,639)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,308,978
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,917,723
<AVERAGE-NET-ASSETS> 900,115,000
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.68)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.69
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 003
<NAME> HIGH YIELD SERIES (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 994,820,207
<INVESTMENTS-AT-VALUE> 1,008,135,990
<RECEIVABLES> 31,059,808
<ASSETS-OTHER> 67,157
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,039,262,955
<PAYABLE-FOR-SECURITIES> 6,027,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,644,009
<TOTAL-LIABILITIES> 10,671,508
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,029,359,615
<SHARES-COMMON-STOCK> 96,175,471
<SHARES-COMMON-PRIOR> 98,265,943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,083,951)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,315,783
<NET-ASSETS> 1,028,591,447
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,192,819
<OTHER-INCOME> 0
<EXPENSES-NET> 10,468,235
<NET-INVESTMENT-INCOME> 66,724,584
<REALIZED-GAINS-CURRENT> 7,874,332
<APPREC-INCREASE-CURRENT> (9,899,503)
<NET-CHANGE-FROM-OPS> 64,699,413
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (66,724,584)
<DISTRIBUTIONS-OF-GAINS> (125,886)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125,110,592
<NUMBER-OF-SHARES-REDEEMED> (177,927,248)
<SHARES-REINVESTED> 30,125,436
<NET-CHANGE-IN-ASSETS> (24,842,277)
<ACCUMULATED-NII-PRIOR> 69,751,519
<ACCUMULATED-GAINS-PRIOR> (4,625,639)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,308,978
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,917,723
<AVERAGE-NET-ASSETS> 5,608,000
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> 0.62
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.65)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.69
<EXPENSE-RATIO> 1.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 004
<NAME> INSURED SERIES (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 569,468,431
<INVESTMENTS-AT-VALUE> 586,540,745
<RECEIVABLES> 9,314,584
<ASSETS-OTHER> 2,993,523
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 598,848,852
<PAYABLE-FOR-SECURITIES> 12,920,256
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,852,103
<TOTAL-LIABILITIES> 14,772,359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 567,354,767
<SHARES-COMMON-STOCK> 53,343,285
<SHARES-COMMON-PRIOR> 59,430,830
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (625,588)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,347,314
<NET-ASSETS> 584,076,493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,855,590
<OTHER-INCOME> 0
<EXPENSES-NET> 6,317,505
<NET-INVESTMENT-INCOME> 30,538,085
<REALIZED-GAINS-CURRENT> 14,627,600
<APPREC-INCREASE-CURRENT> (6,381,895)
<NET-CHANGE-FROM-OPS> 38,783,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,538,085)
<DISTRIBUTIONS-OF-GAINS> (188,126)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,187,534
<NUMBER-OF-SHARES-REDEEMED> (135,247,446)
<SHARES-REINVESTED> 17,105,830
<NET-CHANGE-IN-ASSETS> (59,896,503)
<ACCUMULATED-NII-PRIOR> 35,097,294
<ACCUMULATED-GAINS-PRIOR> 4,257,118
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,138,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,971,538
<AVERAGE-NET-ASSETS> 102,456,000
<PER-SHARE-NAV-BEGIN> 10.83
<PER-SHARE-NII> 0.69
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.58)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.94
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 005
<NAME> INSURED SERIES (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 569,468,431
<INVESTMENTS-AT-VALUE> 586,540,745
<RECEIVABLES> 9,314,584
<ASSETS-OTHER> 2,993,523
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 598,848,852
<PAYABLE-FOR-SECURITIES> 12,920,256
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,852,103
<TOTAL-LIABILITIES> 14,772,359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 567,354,767
<SHARES-COMMON-STOCK> 53,343,285
<SHARES-COMMON-PRIOR> 59,430,830
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (625,588)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,347,314
<NET-ASSETS> 584,076,493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,855,590
<OTHER-INCOME> 0
<EXPENSES-NET> 6,317,505
<NET-INVESTMENT-INCOME> 30,538,085
<REALIZED-GAINS-CURRENT> 14,627,600
<APPREC-INCREASE-CURRENT> (6,381,895)
<NET-CHANGE-FROM-OPS> 38,783,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,538,085)
<DISTRIBUTIONS-OF-GAINS> (188,126)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,187,534
<NUMBER-OF-SHARES-REDEEMED> (135,247,446)
<SHARES-REINVESTED> 17,105,830
<NET-CHANGE-IN-ASSETS> (59,896,503)
<ACCUMULATED-NII-PRIOR> 35,097,294
<ACCUMULATED-GAINS-PRIOR> 4,257,118
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,138,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,971,538
<AVERAGE-NET-ASSETS> 524,452,000
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.95
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 006
<NAME> INSURED SERIES (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 569,468,431
<INVESTMENTS-AT-VALUE> 586,540,745
<RECEIVABLES> 9,314,584
<ASSETS-OTHER> 2,993,523
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 598,848,852
<PAYABLE-FOR-SECURITIES> 12,920,256
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,852,103
<TOTAL-LIABILITIES> 14,772,359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 567,354,767
<SHARES-COMMON-STOCK> 53,343,285
<SHARES-COMMON-PRIOR> 59,430,830
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (625,588)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,347,314
<NET-ASSETS> 584,076,493
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,855,590
<OTHER-INCOME> 0
<EXPENSES-NET> 6,317,505
<NET-INVESTMENT-INCOME> 30,538,085
<REALIZED-GAINS-CURRENT> 14,627,600
<APPREC-INCREASE-CURRENT> (6,381,895)
<NET-CHANGE-FROM-OPS> 38,783,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,538,085)
<DISTRIBUTIONS-OF-GAINS> (188,126)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,187,534
<NUMBER-OF-SHARES-REDEEMED> (135,247,446)
<SHARES-REINVESTED> 17,105,830
<NET-CHANGE-IN-ASSETS> (59,896,503)
<ACCUMULATED-NII-PRIOR> 35,097,294
<ACCUMULATED-GAINS-PRIOR> 4,257,118
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,138,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,971,538
<AVERAGE-NET-ASSETS> 827,000
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.62
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.95
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 007
<NAME> INTERMEDIATE SERIES (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 50,695,167
<INVESTMENTS-AT-VALUE> 51,843,918
<RECEIVABLES> 1,038,429
<ASSETS-OTHER> 817,777
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,700,124
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 373,056
<TOTAL-LIABILITIES> 373,056
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,472,755
<SHARES-COMMON-STOCK> 5,007,087
<SHARES-COMMON-PRIOR> 5,905,485
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (293,501)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,147,814
<NET-ASSETS> 53,327,068
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,254,289
<OTHER-INCOME> 0
<EXPENSES-NET> 869,917
<NET-INVESTMENT-INCOME> 2,384,372
<REALIZED-GAINS-CURRENT> 636,281
<APPREC-INCREASE-CURRENT> 613,155
<NET-CHANGE-FROM-OPS> 3,633,808
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,384,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,139,324
<NUMBER-OF-SHARES-REDEEMED> (16,260,658)
<SHARES-REINVESTED> 1,485,489
<NET-CHANGE-IN-ASSETS> (8,386,409)
<ACCUMULATED-NII-PRIOR> 2,979,505
<ACCUMULATED-GAINS-PRIOR> (630,172)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 294,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 839,211
<AVERAGE-NET-ASSETS> 12,604,000
<PER-SHARE-NAV-BEGIN> 10.45
<PER-SHARE-NII> 0.67
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 008
<NAME> INTERMEDIATE SERIES (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 50,695,167
<INVESTMENTS-AT-VALUE> 51,843,918
<RECEIVABLES> 1,038,429
<ASSETS-OTHER> 817,777
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,700,124
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 373,056
<TOTAL-LIABILITIES> 373,056
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,472,755
<SHARES-COMMON-STOCK> 5,007,087
<SHARES-COMMON-PRIOR> 5,905,485
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (293,501)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,147,814
<NET-ASSETS> 53,327,068
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,254,289
<OTHER-INCOME> 0
<EXPENSES-NET> 869,917
<NET-INVESTMENT-INCOME> 2,384,372
<REALIZED-GAINS-CURRENT> 636,281
<APPREC-INCREASE-CURRENT> 613,155
<NET-CHANGE-FROM-OPS> 3,633,808
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,384,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,139,324
<NUMBER-OF-SHARES-REDEEMED> (16,260,658)
<SHARES-REINVESTED> 1,485,489
<NET-CHANGE-IN-ASSETS> (8,386,409)
<ACCUMULATED-NII-PRIOR> 2,979,505
<ACCUMULATED-GAINS-PRIOR> (630,172)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 294,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 839,211
<AVERAGE-NET-ASSETS> 46,127,000
<PER-SHARE-NAV-BEGIN> 10.45
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 009
<NAME> INTERMEDIATE SERIES (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 50,695,167
<INVESTMENTS-AT-VALUE> 51,843,918
<RECEIVABLES> 1,038,429
<ASSETS-OTHER> 817,777
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,700,124
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 373,056
<TOTAL-LIABILITIES> 373,056
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,472,755
<SHARES-COMMON-STOCK> 5,007,087
<SHARES-COMMON-PRIOR> 5,905,485
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (293,501)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,147,814
<NET-ASSETS> 53,327,068
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,254,289
<OTHER-INCOME> 0
<EXPENSES-NET> 869,917
<NET-INVESTMENT-INCOME> 2,384,372
<REALIZED-GAINS-CURRENT> 636,281
<APPREC-INCREASE-CURRENT> 613,155
<NET-CHANGE-FROM-OPS> 3,633,808
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,384,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,139,324
<NUMBER-OF-SHARES-REDEEMED> (16,260,658)
<SHARES-REINVESTED> 1,485,489
<NET-CHANGE-IN-ASSETS> (8,386,409)
<ACCUMULATED-NII-PRIOR> 2,979,505
<ACCUMULATED-GAINS-PRIOR> (630,172)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 294,639
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 839,211
<AVERAGE-NET-ASSETS> 197,000
<PER-SHARE-NAV-BEGIN> 10.45
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>